DAILY JOURNAL CORPORATION Results of Operations
The Company continues to operate as two different businesses: (1) The Traditional Business, being the business of newspaper publishing and related services that the Company had before 1999 when it purchased a software development company, and (2)Journal Technologies, Inc. ("Journal Technologies"), a wholly-owned subsidiary which supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online. These products are licensed in 42 states and internationally.
Impact of the COVID-19 Pandemic
OnMarch 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 inthe United States ,Canada andAustralia , 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 in-person operations and spending. Management believes that the COVID-19 pandemic has had, and, with the recent rise of Delta variant cases, will continue to have, a significant impact on the Company's business operations. Among other things, dividends from the Company's securities portfolio have declined and are expected to remain lower than in the past. It is also possible that governments may again take extreme actions in response to the pandemic and the Delta variant, such as the renewed closure, or scaling back of operations, of courts and other governmental agencies that are the customers of the Company. Furthermore, even as 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 our 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 has been delayed. On the other
side of the coin, the Company has seen a reduction in operating costs due to
less business travel.
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Comparable nine-month periods ended
The Company's reportable segments, and its corporate income and expenses, for
the nine months ended
Overall Financial Results (000)
For the nine months ended June 30
Reportable Segments
Traditional Journal Corporate
Business Technologies income and expenses Total
2021 2020 2021 2020 2021 2020 2021 2020
Revenues
Advertising $ 5,649 $ 5,415 $ - $ - $ - $ - $ 5,649 $ 5,415
Circulation 3,458 3,857 - - - - 3,458 3,857
Advertising service fees
and other 1,964 1,923 - - - - 1,964 1,923
Licensing and maintenance
fees - - 16,990 16,246 - - 16,990 16,246
Consulting fees - - 4,649 5,065 - - 4,649 5,065
Other public service fees - - 5,242 4,401 - - 5,242 4,401
Total revenues 11,071 11,195 26,881 25,712 - - 37,952 36,907
Operating expenses
Salaries and employee
benefits 8,097 7,778 19,131 20,449 - - 27,228 28,227
Others 2,904 3,541 5,506 7,162 - - 8,410 10,703Total operating expenses 11,001 11,319 24,637 27,611
- - 35,638 38,930
Income (loss) from
operations 70 (124 ) 2,244 (1,899 ) - - 2,314 (2,023 )
Dividends and interest
income - - - - 2,063 4,573 2,063 4,573
Other income - - - - 69 3 69 3
Realized gains on sales
of marketable securities - - - - 18,478 - 18,478 -
Net unrealized gains
(losses) on marketable
securities - - - - 131,754 (41,191 ) 131,754 (41,191 )
Interest expenses on note
payable collateralized by
real estate - - - - (48 ) (63 ) (48 ) (63 )
Interest expenses on
margin loans - - - -
(196 ) (401 ) (196 ) (401 )
Pretax income (loss)
Consolidated revenues were$37,952,000 and$36,907,000 for the nine months endedJune 30, 2021 and 2020, respectively. This increase of$1,045,000 (3%) was primarily from increases in (i) Journal Technologies' license and maintenance fees of$744,000 and public service fees of$841,000 and (ii) the Traditional Business' legal notice advertising net revenues of$471,000 and government notice advertising net revenues of$173,000 , partially offset by reductions in (i) Journal Technologies' consulting fees of$416,000 and (ii) the Traditional Business' display advertising net revenues of$44,000 , classified advertising net revenues of$31,000 , trustee sale notice advertising net revenues of$335,000 , and circulation revenues of$399,000 . The Company's revenues derived from Journal Technologies' operations constituted about 71% and 70% of the Company's total revenues for the nine months endedJune 30, 2021 and 2020, respectively. Consolidated operating expenses decreased by$3,292,000 (8%) to$35,638,000 from$38,930,000 . Total salaries and employee benefits decreased by$999,000 (4%) to$27,228,000 from$28,227,000 primarily resulting from a pandemic-related layoff inApril 2020 . Outside services decreased by$364,000 (14%) to$2,236,000 from$2,600,000 mainly because of decreased independent contractor costs for Journal Technologies, because many of them became employees inJanuary 2020 . Rent expenses decreased by$272,000 (54%) to$228,000 from$500,000 because of the closures of theColorado office inAugust 2020 and theCorona, California office inMarch 2021 . Equipment maintenance and software decreased by$156,000 (14%) to$946,000 from$1,102,000 primarily resulted from reduced maintenance and software costs due to the above-mentioned office closures. Other general and administrative expenses decreased by$1,739,000 (53%) to$1,554,000 from$3,293,000 mainly resulting from reduced business travel expenses due to the pandemic. 16
-------------------------------------------------------------------------------- The Company's non-operating income, net of expenses, increased by$189,199,000 (510%) to a gain of$152,120,000 from a loss of$37,079,000 in the prior fiscal year period primarily because of (i) the realized gains on sales of marketable securities of$18,478,000 and (ii) the recording of net unrealized gains on marketable securities of$131,754,000 during the nine months endedJune 30, 2021 as compared with no realized gains and unrealized losses of$41,191,000 during the prior fiscal year period. During the nine months endedJune 30, 2021 , consolidated pretax income was$154,434,000 , as compared to a pretax loss of$39,102,000 in the prior fiscal year period. There was consolidated net income of$114,319,000 ($82.80 per share) for the nine months endedJune 30, 2021 , as compared with a net loss of$27,842,000 (-$20.16 per share) in the prior fiscal year period. During the nine months endedJune 30, 2021 , the Company's cash and restricted cash and cash equivalents decreased by$17,587,000 to$11,376,000 from$28,963,000 , primarily because of the purchase of additional marketable securities. AtJune 30, 2021 , the aggregate fair market value of the Company's marketable securities was$349,593,000 . These securities had approximately$269,347,000 of net unrealized gains before taxes of$70,275,000 . They generated approximately$2,063,000 in dividends income during the nine months endedJune 30, 2021 , as compared with$4,573,000 in the prior fiscal year period. Most of the unrealized gains were in the common stocks of threeU.S. financial institutions and one foreign manufacturer. Taxes For the nine months endedJune 30, 2021 , the Company recorded a provision for income taxes of$40,115,000 on pretax income of$154,434,000 . This was the net result of applying the effective tax rate anticipated for fiscal 2021 to pretax income before the unrealized and realized gains on marketable securities for the nine months endedJune 30, 2021 . The effective rate of 21.32%, which was higher than the statutory rate of 21% primarily due to state taxes which were offset by the dividends received deduction, resulted in a tax provision of$896,000 on pretax income before the unrealized and realized gains on marketable securities. In addition, the Company recorded a tax provision of$34,405,000 on the unrealized gains on marketable securities, and a tax provision of$4,821,000 on the realized gains on marketable securities, both of which were offset by a tax benefit of$7,000 for the effect of a change in state apportionment on the beginning of the year's deferred tax liability. Consequently, the overall effective tax rate for the nine months endedJune 30, 2021 was 26%, after including the taxes on the realized and unrealized gains on marketable securities. For the nine months endedJune 30, 2020 , the Company recorded an income tax benefit of$11,260,000 on a pretax loss of$39,102,000 . This was the net result of applying the effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized losses on marketable securities, for the nine months endedJune 30, 2020 . The effective tax rate was more than the statutory rate primarily due to the dividends received deduction, which increased the taxable loss, and state tax benefits. In addition, the Company recorded tax benefits of (i)$187,000 resulting from the Coronavirus Aid, Relief and Economic Security ("CARES") Act and (ii)$11,166,000 for the unrealized losses on investments during the nine months endedJune 30, 2020 . The effective tax rate for the nine months endedJune 30, 2020 was 29%, after including the tax benefits from the CARES Act and the unrealized losses on investments. 17 -------------------------------------------------------------------------------- The Company files consolidated federal income tax returns inthe United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2017 with regard to federal income taxes and fiscal 2016 for state income taxes.
The Traditional Business (for the nine-months ended
The Traditional Business' pretax income increased by
Advertising revenues increased by$234,000 (4%) to$5,649,000 from$5,415,000 , primarily because of increased legal notice advertising net revenues of$471,000 mainly from fictitious business name publishing (as counties have tried to catch up with their backlogs), and government notice advertising net revenues of$173,000 . The increases were partially offset by decreased display advertising net revenues of$44,000 , classified advertising net revenues of$31,000 , and trustee sale notice advertising net revenues of$335,000 primarily because of limited foreclosures due to the temporary halt or suspension of mortgage foreclosures in accordance with the federal COVID-19 related "Eviction and Foreclosure Orders" which started inFebruary 2020 and expired inJuly 2021 although the eviction portion has been extended through the end ofSeptember 2021 . Trustee sale notices are very much dependent on the number ofCalifornia andArizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 56% during the nine months endedJune 30, 2021 as compared to the prior fiscal year period, primarily because of limited foreclosures, as discussed above. Management expects there will be fewer foreclosure notice and other public notice advertisements and declining revenues for fiscal 2021. The Company's smaller newspapers, those other than theLos Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 87% of the total public notice advertising revenues in the nine months endedJune 30, 2021 . Public notice advertising revenues and related advertising and other service fees constituted about 16% of the Company's total revenues for both the nine-month periods endedJune 30, 2021 and 2020. Accordingly, the Company's revenues would be adversely affected ifCalifornia andArizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation. 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 an adverse effect on the Company's revenues. The Daily Journals accounted for about 91% of the Traditional Business' total circulation revenues, which declined by$399,000 (10%) to$3,458,000 from$3,857,000 . The court rule and judicial profile services generated about 7% of the total circulation revenues, with the other newspapers and services accounting for the balance. Advertising service fees and other are Traditional Business segment revenues, which include primarily (i) agency commissions received from outside newspapers in which the advertising is placed, and (ii) fees generated when filing notices with government agencies.
The Traditional Business segment operating expenses decreased by
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Journal Technologies (for the nine-months ended
During the nine months ended
Revenues increased by$1,169,000 (5%) to$26,881,000 from$25,712,000 in the prior fiscal year period. Licensing and maintenance fees increased by$744,000 (5%) to$16,990,000 from$16,246,000 primarily because there were a few legacy-type projects that expanded and accounted for approximately$1,134,000 in one-time license fee revenues. (To focus on supporting the Company's main eSeries products, the Company ended effectiveJuly 1, 2021 the maintenance of its legacy software products purchased as part of the acquisitions in fiscal 2013. As such, the Company expects a reduction in the legacy software licensing and maintenance revenues in the future.) Consulting fees decreased by$416,000 (8%) to$4,649,000 from$5,065,000 due to fewer go-lives. Other public service fees increased by$841,000 (19%) to$5,242,000 from$4,401,000 primarily due to increased traffic citation fee revenues and efiling fee revenues. Deferred consulting fees primarily represent advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period.
Operating expenses decreased by
Journal Technologies continues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
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Comparable three-month periods ended
The Company's reportable segments, and its corporate income and expenses, for
the three months ended
Overall Financial Results (000)
For the three months ended June 30
Reportable Segments
Traditional Journal Corporate
Business Technologies income and expenses Total
2021 2020 2021 2020 2021 2020 2021 2020
Revenues
Advertising $ 2,195 $ 1,297 $ - $ - $ - $ - $ 2,195 $ 1,297
Circulation 1,126 1,259 - - - - 1,126 1,259
Advertising service
fees and other 762 575 - - - - 762 575
Licensing and
maintenance fees - - 5,602 5,531 - - 5,602 5,531
Consulting fees - - 2,100 3,147 - - 2,100 3,147
Other public service
fees - - 1,777 1,065 - - 1,777 1,065
Total revenues 4,083 3,131 9,479 9,743 - - 13,562 12,874
Operating expenses
Salaries and employee
benefits 2,736 2,614 6,699 7,048 - - 9,435 9,662
Others 929 1,085 1,874 1,534 - - 2,803 2,619
Total operating
expenses 3,665 3,699 8,573 8,582 - - 12,238 12,281
Income (loss) from
operations 418 (568 ) 906 1,161 - - 1,324 593
Dividends and interest
income - - - - 776 1,596 776 1,596
Other income - - - - 69 - 69 -
Net unrealized gains
on marketable
securities - - - - 55,686 16,489 55,686 16,489
Interest expenses on
note payable
collateralized by real
estate - - - - (14 ) (20 ) (14 ) (20 )
Interest expenses on
margin loans - - - - (68 ) (64 ) (68 ) (64 )
Pretax (loss) income $ 418 $ (568 ) $ 906 $ 1,161 $ 56,449 $ 18,001 $ 57,773 $ 18,594
Consolidated revenues were $13,562,000 and $12,874,000 for the three months
ended June 30, 2021 and 2020, respectively. This increase of $688,000 (5%) was
primarily from increases in (i) Journal Technologies' license and maintenance
fees of $71,000 and public service fees of $712,000 and (ii) the Traditional
Business' legal notice advertising net revenues of $605,000 , government notice
advertising net revenues of $155,000 , display advertising net revenues of
$177,000 and classified advertising net revenues of $61,000 , partially offset by
reductions in (i) Journal Technologies' consulting fees of $1,047,000 and (ii)
the Traditional Business' trustee sale notice advertising net revenues of
$100,000 , and circulation revenues of $133,000 . The Company's revenues derived
from Journal Technologies' operations constituted about 70% and 76% of the
Company's total revenues for the three months ended June 30, 2021 and 2020,
respectively.
Consolidated operating expenses decreased by $43,000 to $12,238,000 from
$12,281,000 . Total salaries and employee benefits decreased by $227,000 (2%) to
$9,435,000 from $9,662,000 primarily resulting from a pandemic-related layoff in
April 2020 . Outside services increased by $208,000 (35%) to $794,000 from
$586,000 mainly because there were reduced contractor costs for Journal
Technologies during the prior year's pandemic closures. Rent expenses decreased
by $92,000 (58%) to $66,000 from $158,000 because of the closures of Colorado
office in August 2020 and Corona, California office in March 2021 . Other general
and administrative expenses decreased by $152,000 (23%) to $495,000 from
$647,000 mainly resulting from reduced business travel expenses due to the
pandemic.
The Company's non-operating income, net of expenses, increased by $38,448,000
(214%) to $56,449,000 from $18,001,000 primarily because of the recording of net
unrealized gains on marketable securities of $55,686,000 during the three months
ended June 30, 2021 as compared with $16,489,000 during the prior fiscal year
period.
20-------------------------------------------------------------------------------- During the three months endedJune 30, 2021 , there was consolidated pretax income of$57,773,000 , as compared with$18,594,000 in the prior fiscal year period. There was consolidated net income of$42,573,000 ($30.83 per share) for the three months endedJune 30, 2021 , as compared with$14,274,000 ($10.34 per share) in the prior fiscal year period.
The Traditional Business (for the three months ended
The Traditional Business' pretax income increased by
Advertising revenues increased by$898,000 (69%) to$2,195,000 from$1,297,000 , primarily because of increased legal notice advertising net revenues of$605,000 primarily for fictitious business name publishing (as the courts have tried to catch up with their backlogs), government notice advertising net revenues of$155,000 , display advertising net revenues of$177,000 and classified advertising net revenues of$61,000 , partially offset by a reduction in trustee sale notice advertising net revenues of$100,000 primarily because of limited foreclosures, as discussed above.
The Traditional Business segment operating expenses decreased by
Journal Technologies (for the three months ended
During the three months ended
Revenues decreased by$264,000 (3%) to$9,479,000 from$9,743,000 in the prior fiscal year period. Licensing and maintenance fees increased by$71,000 (1%) to$5,602,000 from$5,531,000 primarily because there were a few legacy-type projects that expanded and accounted for approximately$444,000 in one-time license fee revenues, partially offset by decreased legacy software maintenance revenues as the Company ended the maintenance of its legacy software products effectiveJuly 1, 2021 . Consulting fees decreased by$1,047,000 (33%) to$2,100,000 from$3,147,000 due to fewer go-lives. Other public service fees increased by$712,000 (67%) to$1,777,000 from$1,065,000 primarily due to increased traffic citation fee revenues and efiling fee revenues.
Operating expenses decreased by
21
--------------------------------------------------------------------------------Liquidity and Capital Resources
During the nine months endedJune 30, 2021 , the Company's cash, restricted cash, cash equivalents and marketable security positions increased by$152,638,000 , after additional net borrowing of$2,413,000 and net pretax unrealized gains on marketable securities of$131,754,000 . Cash, cash equivalents and the proceeds from the sales of marketable securities were primarily used to purchase additional marketable securities of$39,995,000 and pay the real estate loan principal of$94,000 . The investments in marketable securities, which had an adjusted cost basis of approximately$80,246,000 and a market value of about$349,593,000 atJune 30, 2021 , generated approximately$2,063,000 in dividends income during the nine months endedJune 30, 2021 . These securities had approximately$269,347,000 of net unrealized gains before estimated taxes of$70,275,000 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 marketable securities are now included in the Company's net income (loss) and thus may have a significant impact on the Company's financial statements depending on the fluctuations of the market prices of the invested securities. Cash flows from operating activities increased by$1,523,000 during the nine months endedJune 30, 2021 as compared to the prior fiscal year period, primarily due to (i) decreases in income tax receivable of$1,260,000 and deferred tax assets of$49,247,000 and (ii) increases in income tax payable of$375,000 ; accounts payable and accrued liabilities of$1,427,000 (because of the timing difference in remitting efiling fees to the courts) and the additional accrual to the long-term supplemental compensation accrual of$1,410,000 . This was partially offset by (i) a decrease in net income of$49,262,000 , excluding the additional realized gains on sales of marketable securities of$18,478,000 and increases in unrealized gains on marketable securities of$172,945,000 , (ii) a net decrease in deferred revenues of$2,090,000 and (iii) an increase in accounts receivable of$922,000 primarily resulting from more billings. Cash provided from operating activities of$22,000 included net decreases of$2,794,000 in total current and long-term deferred revenues of$16,582,000 .
As of
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations. The amount available for borrowing is based on the market value of the Company's investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly. As ofJune 30, 2021 , the investments were concentrated in just nine companies. Accordingly, a significant decline in the market value of one or more of the Company's investments may not be offset by the hypothetically better performance of other investments, and that could result in a large decrease in the Company's shareholders' equity and net income.
The Company is not a smaller version of Berkshire Hathaway Inc. Instead, it hopes to be a significant software company while it also operates its Traditional Business.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The Company's financial statements and accompanying notes are prepared in accordance withU.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. Management believes that revenue recognition, accounting for software costs, fair value measurement and disclosures (including for the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates. The Company's critical accounting policies are detailed in its Annual Report on Form 10-K for the year endedSeptember 30, 2020 . The above discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this document, including but not limited to those in "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking" statements that involve risks and uncertainties that may cause actual future events or results to differ materially from those described in the forward-looking statements. Words such as "expects," "intends," "anticipates," "should," "believes," "will," "plans," "estimates," "may," variations of such words and similar expressions are intended to identify such forward-looking statements. We disclaim any intention or obligation to revise any forward-looking statements whether as a result of new information, future developments, or otherwise. There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, among others: risks associated with software development and implementation efforts; Journal Technologies' reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; possible changes in the law, particularly changes limiting or eliminating the requirements for public notice advertising; possible loss of the adjudicated status of the Company's newspapers and their legal authority to publish public notice advertising; the impacts of COVID-19 and the efforts to contain it on the Company's customers, advertisers and subscribers, particularly the closure or scaling back of operations of courts, justice agencies and other businesses; a further decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; possible security breaches of the Company's software or websites; the Company's reliance on its president and chief executive officer, who has reduced his work schedule due to a health issue; changes in accounting guidance; material weaknesses in the Company's internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly inCalifornia ) and other factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in this Form 10-Q, including in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with theSecurities and Exchange Commission , including in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 .
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