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, 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 bar members and the public, including efiling and a website to pay traffic citations and fees online. These products are licensed to more than 500 organizations in 42 states and internationally.
Fiscal 2019 compared with fiscal 2018
Consolidated revenues were$48,655,000 and$40,703,000 for fiscal year endedSeptember 30, 2019 and 2018, respectively. This increase of$7,952,000 (20%) was primarily from (i) increased Journal Technologies' license and maintenance fees of$2,954,000 , consulting fees of$2,707,000 and public service fees of$2,370,000 , and (ii) increased Traditional Business' conference revenues of$209,000 , display advertising net revenues of$135,000 and legal notice advertising net revenues of$106,000 , partially offset by a reduction in the Traditional Business' classified advertising net revenues of$246,000 , trustee sale notice advertising net revenues of$196,000 and circulation revenues of$152,000 . The Company's revenues derived from Journal Technologies' operations constituted about 65% and 58% of the Company's total revenues for fiscal 2019 and 2018, respectively. Consolidated operating expenses, excluding goodwill impairment expenses of$13,400,000 as compared with none in the prior year, decreased by$1,284,000 (2%) to$53,479,000 from$54,763,000 . Total salaries and employee benefits increased by$1,182,000 (3%) to$35,014,000 from$33,832,000 primarily resulting from additional personnel costs for Journal Technologies. Outside services decreased by$413,000 (10%) to$3,874,000 from$4,287,000 mainly because of decreased contractor costs for Journal Technologies. Depreciation and amortization costs, which primarily included the amortization of Journal Technologies' intangible assets of none during fiscal 2019 (fully amortized by last year-end) and$3,058,000 in fiscal 2018, decreased by$3,089,000 to$589,000 from$3,678,000 . 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$382,000 (37%) to$1,409,000 from$1,027,000 mainly resulting from increased efilings. Accounting and legal fees increased by$303,000 (23%) to$1,605,000 from$1,302,000 primarily because of additional legal fees to review and negotiate Journal Technologies' contracts with customers. The Company's non-operating income, net of expenses, decreased to a loss of$13,252,000 from income of$2,721,000 primarily because of the recording of fiscal 2019 net unrealized losses on investments of$17,715,000 and increases in the interest rates on the two acquisition margin loans, as compared with the prior year's other-than-temporary impairment losses on investments of$4,560,000 , partially offset by the capital gain of$3,180,000 from the sale of bonds. 21
-------------------------------------------------------------------------------- During fiscal 2019, consolidated pretax loss was$31,476,000 , as compared with$11,339,000 in the prior year. There was a consolidated net loss of$25,216,000 (-$18.26 per share) after tax benefits for fiscal 2019, as compared with net income of$8,201,000 ($5.94 per share) in the prior year mainly from the prior year's adjustments relative to the benefits resulting from theDecember 2017 Tax Cuts and Job Act (the "Tax Act"). During fiscal 2019, the Company's cash and cash equivalents increased by$1,329,000 to$10,630,000 from$9,301,000 . AtSeptember 30, 2019 , the aggregate fair market value of the Company's marketable securities was$194,581,000 . These securities had approximately$140,692,000 of net unrealized gains before taxes of$37,241,000 , and generated approximately$5,380,000 in dividends and interest income during fiscal 2019, which lowers the Company's effective income tax rate because of the dividends received deduction. Most of the unrealized gains were in the common stocks of threeU.S. financial institutions and one foreign manufacturer.
Additional detail about each of the Company's reportable segments, and its corporate income and expenses, is set forth below:
Overall Financial Results (000) For the twelve months ended September 30 Reportable Segments Traditional Journal Business Technologies Corporate Total 2019 2018 2019 2018 2019 2018 2019 2018 Revenues Advertising$ 9,132 $ 9,112 $ --- $ --- $ --- $ ---$ 9,132 $ 9,112 Circulation 5,249 5,401 --- --- --- --- 5,249 5,401 Advertising service fees and other 2,712 2,659 --- --- --- --- 2,712 2,659 Licensing and maintenance fees --- --- 20,179 17,225 --- --- 20,179 17,225 Consulting fees --- --- 5,539 2,832 --- --- 5,539 2,832 Other public service fees --- --- 5,844 3,474 --- --- 5,844 3,474 Total operating revenues 17,093 17,172 31,562 23,531 --- --- 48,655 40,703 Operating expenses Salaries and employee benefits 10,637 10,381 24,377 23,451 --- --- 35,014 33,832 Amortization of intangible assets --- --- --- 3,058 --- --- --- 3,058 Goodwill impairment --- --- 13,400 --- --- --- 13,400 --- Others 6,344 6,459 12,121 11,414 --- --- 18,465 17,873 Total operating expenses 16,981 16,840 49,898 37,923 --- --- 66,879 54,763 Income (loss) from operations 112 332 (18,336 ) (14,392 ) --- --- (18,224 ) (14,060 ) Dividends and interest income --- --- --- --- 5,380 4,808 5,380 4,808 Other income --- --- --- --- 38 37 38 37 Net unrealized losses on investments --- --- --- --- (17,715 ) --- (17,715 ) --- Interest expenses on note payable collateralized by real estate (93 ) (95 ) --- --- --- --- (93 ) (95 ) Interest expense on margin loans --- --- --- --- (862 ) (651 ) (862 ) (651 ) Capital gains on sales of marketable securities and others --- --- --- --- --- 3,182 --- 3,182 Other-than-temporary impairment losses on investments --- --- --- --- --- (4,560 ) --- (4,560 ) Pretax income (loss)$ 19 $ 237 $ (18,336 ) $ (14,392 ) $ (13,159 ) $ 2,816 $ (31,476 ) $ (11,339 ) 22
--------------------------------------------------------------------------------
The Traditional Business
The Traditional Business' business segment pretax income decreased by
Advertising revenues increased by
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 14% during fiscal 2019 as compared to the prior year. 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 fiscal 2020. The Company's smaller newspapers, those other than theLos Angeles andSan Francisco Daily Journals ("The Daily Journals"), accounted for about 88% of the total public notice advertising revenues in fiscal 2019. Public notice advertising revenues and related advertising and other service fees constituted about 18% and 21% of the Company's total revenues for the fiscal 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 in fiscal 2017 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. The Daily Journals accounted for about 90% of The Traditional Business' total circulation revenues, which declined by$152,000 (3%) to$5,249,000 from$5,401,000 . The court rule and judicial profile services generated about 8% 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 increased by
Journal Technologies Journal Technologies' business segment pretax loss increased by$3,944,000 (27%) to$18,336,000 from$14,392,000 , after (i) the goodwill impairment expenses of$13,400,000 during this fiscal year as compared with none in the prior fiscal year, and (ii) no amortization costs of intangible assets during fiscal 2019 (fully amortized by last year-end) as compared with$3,058,000 in fiscal 2018. Revenues increased by$8,031,000 (34%) to$31,562,000 from$23,531,000 in the prior fiscal year. Licensing and maintenance fees increased by$2,954,000 (17%) to$20,179,000 from$17,225,000 . Consulting fees increased by$2,707,000 (96%) to$5,539,000 from$2,832,000 due to more go-lives, which is when installation consulting fees typically become due. Other public service fees increased by$2,370,000 (68%) to$5,844,000 from$3,474,000 primarily due to additional efiling fee revenues. 23
-------------------------------------------------------------------------------- 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. Operating expenses increased by$11,975,000 (32%) to$49,898,000 from$37,923,000 , primarily because of (i) increased salaries and employee benefit costs of$926,000 , and (ii) the goodwill impairment of$13,400,000 , partially offset by last year's fully-amortized costs of intangible assets of$3,058,000 .Goodwill is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. In fiscal 2013, when the Company acquiredNew Dawn Technologies, Inc. andISD Technologies, Inc. , it recorded goodwill of$13,400,000 which represented the expected synergies in expanding the Company's software business. Based on a recent third-party appraiser's valuation report, the entire goodwill of$13,400,000 was impaired and thus fully written off as ofSeptember 30, 2019 . In addition, the Company decided to initiate the end-of-life process of New Dawn's and ISD's legacy software products and focus on Journal Technologies' Internet-based family of products. Journal Technologies is continuing to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future. Taxes For fiscal 2019, the Company recorded an income tax benefit of$6,260,000 on a pretax loss of$31,476,000 . The effective tax rate was below the statutory rate due to the impairment of goodwill, partially offset by the dividends received deduction and a benefit for state taxes. During the prior fiscal year, the Tax Act reduced the maximum corporate income tax rate from 35% to 21%. The impact to the Company's financial statements in fiscal 2018 was as follows: (i) fiscal 2018 income tax expense or benefit was calculated using a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense included a discrete net tax benefit of approximately$16 million resulting from a revaluation of deferred tax assets and liabilities to the expected tax rate that will be applied when temporary differences are expected to reverse, (iii) items that were expected to reverse during fiscal 2018 were valued at the blended rate of 24.28% while temporary differences that will reverse after fiscal 2018 were valued at the 21% rate, and (iv) approximately$20 million of the revaluation of deferred taxes related to items that were initially recorded as accumulated other comprehensive income. This revaluation of approximately$20 million was recorded as a component of income tax expense or benefit in continuing operations. Consequently, during fiscal 2018, the Company recorded an income tax benefit of$19,540,000 on a pretax loss of$11,339,000 . The effective tax rate (before the discrete item discussed above) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes. 24 -------------------------------------------------------------------------------- The Company's effective tax rate was 20% for fiscal 2019 as compared with 172% in the prior fiscal year. The difference in the effective tax rate was primarily due to the effect of the tax cuts in the prior year period and the prior fiscal year's revaluation of deferred taxes related to items previously recorded in other comprehensive income, as discussed above. The Company files consolidated federal income tax returns inthe United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2016 with regard to federal income taxes and fiscal 2015 for state income taxes.
Fiscal 2018 compared with fiscal 2017
For a comparison of the Company's fiscal 2018 and fiscal 2017 results, please see "Management's Discussion and Analysis of Financial Condition and Operations" in Part II, Item 7 of the Company's annual report on Form 10-K for the fiscal year endedSeptember 30, 2018 . 25 --------------------------------------------------------------------------------
Reportable Segments The Company's Traditional Business is one reportable segment and the other is Journal Technologies. Additional details about each of the reportable segments and its corporate income and expenses is set forth below: Reportable Segments Traditional Journal Business Technologies Corporate Total Fiscal 2019 Revenues Advertising$ 9,132,000 $ --- $ ---$ 9,132,000 Circulation 5,249,000 --- --- 5,249,000 Advertising service fees and other 2,712,000 --- --- 2,712,000 Licensing and maintenance fees --- 20,179,000 --- 20,179,000 Consulting fees --- 5,539,000 --- 5,539,000 Other public service fees --- 5,844,000 --- 5,844,000 Operating expenses 16,981,000 49,898,000* --- 66,879,000* Income (loss) from operations 112,000 (18,336,000 ) --- (18,224,000 ) Dividends and interest income --- --- 5,380,000 5,380,000 Other income --- --- 38,000 38,000 Net unrealized losses on investments --- --- (17,715,000 ) (17,715,000 ) Interest expenses on note payable collateralized by real estate (93,000 ) --- --- (93,000 ) Interest expenses on margin loans --- --- (862,000 ) (862,000 ) Pretax income 19,000 (18,336,000 ) (13,159,000 ) (31,476,000 ) Income tax expense (5,000 ) 2,450,000 3,815,000 6,260,000 Net loss 14,000 (15,886,000 ) (9,344,000 ) (25,216,000 ) Total assets 17,176,000 22,741,000 197,459,000 237,376,000 Capital expenditures 132,000 33,000 --- 165,000
* included goodwill impairment of
Reportable Segments Traditional Journal Business Technologies Corporate Total Fiscal 2018 Revenues Advertising, net$ 9,112,000 $ --- $ ---$ 9,112,000 Circulation 5,401,000 --- --- 5,401,000 Advertising service fees and other 2,659,000 --- --- 2,659,000 Licensing and maintenance fees --- 17,225,000 --- 17,225,000 Consulting fees --- 2,832,000 --- 2,832,000 Other public service fees --- 3,474,000 --- 3,474,000 Operating expenses 16,840,000 37,923,000 --- 54,763,000 Income (loss) from operations 332,000 (14,392,000 ) --- (14,060,000 ) Dividends and interest income --- --- 4,808,000 4,808,000 Other income --- --- 37,000 37,000 Interest expense on note payable collateralized by real estate (95,000 ) --- --- (95,000 ) Interest expense on margin loans --- --- (651,000 ) (651,000 ) Capital gains on sales of marketable Securities and others --- --- 3,182,000 3,182,000 Other-than-temporary impairment losses on investments --- --- (4,560,000 ) (4,560,000 ) Pretax (loss) income 237,000 (14,392,000 ) 2,816,000 (11,339,000 ) Income tax benefit 490,000 695,000 18,355,000 19,540,000 Net (loss) income 727,000 (13,697,000 ) 21,171,000 8,201,000 Total assets 19,602,000 29,885,000 214,511,000 263,998,000 Capital expenditures 212,000 --- --- 212,000 Amortization of intangible assets --- 3,058,000 --- 3,058,000 26
--------------------------------------------------------------------------------
Reportable Segments Traditional Journal Business Technologies Corporate Total Fiscal 2017 Revenues Advertising, net$ 9,104,000 $ --- $ ---$ 9,104,000 Circulation 5,654,000 --- --- 5,654,000 Advertising service fees and other 2,812,000 --- --- 2,812,000 Licensing and maintenance fees --- 16,037,000 --- 16,037,000 Consulting fees --- 4,476,000 --- 4,476,000 Other public service fees --- 3,301,000 --- 3,301,000 Operating expenses 17,852,000 36,699,000 --- 54,551,000 Loss from operations (282,000 ) (12,885,000 ) --- (13,167,000 ) Dividends and interest income --- --- 4,844,000 4,844,000 Other income 22,000 --- 12,000 34,000 Interest expense on note payable collateralized by real estate (100,000 ) --- --- (100,000 ) Interest expense on margin loans --- --- (422,000 ) (422,000 ) Interest and penalty expense reversal for uncertain and unrecognized tax benefits --- 743,000 --- 743,000 Pretax (loss) income (360,000 ) (12,142,000 ) 4,434,000 (8,068,000 ) Income tax benefit (expense) (2,000 ) 7,910,000 (758,000 ) 7,150,000 Net (loss) income (362,000 ) (4,232,000 ) 3,676,000 (918,000 ) Total assets 16,606,000 33,461,000 230,641,000 280,708,000 Capital expenditures 160,000 93,000 --- 253,000 Amortization of intangible assets --- 4,895,000 --- 4,895,000 During fiscal 2019, 2018 and 2017, the Traditional Business had total operating revenues of$17,093,000 ,$17,172,000 and$17,570,000 of which$11,844,000 ,$11,771,000 and$11,916,000 , respectively, were recognized after services were provided while$5,249,000 ,$5,401,000 and$5,654,000 , respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company's software business were$31,562,000 ,$23,531,000 and$23,814,000 , of which$12,353,000 ,$7,437,000 and$8,618,000 , respectively, were recognized upon completion of services while$19,209,000 ,$16,094,000 and$15,196,000 , respectively, were recognized ratably over the subscription periods. Approximately 65% of the Company's revenues during fiscal 2019 were derived from Journal Technologies, as compared with 58% and 58% in the prior two years. In addition, the Company's revenues have been primarily fromthe United States , with approximately 1% from foreign countries. Almost all of Journal Technologies' revenues are from governmental agencies. 27 -------------------------------------------------------------------------------- The following table sets forth certain deferred obligations fromOctober 1, 2018 throughSeptember 30, 2019 : Beginning Ending Balance Addition Recognized Balance Deferred subscriptions$ 3,174,000 $ 5,270,000 $ (5,249,000 ) $ 3,195,000 Deferred installation contracts 2,554,000 5,887,000 (6,509,000 ) 1,932,000 Deferred maintenance agreements and others 14,362,000 20,904,000 (19,209,000 ) 16,057,000
Disclosure of Contractual Obligations
The following table sets forth certain contractual obligations as ofSeptember 30, 2019 : Contractual Obligations (000) Less than More than 1 year 1-3 years 3-5 years 5 years Total Real estate loan$ 126 $ 272 $ 299 $ 1,138 $ 1,835 Obligations under operating leases 474 40 --- --- 514 Long-term accrued liabilities * --- 31 64 135 230$ 600 $ 343 $ 363 $ 1,273 $ 2,579
* The long-term accrued liabilities for the Management Incentive Plan are discounted to the present value using a discount rate of 6%.
In addition, during fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of$29.5 million for two acquisitions, in each case pledging its marketable securities as collateral. These investment margin account borrowings do not mature. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. The interest rate as ofSeptember 30, 2019 , 2018 and 2017 was 2.5%, 2.5% and 1.75%, respectively.
Liquidity and Capital Resources
During fiscal 2019, the Company's cash and cash equivalents and marketable security positions decreased by$16,386,000 , primarily resulting from unrealized losses on investments of$17,715,000 . Cash and cash equivalents were used for the purchase of capital assets of$165,000 and the payment of loan principal of$121,000 . The investments in marketable securities, which had an adjusted cost basis of approximately$53,889,000 and a market value of about$194,581,000 atSeptember 30, 2019 , generated approximately$5,380,000 in dividends and interest income. These securities had approximately$140,692,000 of net unrealized gains before estimated taxes of$37,241,000 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 included in the Company's net income (loss) and thus may have a significant impact on the Company's reported results depending on the fluctuations of the prices of the marketable securities owned by the Company. Cash flows from operating activities increased by$3,496,000 during fiscal 2019 as compared to the prior fiscal year, primarily resulting from increases in accounts payable and accrued liabilities of$1,435,000 which included additional efiling fees to be remitted to the courts. 28 --------------------------------------------------------------------------------
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 both of them will continue to play an important role in monitoring existing investments and selecting any future investments. As ofSeptember 30, 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 net income and shareholders' equity.
Critical Accounting Policies and Estimates
The Company's financial statements and accompanying notes are prepared in accordance withU.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, income taxes and segment reporting are critical accounting policies and estimates. The Company recognizes revenues in accordance with the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). For the Traditional Business, 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 agency commissions. 29
-------------------------------------------------------------------------------- Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one-transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third-party hosting fees when used. Revenues for consulting are recognized at point of delivery (go-live) upon completion of services. These contracts include assurance warranty provisions for limited periods and do not include financing terms. For some contracts, the Company acts as a principal with respect to certain services, such as data conversion, interfaces and hosting that are provided by third-parties, and recognizes such revenues on a gross basis. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery (go-live), and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can efile cases and pay traffic citations and other fees. ASC 985-20, Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed, provides that 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 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 (i) completed, (ii) traced to the product specifications and (iii) reviewed for high-risk development issues. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date. ASC 820, Fair Value Measurement and Disclosures, requires the Company to (i) disclose the amounts of transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 measurements. This guidance also provides clarification of existing disclosures requiring the Company to determine each class of its investments based on risk and to disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 measurements. The Company made no transfers in and out of Level 1 and Level 2 measurements in fiscal years 2019, 2018 and 2017. During that time all of the Company's investments have been quoted on public markets and, therefore, all fair value calculations have been based on Level 1 measurements. The estimated Incentive Plan's future commitment is calculated based on an average of the prior fiscal year (fiscal 2018) and the current year's pretax earnings before certain items, discounted to the present value at 6% since each granted Incentive Plan Unit will expire over its remaining life term of up to 10 years. The Company analyzes goodwill for possible impairment under ASC 350, Intangibles -Goodwill and Other, annually or whenever events or changes in circumstances indicate that the value may not be recoverable. Considered factors for potential goodwill impairment evaluation for the reporting units include current year's business profitability before intangible amortization, fluctuations of revenues, changes in the market place, the status of installation contracts and new business, among other things. During the last quarter of fiscal 2019, the Company adopted early ASU 2017-04 Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test and requiring impairment charges to be based on Step 1, which is to compare the fair value of a reporting unit with its carrying amount. A goodwill impairment should be recognized in the amount by which the carrying amount exceeds the reporting unit's fair value. The Company's annual goodwill impairment analysis in 2019 resulted in an impairment loss of$13,400,000 based on a third-party appraiser's valuation report. 30 -------------------------------------------------------------------------------- ASC 740, 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. This accounting guidance also prescribes recognition thresholds and measurement attributes for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. 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 and its deferred tax liabilities related to the unrealized net gains on investments. See Note 3 of Notes to Consolidated Financial Statements for further discussion. ASC 280-10, Segment Reporting, defines an operating segment as a component of a public entity that has discrete financial information that is evaluated regularly by the Company's Chief Executive Officer to decide how to allocate resources and to assess performance. In accordance with ASC 280-10, the Company has two reportable business segments which are: (i) The Traditional Business and (ii) Journal Technologies.
The above discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in this report.
31
--------------------------------------------------------------------------------
© Edgar Online, source