10-Q 1 djco20240331_10q.htm FORM 10-Q djco20240331_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

 

 

For the quarterly period ended March 31, 2024

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from _______________ to _____________________

 

Commission File Number 0-14665

 

DAILY JOURNAL CORPORATION

(Exact name of registrant as specified in its charter)

 

South Carolina 95-4133299
(State or other jurisdiction of  (I.R.S. Employer
incorporation or organization) Identification No.)
   
915 East First Street  
Los Angeles, California 90012-4050
(Address of principal executive offices) (Zip code)

         

(213) 229-5300

(Registrant's telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

DJCO

The Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          

Yes: ☒         No:  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes: ☒         No:  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer:  ☐ Accelerated Filer:  ☐
Non-accelerated Filer:  ☐ Smaller Reporting Company: 
  Emerging Growth Company: 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:          No:  ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 1,377,026 shares outstanding at April 30, 2024

 

1

 

 

DAILY JOURNAL CORPORATION

 

 

INDEX

 

 

 

  Page Nos.
   
PART I Financial Information  
   
Item 1. Financial Statements (Unaudited)  
   
Consolidated Balance Sheets ‑ March 31, 2024 and September 30, 2023 3
   
Consolidated Statements of Income and Comprehensive Income ‑ Three months ended March 31, 2024 and 2023 4
   
Consolidated Statements of Income and Comprehensive Income ‑ Six months ended March 31, 2024 and 2023 5
   
Consolidated Statements of Shareholders’ Equity ‑ Six months ended March 31, 2024 and 2023 6
   
Consolidated Statements of Cash Flows ‑ Six months ended March 31, 2024 and 2023 7
   
Notes to Consolidated Financial Statements 8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 4. Controls and Procedures 22
   
Part II Other Information  
   
Item 6. Exhibits 23

 

 

2

 

 

 

PART I

Item 1. FINANCIAL STATEMENTS

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

March 31

   

September 30

 
   

2024

   

2023

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 10,557,000     $ 20,844,000  

Restricted cash

    2,144,000       2,100,000  

Non-qualified deferred compensation plan - trust account asset value

    522,000       194,000  

Marketable securities at fair value -- common stocks

    297,003,000       303,128,000  

Accounts receivable, less allowance for doubtful accounts of $250,000 at March 31, 2024 and September 30, 2023

    15,624,000       18,687,000  

Inventories

    64,000       72,000  

Prepaid expenses and other current assets

    514,000       380,000  

Total current assets

    326,428,000       345,405,000  
                 

Property, plant and equipment, at cost

               

Land, buildings and improvements

    16,418,000       16,400,000  

Furniture, office equipment and computer software

    1,697,000       1,703,000  

Machinery and equipment

    1,521,000       1,521,000  
      19,636,000       19,624,000  

Less accumulated depreciation

    (10,386,000 )     (10,264,000 )
      9,250,000       9,360,000  

Operating lease right-of-use assets

    69,000       95,000  
    $ 335,747,000     $ 354,860,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 6,070,000     $ 6,643,000  

Accrued liabilities

    6,054,000       8,789,000  

Income tax payable

    2,550,000       1,069,000  

Note payable collateralized by real estate

    161,000       158,000  

Deferred subscriptions

    2,562,000       2,678,000  

Deferred consulting fees

    4,228,000       5,828,000  

Deferred maintenance agreements and others

    14,772,000       17,033,000  

Total current liabilities

    36,397,000       42,198,000  
                 

Long term liabilities

               

Investment margin account borrowings

    29,421,000       75,000,000  

Note payable collateralized by real estate

    1,038,000       1,120,000  

Deferred maintenance agreements

    816,000       1,000,000  

Accrued liabilities

    3,421,000       4,274,000  

Accrued non-qualified deferred compensation

    509,000       200,000  

Deferred income taxes

    35,646,000       30,599,000  

Total long-term liabilities

    70,851,000       112,193,000  
                 

Commitments and contingencies (Notes 10 and 11)

           
                 

Shareholders' equity

               

Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued

    -       -  

Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 428,027 treasury shares, at March 31, 2024 and September 30, 2023

    14,000       14,000  

Additional paid-in capital

    1,755,000       1,755,000  

Retained earnings

    226,730,000       198,700,000  

Total shareholders' equity

    228,499,000       200,469,000  
    $ 335,747,000     $ 354,860,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Three months

ended March 31

 
   

2024

   

2023

 
                 

Revenues

               

Advertising

  $ 2,316,000     $ 2,204,000  

Circulation

    1,099,000       1,108,000  

Advertising service fees and other

    697,000       778,000  

Licensing and maintenance fees

    6,854,000       5,679,000  

Consulting fees

    3,199,000       4,433,000  

Other public service fees

    2,406,000       1,952,000  
      16,571,000       16,154,000  
                 

Costs and expenses

               

Salaries and employee benefits

    12,011,000       10,147,000  

Decrease to the long-term supplemental compensation accrual

    (410,000 )     (200,000 )

Agency commissions

    299,000       233,000  

Outside services

    1,583,000       1,749,000  

Postage and delivery expenses

    183,000       167,000  

Newsprint and printing expenses

    160,000       193,000  

Depreciation and amortization

    67,000       70,000  

Equipment maintenance and software

    336,000       354,000  

Credit card merchant discount fees

    558,000       455,000  

Rent expenses

    71,000       74,000  

Accounting and legal fees

    155,000       222,000  

Other general and administrative expenses

    925,000       1,065,000  
      15,938,000       14,529,000  

Income from operations

    633,000       1,625,000  

Other income (expense)

               

Dividends and interest income

    1,289,000       4,063,000  

Realized gains on sales of marketable securities

    14,261,000       -  

Net unrealized gains on marketable securities

    5,503,000       8,644,000  

Interest expense on margin loans and others

    (1,056,000 )     (1,052,000 )

Interest expense on note payable collateralized by real estate

    (10,000 )     (12,000 )

Income before income taxes

    20,620,000       13,268,000  

Income tax provisions

    (5,205,000 )     (3,835,000 )

Net income

  $ 15,415,000     $ 9,433,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,377,026       1,377,026  

Basic and diluted net income per share

  $ 11.19     $ 6.85  
                 

Comprehensive income

  $ 15,415,000     $ 9,433,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

4

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Six months

ended March 31

 
   

2024

   

2023

 
                 

Revenues

               

Advertising

  $ 4,403,000     $ 4,194,000  

Circulation

    2,194,000       2,206,000  

Advertising service fees and other

    1,402,000       1,477,000  

Licensing and maintenance fees

    13,411,000       10,074,000  

Consulting fees

    6,501,000       6,755,000  

Other public service fees

    4,653,000       3,749,000  
      32,564,000       28,455,000  
                 

Costs and expenses

               

Salaries and employee benefits

    23,358,000       19,778,000  

Decrease to the long-term supplemental compensation accrual

    (830,000 )     (720,000 )

Agency commissions

    542,000       444,000  

Outside services

    3,250,000       2,979,000  

Postage and delivery expenses

    359,000       334,000  

Newsprint and printing expenses

    365,000       392,000  

Depreciation and amortization

    133,000       145,000  

Equipment maintenance and software

    712,000       657,000  

Credit card merchant discount fees

    1,110,000       880,000  

Rent expenses

    141,000       143,000  

Accounting and legal fees

    411,000       495,000  

Other general and administrative expenses

    1,757,000       2,019,000  
      31,308,000       27,546,000  

Income from operations

    1,256,000       909,000  

Other income (expense)

               

Dividends and interest income

    2,858,000       5,132,000  

Realized gains on sales of marketable securities

    14,261,000       422,000  

Net unrealized gains on marketable securities

    20,193,000       32,669,000  

Interest expense on margin loans and others

    (2,187,000 )     (1,913,000 )

Interest expense on note payable collateralized by real estate

    (21,000 )     (24,000 )

Income before income taxes

    36,360,000       37,195,000  

Income tax provisions

    (8,330,000 )     (9,935,000 )

Net income

  $ 28,030,000     $ 27,260,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,377,026       1,377,026  

Basic and diluted net income (loss) per share

  $ 20.36     $ 19.80  
                 

Comprehensive income

  $ 28,030,000     $ 27,260.000  

 

See accompanying Notes to Consolidated Financial Statements.

 

5

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                   

Additional

           

Total

 
   

Common Stock

   

Treasury Stock

   

Paid-in

   

Retained

   

Shareholders'

 
   

Share

   

Amount

   

Share

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                                         

Balance at September 30, 2022

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 177,248,000     $ 179,017,000  

Net income

    -       -       -       -       -       17,827,000       17,827,000  

Balance at December 31, 2022

    1,805,053       18,000       (428,027 )     (4,000 )     1,755,000       195,075,000       196,844,000  

Net income

    -       -       -       -       -       9,433,000       9,433,000  

Balance at March 31, 2023

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 204,508,000     $ 206,277,000  
                                                         

Balance at September 30, 2023

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 198,700,000     $ 200,469,000  

Net income

    -       -       -       -       -       12,615,000       12,615,000  

Balance at December 31, 2023

    1,805,053       18,000       (428,027 )     (4,000 )     1,755,000       211,315,000       213,084,000  

Net income

    -       -       -       -       -       15,415,000       15,415,000  

Balance at March 31, 2024

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 226,730,000     $ 228,499,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

6

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six months

ended March 31

 
   

2024

   

2023

 

Cash flows from operating activities

               

Net income

  $ 28,030,000     $ 27,260,000  

Adjustments to reconcile net income to net cash (used in) provided from operations

               

Depreciation and amortization

    133,000       145,000  

Net unrealized gains on marketable securities

    (20,193,000 )     (32,669,000 )

Realized gains on sales of marketable securities

    (14,261,000 )     (422,000 )

Stock dividends

    -       (2,978,000 )

Deferred income taxes

    5,047,000       9,614,000  

Changes in operating assets and liabilities (Increase) decrease in current assets

               

Accounts receivable, net

    3,063,000       3,416,000  

Inventories

    8,000       (42,000 )

Prepaid expenses and other assets

    (108,000 )     25,000  

Income tax receivable

    -       269,000  

Increase (decrease) in liabilities

               

Accounts payable

    (573,000 )     (643,000 )

Accrued liabilities, including non-qualified deferred compensation

    (3,279,000 )     (2,998,000 )

Income tax payable

    1,481,000       -  

Deferred subscriptions

    (116,000 )     (127,000 )

Deferred consulting fees

    (1,600,000 )     1,627,000  

Deferred maintenance agreements and others

    (2,445,000 )     (747,000 )

Net cash (used in) provided from operating activities

    (4,813,000 )     1,730,000  
                 

Cash flows from investing activities

               

Proceeds from sales of marketable securities

    40,579,000       2,826,000  

Purchases of marketable securities

    -       (10,001,000 )

Purchases of property, plant and equipment

    (23,000 )     (74,000 )

Net cash provided from (used in) investing activities

    40,556,000       (7,249,000 )
                 

Cash flows from financing activities

               

Proceeds from margin loan borrowing

    -       6,011,000  

Payment to margin loan borrowing

    (45,579,000 )     (11,000 )

Payment of real estate loan principal

    (79,000 )     (77,000 )

Net cash (used in) provided from financing activities

    (45,658,000 )     5,923,000  
                 

(Decrease) increase in cash and restricted cash and cash equivalents

    (9,915,000 )     404,000  
                 

Cash and restricted cash and cash equivalents

               

Beginning of period

    23,138,000       15,468,000  

End of period

  $ 13,223,000     $ 15,872,000  

Interest paid during period

  $ 2,198,000     $ 1,869,000  

Net income taxes paid

  $ 1,802,000     $ 52,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

7

 

 

DAILY JOURNAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1 - The Corporation and Operations

 

Daily Journal Corporation (“Daily Journal”) publishes newspapers and websites covering California and Arizona and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. This is sometimes referred to as the Company’s “Traditional Business”.

 

Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of the Company, 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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 30 states, and internationally.

 

Essentially all of the Company’s U.S. operations are based in California, Arizona and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects and in British Columbia, Canada, where the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in August 2022.

 

 

Note 2 - Basis of Presentation

 

In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of its financial position as of March 31, 2024, its results of operations for the three- and six-month periods ended March 31, 2024 and 2023, its consolidated statements of shareholders’ equity for the three- and six-month periods ended March 31, 2024 and 2023 and cash flows for the six-month periods ended March 31, 2024 and 2023. The results of operations for the six months ended March 31, 2034 are not necessarily indicative of the results to be expected for the full year.

 

The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

 

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

 

8

 

 

 

Note 3 - Accounting Standards Adopted in Fiscal 2024

 

On October 1, 2023, the Company adopted Current Expected Credit Losses, a credit loss accounting standard (model) issued by the Financial Accounting Stands Board, requiring financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The adoption of this guidance has no material effect on the Company’s consolidated financial statements.

 

 

Note 4 – Right-of-Use (ROU) Asset

 

At March 31, 2024, the Company had a ROU asset and lease liability of approximately $69,000 for its operating office and equipment leases, including approximately $21,000 beyond one year.  Operating office and equipment leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying consolidated balance sheets. 

 

 

Note 5 – Revenue Recognition

 

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.

 

Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one-transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third-party hosting fees when used. Revenues for consulting are recognized at point of delivery (go-live) upon completion of services. These contracts include assurance warranty provisions for limited periods and do not include financing terms. For some contracts, the Company acts as a principal with respect to certain services, such as data conversion, interfaces and hosting that are provided by third-parties, and recognizes such revenues on a gross basis. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery (go-live), and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can e-file cases or 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. 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.

 

9

 

 

Note 6 - Treasury stock and net income per common share

 

In June 2022, the Company received from the late Charles T. Munger 3,720 shares of Daily Journal common stock as his gracious personal gift (worth approximately $1 million on the date of the gift) for the purpose of establishing a new senior management equity incentive plan, which has been approved by the Board of Directors and shareholders, though no grants under the plan have yet been made. These donated shares were considered treasury stock, and the Company accounted for them using the par method which resulted in an immaterial effected amount on Treasury Stock and Additional Paid-in Capital. In addition, the number of outstanding shares of the Company was reduced by these 3,720 shares to reflect the actual number of outstanding shares of 1,377,026 at March 31, 2024. The net income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,377,026 for both the three- and six-month periods ended March 31, 2024 and 2023.

 

 

Note 7 - Basic and Diluted Net Income Per Share

 

The Company does not have any common stock equivalents, and therefore basic and diluted net income per share are the same.

 

 

Note 8 - Investments in Marketable Securities

 

All investments are classified as “Current assets” because they are available for sale at any time. These “available-for-sale” marketable securities are stated at fair value. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to ASC 820, Fair Value Measurement. As of March 31, 2024 and September 30, 2023, there were net accumulated pretax unrealized gains of $157,909,000 and $137,716,000, respectively, recorded in the accompanying consolidated balance sheets. Most of the accumulated pretax unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

 

During the six months ended March 31, 2024, the Company recorded and included in its net income the net unrealized gains on marketable securities of $20,193,000, as compared with $32,669,000, in the prior year period.

 

In March 2024, the Company sold part of its marketable securities for approximately $40,579,000, realizing net gains of $14,261,000. The Company used these proceeds to further pay down the margin loan balance to $29,421,000 from $75,000,000 at September 30, 2023, aggregating a paydown of approximately $45,579,000 during the six months ended March 31, 2024. (During last quarter, there was already a paydown of $5,000,000 to this loan by means of excess cash from operations.)

 

In December 2022, the Company sold part of its marketable securities for approximately $2,826,000, realizing net gains of $422,000, and borrowed an additional $6,011,000 from the margin loan account to purchase additional marketable securities with a total cost of approximately $10,001,000. The Company repaid $11,000 subsequently. In addition, the Company received stock dividends in March 2023 worth approximately $2,978,000 from one of the companies in which it holds marketable securities.

 

10

 

Our long-serving director and former chairman, Charles T. Munger, had managed the Company’s marketable securities portfolio since the original purchases were made with the Company’s excess cash in 2009 as an alternative to near-zero interest rate investments.  Mr. Munger died in November 2023, and the Company remains committed to using the portfolio as a source of strength in support of its operating businesses, just as it has for the past 15 years. The Board has been evaluating ways to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses, and the recent sales of a portion of the portfolio and the concurrent paydown of the Company’s margin loan, each as described above, are reflective of that evaluation.

 

Investments in marketable securities as of March 31, 2024 and September 30, 2023 are summarized below.

 

Investment in Financial Instruments

 

   

March 31, 2024

   

September 30, 2023

 
   

Aggregate

fair value

   

Amortized/

Adjusted

cost basis

   

Pretax

unrealized gains

   

Aggregate

fair value

   

Amortized/

Adjusted

cost basis

   

Pretax

unrealized gains

 

Marketable securities Common stocks

  $ 297,003,000     $ 139,094,000     $ 157,909,000     $ 303,128,000     $ 165,412,000     $ 137,716,000  

 

 

Note 9 - Income Taxes

 

For the six months ended March 31, 2024, the Company recorded an income tax provision of $8,330,000 on the pretax income of $36,360,000. The income tax provision consisted of tax provisions of $3,660,000 on the realized gains on marketable securities, $5,180,000 on the unrealized gains on marketable securities, $40,000 on income from foreign operations, and $480,000 on income from US operations and dividend income, partially offset by a tax benefit of $210,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $820,000 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 six months ended March 31, 2024 was 22.9%, after including the taxes on the realized and unrealized gains on marketable securities.

 

For the six months ended March 31, 2023, the Company recorded an income tax provision of $9,935,000 on the pretax income of $37,195,000. The income tax provision consisted of a tax provision of $110,000 on the realized gains on marketable securities and $8,770,000 on the unrealized gains on marketable securities, a tax provision of $1,005,000 on income from operations, including dividend income, and a tax provision of $210,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability, partially offset by a tax benefit of $160,000 for the dividends received deduction and other permanent book and tax differences.  Consequently, the overall effective tax rate for the six months ended March 31, 2023 was 26.7%, after including the taxes on the realized and unrealized gains on marketable securities.

 

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 2021 with regard to federal income taxes and fiscal 2020 for state income taxes. 

 

 

Note 10 - Debt 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. At March 31, 2024, the margin loan balance was approximately $29.4 million. 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 March 31, 2024 was 6%. These investment margin account borrowings do not mature.

 

11

 

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 for Journal Technologies. The Company paid $1.24 million and financed the balance with a real estate bank loan of $2.26 million which had a fixed interest rate of 4.66%. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. 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 10 years. This real estate loan had a balance of approximately $1.2 million as of March 31, 2024. Each monthly installment payment is approximately $16,700. In April 2022, the Company sold approximately 17,564 square feet of the land along the front of its Logan building to the City of Logan for approximately $381,000 in connection with the City of Logan’s street widening project. In October 2022, the Company again amended this real estate loan contract as the bank transferred its index to Secured Overnight Financing Rate from London Interbank Offered Rate which was ceased by the Federal Reserve and the Alternative Reference Rates Committee in the United States. The term of the loan, including the interest rate and the balance, remains unchanged.

 

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 October 2025.

 

Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a 409(A) non-qualified deferred compensation plan for its employees. As of March 31, 2024, there were deferred compensation liabilities of approximately $509,000, which were held under a 409(A) plan trust account secured by a company-owned life insurance policy.

 

 

Note 11 - Contingencies

 

From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, 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.

 

12

 

 

 

Note 12 - Operating Segments

 

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each of the reportable segments and its income and expenses is set forth below:

 

Overall Financial Results (000)

For the six months ended March 31

 

   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

   

Total

 
   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

 

Revenues

                                                               

Advertising

  $ 4,403     $ 4,194     $ -     $ -     $ -     $ -     $ 4,403     $ 4,194  

Circulation

    2,194       2,206       -       -       -       -       2,194       2,206  

Advertising service fees and other

    1,402       1,477       -       -       -       -       1,402       1,477  

Licensing and maintenance fees

    -       -       13,411       10,074       -       -       13,411       10,074  

Consulting fees

    -       -       6,501       6,755       -       -       6,501       6,755  

Other public service fees

    -       -       4,653       3,749       -       -       4,653       3,749  

Total operating revenues

    7,999       7,877       24,565       20,578       -       -       32,564       28,455  

Operating expenses

                                                               

Salaries and employee benefits

    5,173       4,499       18,185       15,279       -       -       23,358       19,778  

Decrease to the long-term supplemental compensation accrual

    (800 )     (700 )     (30 )     (20 )     -       -       (830 )     (720 )

Others

    2,765       2,435       6,015       6,053       -       -       8,780       8,488  

Total operating expenses

    7,138       6,234       24,170       21,312       -       -       31,308       27,546  

Income (loss) from operations

    861       1,643       395       (734 )     -       -       1,256       909  

Dividends and interest income

    -       -       -       -       2,858       5,132       2,858       5,132  

Interest expenses on note payable collateralized by real estate

    -       -       -       -       (21 )     (24 )     (21 )     (24 )

Interest expense on margin loans and others

    -       -       -       -       (2,187 )     (1,913 )     (2,187 )     (1,913 )

Gains on sales of marketable securities, net

    -       -       -       -       14,261       422       14,261       422  

Net unrealized gains on marketable securities

    -       -       -       -       20,193       32,669       20,193       32,669  

Pretax income (loss)

    861       1,643       395       (734 )     35,104       36,286       36,360       37,195  

Income tax (expense) benefit

    (200 )     (435 )     (90 )     135       (8,040 )     (9,635 )     (8,330 )     (9,935 )

Net income (loss)

  $ 661     $ 1,208     $ 305     $ (599 )   $ 27,064     $ 26,651     $ 28,030     $ 27,260  

Total assets

  $ 14,807     $ 14,053     $ 23,937     $ 25,444     $ 297,003     $ 319,523     $ 335,747     $ 359,020  

Capital expenditures

  $ 23     $ 70     $ -     $ 4     $ -     $ -     $ 23     $ 74  

 

13

 

 

Overall Financial Results (000)

For the three months ended March 31

 

   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

   

Total

 
   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

 

Revenues

                                                               

Advertising

  $ 2,316     $ 2,204     $ -     $ -     $ -     $ -     $ 2,316     $ 2,204  

Circulation

    1,099       1,108       -       -       -       -       1,099       1,108  

Advertising service fees and other

    697       778       -       -       -       -       697       778  

Licensing and maintenance fees

    -       -       6,854       5,679       -       -       6,854       5,679  

Consulting fees

    -       -       3,199       4,433       -       -       3,199       4,433  

Other public service fees

    -       -       2,406       1,952       -       -       2,406       1,952  

Total operating revenues

    4,112       4,090       12,459       12,064       -       -       16,571       16,154  

Operating expenses

                                                               

Salaries and employee benefits

    2,624       2,281       9,387       7,866       -       -       12,011       10,147  

Decrease to the long-term supplemental compensation accrual

    (380 )     (200 )     (30 )     -       -       -       (410 )     (200 )

Others

    1,294       1,301       3,043       3,281       -       -       4,337       4,582  

Total operating expenses

    3,538       3,382       12,400       11,147       -       -       15,938       14,529  

Income from operations

    574       708       59       917       -       -       633       1,625  
                                                                 

Dividends and interest income

    -       -       -       -       1,289       4,063       1,289       4,063  

Interest expenses on note payable collateralized by real estate

    -       -       -       -       (10 )     (12 )     (10 )     (12 )

Interest expense on margin loans and other

    -       -       -       -       (1,056 )     (1,052 )     (1,056 )     (1,052 )

Gains on sales of marketable securities

    -       -       -       -       14,261       -       14,261       -  

Net unrealized gains on marketable securities

    -       -       -       -       5,503       8,644       5,503       8,644  

Pretax income

    574       708       59       917       19,987       11,643       20,620       13,268  

Income tax (expense) benefit

    (145 )     (200 )     160       (215 )     (5,220 )     (3,420 )     (5,205 )     (3,835 )

Net income

  $ 429     $ 508     $ 219     $ 702     $ 14,767     $ 8,223     $ 15,415     $ 9,433  

Total assets

  $ 14,807     $ 14,053     $ 23,937     $ 25,444     $ 297,003     $ 319,523     $ 335,747     $ 359,020  

Capital expenditures

  $ 18     $ 38     $ -     $ -     $ -     $ -     $ 18     $ 38  

 

During the six months ended March 31, 2024, the Traditional Business had total operating revenues of $7,999,000 with $5,805,000 recognized after services were provided and $2,194,000 recognized ratably over the subscription terms, as compared with total operating revenues of $7,877,000 with $5,671,000 recognized after services were provided and $2,206,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $24,565,000 with $11,384,000 recognized upon completion of services and $13,181,000 recognized ratably over the subscription periods, as compared with total operating revenues of $20,578,000 with $10,687,000 recognized upon completion of services and $9,891,000 recognized ratably over the subscription periods in the prior fiscal year period.

 

During the three months ended March 31, 2024, the Traditional Business had total operating revenues of $4,112,000 with $3,013,000 recognized after services were provided and $1,099,000 recognized ratably over the subscription terms, as compared with total operating revenues of $4,090,000 with $2,982,000 recognized after services were provided and $1,108,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $12,459,000 with $5,814,000 recognized upon completion of services and $6,645,000 recognized ratably over the subscription periods, as compared with total operating revenues of $12,064,000 with $6,566,000 recognized upon completion of services and $5,498,000 recognized ratably over the subscription periods in the prior fiscal year period.

 

Approximately 75% of the Company’s revenues were derived from Journal Technologies during both the three-month periods ended March 31, 2024 and 2023. In addition, the Company’s revenues have been primarily from the United States with approximately 14% from foreign countries during the six-months ended March 31, 2023. Journal Technologies’ revenues are primarily from governmental agencies.

 

 

Note 13 - Subsequent Events

 

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

 

14

 

 

 

Item 2. 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., 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 e-filing and a website to pay traffic citations and fees online. These products are licensed in approximately 30 states and internationally.

 

Reportable Segments

 

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each reportable segment and its income and expenses is set forth below:

 

Overall Financial Results (000)

For the six months ended March 31

 

   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

   

Total

 
   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

   

2024

   

2023

 

Revenues

                                                               

Advertising

  $ 4,403     $ 4,194     $ -     $ -     $ -     $ -     $ 4,403     $ 4,194  

Circulation

    2,194       2,206       -       -       -       -       2,194       2,206  

Advertising service fees and other

    1,402       1,477       -       -       -       -       1,402       1,477  

Licensing and maintenance fees

    -       -       13,411       10,074       -       -       13,411       10,074  

Consulting fees

    -       -       6,501       6,755       -       -       6,501       6,755  

Other public service fees

    -       -       4,653       3,749       -       -       4,653       3,749  

Total operating revenues

    7,999       7,877       24,565       20,578       -       -       32,564       28,455  

Operating expenses

                                                               

Salaries and employee benefits

    5,173       4,499       18,185       15,279       -       -       23,358       19,778  

Decrease to the long-term supplemental compensation accrual

    (800 )     (700 )     (30 )     (20 )     -       -       (830 )     (720 )

Others

    2,765       2,435       6,015       6,053       -       -       8,780       8,488  

Total operating expenses

    7,138       6,234       24,170       21,312       -       -       31,308       27,546  

Income (loss) from operations

    861       1,643       395       (734 )     -       -       1,256       909  

Dividends and interest income

    -       -       -       -       2,858       5,132       2,858       5,132  

Interest expenses on note payable collateralized by real estate

    -       -       -       -       (21 )     (24 )     (21 )     (24 )

Interest expense on margin loans and others

    -       -       -       -       (2,187 )     (1,913 )     (2,187 )     (1,913 )

Gains on sales of marketable securities, net

    -       -       -       -       14,261       422       14,261       422  

Net unrealized gains on marketable securities

    -       -       -       -       20,193       32,669       20,193       32,669  

Pretax income (loss)

    861       1,643       395       (734 )     35,104       36,286       36,360       37,195  

Income tax (expense) benefit

    (200 )     (435 )     (90 )     135       (8,040 )     (9,635 )     (8,330 )     (9,935 )

Net income (loss)

  $ 661     $ 1,208     $ 305     $ (599 )   $ 27,064     $ 26,651     $ 28,030     $ 27,260  

Total assets

  $ 14,807     $ 14,053     $ 23,937     $ 25,444     $ 297,003     $ 319,523     $ 335,747     $ 359,020  

Capital expenditures

  $ 23     $ 70     $ -