The following graph shows a five-year comparison of cumulative total return on the Company’s common stock, Standard & Poor’s 500 Composite Index, Standard & Poor’s Publishing MidCap Index and Standard & Poor’s Software & Services Select Industry Index, assuming $100 was invested on September 30, 2013, and all dividends were reinvested. The Company has not declared a dividend in any of the fiscal years shown.
Daily Journal Corporation
Total Cumulative Shareholder Return for Five Years Ended September 30, 2018
Item 6. Selected Financial Data
The following sets forth selected financial data for the Company as of, and for each of the five years ended September 30, 2018. Such data should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included herein.
| Fiscal Year Ended September 30 | ||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
(Dollar amounts in thousands, except share and per share amounts) | ||||||||||||||||||||
Consolidated Statement of Comprehensive Income (Loss): | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
| Advertising, net | $ | 9,112 | $ | 9,104 | $ | 9,854 | $ | 10,502 | $ | 11,435 | ||||||||||
Circulation | 5,401 | 5,654 | 5,912 | 5,915 | 6,038 | |||||||||||||||
Advertising service fees and other | 2,659 | 2,812 | 2,651 | 2,703 | 2,800 | |||||||||||||||
Licensing and maintenance fees | 17,225 | 16,037 | 14,758 | 13,984 | 12,987 | |||||||||||||||
Consulting fees | 2,832 | 4,476 | 4,085 | 4,704 | 4,002 | |||||||||||||||
Other public service fees | 3,474 | 3,301 | 4,352 | 6,170 | 6,161 | |||||||||||||||
| 40,703 | 41,384 | 41,612 | 43,978 | 43,423 | ||||||||||||||||
Costs and expenses | ||||||||||||||||||||
Salaries and employee benefits | 33,832 | 31,749 | 27,381 | 26,010 | 25,262 | |||||||||||||||
Outside services | 4,287 | 4,552 | 3,729 | 3,524 | 3,212 | |||||||||||||||
Postage and delivery costs | 857 | 1,112 | 1,141 | 1,318 | 1,281 | |||||||||||||||
Newsprint and printing expenses | 780 | 877 | 912 | 1,225 | 1,221 | |||||||||||||||
Depreciation and amortization | 3,678 | 5,586 | 5,709 | 5,531 | 5,516 | |||||||||||||||
Other general and administrative expenses | 11,329 | 10,675 | 9,380 | 9,882 | 9,121 | |||||||||||||||
| 54,763 | 54,551 | 48,252 | 47,490 | 45,613 | ||||||||||||||||
Loss from operations | (14,060 | ) | (13,167 | ) | (6,640 | ) | (3,512 | ) | (2,190 | ) | ||||||||||
Other income and expenses | ||||||||||||||||||||
Dividends and interest income | 4,808 | 4,844 | 4,085 | 3,829 | 3,001 | |||||||||||||||
Other income | 37 | 34 | 61 | 65 | 97 | |||||||||||||||
Interest expenses on margin loans | (651 | ) | (422 | ) | (284 | ) | (224 | ) | (230 | ) | ||||||||||
Interest expense on note payable collateralized by real estate | (95 | ) | (100 | ) | (88 | ) | --- | --- | ||||||||||||
Interest and penalty (expense) expense reversal accrued for uncertain and unrecognized tax benefits | 3,182 | 743 | (112 | ) | (96 | ) | (537 | ) | ||||||||||||
Capital gains on sales of marketable securities and others | --- | --- | --- | 4 | --- | |||||||||||||||
Other-than temporary impairment losses on Investments | (4,560 | ) | --- | --- | (376 | ) | --- | |||||||||||||
(Loss) income before taxes | (11,339 | ) | (8,068 | ) | (2,978 | ) | (310 | ) | 141 | |||||||||||
Benefit from income taxes | 19,540 | 7,150 | 1,935 | 1,120 | 490 | |||||||||||||||
Net income (loss) | $ | 8,201 | $ | (918 | ) | $ | (1,043 | ) | $ | 810 | $ | 631 | ||||||||
Weighted average number of common shares outstanding – basic and diluted | 1,380,746 | 1,380,746 | 1,380,746 | 1,380,746 | 1,380,746 | |||||||||||||||
Basic and diluted net income (loss) per share | $ | 5.94 | $ | (0.66 | ) | $ | (0.76 | ) | $ | 0.59 | $ | 0.46 | ||||||||
Comprehensive income (loss) | ||||||||||||||||||||
Net income (loss) | $ | 8,201 | $ | (918 | ) | $ | (1,043 | ) | $ | 810 | $ | 631 | ||||||||
Net change in unrealized appreciation of investments (net of taxes) | (5,823 | ) | 35,316 | (2,214 | ) | (8,811 | ) | 22,393 | ||||||||||||
Reclassification adjustment of other-than-temporary impairment losses recognized in net income | 3,350 | --- | --- | 230 | --- | |||||||||||||||
Net change in comprehensive income (loss) | $ | 5,728 | $ | 34,398 | $ | (3,257 | ) | $ | (7,771 | ) | $ | 23,024 | ||||||||
September 30 | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 263,998 | $ | 280,708 | $ | 225,446 | $ | 228,196 | $ | 243,877 | ||||||||||
Shareholders’ equity | 162,916 | 159,741 | 125,343 | 128,600 | 136,371 | |||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 bar members and the public, including efiling and a website to pay traffic citations online.and fees online, and bar members. These products are licensed to more than 500 organizations in 42 states and internationally.
Comprehensive Income (Loss)Impact of the
COVID-19 Pandemic
Comprehensive income (loss) includes net income (loss) and unrealized net (losses) gains on investments, net of taxes, as summarized below:
Comprehensive Income (Loss) | ||||||||||||
Fiscal Year Ended September 30 | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Net income (loss) | $ | 8,201,000 | $ | (918,000 | ) | $ | (1,043,000 | ) | ||||
Net increase (decrease) in unrealized appreciation of investments (net of taxes) | (5,823,000 | ) | 35,316,000 | (2,214,000 | ) | |||||||
Reclassification adjustment of other-than-temporary impairment losses recognized in net income (net of taxes) | 3,350,000 | --- | --- | |||||||||
| $ | 5,728,000 | $ | 34,398,000 | $ | (3,257,000 | ) | ||||||
On March 13, 2020, the United States declared the outbreak of COVID-19 to be a national emergency, and several states and municipalities also declared public health emergencies. Unprecedented actions were taken by public health and governmental authorities to contain and combat the spread of COVID-19, including “stay-at-home” orders and similar mandates that restricted the daily activities of individuals and limited the operation of businesses that were deemed “non-essential.” In addition, most of Journal Technologies’ customers, which are primarily courts and governmental agencies in the United States, Canada and Australia, were either closed or significantly scaled back their activities. Similarly, many law firms and companies from which the Traditional Business derives advertising and subscription revenues also curtailed their operations and spending.
In light of this extraordinary situation, on April 30, 2020, the Company made a difficult decision to reorganize its part-time and full-time workforce at both The Traditional Business and Journal Technologies, which included some layoffs and temporary furloughs.
Management believes that the COVID-19 pandemic has had, and, with the recent resurgence of COVID-19 cases, will continue to have a significant impact on the Company’s business operations. This might include a substantial decrease in the value of the Company’s marketable securities portfolio, which is concentrated in the common stocks of three U.S. financial institutions, or at least a fair degree of volatility. In the future, dividends from the Company’s portfolio are expected to decrease as some banks reduce their dividends. It might also include the unprecedented continued closure, renewed closure or scaling back of operations of courts and other governmental agencies that are the customers of Journal Technologies, and fundamental changes in the way the advertisers and subscribers of the Traditional Business conduct operations. Even if courts, governmental agencies and other businesses return to more normal operations, there are likely to be changes in those operations and personal behaviors going forward, including limitations on travel and more working from home, that will adversely affect the Company, its financial results and cash flows.
Due to the uncertainties associated with the duration and severity of the COVID-19 pandemic, the efforts to contain it, and the changes in business operations and personal behaviors that are likely to follow from it, management cannot at this point estimate the magnitude of its impact on the Company’s business operations. In recent years, the newspaper industry, including our Traditional Business, has declined, and we expect this to continue at an accelerated pace due to the impacts of COVID-19 and its aftermath, as advertising and subscription revenues decrease.
For Journal Technologies, there have been several delays or cancellations in government procurement processes. Also, although we have been able to complete some existing projects remotely, we have been unable to finish certain implementations and trainings because of inability to work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, receipt of those revenues is being delayed. In addition, there has been a reduction in efiling revenues and delayed client payments as many courts and other justice agencies were closed for much of the year. On the other side of the coin, the Company has seen a reduction in operating costs due to less business travel.
Fiscal 2018 2020compared with fiscal 20172019
The Company’s reportable segments, and its corporate income and expenses, for the fiscal 2020 and 2019, is set forth below:
Overall Financial Results (000)
For the twelve months ended September 30
Reportable Segments | ||||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies |
Corporate |
Total | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 7,104 | $ | 9,132 | $ | — | $ | — | $ | — | $ | — | $ | 7,104 | $ | 9,132 | ||||||||||||||||
Circulation | 5,090 | 5,249 | — | — | — | — | 5,090 | 5,249 | ||||||||||||||||||||||||
Advertising service fees and other | 2,501 | 2,712 | — | — | — | — | 2,501 | 2,712 | ||||||||||||||||||||||||
Licensing and maintenance fees | — | — | 21,647 | 20,179 | — | — | 21,647 | 20,179 | ||||||||||||||||||||||||
Consulting fees | — | — | 7,718 | 5,539 | — | — | 7,718 | 5,539 | ||||||||||||||||||||||||
Other public service fees | — | — | 5,882 | 5,844 | — | — | 5,882 | 5,844 | ||||||||||||||||||||||||
Total operating revenues | 14,695 | 17,093 | 35,247 | 31,562 | — | — | 49,942 | 48,655 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 11,290 | 10,637 | 26,512 | 24,377 | — | — | 37,802 | 35,014 | ||||||||||||||||||||||||
Goodwill impairment | — | — | — | 13,400 | — | — | — | 13,400 | ||||||||||||||||||||||||
Others | 5,135 | 6,344 | 8,288 | 12,121 | — | — | 13,423 | 18,465 | ||||||||||||||||||||||||
Total operating expenses | 16,425 | 16,981 | 34,800 | 49,898 | — | — | 51,225 | 66,879 | ||||||||||||||||||||||||
Income (loss) from operations | (1,730 | ) | 112 | 447 | (18,336 | ) | — | — | (1,283 | ) | (18,224 | ) | ||||||||||||||||||||
Dividends and interest income | — | — | — | — | 4,965 | 5,380 | 4,965 | 5,380 | ||||||||||||||||||||||||
Other income | — | — | — | �� | — | 3 | 38 | 3 | 38 | |||||||||||||||||||||||
Net unrealized losses on investments | — | — | — | — | (3,099 | ) | (17,715 | ) | (3,099 | ) | (17,715 | ) | ||||||||||||||||||||
Interest expenses on note payable collateralized by real estate and other | (84 | ) | (93 | ) | — | — | (35 | ) | — | (119 | ) | (93 | ) | |||||||||||||||||||
Interest expense on margin loans | — | — | — | — | (434 | ) | (862 | ) | (434 | ) | (862 | ) | ||||||||||||||||||||
Gains on sales of marketable securities, net | — | — | — | — | 4,193 | — | 4,193 | — | ||||||||||||||||||||||||
Pretax income (loss) | $ | (1,814 | ) | $ | 19 | $ | 447 | $ | (18,336 | ) | $ | 5,593 | $ | (13,159 | ) | $ | 4,226 | $ | (31,476 | ) | ||||||||||||
Consolidated operating revenues were $40,703,000$49,942,000 and $41,384,000$48,655,000 for the fiscal year ended September 30, 20182020 and 2017,2019, respectively. This decreaseincrease of $681,000$1,287,000 (3%) was primarily from (i) a $1,644,000 reduction in Journal Technologies’ consulting fees due to fewer go-lives in fiscal 2018 and (ii) a $168,000 reduction in The Traditional Business’s trustee sale notice and related service fee revenues and a $253,000 reduction in circulation revenues, partially offset by increased Journal Technologies’ license and maintenance fees of $1,188,000$1,468,000, consulting fees of $2,179,000 and public service fees of $173,000.$38,000, partially offset by a reduction in the Traditional Business’ display advertising (including conferences which were discontinued) net revenues of $1,009,000, classified advertising net revenues of $218,000, trustee sale notice advertising net revenues of $282,000, legal notice advertising net revenues of $523,000 and circulation revenues of $159,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 58%71% and 65% of the Company’s total operating revenues for both fiscal 20182020 and fiscal 2017. 2019, respectively.
Consolidated operating expenses, excluding last year’s goodwill impairment write-off of $13,400,000, decreased by $2,254,000 (4%) to $51,225,000 from $53,479,000. Total salaries and employee benefits increased by $212,000 to $54,763,000 from $54,551,000. Total personnel costs increased by $2,083,000 (7%$2,788,000 (8%) to $33,832,000$37,802,000 from $31,749,000$35,014,000 primarily resulting from additional personnel costs for Journal Technologies.Technologies as independent contractors were transferred to employee status. Outside services decreased by $265,000 (6%$446,000 (12%) to $4,287,000$3,428,000 from $4,552,000$3,874,000 mainly because of decreased contractor’scontractor costs for Daily Journal.Journal Technologies. Depreciation and amortization costs which includeddecreased by $65,000 (11%) to $524,000 from $589,000 because of more fully-depreciated assets. Rent expenses decreased by $405,000 (40%) to $612,000 from $1,017,000 because of the closure of both the San Francisco and Modesto offices in October 2019 and the Colorado office in August 2020. Accounting and legal fees decreased by $666,000 (41%) to $939,000 from $1,605,000 primarily the amortizationbecause of decreased legal fees to review and negotiate Journal Technologies’ intangible assetscontracts with customers, more of $3,058,000 and $4,895,000 for fiscal 2018 and 2017, respectively, decreased by $1,908,000 to $3,678,000 from $5,586,000 mainly because all intangible assets became fully amortized during fiscal 2018.which was done in-house. Other general and administrative expenses increaseddecreased by $654,000 (6%$3,042,000 (44%) to $11,329,000$3,848,000 from $10,675,000$6,890,000 mainly because of increased rentresulting from reduced business travel expenses of $254,000 as we expanded the Coloradoand miscellaneous office and other computer related expenses of $372,000 for Journal Technologies.equipment purchases.
The Company’s non-operating income, net of expenses, decreasedincreased by $2,378,000 (47%)$18,761,000 to $2,721,000a gain of $5,509,000 from $5,099,000a loss of $13,252,000 primarily resulting frombecause of the recording of (i) net gains of $4,193,000 on partial sales of marketable securities as compared with none in the non-cash other-than-temporary impairmentprior fiscal year and (ii) net unrealized losses on investments of $4,560,000, partially offset by$3,099,000 during the capital gains on sales of marketable securities and others of $3,182,000, (ii) increases in the interest rate on the two acquisition margin loans of $229,000 and (iii)fiscal 2020 as compared with $17,715,000 during the prior year’s interest and penalty expense reversal of $743,000 for uncertain and unrecognized tax benefits.fiscal year.
During fiscal 2018,2020, consolidated pretax lossincome was $11,339,000$4,226,000, as compared with $8,068,000a pretax loss of $31,476,000 in the prior fiscal year. There was consolidated net income (after tax benefits) of $8,201,000$4,041,000 ($5.942.93 per share) for fiscal 2018 primarily due to tax benefits resulting from the December 2017 Tax Cuts and Jobs Act (the “Tax Act”)2020, as compared with a net loss of $918,000$25,216,000 (-$0.6618.26 per share) in the prior fiscal year. (See Taxes.)
During fiscal 2020, the Company’s cash and restricted cash and cash equivalents increased by $18,333,000 to $28,963,000 from $10,630,000, primarily because of the proceeds of $16,307,000 from the sales of some marketable securities. At September 30, 2018,2020, the aggregate fair market value of the Company’s marketable securities was $212,296,000.$179,368,000. These securities had approximately $158,407,000$137,593,000 of net unrealized gains before taxes of $42,151,000$35,870,000, and generated approximately $4,808,000$4,965,000 in dividends and interest income induring fiscal 20182020, 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 three U.S. financial institutions and one foreign manufacturer.
Taxes
For fiscal 2020, the Company recorded an income tax provision of $185,000 on pretax income of $4,226,000. The effective tax rate was less than the statutory rate primarily due to the dividends received deduction (“DRD”), a benefit resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and net state tax benefits. The effective tax rate for fiscal 2020 was 4.4%, after including the DRD, the tax benefits from the CARES Act and state taxes, as compared with 20% in the prior fiscal year.
The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company. One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years. In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018. Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014. The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014. The tax benefit of $187,000 resulting from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.
During fiscal 2020, the Company recorded net unrealized losses on investments of $3,099,000. An income tax benefit of $1,371,000 resulting from these losses was recorded as a temporary difference in deferred income taxes. The Company also recorded a net gain of $4,193,000 on the sales of marketable securities.
Additional details about eachFor 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 Company’s reportable segments,statutory rate due to the impairment of goodwill, partially offset by the DRD and its corporate income and expenses, is set forth below:a benefit for state taxes.
Overall Financial Results (000) | ||||||||||||||||||||||||||||||||
For the twelve months ended September 30 | ||||||||||||||||||||||||||||||||
Reportable Segments | ||||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies |
Corporate |
Total | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 9,112 | $ | 9,104 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 9,112 | $ | 9,104 | ||||||||||||||||
Circulation | 5,401 | 5,654 | --- | --- | --- | --- | 5,401 | 5,654 | ||||||||||||||||||||||||
Advertising service fees and other | 2,659 | 2,812 | --- | --- | --- | --- | 2,659 | 2,812 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | --- | 17,225 | 16,037 | --- | --- | 17,225 | 16,037 | ||||||||||||||||||||||||
Consulting fees | --- | --- | 2,832 | 4,476 | --- | --- | 2,832 | 4,476 | ||||||||||||||||||||||||
Other public service fees | --- | --- | 3,474 | 3,301 | --- | --- | 3,474 | 3,301 | ||||||||||||||||||||||||
Total operating revenues | 17,172 | 17,570 | 23,531 | 23,814 | --- | --- | 40,703 | 41,384 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 10,381 | 10,548 | 23,451 | 21,201 | --- | --- | 33,832 | 31,749 | ||||||||||||||||||||||||
Amortization of intangible assets | --- | --- | 3,058 | 4,895 | --- | --- | 3,058 | 4,895 | ||||||||||||||||||||||||
Others | 6,459 | 7,304 | 11,414 | 10,603 | --- | --- | 17,873 | 17,907 | ||||||||||||||||||||||||
Total operating expenses | 16,840 | 17,852 | 37,923 | 36,699 | --- | --- | 54,763 | 54,551 | ||||||||||||||||||||||||
Income (loss) from operations | 332 | (282 | ) | (14,392 | ) | (12,885 | ) | --- | --- | (14,060 | ) | (13,167 | ) | |||||||||||||||||||
Dividends and interest income | --- | --- | --- | --- | 4,808 | 4,844 | 4,808 | 4,844 | ||||||||||||||||||||||||
Other income | --- | 22 | --- | --- | 37 | 12 | 37 | 34 | ||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (95 | ) | (100 | ) | --- | --- | --- | --- | (95 | ) | (100 | ) | ||||||||||||||||||||
Interest expense on margin loans | --- | --- | --- | --- | (651 | ) | (422 | ) | (651 | ) | (422 | ) | ||||||||||||||||||||
Capital gains on sales of marketable securities and others | --- | --- | --- | --- | 3,182 | --- | 3,182 | --- | ||||||||||||||||||||||||
Other-than-temporary impairment losses on investments | --- | --- | --- | --- | (4,560 | ) | --- | (4,560 | ) | --- | ||||||||||||||||||||||
Interest expense reversal for uncertain and unrecognized tax benefits | --- | --- | --- | 743 | --- | --- | --- | 743 | ||||||||||||||||||||||||
Pretax income (loss) | $ | 237 | $ | (360 | ) | $ | (14,392 | ) | $ | (12,142 | ) | $ | 2,816 | $ | 4,434 | $ | (11,339 | ) | $ | (8,068 | ) | |||||||||||
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2017 with regard to federal income taxes and fiscal 2016 for state income taxes.
The Traditional Business
The Traditional Business segment’s pretax income increased by $597,000 to pretax income of $237,000 fromhad a pretax loss of $360,000.$1,814,000, representing a $1,833,000 decrease in income from pretax income of $19,000 in the prior fiscal year.
Advertising revenues increaseddecreased by $8,000$2,028,000 (22%) to $9,112,000$7,104,000 from $9,104,000,$9,132,000, primarily resulting from increases in conferencebecause of decreased display advertising (including conferences which were discontinued) net revenues of $92,000 and$1,009,000, classified advertising net government notice advertising revenues of $65,000, partially offset by declines in$218,000, trustee sale notice advertising net revenues of $149,000.$282,000 and legal notice advertising net revenues of $523,000.
Trustee sale notices are very much dependent on the number of California and Arizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 13%34% during the twelve months ended September 30, 2018fiscal 2020 as compared to the prior fiscal year. Because this slowing is expectedUnless the economic impact of the efforts to continue, the Companycontain COVID-19 result in significant additional foreclosures in California and Arizona, management expects there will be fewer foreclosure notice and other public notice advertisements and declining revenues infor fiscal 2019, and the Company’s print-based earnings will also likely decline significantly because it will be impractical for the Company to offset all revenue losses by expense reduction.2021. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 88%86% of the total public notice advertising revenues in fiscal 2018.the twelve months ended September 30, 2020. Public notice advertising revenues and related advertising and other service fees constituted about 21%15% and 18% of the Company’s total operating revenues for both fiscal 20182020 and 2017.2019, respectively. Because of this concentration, the Company’s revenues would be significantly adversely affected if California and Arizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as had been recentlywas implemented in Arizona in 2017 for one notice type that hashad 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 89%91% of Thethe Traditional Business’ total circulation revenues, which declined by $253,000$159,000 (3%) to $5,401,000$5,090,000 from $5,654,000.$5,249,000. The court rule and judicial profile services generated about 8%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 $1,012,000 (6%$556,000 (3%) to $16,840,000$16,425,000 from $17,852,000,$16,981,000, primarily due to decreased personnelrent, outside contract printing and contractordistributing costs.
Journal Technologies
During fiscal 2020, Journal Technologies’ business segment pretax lossincome increased by $2,250,000 (19%$5,383,000 (109%) to $14,392,000$447,000 from $12,142,000, after recording the interest and penalty expense reversala pretax loss of $743,000 for uncertain and unrecognized tax benefits$4,936,000 in the prior fiscal year, and includingexcluding the amortization costsgoodwill impairment loss of intangible assets of $3,058,000 for fiscal 2018 and $4,895,000 for fiscal 2017.$13,400,000 in 2019.
Revenues decreasedincreased by $283,000 (1%$3,685,000 (12%) to $23,531,000$35,247,000 from $23,814,000$31,562,000 in the prior fiscal year. Licensing and maintenance fees increased by $1,188,000$1,468,000 (7%) to $17,225,000$21,647,000 from $16,037,000.$20,179,000. Consulting fees decreasedincreased by $1,644,000 (37%$2,179,000 (39%) to $2,832,000$7,718,000 from $4,476,000. $5,539,000 due to more go-lives.
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 $173,000 (5%$38,000 (1%) to $3,474,000$5,882,000 from $3,301,000$5,844,000 primarily due to an increase in the number of traffic tickets processed through Journal Technologies’ products.additional efiling fee revenues.
Operating expenses increaseddecreased by $1,224,000 (3%$1,698,000 (5%) to $37,923,000$34,800,000 from $36,699,000,$36,498,000, excluding prior year’s goodwill impairment loss of $13,400,000, primarily duebecause of decreased business travel expenses and legal fees to increased personnel costs.review and negotiate Journal Technologies’ contracts with customers, more of which was done in-house.
Intangible assets, including customer relationships and developed technology from the fiscal 2013 acquisitions, were fully amortized on a straight-line basis over five years for financial statement purposes due to the short life cycle of technology on which customer relationships depend, and are being amortized over 15 years for tax purposes. Goodwill, which is not amortized for financial statement purposes, is amortized over 15 years for tax purposes. Goodwill represents the expected synergies in expanding the Company’s software business. Goodwill is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Considered factors for potential goodwill impairment evaluation include the current year’s operating financial results before intangible amortization, fluctuations of revenues, changes in the market place, the status of installation contracts and new business, among other things. Journal Technologies is continuingcontinues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
Taxes
The Tax Act reduced the maximum corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company has completed its review of the Tax Act. The impact to its financial statements is as follows: (i) current income tax expense or benefit is calculated using a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense includes 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 relates to items that were initially recorded as accumulated other comprehensive income (“AOCI”). This revaluation of approximately $20 million was recorded as a component of income tax expense or benefit in continuing operations.
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 Tax Act item discussed above) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes.
On a pretax loss of $8,068,000 for fiscal 2017, the Company recorded an income tax benefit of $7,150,000 which included a reversal of an accrued liability of approximately $2,665,000 for uncertain and unrecognized tax benefits relating to an acquisition in fiscal 2013. The Internal Revenue Service concluded its examination of the Company’s fiscal 2014 income tax return with no proposed changes to the tax position that gave rise to this liability. As a result, this liability was reversed along with the related accrued interest and penalty expense of $743,000. In addition, a deferred tax liability, in the amount of $352,000, relating to temporary differences that would only exist if the uncertain tax position was never recognized, was reversed. The effective tax rate (before the discrete IRS item) was greater than the statutory rate mainly resulting from the dividends received deduction. The Company’s effective tax rate was 172% and 89% for fiscal 2018 and 2017, respectively.
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2015 with regard to federal income taxes and fiscal 2013 for state income taxes.
Fiscal 2017 compared with fiscal 2016
Consolidated revenues were $41,384,000 and $41,612,000 for fiscal year ended September 30, 2017 and 2016, respectively. This decrease of $228,000 was primarily from the reduction in (i) The Traditional Business’s trustee sale notice and its related service fee revenues of $724,000 and (ii) Journal Technologies’ public service fees of $1,051,000 primarily due to a reduction in the number of traffic tickets processed through Journal Technologies’ products, partially offset by increased Journal Technologies’ license and maintenance fees of $1,279,000 and consulting fees of $391,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 58% and 56% of the Company’s total operating revenues for fiscal 2017 and 2016, respectively.
Consolidated operating expenses increased by $6,299,000 (13%) to $54,551,000 from $48,252,000, primarily resulting from additional personnel costs and services for Journal Technologies. Total personnel costs increased by $4,368,000 (16%) to $31,749,000 from $27,381,000. Outside services increased by $823,000 (22%) to $4,552,000 from $3,729,000 mainly because of increased contractors’ costs for Journal Technologies. Depreciation and amortization costs, which included primarily the amortization of Journal Technologies’ intangible assets of $4,895,000 for both fiscal 2017 and 2016, decreased by $123,000 to $5,586,000 from $5,709,000. Other general and administrative expenses increased by $1,295,000 (14%) to $10,675,000 from $9,380,000 mainly because of increased accounting and legal fees and other hosting service fees for Journal Technologies.
The Company’s non-operating income, net of expenses, increased by $1,437,000 (39%) to $5,099,000 from $3,662,000 primarily because of the interest and penalty expense reversal of $743,000 for uncertain and unrecognized tax benefits and more dividend income, partially offset by increases in the interest rate on the two acquisition margin loans and additional interest expense for the Company’s real estate loan.
During fiscal 2017, consolidated pretax loss was $8,068,000 as compared with $2,978,000 in the prior year. There was a consolidated net loss after tax benefits of $918,000 (-$0.66 per share) for fiscal 2017 as compared with $1,043,000 (-$0.76 per share) in the prior year.
At September 30, 2017, the aggregate fair market value of the Company’s marketable securities was $229,265,000. These securities had approximately $165,872,000 of unrealized gains before taxes of $64,550,000 and generated approximately $4,844,000 in dividends and interest income in fiscal 2017 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 three U.S. financial institutions and one foreign manufacturer.
Additional details 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 Business | Journal Technologies |
Corporate |
Total | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 9,104 | $ | 9,854 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 9,104 | $ | 9,854 | ||||||||||||||||
Circulation | 5,654 | 5,912 | --- | --- | --- | --- | 5,654 | 5,912 | ||||||||||||||||||||||||
Advertising service fees and other | 2,812 | 2,651 | --- | --- | --- | --- | 2,812 | 2,651 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | --- | 16,037 | 14,758 | --- | --- | 16,037 | 14,758 | ||||||||||||||||||||||||
Consulting fees | --- | --- | 4,476 | 4,085 | --- | --- | 4,476 | 4,085 | ||||||||||||||||||||||||
Other public service fees | --- | --- | 3,301 | 4,352 | --- | --- | 3,301 | 4,352 | ||||||||||||||||||||||||
Total operating revenues | 17,570 | 18,417 | 23,814 | 23,195 | --- | --- | 41,384 | 41,612 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 10,548 | 9,997 | 21,201 | 17,384 | --- | --- | 31,749 | 27,381 | ||||||||||||||||||||||||
Amortization of intangible assets | --- | 142 | 4,895 | 4,895 | --- | --- | 4,895 | 5,037 | ||||||||||||||||||||||||
Others | 7,304 | 7,101 | 10,603 | 8,733 | --- | --- | 17,907 | 15,834 | ||||||||||||||||||||||||
Total operating expenses | 17,852 | 17,240 | 36,699 | 31,012 | --- | --- | 54,551 | 48,252 | ||||||||||||||||||||||||
(Loss) income from operations | (282 | ) | 1,177 | (12,885 | ) | (7,817 | ) | --- | --- | (13,167 | ) | (6,640 | ) | |||||||||||||||||||
Dividends and interest income | --- | --- | --- | --- | 4,844 | 4,085 | 4,844 | 4,085 | ||||||||||||||||||||||||
Other income | 22 | 52 | --- | --- | 12 | 9 | 34 | 61 | ||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (100 | ) | (88 | ) | --- | --- | --- | --- | (100 | ) | (88 | ) | ||||||||||||||||||||
Interest expense on margin loans | --- | --- | --- | --- | (422 | ) | (284 | ) | (422 | ) | (284 | ) | ||||||||||||||||||||
Interest expense reversal (accrual) for uncertain and unrecognized tax benefits | --- | --- | 743 | (112 | ) | --- | --- | 743 | (112 | ) | ||||||||||||||||||||||
Pretax (loss) income | $ | (360 | ) | $ | 1,141 | $ | (12,142 | ) | $ | (7,929 | ) | $ | 4,434 | $ | 3,810 | $ | (8,068 | ) | $ | (2,978 | ) | |||||||||||
The Traditional Business
The Traditional Business segment’s pretax income decreased by $1,501,000 to a pretax loss of $360,000 from pretax income of $1,141,000.
Advertising revenues decreased by $750,000 to $9,104,000 from $9,854,000, primarily resulting from the declines in trustee sale notice advertising and its related service fee revenues of $724,000.
Trustee sale notices are very much dependent on the number of California and Arizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 25% during the twelve months ended September 30, 2017 as compared to the prior year. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 89% of the total public notice advertising revenues in fiscal 2017. Public notice advertising revenues and related advertising and other service fees constituted about 21% and 23% of the Company’s total operating revenues for fiscal 2017 and 2016, respectively.
The Daily Journals accounted for about 88% of The Traditional Business’ total circulation revenues, which declined by $258,000 to $5,654,000 from $5,912,000. The court rule and judicial profile services generated about 10% 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 $612,000 (4%) to $17,852,000 from $17,240,000, primarily due to increased personnel costs.
Journal Technologies
Journal Technologies’ business segment pretax loss increased by $4,213,000 (53%) to $12,142,000 from $7,929,000, after recording the interest and penalty expense reversal of $743,000 for uncertain and unrecognized tax benefits in March 2017 and including the amortization costs of intangible assets of $4,895,000 for both fiscal 2017 and 2016.
Revenues increased by $619,000 (3%) to $23,814,000 from $23,195,000 in the prior year. Licensing and maintenance fees increased by $1,279,000 (9%) to $16,037,000 from $14,758,000. Consulting fees also increased by $391,000 (10%) to $4,476,000 from $4,085,000. Other public service fees decreased by $1,051,000 (24%) to $3,301,000 from $4,352,000 primarily due to a reduction in the number of traffic tickets processed online for the public to pay traffic citations.
Operating expenses increased by $5,687,000 (18%) to $36,699,000 from $31,012,000, primarily due to increased personnel costs.
Taxes
At the beginning of fiscal 2017, the Company had a liability for uncertain and unrecognized tax benefits in the amount of $2,723,000 relating to an acquisition in fiscal 2013. During the second quarter of fiscal 2017, the Internal Revenue Service concluded its examination of the Company’s fiscal 2014 income tax return and proposed no changes to the tax position that gave rise to this liability. Consequently, this liability was reversed in March 2017 along with the related accrued interest and penalty expenses of $743,000. In addition, a deferred tax liability, in the amount of $352,000, relating to temporary differences that would only exist if the uncertain tax position was never recognized, was reversed. At September 30, 2016, the liability was approximately $2,723,000, after a reduction of $521,000 resulting from the recognition of deferred revenues and from the amortization of goodwill for tax purposes. During 2016 and 2015, interest expense of approximately $112,000 and $96,000 respectively, was recorded as “interest and penalty expense accrued for uncertain and unrecognized tax benefits”.
During fiscal 2017, the Company recorded an income tax benefit of $7,150,000 on pretax loss of $8,068,000. 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. On pretax loss of $2,978,000 for fiscal 2016, the Company recorded an income tax benefit of $1,935,000. The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction. The Company’s effective tax rate was 89% and 65% for fiscal 2017 and 2016, respectively.
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 Business | Journal 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 | ||||||||||||
Reportable Segments | ||||||||||||||||
Traditional Business | Journal 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 | ||||||||||||
Reportable Segments | Reportable Segments | |||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies |
Corporate |
Total | Traditional Business | Journal Technologies |
Corporate |
Total | |||||||||||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||||||||||
Fiscal 2020 | ||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising, net | $ | 9,854,000 | $ | --- | $ | --- | $ | 9,854,000 | ||||||||||||||||||||||||
Advertising | $ | 7,104,000 | $ | — | $ | — | $ | 7,104,000 | ||||||||||||||||||||||||
Circulation | 5,912,000 | --- | --- | 5,912,000 | 5,090,000 | — | — | 5,090,000 | ||||||||||||||||||||||||
Advertising service fees and other | 2,651,000 | --- | --- | 2,651,000 | 2,501,000 | — | — | 2,501,000 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | 14,758,000 | --- | 14,758,000 | — | 21,647,000 | — | 21,647,000 | ||||||||||||||||||||||||
Consulting fees | --- | 4,085,000 | --- | 4,085,000 | — | 7,718,000 | — | 7,718,000 | ||||||||||||||||||||||||
Other public service fees | --- | 4,352,000 | --- | 4,352,000 | — | 5,882,000 | — | 5,882,000 | ||||||||||||||||||||||||
Operating expenses | 17,240,000 | 31,012,000 | --- | 48,252,000 | 16,425,000 | 34,800,000 | — | 51,225,000 | ||||||||||||||||||||||||
Income (loss) from operations | 1,177,000 | (7,817,000 | ) | --- | (6,640,000 | ) | (1,730,000 | ) | 447,000 | — | (1,283,000 | ) | ||||||||||||||||||||
Dividends and interest income | --- | --- | 4,085,000 | 4,085,000 | — | — | 4,965,000 | 4,965,000 | ||||||||||||||||||||||||
Other income | 52,000 | --- | 9,000 | 61,000 | — | — | 3,000 | 3,000 | ||||||||||||||||||||||||
Interest expense on note payable collateralized by real estate | (88,000 | ) | --- | --- | (88,000 | ) | ||||||||||||||||||||||||||
Interest expense on margin loans | --- | --- | (284,000 | ) | (284,000 | ) | ||||||||||||||||||||||||||
Interest expense accrued for uncertain and unrecognized tax benefits | --- | (112,000 | ) | --- | (112,000 | ) | ||||||||||||||||||||||||||
Pretax income (loss) | 1,141,000 | (7,929,000 | ) | 3,810,000 | (2,978,000 | ) | ||||||||||||||||||||||||||
Income tax benefit (expense) | (530,000 | ) | 3,140,000 | (675,000 | ) | 1,935,000 | ||||||||||||||||||||||||||
Net income (loss) | 611,000 | (4,789,000 | ) | 3,135,000 | (1,043,000 | ) | ||||||||||||||||||||||||||
Net unrealized losses on investments | — | — | (3,099,000 | ) | (3,099,000 | ) | ||||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (84,000 | ) | — | (35,000 | ) | (119,000 | ) | |||||||||||||||||||||||||
Interest expenses on margin loans | — | — | (434,000 | ) | (434,000 | ) | ||||||||||||||||||||||||||
Gains on sales of marketable securities, net | — | — | 4,193,000 | 4,193,000 | ||||||||||||||||||||||||||||
Pretax income | (1,814,000 | ) | 447,000 | 5,593,000 | 4,226,000 | |||||||||||||||||||||||||||
Income tax expense | 685,000 | 100,000 | (970,000 | ) | (185,000 | ) | ||||||||||||||||||||||||||
Net loss | (1,129,000 | ) | 547,000 | 4,623,000 | 4,041,000 | |||||||||||||||||||||||||||
Total assets | 17,644,000 | 39,786,000 | 168,016,000 | 225,446,000 | 35,896,000 | 22,277,000 | 180,402,000 | 238,575,000 | ||||||||||||||||||||||||
Capital expenditures, including purchase of Logan building | 3,662,000 | 117,000 | --- | 3,779,000 | ||||||||||||||||||||||||||||
Amortization of intangible assets | 142,000 | 4,895,000 | --- | 5,037,000 | ||||||||||||||||||||||||||||
Capital expenditures | 121,000 | 63,000 | — | 184,000 | ||||||||||||||||||||||||||||
Reportable Segments | ||||||||||||||||
Traditional Business | Journal 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 $13,400,000
During fiscal 2018, 20172020 and 2016,2019, the Traditional Business had total operating revenues of $17,172,000, $17,570,000$14,695,000 and $18,417,000$17,093,000 of which $11,771,000, $11,916,000$9,605,000 and $12,505,000,$11,844,000, respectively, were recognized after services were provided while $5,401,000, $5,654,000$5,090,000 and $5,912,000,$5,249,000, respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $23,531,000, $23,814,000$35,247,000 and $23,195,000,$31,562,000, of which $7,437,000, $8,618,000$14,025,000 and $9,735,000,$12,353,000, respectively, were recognized upon completion of services while $16,094,000, $15,196,000$21,222,000 and $13,460,000,$19,209,000, respectively, were recognized ratably over the subscription periods.
Approximately 58%71% of the Company’s revenues during fiscal 20182020 were derived from Journal Technologies, as compared with 58% and 56%65% in the prior two years.fiscal year. In addition, the Company’s revenues have been primarily from the United States, with approximately 1% from foreign countries. Almost all of Journal Technologies’ revenues are all from governmental agencies.
The following table sets forth certain deferred obligations from October 1, 2017 through September 30, 2018:
Beginning Balance |
Addition |
Recognized | Ending Balance | |||||||||||||
Deferred subscriptions | $ | 3,284,000 | $ | 5,291,000 | $ | (5,401,000 | ) | $ | 3,174,000 | |||||||
Deferred installation contracts | 5,072,000 | 1,445,000 | (3,963,000 | ) | 2,554,000 | |||||||||||
Deferred maintenance agreements and others | 10,201,000 | 20,255,000 | (16,094,000 | ) | 14,362,000 | |||||||||||
Disclosure of Contractual Obligations
The following table sets forth certain contractual obligations as of September 30, 2018:
Contractual Obligations (000)
Less than 1 year |
1-3 years |
3-5 years | More than 5 years |
Total | ||||||||||||||||
Real estate loan | $ | 121 | $ | 259 | $ | 285 | $ | 1,291 | $ | 1,956 | ||||||||||
Obligations under operating leases | 848 | 350 | --- | --- | 1,198 | |||||||||||||||
Long-term accrued liabilities * | --- | 26 | 16 | 128 | 170 | |||||||||||||||
| $ | 969 | $ | 635 | $ | 301 | $ | 1,419 | $ | 3,324 | |||||||||||
* 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 of September 30, 2018 was 2.50%, an increase of .75% in interest rate during fiscal 2018 as compared with 1.75% after the same interest rate increase of .75% during fiscal 2017. During fiscal 2016, there was an interest rate increase of .25%. Prior to fiscal 2016, there had been no change to the interest rate which was at .75% since December 2012.
During the second quarter of fiscal 2017, the prior years’ accrual of liability of approximately $2,723,000 for uncertain and unrecognized tax benefits relating to one of the acquisitions in fiscal 2013 was completely reversed as the Internal Revenue Service concluded its examination of the Company’s fiscal 2014 income tax return and proposed no changes to the tax position that gave rise to this liability.
Liquidity and Capital Resources
During fiscal 2018,2020, the Company’s cash and restricted cash and cash equivalents and marketable security positions decreasedincreased by $11,052,000 to $221,597,000 after the sale$3,120,000, including net unrealized losses on investments of the bonds for $8,125,000 with a capital gain of $3,180,000.$3,099,000. Cash and cash equivalents were used for the purchase of capital assets of $212,000$184,000 and payment for loan principal of $126,000. There were cash provided by operating activities of $1,881,000,$2,336,000 which included a net decreasedecreases of $555,000 in accounts receivable and a net increase of $1,533,000$1,808,000 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 $41,775,000 and a market value of about $212,296,000$179,368,000 at September 30, 2018,2020, generated approximately $4,965,000 in dividends income during fiscal 2020. These securities had approximately $158,407,000$137,593,000 of net unrealized gains before estimated taxes of $42,151,000$35,870,000 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 generated approximately $4,808,000 in dividends and interest income.thus may have a significant impact depending on the fluctuations of the market prices of the invested securities.
Cash flows from operating activities increased by $770,000$721,000 during fiscal 20182020 as compared to the prior fiscal year, primarily resulting fromdue to increases in net income of $29,257,000, decreases in deferred tax assets of $6,982,000 and decreases in accounts receivable of $1,206,000$2,542,000 primarily resulting from more payment collections, partially offset by this year’s net gains on sales of marketable securities of $4,193,000, last year’s goodwill impairment expenses of $13,400,000 and decreases in (i) unrealized losses on investments of $14,616,000, (ii) accounts payable and accrued liabilities of $2,208,000 because of more customer payments. Thethe timing difference in remitting efiling fees to the courts and (iii) net cash used in operating activities of $1,881,000 included net increases of $1,533,000 in deferred subscriptions, deferred installation contracts and deferred maintenance agreements and others.others and deferred installation contracts of $2,902,000.
As of September 30, 2018,2020, the Company had working capital of $199,971,000,$188,318,000, including the liabilities for deferred subscriptions, deferred installation and maintenance agreements and others of $19,914,000, which are scheduled to be earned within one year.$18,926,000.
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. COVID-19 and the efforts to contain it, however, have significantly impacted the Company’s cash flows from operations and the value of its marketable securities portfolio. The Company may or may not have the ability to borrow additional amounts 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 managementsecurities 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 ofamong 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, andpossibilities, it may utilize governmentbe required to consider selling some of those securities as a defaultto generate cash 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 continueneeded to play an important role in monitoring existing investments and selecting any future investments.fund ongoing operations.
As of September 30, 2018,2020, the investments were concentrated in just sixfive 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 recognitionnet income.
The Company is not a smaller version of impairment losses in the Company’s income statement (such as the other-than-temporary impairment losses of $4,560,000 recognized during this year).Berkshire Hathaway Inc. Instead, it hopes to be a significant software company while it also holds its traditional business.
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, 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.
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, and subscription and advertising revenues are recognized ratably (using the output method based on time-elapsed).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 of Computer 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 2018, 20172020 and 2016.2019. 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 using Level 3 inputs, based on an average of the prior fiscal year (fiscal 2017)2019) 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. In addition, ASC 2011-08, Testing Goodwill for Impairment, allows for the option of performing a qualitative assessment before calculating the fair value of a reporting unit. If it is determined based on qualitative factors that there is no impairment to goodwill, then the fair value of a reporting unit is not needed. If a quantitative analysis is required and the unit’s carrying amount exceeds its fair value, then the second step is performed to measure the amount of potential impairment. The Company’s annual goodwill impairment analysis in 2018 did not result in an impairment charge based on the qualitative assessment using the above-mentioned considered factors for potential goodwill impairment.
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) Thethe 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.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
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. 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 of September 30, 2018 was 2.50%, an increase of .75% in interest rate during fiscal 2018 as compared with 1.75% after the same interest rate increase of .75% during fiscal 2017. During fiscal 2016, there was an interest rate increase of .25%. Prior to fiscal 2016, there had been no change to the interest rate which was at .75% since December 2012. The Company was not subject to any significant interest rate risk during such period.
Foreign Currency Risk
The Company holds foreign marketable securities based in the South Korean Won and Hong Kong Dollar that are subject to risk associated with changes in the exchange rates of these currencies against the United States Dollar. The fair value of the foreign marketable security held in South Korean Won was $10,249,000 with an adjusted cost of $10,249,000 (after the other-than-temporary impairment losses of $4,560,000) and $11,724,000 with an adjusted cost of $14,810,000 as of September 30, 2018 and 2017, respectively. The exchange rate of the South Korean Won against the United States Dollar was $0.00090 and $0.00087 at September 30, 2018 and 2017, respectively. The fair value of the foreign marketable security held in Hong Kong Dollars was $42,587,000 with an adjusted cost of $14,710,000 and $55,000,000 with an adjusted cost of $14,710,000 as of September 30, 2018 and 2017, respectively. The exchange rate of the Hong Kong Dollar against the United States Dollar was $0.12780 and $0.12803 at September 30, 2018 and 2017, respectively.
Equity Price Risk
The Company owns marketable securities and is subject to equity price risk. The following table summarizes our equity securities with significant equity price risk as of September 30, 2018 and 2017. The effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates are also shown. The selected 30% hypothetical changes do not reflect what could be considered the best or worst case scenarios. Indeed, results could be far better or worse due both to the nature of equity markets and the aforementioned concentration in our equity investment portfolio.
Equity Price Risk (000)
Fair Value | Hypothetical Price Change | Estimated Fair Value after Hypothetical Change in Prices | Hypothetical Percentage Increase (Decrease) in Shareholders’ Equity | |||||||||||
September 30, 2018 | ||||||||||||||
Equity securities | $ | 212,296 | 30% increase | $ | 275,985 | 39% increase | ||||||||
| 30% decrease | 148,607 | 39% decrease | ||||||||||||
September 30, 2017 | ||||||||||||||
Equity securities | $ | 220,973 | 30% increase | $ | 287,265 | 41% increase | ||||||||
| 30% decrease | 154,681 | 41% decrease | ||||||||||||
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of Daily Journal Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Daily Journal Corporation (the Company) as of September 30, 20182020 and 2017,2019, the related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the periodthen ended, September 30, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the periodthen ended, September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated December 12, 2018 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
\s\ Squar MilnerBaker Tilly US, LLP
We have served as the Company's auditor since 2016.
Los Angeles, California
December 12, 201817, 2020
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30 | September 30 | September 30 | September 30 | |||||||||||||
2018 | 2017 | 2020 | 2019 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 9,301,000 | $ | 3,384,000 | $ | 26,922,000 | $ | 8,615,000 | ||||||||
Marketable securities at fair value, including common stocks of $212,296,000 and bonds of $0 at September 30, 2018 and common stocks of $220,973,000 and bonds of $8,292,000 at September 30, 2017 | 212,296,000 | 229,265,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $200,000 at September 30, 2018 and September 30, 2017 | 4,803,000 | 5,358,000 | ||||||||||||||
| Restricted cash | 2,041,000 | 2,015,000 | ||||||||||||||
Marketable securities at fair value -- common stocks of $179,368,000 at September 30, 2020 and $194,581,000 at September 30, 2019 | 179,368,000 | 194,581,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $250,000 at September 30, 2020 and $200,000 at September 30, 2019 | 6,727,000 | 7,036,000 | ||||||||||||||
Inventories | 46,000 | 40,000 | 36,000 | 40,000 | ||||||||||||
Prepaid expenses and other current assets | 512,000 | 798,000 | 613,000 | 508,000 | ||||||||||||
Income tax receivable | 270,000 | 909,000 | 601,000 | 153,000 | ||||||||||||
Total current assets | 227,228,000 | 239,754,000 | 216,308,000 | 212,948,000 | ||||||||||||
Property, plant and equipment, at cost | ||||||||||||||||
Land, buildings and improvements | 16,422,000 | 16,396,000 | 16,572,000 | 16,499,000 | ||||||||||||
Furniture, office equipment and computer software | 2,877,000 | 2,724,000 | 1,782,000 | 2,119,000 | ||||||||||||
Machinery and equipment | 1,749,000 | 1,799,000 | 1,524,000 | 1,750,000 | ||||||||||||
| 21,048,000 | 20,919,000 | 19,878,000 | 20,368,000 | |||||||||||||
Less accumulated depreciation | (9,828,000 | ) | (9,292,000 | ) | (9,422,000 | ) | (9,572,000 | ) | ||||||||
| 11,220,000 | 11,627,000 | 10,456,000 | 10,796,000 | |||||||||||||
Intangibles, net | --- | 3,058,000 | ||||||||||||||
Goodwill | 13,400,000 | 13,400,000 | ||||||||||||||
Operating lease right-of-use assets | 140,000 | 0 | ||||||||||||||
Deferred income taxes - Federal | 9,269,000 | 10,652,000 | 11,137,000 | 12,596,000 | ||||||||||||
Deferred income taxes - State | 2,881,000 | 2,217,000 | 534,000 | 1,036,000 | ||||||||||||
| $ | 263,998,000 | $ | 280,708,000 | $ | 238,575,000 | $ | 237,376,000 | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 2,820,000 | $ | 3,049,000 | $ | 3,926,000 | $ | 4,520,000 | ||||||||
Accrued liabilities | 4,402,000 | 3,112,000 | 5,005,000 | 5,173,000 | ||||||||||||
Note payable collateralized by real estate | 121,000 | 115,000 | 133,000 | 126,000 | ||||||||||||
Deferred subscriptions | 3,174,000 | 3,284,000 | 2,899,000 | 3,195,000 | ||||||||||||
Deferred installation contracts | 2,554,000 | 5,072,000 | 140,000 | 1,932,000 | ||||||||||||
Deferred maintenance agreements and others | 14,186,000 | 9,442,000 | 15,887,000 | 15,722,000 | ||||||||||||
Total current liabilities | 27,257,000 | 24,074,000 | 27,990,000 | 30,668,000 | ||||||||||||
Long term liabilities | ||||||||||||||||
Investment margin account borrowings | 29,493,000 | 29,493,000 | 29,493,000 | 29,493,000 | ||||||||||||
Note payable collateralized by real estate | 1,835,000 | 1,956,000 | 1,576,000 | 1,709,000 | ||||||||||||
Deferred maintenance agreements | 176,000 | 759,000 | 450,000 | 335,000 | ||||||||||||
Accrued liabilities | 170,000 | 135,000 | 1,455,000 | 230,000 | ||||||||||||
Deferred income taxes | 42,151,000 | 64,550,000 | 35,870,000 | 37,241,000 | ||||||||||||
Total long term liabilities | 73,825,000 | 96,893,000 | 68,844,000 | 69,008,000 | ||||||||||||
Commitments and contingencies (Notes 4 and 5) | --- | --- | — | — | ||||||||||||
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; 1,805,053 shares issued, including 424,307 treasury shares, at September 30, 2018 and September 30, 2017 | 14,000 | 14,000 | ||||||||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued | 0 | 0 | ||||||||||||||
Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 424,307 treasury shares,at September 30, 2020 and September 30, 2019 | 14,000 | 14,000 | ||||||||||||||
Additional paid-in capital | 1,755,000 | 1,755,000 | 1,755,000 | 1,755,000 | ||||||||||||
Retained earnings | 45,361,000 | 57,150,000 | 139,972,000 | 135,931,000 | ||||||||||||
Accumulated other comprehensive income | 115,786,000 | 100,822,000 | ||||||||||||||
Total shareholders' equity | 162,916,000 | 159,741,000 | 141,741,000 | 137,700,000 | ||||||||||||
| $ | 263,998,000 | $ | 280,708,000 | $ | 238,575,000 | $ | 237,376,000 | |||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
2018 | 2017 | 2016 | 2020 | 2019 | ||||||||||||||||
Revenues | ||||||||||||||||||||
Advertising, net | $ | 9,112,000 | $ | 9,104,000 | $ | 9,854,000 | $ | 7,104,000 | $ | 9,132,000 | ||||||||||
Circulation | 5,401,000 | 5,654,000 | 5,912,000 | 5,090,000 | 5,249,000 | |||||||||||||||
Advertising service fees and other | 2,659,000 | 2,812,000 | 2,651,000 | 2,501,000 | 2,712,000 | |||||||||||||||
Licensing and maintenance fees | 17,225,000 | 16,037,000 | 14,758,000 | 21,647,000 | 20,179,000 | |||||||||||||||
Consulting fees | 2,832,000 | 4,476,000 | 4,085,000 | 7,718,000 | 5,539,000 | |||||||||||||||
Other public service fees | 3,474,000 | 3,301,000 | 4,352,000 | 5,882,000 | 5,844,000 | |||||||||||||||
| 40,703,000 | 41,384,000 | 41,612,000 | 49,942,000 | 48,655,000 | ||||||||||||||||
Costs and expenses | ||||||||||||||||||||
Salaries and employee benefits | 33,832,000 | 31,749,000 | 27,381,000 | 37,802,000 | 35,014,000 | |||||||||||||||
Outside services | 4,287,000 | 4,552,000 | 3,729,000 | 3,428,000 | 3,874,000 | |||||||||||||||
Postage and delivery expenses | 857,000 | 1,112,000 | 1,141,000 | 712,000 | 838,000 | |||||||||||||||
Newsprint and printing expenses | 780,000 | 877,000 | 912,000 | 699,000 | 727,000 | |||||||||||||||
Depreciation and amortization | 3,678,000 | 5,586,000 | 5,709,000 | 524,000 | 589,000 | |||||||||||||||
Goodwill impairment | 0 | 13,400,000 | ||||||||||||||||||
Equipment maintenance and software | 1,268,000 | 1,516,000 | ||||||||||||||||||
Credit card merchant discount fees | 1,393,000 | 1,409,000 | ||||||||||||||||||
Rent expenses | 612,000 | 1,017,000 | ||||||||||||||||||
Accounting and legal fees | 939,000 | 1,605,000 | ||||||||||||||||||
Other general and administrative expenses | 11,329,000 | 10,675,000 | 9,380,000 | 3,848,000 | 6,890,000 | |||||||||||||||
| 54,763,000 | 54,551,000 | 48,252,000 | 51,225,000 | 66,879,000 | ||||||||||||||||
Loss from operations | (14,060,000 | ) | (13,167,000 | ) | (6,640,000 | ) | (1,283,000 | ) | (18,224,000 | ) | ||||||||||
Other income (expenses) | ||||||||||||||||||||
Dividends and interest income | 4,808,000 | 4,844,000 | 4,085,000 | 4,965,000 | 5,380,000 | |||||||||||||||
Other income | 37,000 | 34,000 | 61,000 | 3,000 | 38,000 | |||||||||||||||
Interest expense on note payable collateralized by real estate | (95,000 | ) | (100,000 | ) | (88,000 | ) | ||||||||||||||
Net unrealized losses on investments | (3,099,000 | ) | (17,715,000 | ) | ||||||||||||||||
Interest expense on note payable collateralized by real estate and others | (119,000 | ) | (93,000 | ) | ||||||||||||||||
Interest expense on margin loans | (651,000 | ) | (422,000 | ) | (284,000 | ) | (434,000 | ) | (862,000 | ) | ||||||||||
Interest and penalty expense reversal (accrual) for uncertain and unrecognized tax benefits | --- | 743,000 | (112,000 | ) | ||||||||||||||||
Capital gains on sales of marketable securities and others | 3,182,000 | --- | --- | |||||||||||||||||
Other-than-temporary impairment losses on investments | (4,560,000 | ) | --- | --- | ||||||||||||||||
Loss before taxes | (11,339,000 | ) | (8,068,000 | ) | (2,978,000 | ) | ||||||||||||||
Benefit from income taxes | 19,540,000 | 7,150,000 | 1,935,000 | |||||||||||||||||
Gains on sales of marketable securities, net | 4,193,000 | 0 | ||||||||||||||||||
Income (loss) before taxes | 4,226,000 | (31,476,000 | ) | |||||||||||||||||
(Provision for) benefit from income taxes | (185,000 | ) | 6,260,000 | |||||||||||||||||
Net income (loss) | $ | 8,201,000 | $ | (918,000 | ) | $ | (1,043,000 | ) | $ | 4,041,000 | $ | (25,216,000 | ) | |||||||
Weighted average number of common shares outstanding – basic and diluted | 1,380,746 | 1,380,746 | 1,380,746 | 1,380,746 | 1,380,746 | |||||||||||||||
Basic and diluted net (loss) income per share | $ | 5.94 | $ | (0.66 | ) | $ | (0.76 | ) | ||||||||||||
Comprehensive income (loss) | ||||||||||||||||||||
Net income (loss) | $ | 8,201,000 | $ | (918,000 | ) | $ | (1,043,000 | ) | ||||||||||||
Net change in unrealized appreciation of investments (net of tax benefits of $1,258,000 for fiscal 2018; net of taxes of $22,300,000 for fiscal 2017, and net of tax benefits of $1,028,000 for fiscal 2016) | (5,823,000 | ) | 35,316,000 | (2,214,000 | ) | |||||||||||||||
Reclassification adjustment of other-than-temporary impairment losses recognized in net income (net of taxes of $1,210,000, $0 and $0 for fiscal 2018, 2017 and 2016, respectively) | 3,350,000 | --- | --- | |||||||||||||||||
| $ | 5,728,000 | $ | 34,398,000 | $ | (3,257,000 | ) | ||||||||||||||
Basic and diluted net income (loss) per share | $ | 2.93 | $ | (18.26 | ) | |||||||||||||||
��
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Retained | Comprehensive | Shareholders' | |||||||||||||||||||||||||||
Share | Amount | Share | Amount | Capital | Earnings | Income | Equity | |||||||||||||||||||||||||
Balance at September 30, 2015 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 59,111,000 | $ | 67,720,000 | $ | 128,600,000 | ||||||||||||||||
Net loss | --- | --- | --- | --- | --- | (1,043,000 | ) | --- | (1,043,000 | ) | ||||||||||||||||||||||
Unrealized losses on investments, net | --- | --- | --- | --- | --- | --- | (2,214,000 | ) | (2,214,000 | ) | ||||||||||||||||||||||
Balance at September 30, 2016 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 58,068,000 | 65,506,000 | 125,343,000 | ||||||||||||||||||||||
Net loss | --- | --- | --- | --- | --- | (918,000 | ) | --- | (918,000 | ) | ||||||||||||||||||||||
Unrealized gains on investments, net | --- | --- | --- | --- | --- | --- | 35,316,000 | 35,316,000 | ||||||||||||||||||||||||
Balance at September 30, 2017 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 57,150,000 | 100,822,000 | 159,741,000 | ||||||||||||||||||||||
Net income | --- | --- | --- | --- | --- | 8,201,000 | --- | 8,201,000 | ||||||||||||||||||||||||
Unrealized losses on investments, net | --- | --- | --- | --- | --- | --- | (5,823,000 | ) | (5,823,000 | ) | ||||||||||||||||||||||
Sale of bond investments (net of taxes) | --- | --- | --- | --- | --- | --- | (2,553,000 | ) | (2,553,000 | ) | ||||||||||||||||||||||
Reclassification of stranded tax effects | --- | --- | --- | --- | --- | (19,990,000 | ) | 19,990,000 | --- | |||||||||||||||||||||||
Reclassification adjustment of other-than-temporary impairment losses recognized in net income (net of taxes) | --- | --- | --- | --- | --- | --- | 3,350,000 | 3,350,000 | ||||||||||||||||||||||||
Balance at September 30, 2018 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 45,361,000 | $ | 115,786,000 | $ | 162,916,000 | ||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Retained | Comprehensive | Shareholders' | |||||||||||||||||||||||||||
Share | Amount | Share | Amount | Capital | Earnings | Income | Equity | |||||||||||||||||||||||||
Balance at September 30, 2018 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 45,361,000 | $ | 115,786,000 | $ | 162,916,000 | ||||||||||||||||
Net loss | — | 0 | — | 0 | 0 | (25,216,000 | ) | 0 | (25,216,000 | ) | ||||||||||||||||||||||
Adoption of new accounting pronouncement | — | 0 | — | 0 | 0 | 115,786,000 | (115,786,000 | ) | 0 | |||||||||||||||||||||||
Balance at September 30, 2019 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 135,931,000 | 0 | 137,700,000 | ||||||||||||||||||||||
Net income | — | 0 | — | 0 | 0 | 4,041,000 | 0 | 4,041,000 | ||||||||||||||||||||||||
Balance at September 30, 2020 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 139,972,000 | $ | 0 | $ | 141,741,000 | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018 | 2017 | 2016 | 2020 | 2019 | ||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||
Net (loss) income | $ | 8,201,000 | $ | (918,000 | ) | $ | (1,043,000 | ) | ||||||||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | ||||||||||||||||||||
Net income (loss) | $ | 4,041,000 | $ | (25,216,000 | ) | |||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||
Depreciation and amortization | 3,678,000 | 5,586,000 | 5,709,000 | 524,000 | 589,000 | |||||||||||||||
Gains on sales of marketable securities | (3,182,000 | ) | --- | --- | ||||||||||||||||
Goodwill impairment | 0 | 13,400,000 | ||||||||||||||||||
Gains on sales of marketable securities, net | (4,193,000 | ) | 0 | |||||||||||||||||
Deferred income taxes | (19,241,000 | ) | (4,574,000 | ) | (1,637,000 | ) | 590,000 | (6,392,000 | ) | |||||||||||
Discount earned on bonds | --- | (3,000 | ) | (3,000 | ) | |||||||||||||||
Other-than-temporary impairment losses on investments | 4,560,000 | --- | --- | |||||||||||||||||
Unrealized losses on investments | 3,099,000 | 17,715,000 | ||||||||||||||||||
Changes in assets and liabilities | ||||||||||||||||||||
(Increase) decrease in current assets | ||||||||||||||||||||
Accounts receivable, net | 555,000 | (651,000 | ) | 966,000 | 309,000 | (2,233,000 | ) | |||||||||||||
Inventories | (6,000 | ) | 1,000 | 7,000 | 4,000 | 6,000 | ||||||||||||||
Prepaid expenses and other assets | 286,000 | 2,000 | (116,000 | ) | (105,000 | ) | 4,000 | |||||||||||||
Income tax receivable | 639,000 | (19,000 | ) | (125,000 | ) | (448,000 | ) | 117,000 | ||||||||||||
Increase (decrease) in liabilities | ||||||||||||||||||||
Accounts payable | (229,000 | ) | 405,000 | (1,568,000 | ) | (594,000 | ) | 1,700,000 | ||||||||||||
Accrued liabilities | 1,325,000 | (143,000 | ) | (209,000 | ) | 917,000 | 831,000 | |||||||||||||
Income taxes | --- | (2,723,000 | ) | (268,000 | ) | |||||||||||||||
Deferred subscription | (110,000 | ) | (118,000 | ) | (72,000 | ) | (296,000 | ) | 21,000 | |||||||||||
Deferred installation contracts | (2,518,000 | ) | (2,268,000 | ) | (1,284,000 | ) | (1,792,000 | ) | 1,695,000 | |||||||||||
Deferred maintenance agreements and others | 4,161,000 | 2,772,000 | 867,000 | 280,000 | (622,000 | ) | ||||||||||||||
Net cash (used in) provided by operating activities | (1,881,000 | ) | (2,651,000 | ) | 1,224,000 | |||||||||||||||
Net cash provided by operating activities | 2,336,000 | 1,615,000 | ||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Sales of marketable securities | 8,125,000 | --- | --- | 16,307,000 | 0 | |||||||||||||||
Purchases of marketable securities | --- | (5,013,000 | ) | (3,832,000 | ) | |||||||||||||||
Purchases of property, plant and equipment, including the Logan Utah office building in fiscal 2016 | (212,000 | ) | (253,000 | ) | (3,779,000 | ) | ||||||||||||||
Purchases of property, plant and equipment, net | (184,000 | ) | (165,000 | ) | ||||||||||||||||
Net cash provided by (used in) investing activities | 7,913,000 | (5,266,000 | ) | (7,611,000 | ) | 16,123,000 | (165,000 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Note payable collateralized by real estate | --- | --- | 2,260,000 | |||||||||||||||||
| Proceeds from margin loan borrowing | 1,000,000 | 0 | ||||||||||||||||||
| Payment to margin loan borrowing | (1,000,000 | ) | 0 | |||||||||||||||||
Payment of loan principal | (115,000 | ) | (110,000 | ) | (79,000 | ) | (126,000 | ) | (121,000 | ) | ||||||||||
Net cash (used in) provided by financing activities | (115,000 | ) | (110,000 | ) | 2,181,000 | |||||||||||||||
Net cash used in financing activities | (126,000 | ) | (121,000 | ) | ||||||||||||||||
Increase (decrease) in cash and cash equivalents | 5,917,000 | (8,027,000 | ) | (4,206,000 | ) | |||||||||||||||
Increase in cash and restricted cash and cash equivalents | 18,333,000 | 1,329,000 | ||||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Cash and restricted cash and cash equivalents | ||||||||||||||||||||
Beginning of year | 3,384,000 | 11,411,000 | 15,617,000 | 10,630,000 | 9,301,000 | |||||||||||||||
End of year | $ | 9,301,000 | $ | 3,384,000 | $ | 11,411,000 | $ | 28,963,000 | $ | 10,630,000 | ||||||||||
Interest paid during year | $ | 736,000 | $ | 516,000 | $ | 361,000 | $ | 529,000 | $ | 963,000 | ||||||||||
Income taxes refunded during year | $ | (1,077,000 | ) | $ | (3,000 | ) | $ | (13,000 | ) | $ | (47,000 | ) | $ | (121,000 | ) | |||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND OPERATIONS
Daily Journal Corporation (“Daily Journal”) publishes newspapers and web siteswebsites covering California and Arizona and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising.
Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary includes as of October 1, 2014, the combined operations of Sustain Technologies, Inc. (“Sustain”), a wholly-owned subsidiary since 2008; New Dawn Technologies, Inc. (“New Dawn”), acquired in December 2012; and ISD Technologies, Inc. (“ISD”), acquired in September 2013.Daily Journal, Technologies 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.
Essentially all of the Company’s U.S. operations of Daily Journal and Journal Technologies are based in California, Arizona Colorado and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of the Daily Journal and Journal Technologies (collectively the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to conform to the current year’syear's presentation.
Concentrations of Credit Risk: The Company extends unsecured credit to most of its advertising customers. The Company recognizes that extending credit and setting appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. Credit limits, setting and maintaining credit standards, and managing the overall quality of the credit portfolio is largely centralized. The level of credit is influenced by the customer’s credit and payment history which the Company monitors when establishing a reserve.
The Company maintains the reserve account for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate or its judgments about their abilities to pay are incorrect, additional allowances might be required and its results of operations could be materially affected.
Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Restricted Cash: The Company considers cash to be restricted when withdrawal or general use is legally restricted. Restricted cash of $2,041,000 and $2,015,000 at September 30, 2020 and 2019, respectively, represents cash held to secure two letters of credit issued by a bank for a software installation contract in Australia.
Fair Value of Financial Instruments: The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities. In addition, the Company has investments in marketable securities, all categorized as “available-for-sale” and stated at fair market value. In fiscal 2019, the Company adopted Accounting Standards Update (“ASU”) No.2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires an entity that holds financial assets or owes financial liabilities to, among other things, measure equity investments at fair value with theand recognize unrealized gains and(losses) through net income (loss). Accordingly, the Company’s net income of $4,041,000 for fiscal 2020, included net unrealized losses on investments of $3,099,000. In fiscal 2019, the Company’s net loss of taxes, reported in “Accumulated other comprehensive income” (AOCI) in the accompanying consolidated balance sheets. The$25,216,000 included net unrealized gains and losses included in AOCI represent changes in the fair valueon investments of the investments due to changes in both market prices and foreign currency exchange rates.$17,715,000. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification (“ASC”)Topic 820, Fair Value Measurement and Disclosures. At September 30, 2018, 2020, the aggregate fair market value of the Company’s marketable securities was $212,296,000.$179,368,000. These investments had approximately $158,407,000$137,593,000 of net unrealized gains before taxes of $42,151,000.$35,870,000. Most of the unrealized net gains were in the common stocks of three U.S. financial institutions. At September 30, 2017, 2019, the Company had marketable securities at fair market value of approximately $229,265,000,$194,581,000, including approximately $165,872,000$140,692,000 of unrealized net gains before taxes of $64,550,000.$37,241,000.
All investments are classified as “Current assets” because they are available for sale at any time. In February 2018, August 2020, the Company sold part of its bond investments for $8,125,000,$16,307,000, realizing a net gain of approximately $3,180,000, and simultaneously reclassified a previously lodged tax effect of $30,000 from accumulated other comprehensive income to retained earnings. This represented a decrease to retained earnings and an increase to accumulated other comprehensive income. (The Company uses an “individual security approach” to release stranded tax effects for its available-for-sale securities when sold or extinguished.)$4,193,000.
Investment in Financial Instruments
September 30, 2018 | September 30, 2017 | September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax unrealized gains |
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax unrealized gains |
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax |
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax | |||||||||||||||||||||||||||||||||||||
Marketable securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stocks | $ | 212,296,000 | $ | 53,889,000 | $ | 158,407,000 | $ | 220,973,000 | $ | 58,449,000 | $ | 162,524,000 | $ | 179,368,000 | $ | 41,775,000 | $ | 137,593,000 | $ | 194,581,000 | $ | 53,889,000 | $ | 140,692,000 | ||||||||||||||||||||||||
Bonds | --- | --- | --- | 8,292,000 | 4,944,000 | 3,348,000 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 212,296,000 | $ | 53,889,000 | $ | 158,407,000 | $ | 229,265,000 | $ | 63,393,000 | $ | 165,872,000 | |||||||||||||||||||||||||||||||||||||
The Company performed separate evaluations for equity securities with a fair value at As of September 30, 2018 and 2017 below cost to determine if the unrealized losses2020, there were other-than-temporary. This evaluation considered a number of factors including, but not limited to, the financial condition and near term prospects of the issuer, the Company’s ability and intent to hold the securities until fair value recovers, and the length of time and extent to which the fair value had been less than cost. The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management and portfolio objectives. As of September 30, 2018, the Company concluded that theno unrealized losses related to the marketable securities of one issuer were other-than-temporary and thus recorded impairment losses of $4,560,000 ($3,350,000 net of taxes). U.S. GAAP requires that the Company recognize other-than-temporary impairment losses in earnings rather than in accumulated comprehensive income when the security prices remain below cost for a period of time that may be deemed excessive even in instances where the Company possesses the ability and intent to hold the security. In fiscal 2017, there were no other-than-temporary impairment losses related to the marketable securities.
Intangible Assets: At September 30, 2018 and 2017, intangible assets were composed of (i) customer relationships of $0 and $2,776,000 (net of the accumulated amortization expenses of $21,950,000 and $19,174,000), respectively, and (ii) developed technology of $0 and $282,000 (net of accumulated amortization expenses of $2,525,000 and $2,243,000), respectively. These intangible assets were being amortized over five years based on their estimated useful lives. All intangible assets became fully amortized as of September 30, 2018. Intangible amortization expense was $3,058,000, $4,895,000 and $5,037,000 for fiscal 2018, 2017 and 2016, respectively.
Intangible Assets
September 30, 2018 | September 30, 2017 | |||||||||||||||||||||||
Customer Relationships | Developed Technology |
Total | Customer Relationships | Developed Technology |
Total | |||||||||||||||||||
Gross intangible | $ | 21,950,000 | $ | 2,525,000 | $ | 24,475,000 | $ | 21,950,000 | $ | 2,525,000 | $ | 24,475,000 | ||||||||||||
Accumulated amortization | (21,950,000 | ) | (2,525,000 | ) | (24,475,000 | ) | (19,174,000 | ) | (2,243,000 | ) | (21,417,000 | ) | ||||||||||||
| $ | --- | $ | --- | $ | --- | $ | 2,776,000 | $ | 282,000 | $ | 3,058,000 | |||||||||||||
Goodwill: The Company accounts forentire goodwill in accordance with ASC 350, Intangibles — Goodwillof $13,400,000 was concluded to be impaired and Other. 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. The goodwill amount reported in the consolidated balance sheets relates only to Journal Technologies. The Company performed qualitative assessments for Journal Technologies and determined there were no substantive changes during the current year and no indicationthus fully written off as of impairment. In making this assessment, the Company only considered Journal Technologies’ assets and their revenue generating abilities as required by ASC 350. Goodwill represents the expected synergies in expanding the Company’s software business. Considered factors for potential goodwill impairment evaluation include the current year’s operating financial results before intangible amortization, fluctuations of revenues, changes in the market place, the status of installation contracts and new business, among other things. As of September 30, 2018 and 2017, there was goodwill of $13,400,000.2019 (fiscal 2019).
Prepaid Expenses and Other Current Assets: Included in other assets were in-progress installation service costs of $0 and $350,000 as of September 30, 2018 and 2017, respectively, for the legacy projects from the fiscal 2013 acquisitions for which revenues had not been recognized and were deferred.
Inventories: Inventories, comprised of newsprint and paper, are stated at cost, on a first-in, first-outfirst-in, first-out basis, which does not exceed current net realizable value.
Property, plant and equipmentequipment:: Property, plant and equipment are carried on the basis of cost or fair value for assets acquired in business combinations. Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 – 39 years. At September 30, 2018, 2020, the estimated useful lives were (i) 5 – 39years for building and improvements, (ii) 3 – 5 years for furniture, office equipment and software, and (iii) 3 – 10 years for machinery and equipment. Leasehold improvements are amortized over the term of the related leases or the useful life of the assets, whichever is shorter. Assets are depreciated using the straight-line method for financial statements and accelerated method for tax purposes. Depreciation and amortization expenses were $620,000, $691,000$524,000 and $672,000$589,000 for fiscal 2018, 20172020 and 2016,2019, respectively.
Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are expensed as incurred. Gains or losses on dispositions of assets are reflected in current earnings.
Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. There were no such impairments identified during fiscal 20182020 and 2017.2019.
Journal Technologies’ Software Development Costs: Development costs related to software products for sale or licensing are expensed as incurred until the technological feasibility of the product has been established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The establishment of technological feasibility and the ongoing assessment of recoverability of costs require considerable judgment by the Company with respect to certain internal and external factors, including, but not limited to, anticipated future product revenue, estimated economic life and changes in hardware and software technology.
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.
Revenue Recognition:
The Company recognizes revenues in accordance with the provisions of ASU No. 2014-09,2014-09, Revenue from Contracts with Customers (ASC Topic 606)606), which it adopted effective October 1, 2017, using the modified retrospective method. (See “Accounting Standards Adopted in Fiscal 2018”.)
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.
Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one-transactionone-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-partythird-party hosting fees when used. Revenues for consulting are recognized at point of delivery (go-live) upon completion of services, and subscription and advertising revenues are recognized ratably (using the output method based on time-elapsed) after the go-live.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,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.
The adoption of ASC 606 also requires the capitalization of certain costs of obtaining contracts, specifically sales commissions which are to be amortized over the expected term of the contracts. For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations. In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.
Since the Company recognizes revenues when it can invoice the customer pursuant to the contract for the value of completed performance, as a practical expedient and because reliable estimates cannot be made, it has elected not to include the transaction price allocated to unsatisfied performance obligations. Also, as a practical expedient, the Company has elected not to include its evaluation of variable consideration of certain usage based fees (i.e. public service fees) that are included in some contracts. Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.
Approximately 58%, 58%71% and 56%65% of the Company’s revenues in fiscal 2018, 20172020 and 2016,2019, respectively, were derived from sales of software licenses, annual software licenses, maintenance and support agreements and consulting services that typically include implementation and training.
The change in allowance for doubtful accounts is as follows:
Allowance for Doubtful Accounts
Description |
Balance at Beginning of Year | Additions Charged to Costs and Expenses | Accounts Charged off less Recoveries |
Balance at End of Year |
Balance at Beginning of Year | Additions Charged to Costs and Expenses | Accounts Charged off less Recoveries |
Balance at End of Year | ||||||||||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||||||||||||||
| Fiscal 2020 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 200,000 | $ | 6,000 | $ | (6,000 | ) | $ | 200,000 | $ | 200,000 | $ | 116,000 | $ | (66,000 | ) | $ | 250,000 | ||||||||||||||
| Fiscal 2017 | ||||||||||||||||||||||||||||||||
| Fiscal 2019 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 200,000 | $ | 33,000 | $ | (33,000 | ) | $ | 200,000 | $ | 200,000 | $ | 8,000 | $ | (8,000 | ) | $ | 200,000 | ||||||||||||||
| Fiscal 2016 | ||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 250,000 | $ | 5,000 | $ | (55,000 | ) | $ | 200,000 | |||||||||||||||||||||||
Management Incentive Plan: In fiscal 1987, the Company implemented a Management Incentive Plan (the “Incentive Plan”) that entitles a participant to participate in pretax earnings before adjustment for certain items of the Company. In 2003, the Company modified the Incentive Plan to provide participants with three different types of non-negotiable incentive certificates based on the nature of the particular participants’ responsibilities. Each certificate entitles the participant to a specified share of the applicable pretax earnings in the year of grant and to receive the same percentage of pretax earnings to be generated in each of the next nine years provided they remain with the Company or are in retirement after working for the Company to age 65. If a participant dies while any of his or her certificates remain outstanding, future payments under those certificates will be made to the deceased participant’s beneficiaries.
In fiscal 2015, after combining Sustain, New Dawn and ISD into one company, the Company converted each existing Sustain Non-negotiable Incentive Certificate along with its supplemental Addendum to a new “Journal Technologies Non-negotiable Incentive Certificate” coupled with a similar supplemental Addendum which defines how the value of the Journal Technologies Certificate will be paid upon a triggering event such as a sale of Journal Technologies or an initial public offering. Employees and consultants of Journal Technologies are eligible to participate in these “Journal Technologies Certificates”. Payouts under the Journal Technologies Certificates are calculated based on the pretax income of Journal Technologies before supplemental compensation expenses, workers’ compensation expenses, intangible amortizations and goodwill impairment. Also effective fiscal 2015, the calculation of payouts under the Daily Journal Non-Consolidated Certificates is based on the pretax earnings of the traditional publishing business before supplemental compensation expenses, workers’ compensation expenses, financing costs of the non-traditional business activities and any write-downs of unrealized losses on investments. The calculation of payouts under the Daily Journal Consolidated Certificate remains unchanged. For any certificate held by an employee who is expected to become retirement eligible during the 10 year period of the certificate, the Company recognizes the future commitments at each fiscal year-end over the period from the grant date through retirement eligibility.ten years.
Certificate interests entitled participants to receive 6.09%, 5.12%7.51% and 4.49%6.79% (amounting to $367,400, $268,250$502,700 and $271,350,$465,500, respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and certain other items, 8.72%, 8.53%9.4% and 8.30%9.00% (amounting to $0, $0 and $0 for fiscal 2018, 20172020 and 2016,2019, respectively) for Journal Technologies and 8.2%, 8.2% and 8.2% (amounting to $0, $0$452,900 and $0, respectively) for Daily Journal consolidated in fiscal 2018, 20172020 and 2016,2019, respectively. The Company accrued $170,000$1,445,000 and $135,000$230,000 as of September 30, 2018 2020 and 2017,2019, respectively, for the Plan’s future commitment for those who will still have Certificates at the age of 65. This future commitment included an increase in the accrual in fiscal 20182020 of $35,000$1,215,000 or $.03$.88 per outstanding share on an adjusted pretax basis as compared with an increase in fiscal 20172019 of $75,000$60,000 or $.06$.04 per outstanding share, in each case due to increased estimated future pretax income. The estimated Incentive Plan’s future commitment is calculated based on an average of the past year and the current year pretax earnings before certain items, discounted to the present value at 6% since each granted Certificate will expire over its remaining life term of up to 10 years.
Income taxes: The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of the assets and liabilities. The Company accounts for uncertainty in income taxes under ASC 740-10740-10 which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-steptwo-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.
Net income(loss) income per common share: The net income (loss) income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,380,746 for fiscal 2018, 20172020 and 2016.2019. The Company does not have any common stock equivalents, and therefore basic and diluted net income per share is the same.
Use of Estimates: The presentation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The long-term Incentive Plan accrual is calculated using Level 3 inputs, as defined in the fair value hierarchy, based on an average of the past year’s and the current year’s pretax earnings, discounted to the present value at 6% since each granted Unit will expire over its remaining life term of up to 10 years. Actual results could differ from these estimates.
Accounting Standards Adopted in Fiscal 20182020
In November 2015,At the Financial Accounting Standards Board (FASB) issuedbeginning of fiscal 2020, the Company adopted Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update requires deferred tax liabilities and assets to be classified as noncurrent in the consolidated balance sheet. The Company adopted this guidance effective October 1, 2017 and concluded that it has no significant impact on the Company’s financial condition, results of operations or disclosures because it is simply a reclassification of current deferred taxes to non-current deferred taxes with an itemization of federal and state deferred taxes.
In February 2018, the FASB issued an amendment to ASC Subtopic 220-10, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”ASU”). This amendment permits entities to reclassify stranded tax effects resulting from tax rate changes related to the Tax Cuts and Jobs Act (the “Tax Act”), from AOCI to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The election can be applied as of the first day of the interim period in which it is adopted or retroactively to the first interim period in which the tax effects of the Tax Act were recognized. The Company elected to adopt this amendment as of January 1, 2018. Pursuant to this amendment, the Company can only reclassify the stranded tax effects resulting from the Tax Act and not those relative to the previous California/State apportionment. As such, the Company recorded a reclassification of stranded tax effects of $19,960,000 between AOCI and retained earnings. This represented a decrease to retained earnings and an increase to AOCI, both of which are listed under the “Shareholders’ equity” section of the Company’s Consolidated Balance Sheets.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606),which requires that revenues be recognized in an amount reflecting the consideration an entity expects to receive in exchange for those goods or services when a customer obtains control of promised goods or services. The Company elected to adopt ASC Topic 606 early effective October 1, 2017 using the modified retrospective method.
The Company has concluded that the adoption of the ASC Topic 606 in fiscal 2018 had no significant impact on the Company’s financial condition or results of operations. For the Company’s traditional publishing business (the “Traditional Business”), revenue recognition related to advertising, circulation, and advertising service fees remains unchanged. For the Journal Technologies’ software business, the Company previously utilized the completed performance method of accounting, pursuant to which the Company did not recognize revenues for implementation services or licenses, maintenance, support and hosting services until after the services were performed and accepted by the customer (final go-live), due to the fact that the customer’s acceptance was typically unpredictable and reliable estimates of the progress towards completion could not be made. In addition, maintenance services were recognized over the term of the maintenance period. Thus, the Company’s past revenue recognition policy was already in conformity with ASU Topic 606, which calls for revenue recognition at the point of delivery when a performance obligation is fulfilled. Consequently, the Company believes there are no required material retrospective or accumulated catch-up adjustments with respect to prior years’ financial figures, as revenues have been recognized consistently in the same manner throughout the comparative reporting periods.
New Accounting Pronouncements:
In January 2016 FASB issued “ASU” No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments and applies to all entities that hold financial assets or owe financial liabilities. It requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in Other Comprehensive Income changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The Update also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU is effective for public business with fiscal years beginning after December 15, 2017, including interim periods within that annual period, which is the Company’s fiscal 2019. The Company has adopted this guidance effective October 1, 2018 and concluded that it may have a significant impact on the Company’s financial condition, results of operations or disclosures, depending on the market price fluctuations of the invested marketable securities.
In February 2016, the FASB issued ASU 2016-02,-02, Leases (Topic 842)842). This updatewhich requires that all leases be recognized by lessees on the balance sheet through a right-of-use asset and corresponding lease liability, including today’s operating leases. This standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which isThere has been no significant impact on the Company’s fiscal year 2020. The Company plans to begin its assessment in fiscal 2019 to evaluate what impact, if any, the adoption of this ASU may have on its financial condition, results of operations or disclosures. At September 30, 2020, the Company recorded a right-of-use asset and lease liability of approximately $140,000 for its operating office leases, including approximately $10,000 beyond one year. Operating office leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets.
In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentNew Accounting Pronouncement:. 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. This ASU is effective for public business with fiscal years beginning after December 15, 2019, which is the Company’s fiscal 2021. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company has not yet evaluated what impact, if any, the adoption of this ASU may have on its financial condition, results of operations or disclosures because it is not required to be adopted for several years.
No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
3. INCOME TAXES
The benefitprovision (benefit) from income taxes consists of the following:
2018 | 2017 | 2016 | 2020 | 2019 | ||||||||||||||||
Current: | ||||||||||||||||||||
Federal | $ | (209,000 | ) | $ | (2,570,000 | ) | $ | (268,000 | ) | $ | (420,000 | ) | $ | 132,000 | ||||||
State | (90,000 | ) | (6,000 | ) | (30,000 | ) | 15,000 | 0 | ||||||||||||
| (299,000 | ) | (2,576,000 | ) | (298,000 | ) | (405,000 | ) | 132,000 | ||||||||||||
Deferred: | ||||||||||||||||||||
Federal | (18,577,000 | ) | (3,854,000 | ) | (1,369,000 | ) | 808,000 | (4,685,000 | ) | |||||||||||
State | (664,000 | ) | (720,000 | ) | (268,000 | ) | (218,000 | ) | (1,707,000 | ) | ||||||||||
| (19,241,000 | ) | (4,574,000 | ) | (1,637,000 | ) | 590,000 | (6,392,000 | ) | ||||||||||||
| $ | (19,540,000 | ) | $ | (7,150,000 | ) | $ | (1,935,000 | ) | $ | 185,000 | $ | (6,260,000 | ) | |||||||
The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:
2018 | 2017 | 2016 | ||||||||||
Statutory federal income tax rate | 24.3 | % | 34.0 | % | 34.0 | % | ||||||
State franchise taxes (net of federal tax benefit) | 5.7 | 6.2 | 5.2 | |||||||||
Revalue of deferred taxes due to federal rate change | 176.0 | --- | --- | |||||||||
Effect of federal rate change on beginning net deferred tax liabilities | (34.0 | ) | --- | --- | ||||||||
Business meals/gifts/other permanent differences | (0.4 | ) | (0.8 | ) | (2.3 | ) | ||||||
Domestic production activity deduction and deferred revenue | (0.9 | ) | --- | --- | ||||||||
Dividends received deduction | 5.8 | 10.0 | 24.5 | |||||||||
Reversal of uncertain and unrecognized tax position | --- | 37.6 | --- | |||||||||
Penalties for uncertain and unrecognized tax benefits | --- | 2.0 | --- | |||||||||
Prior year true-up | (1.8 | ) | 1.0 | (2.0 | ) | |||||||
Foreign tax credits | --- | 2.0 | 4.0 | |||||||||
Effect of state rate change on beginning balance of deferred tax liabilities | (0.7 | ) | (0.3 | ) | 1.4 | |||||||
Others | (1.7 | ) | (3.0 | ) | 0.2 | |||||||
Effective tax rate | 172.3 | % | 88.7 | % | 65.0 | % | ||||||
| 2020 | 2019 | |||||||
Statutory federal income tax rate | 21.0 | % | 21.0 | % | ||||
State franchise taxes (net of federal tax benefit) | 5.6 | 4.5 | ||||||
Effect of state rate change on beginning balance of deferred tax liabilities | (9.4 | ) | (0.2 | ) | ||||
Business meals/gifts/other permanent differences | 0.6 | (0.1 | ) | |||||
Goodwill impairment | 0 | (6.5 | ) | |||||
Dividends received deduction | (11.1 | ) | 1.5 | |||||
Revenue recognized for book but not tax | 0.4 | 0 | ||||||
Prior year true-up | 0 | 0.2 | ||||||
Foreign tax credits | (0.4 | ) | 0.1 | |||||
CARES Act benefits | (4.4 | ) | 0 | |||||
Others | 2.1 | (0.6 | ) | |||||
Effective tax rate | 4.4 | % | 19.9 | % | ||||
The Company’s deferred income tax assets and liabilities were comprised of the following:
2018 | 2017 | 2020 | 2019 | |||||||||||||
Deferred tax assets attributable to: | ||||||||||||||||
Accrued liabilities, including supplemental compensation and vacation pay accrual | $ | (106,000 | ) | $ | (69,000 | ) | $ | 415,000 | $ | 178,000 | ||||||
Impairment losses on investments | 2,215,000 | 1,376,000 | 1,016,000 | 2,201,000 | ||||||||||||
Bad debt reserves not yet deductible | 42,000 | 62,000 | 55,000 | 41,000 | ||||||||||||
Depreciation and amortization | 4,446,000 | 5,977,000 | 3,482,000 | 3,999,000 | ||||||||||||
Deferred revenues | 745,000 | 1,431,000 | 913,000 | 885,000 | ||||||||||||
Goodwill | 590,000 | 677,000 | ||||||||||||||
Net operating losses | 4,643,000 | 3,100,000 | 4,768,000 | 5,195,000 | ||||||||||||
Credits and other | 455,000 | 1,303,000 | 432,000 | 456,000 | ||||||||||||
Total deferred tax assets | 12,440,000 | 13,180,000 | 11,671,000 | 13,632,000 | ||||||||||||
Deferred tax liabilities attributable to: | ||||||||||||||||
Unrealized gains on investments | (42,151,000 | ) | (64,550,000 | ) | (35,870,000 | ) | (37,241,000 | ) | ||||||||
Goodwill | (290,000 | ) | (311,000 | ) | ||||||||||||
Total deferred tax liabilities | (42,441,000 | ) | (64,861,000 | ) | ||||||||||||
Net deferred income taxes | $ | (30,001,000 | ) | $ | (51,681,000 | ) | $ | (24,199,000 | ) | $ | (23,609,000 | ) | ||||
The Tax Act reduced the maximum corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company has completed its review of the Tax Act. The impact to its financial statements is as follows: (i) current income tax expense or benefit is calculated using a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense includes 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 duringFor 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 relates to items that were initially recorded as accumulated other comprehensive income (“AOCI”). This revaluation of approximately $20 million was recorded as a component of income tax expense or benefit in continuing operations.
During fiscal 2018,2020, the Company recorded an income tax benefitprovision of $19,540,000$185,000 on a pretax lossincome of $11,339,000.$4,226,000. The effective tax rate (before the discrete Tax Act item discussed above) was greaterless than the statutory rate primarily due to the dividends received deduction (“DRD”), a benefit resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and net state tax benefits. The effective tax rate for the fiscal 2020 was 4.4%, after including the DRD, the tax benefits from the CARES Act and state taxes.
The CARES Act, which increaseswas signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company. One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years. In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018. Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014. The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014. The tax purposes. benefit of $187,000 resulting from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.
OnDuring fiscal 2020, the Company recorded net unrealized losses on investments of $3,099,000. An income tax benefit of $1,371,000 resulting from these losses was recorded as a pretax losstemporary difference in deferred income taxes. The Company also recorded a net gain of $8,068,000 for$4,193,000 on the sales of marketable securities.
For fiscal 2017,2019, the Company recorded an income tax benefit of $7,150,000 which included a reversal of an accrued liability of approximately $2,665,000 for uncertain and unrecognized tax benefits relating to an acquisition in fiscal 2013. The Internal Revenue Service (“IRS”) concluded its examination of the Company’s fiscal 2014 income tax return with no proposed changes to the tax position that gave rise to this liability. As a result, this liability was reversed along with the related accrued interest and penalty expense of $743,000. In addition, a deferred tax liability, in the amount of $352,000, relating to temporary differences that would only exist if the uncertain tax position was never recognized, was reversed. The effective tax rate (before the discrete IRS item) was greater than the statutory rate mainly resulting from the dividends received deduction.
On$6,260,000 on a pretax loss of $2,978,000 for fiscal 2016, the Company recorded an income tax benefit of $1,935,000.$31,476,000. The effective tax rate was greater thanbelow the statutory rate mainly resulting fromdue to the impairment of goodwill, partially offset by the dividends received deduction. deduction and a benefit for state taxes.
The Company’s effective tax rate was 172%, 89% and 65%4.4% for fiscal 2018, 2017 and 2016, respectively.2020 as compared with 20% in the prior fiscal year.
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 20152017 with regard to federal income taxes and fiscal 20132016 for state income taxes.
The Company has federal and state income tax net operating losses (“NOLs”). A portion of the fiscal 2017 federal and state NOLs were carried back to previous years.years and a portion of the fiscal 2019 federal NOL was carried back to fiscal 2014. As of September 30, 2018, 2020, the Company had federal, California and other state NOL carryforwards of $18.5$20.1 million, $6.2$6.1 million and 4.3$2.6 million, respectively. These NOLs will expire at various dates from fiscal 2036 through 2038,2039, as follows:
Fiscal year ended | Federal NOL | California NOL | Other State NOL | |||||||||
(in millions) | ||||||||||||
September 30, 2036 | $ | .8 | $ | --- | $ | --- | ||||||
September 30, 2037 | 6.5 | .7 | 1.5 | |||||||||
September 30, 2038 | 11.2 | 5.5 | 2.8 | |||||||||
Fiscal Year ended | Federal NOL | California NOL | Other State NOL | |||||||||
(in millions) | ||||||||||||
September 30, 2036 | $ | .8 | $ | 0 | $ | 0 | ||||||
September 30, 2037 | 6.6 | 0 | .3 | |||||||||
September 30, 2038 | 11.1 | 5.4 | 2.0 | |||||||||
September 30, 2039 | 0 | .7 | .3 | |||||||||
No expiration | 1.6 | 0 | 0 | |||||||||
The Company believes it is more likely than not that the benefit of these NOLs will be realized in the future. Consequently, the Company has not provided a valuation allowance.
4. DEBTS AND COMMITMENTS
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. 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 of September 30, 2018 2020 was 2.50%.75%. These investment margin account borrowings do not mature.
In November 2015, the Company purchased a 30,700 square foot office building constructed in 1998 on about 3.6 acres in Logan, Utah that had been previously leased by Journal Technologies. The Company paid $1.24 million and financed the balance with a real estate bank loan of $2.26 million which bears a fixed interest rate of 4.66% and is repayable in equal monthly installments of about $17,600 through 2030. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. This real estate loan had a balance of approximately $1.96$1.71 million as of September 30, 2018.2020. (In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33% for the remaining of its 10 years.)
The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through fiscal 2021. During fiscal 2014, the Company renewed its office lease for its San Francisco office for five years to end on October 31, 2019 with a current monthly rent of approximately $28,000 for about 6,200 square feet. Beginning in fiscal 2017, the2022. The Company leased approximately 9,8006,200 square feet of office space (expiring in August 2020)San Francisco, but the Company closed its San Francisco office upon the end of the lease in Englewood, Colorado, for a monthly rent of approximately $21,000.October 2019.
The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to the leased properties. Rental expenses for fiscal years 2018, 20172020 and 20162019 were $996,000, $742,000$612,000 and $745,000,$1,017,000, respectively.
The following table represents the Company’s future obligations:obligations
Payments due by Fiscal Year | Payments due by Fiscal Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019 |
2020 |
2021 |
2022 |
2023 | 2024 and after |
Total | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and after | Total | |||||||||||||||||||||||||||||||||||||||||||
Real estate loan | $ | 121,000 | $ | 126,000 | $ | 133,000 | $ | 139,000 | $ | 146,000 | $ | 1,291,000 | $ | 1,956,000 | $ | 131,000 | $ | 148,000 | $ | 153,000 | $ | 158,000 | $ | 164,000 | $ | 955,000 | $ | 1,709,000 | ||||||||||||||||||||||||||||
Obligations under operating leases | 848,000 | 331,000 | 19,000 | --- | --- | --- | 1,198,000 | 129,000 | 11,000 | 0 | 0 | 0 | 0 | 140,000 | ||||||||||||||||||||||||||||||||||||||||||
Long-term accrued liabilities* | --- | 20,000 | 6,000 | 4,000 | 12,000 | 128,000 | 170,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Long-term accrued liabilities and other* | 10,000 | 434,000 | 191,000 | 215,000 | 160,000 | 445,000 | 1,455,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 969,000 | $ | 477,000 | $ | 158,000 | $ | 143,000 | $ | 158,000 | $ | 1,419,000 | $ | 3,324,000 | $ | 270,000 | $ | 593,000 | $ | 344,000 | $ | 373,000 | $ | 324,000 | $ | 1,400,000 | $ | 3,304,000 | |||||||||||||||||||||||||||||
* |
|
5. 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 adverse effect on the Company’s financial position, results of operations or cash flows.
6. REPORTABLE SEGMENTS
An operating segment is defined as a component of an enterprise which has discrete financial information that is evaluated regularly by the Company’s Chief Executive Officer to decide how to allocate resources and to access performance.
In accordance with ASC 280-10,280-10, Segment Reporting, the Company has two2 segments of business. The Company’s reportable segments are: (i) Thethe Traditional Business and (ii) Journal Technologies. All inter-segment transactions were eliminated.
Summarized financial information concerning the Company’s reportable segments and Corporate income and expenses is shown in the following table:table.
Reportable Segments | ||||||||||||||||
Traditional Business | Journal 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 | ||||||||||||
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 Business | Journal 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 | ||||||||||||
Reportable Segments | Reportable Segments | |||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies |
Corporate |
Total | Traditional Business | Journal Technologies |
Corporate |
Total | |||||||||||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||||||||||
Fiscal 2020 | ||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising, net | $ | 9,854,000 | $ | --- | $ | --- | $ | 9,854,000 | ||||||||||||||||||||||||
Advertising | $ | 7,104,000 | $ | 0 | $ | 0 | $ | 7,104,000 | ||||||||||||||||||||||||
Circulation | 5,912,000 | --- | --- | 5,912,000 | 5,090,000 | 0 | 0 | 5,090,000 | ||||||||||||||||||||||||
Advertising service fees and other | 2,651,000 | --- | --- | 2,651,000 | 2,501,000 | 0 | 0 | 2,501,000 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | 14,758,000 | --- | 14,758,000 | 0 | 21,647,000 | 0 | 21,647,000 | ||||||||||||||||||||||||
Consulting fees | --- | 4,085,000 | --- | 4,085,000 | 0 | 7,718,000 | 0 | 7,718,000 | ||||||||||||||||||||||||
Other public service fees | --- | 4,352,000 | --- | 4,352,000 | 0 | 5,882,000 | 0 | 5,882,000 | ||||||||||||||||||||||||
Operating expenses | 17,240,000 | 31,012,000 | --- | 48,252,000 | 16,425,000 | 34,800,000 | 0 | 51,225,000 | ||||||||||||||||||||||||
Income (loss) from operations | 1,177,000 | (7,817,000 | ) | --- | (6,640,000 | ) | (1,730,000 | ) | 447,000 | 0 | (1,283,000 | ) | ||||||||||||||||||||
Dividends and interest income | --- | --- | 4,085,000 | 4,085,000 | 0 | 0 | 4,965,000 | 4,965,000 | ||||||||||||||||||||||||
Other income | 52,000 | --- | 9,000 | 61,000 | 0 | 0 | 3,000 | 3,000 | ||||||||||||||||||||||||
Interest expense on note payable collateralized by real estate | (88,000 | ) | --- | --- | (88,000 | ) | ||||||||||||||||||||||||||
Interest expense on margin loans | --- | --- | (284,000 | ) | (284,000 | ) | ||||||||||||||||||||||||||
Interest expense accrued for uncertain and unrecognized tax benefits | --- | (112,000 | ) | --- | (112,000 | ) | ||||||||||||||||||||||||||
Pretax income (loss) | 1,141,000 | (7,929,000 | ) | 3,810,000 | (2,978,000 | ) | ||||||||||||||||||||||||||
Income tax benefit (expense) | (530,000 | ) | 3,140,000 | (675,000 | ) | 1,935,000 | ||||||||||||||||||||||||||
Net income (loss) | 611,000 | (4,789,000 | ) | 3,135,000 | (1,043,000 | ) | ||||||||||||||||||||||||||
Net unrealized losses on investments | 0 | 0 | (3,099,000 | ) | (3,099,000 | ) | ||||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (84,000 | ) | 0 | (35,000 | ) | (119,000 | ) | |||||||||||||||||||||||||
Interest expenses on margin loans | 0 | 0 | (434,000 | ) | (434,000 | ) | ||||||||||||||||||||||||||
Gains on sales of marketable securities, net | 0 | 0 | 4,193,000 | 4,193,000 | ||||||||||||||||||||||||||||
Pretax income | (1,814,000 | ) | 447,000 | 5,593,000 | 4,226,000 | |||||||||||||||||||||||||||
Income tax expense | 685,000 | 100,000 | (970,000 | ) | (185,000 | ) | ||||||||||||||||||||||||||
Net loss | (1,129,000 | ) | 547,000 | 4,623,000 | 4,041,000 | |||||||||||||||||||||||||||
Total assets | 17,644,000 | 39,786,000 | 168,016,000 | 225,446,000 | 35,896,000 | 22,277,000 | 180,402,000 | 238,575,000 | ||||||||||||||||||||||||
Capital expenditures, including purchase of Logan building | 3,662,000 | 117,000 | --- | 3,779,000 | ||||||||||||||||||||||||||||
Amortization of intangible assets | 142,000 | 4,895,000 | --- | 5,037,000 | ||||||||||||||||||||||||||||
Capital expenditures | 121,000 | 63,000 | 0 | 184,000 | ||||||||||||||||||||||||||||
Reportable Segments | ||||||||||||||||
Traditional Business | Journal Technologies |
Corporate |
Total | |||||||||||||
Fiscal 2019 | ||||||||||||||||
Revenues | ||||||||||||||||
Advertising | $ | 9,132,000 | $ | 0 | $ | 0 | $ | 9,132,000 | ||||||||
Circulation | 5,249,000 | 0 | 0 | 5,249,000 | ||||||||||||
Advertising service fees and other | 2,712,000 | 0 | 0 | 2,712,000 | ||||||||||||
Licensing and maintenance fees | 0 | 20,179,000 | 0 | 20,179,000 | ||||||||||||
Consulting fees | 0 | 5,539,000 | 0 | 5,539,000 | ||||||||||||
Other public service fees | 0 | 5,844,000 | 0 | 5,844,000 | ||||||||||||
Operating expenses | 16,981,000 | 49,898,000* | 0 | 66,879,000 | * | |||||||||||
Income (loss) from operations | 112,000 | (18,336,000 | ) | 0 | (18,224,000 | ) | ||||||||||
Dividends and interest income | 0 | 0 | 5,380,000 | 5,380,000 | ||||||||||||
Other income | 0 | 0 | 38,000 | 38,000 | ||||||||||||
Net unrealized losses on investments | 0 | 0 | (17,715,000 | ) | (17,715,000 | ) | ||||||||||
Interest expenses on note payable collateralized by real estate | (93,000 | ) | 0 | 0 | (93,000 | ) | ||||||||||
Interest expenses on margin loans | 0 | 0 | (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 | 0 | 165,000 | ||||||||||||
* included goodwill impairment of $13,400,000
During fiscal 2018, 20172020 and 2016,2019, the Traditional Business had total operating revenues of $17,172,000, $17,570,000$14,695,000 and $18,417,000$17,093,000 of which $11,771,000, $11,916,000$9,605,000 and $12,505,000,$11,844,000, respectively, were recognized after services were provided while $5,401,000, $5,654,000$5,090,000 and $5,912,000,$5,249,000, respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $23,531,000, $23,814,000$35,247,000 and $23,195,000,$31,562,000, of which $7,437,000, $8,618,000$14,025,000 and $9,735,000,$12,353,000, respectively, were recognized upon completion of services while $16,094,000, $15,196,000$21,222,000 and $13,460,000,$19,209,000, respectively, were recognized ratably over the subscription periods.
7. RESULTS OF OPERATIONS BY QUARTER (UNAUDITED)
Quarter ended | ||||||||||||||||
December 31 | March 31 | June 30 | September 30 | |||||||||||||
(in thousands except per share amounts) | ||||||||||||||||
2018 | ||||||||||||||||
Revenues | $ | 10,252 | $ | 9,338 | $ | 11,007 | $ | 10,106 | ||||||||
Costs and expenses | 13,697 | 13,711 | 13,716 | 13,639 | ||||||||||||
Loss from operations | (3,445 | ) | (4,373 | ) | (2,709 | ) | (3,533 | ) | ||||||||
Other income, net | 1,334 | 4,041 | 1,027 | 879 | ||||||||||||
Other-than-temporary impairment losses on investments | --- | --- | --- | (4,560 | ) | |||||||||||
Loss before taxes | (2,111 | ) | (332 | ) | (1,682 | ) | (7,214 | ) | ||||||||
Benefits from income taxes | 16,850 | 100 | 710 | 1,880 | ||||||||||||
Net income (loss) | 14,739 | (232 | ) | (972 | ) | (5,334 | ) | |||||||||
Basic and diluted net income (loss) per share | 10.67 | (.17 | ) | (.70 | ) | (3.86 | ) | |||||||||
2017 | ||||||||||||||||
Revenues | $ | 9,990 | $ | 10,279 | $ | 10,201 | $ | 10,914 | ||||||||
Costs and expenses | 12,843 | 13,545 | 13,834 | 14,329 | ||||||||||||
Loss from operations | (2,853 | ) | (3,266 | ) | (3,633 | ) | (3,415 | ) | ||||||||
Other income, net | 1,072 | 2,005 | 817 | 1,205 | ||||||||||||
Income (loss) before taxes | (1,781 | ) | (1,261 | ) | (2,816 | ) | (2,210 | ) | ||||||||
Benefits from income taxes | 310 | 4,240 | 1,465 | 1,135 | ||||||||||||
Net (loss) income | (1,471 | ) | 2,979 | (1,351 | ) | (1,075 | ) | |||||||||
Basic and diluted net income (loss) per share | (1.07 | ) | 2.16 | (.98 | ) | (.77 | ) | |||||||||
8. SUBSEQUENT EVENTS
The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no additional subsequent events occurred that required recognition in the financial statements or disclosures in the Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 September 30, 2018.2020. Based on that evaluation, management concluded that because of material weaknesses in its internal control over financial reporting, as further described below, the Company’s disclosure controls and procedures were not effective as of September 30, 2018.2020. There exist material weaknesses in its internal control over financial reporting because the Company does not segregate duties to the extent it could if it had more people and the Company does not have an “independent” internal audit group due to the small size of its accounting department.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting has been designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations, and sometimes they can have one or more material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Each year, management is required by SEC rules to evaluate the effectiveness of the Company’s internal control over financial reporting. If management identifies any material weaknesses in the course of the evaluation, the rules do not allow us to conclude that our internal control over financial reporting is effective. That evaluation is conducted under the supervision and with the participation of Mr. Salzman, and is based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, which applies to all accelerated filers regardless of size. Based on the evaluation under that framework and applicable SEC rules, management has identified the following deficiencies that constitute material weaknesses in the Company’s internal control over financial reporting:
Segregation of duties: As a small company, we have threeone long-time knowledgeable managers inmanager overseeing both our advertising and subscription departments, seveneight experienced employees in the accounting department and three in the IT department. Accordingly, we are not able to segregate duties to the extent we could if we had more people, and we have not sufficiently designed controls that support an effective assessment of our internal controls relating to the prevention of fraud and possible management override of controls.people. Although the Company has remediated some of the issues associated with administrative access to specific systems, these steps have not fully remediated the control issue.
Ineffective management assessment of internal control over financial reporting: The Company does not have an internal audit department due to the small size of its accounting department.department, and we have not sufficiently designed controls that support an effective assessment of our internal controls relating to the prevention of fraud and possible management override of controls. Hiring an outside firm would certainly help complete the documentation of the internal control assessment to the level required by the COSO framework, but the Company questions whether that would be a wise use of shareholders’ money.
Recognizing our deficiencies, we use mitigating controls, including a variety of internal procedures to check and double-check the areas where one person is responsible for multiple duties. Among other things, the Company’s monitoring activities include monthly review and comparative analysis of financial, production and public information with prior periods by the Company’s department supervisors, the CEO/CFO and the Board of Directors. We will continue to review our compensating controls and procedures in our efforts to remediate the above mentioned material weaknesses.
In addition, we believe our most important internal control is our hiring and retention of honest and capable people, whom we trust to do their jobs well. Accordingly, we believe our overall internal control environment is sufficient for a company of our size.
In the context of the COSO 2013 Framework;Framework, however, we believe that the above-mentioned control deficiencies constitute material weaknesses, and therefore we must conclude that our internal control over financial reporting was not effective as of September 30, 2018.2020.
Squar Milner LLP, the Company’s independent registered public accounting firm, expressed an unqualified opinion for the audit of our consolidated financial statements as of and for the year ended September 30, 2018. It has also issued its report on the effectiveness of our internal control over financial reporting as of September 30, 2018, which is presented below.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Daily Journal Corporation
Opinion on the Internal Control Over Financial Reporting
We have audited Daily Journal Corporation's (the Company) internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and 2017 and the related consolidated statements of comprehensive income (loss), shareholders’ equity and cash flows for each of the years ended in the three year period ended September 30, 2018 and our report dated December 12, 2018 expressed an unqualified opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following deficiencies in internal control have been identified as material weaknesses over the Company’s control environment and monitoring pursuant to the COSO framework:
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2018 financial statements, and this report does not affect our report dated December 12, 2018.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
\s\ Squar Milner LLP
Los Angeles, California
December 12, 2018
Changes in Internal Control over Financial Reporting
In light of the material weaknesses in the Company’s internal control over financial reporting discussed above for the fiscal year ended September 30, 2018, management concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2018. Except as described above under Management’s Report on Internal Control over Financial Reporting, there were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth in the tables, the notes thereto, and the paragraphs under the captions “Election of Directors”, “Corporate Governance” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on or aboutin February 14, 20192021 (the “Proxy Statement”), which Proxy Statement will be filed with the SEC within 120 days after September 30, 2018,2020, is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to all directors, officers and employees of the Company, including the Chief Executive Officer, Chief Financial Officer and Controller. The Company’s Code of Ethics has been filed as Exhibit 14 hereto.
Item 11. Executive Compensation
The information set forth under the captions “Executive Compensation” and “Corporate Governance” in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the caption “Corporate Governance” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information set forth under the caption “Other Matters Regarding Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this Report:
(1) | Consolidated Financial Statements: |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets at September 30, | |
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, | |
Consolidated Statements of Shareholders’ Equity for the years ended September 30, | |
Consolidated Statements of Cash Flows for the years ended September 30, | |
Notes to Consolidated Financial Statements | |
|
|
| Exhibits |
| 3.1 | Articles of Incorporation of Daily Journal Corporation, as amended. |
3.2 | Amended and Restated Bylaws of Daily Journal |
| 4.1 | Description of Common Stock of Daily Journal Corporation (~) |
10.1 | |
14 | |
21 | |
31 | |
32 |
| 101.INS | Inline XBRL Instance |
| 101.SCH | Inline XBRL Taxonomy Extension Schema |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation |
| 101.DEF | Inline XBRL Taxonomy Extension Definition |
| 101.LAB | Inline XBRL Taxonomy Extension Labels |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| Filed as an Exhibit to the Company’s |
(‡) | Management Compensatory Plan. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | |||
| |||
By: | /s/ Gerald L. Salzman | ||
Gerald L. Salzman | |||
President | |||
Date: December 12, 201817, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | |||
| Chairman of the Board | December | |||
Charles T. Munger | |||||
/s/ Gerald L. Salzman | President, Chief Executive Officer, Chief Financial Officer, Treasurer and Director
Principal Financial Officer and Principal Accounting Officer) | December | |||
Gerald L. Salzman | |||||
|
|
| |||
| |||||
| Director |
| |||
Peter Kaufman | |||||
| Director |
| |||
Gary Wilcox | |||||
/s/ Mary Conlin | Director | December 17, 2020 | |||
Mary Conlin |
65