Daily Journal Corporation — FY2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2011, compared with fiscal 2010; it does not provide standalone fourth-quarter results. The company operates a traditional newspaper, publishing and public-notice advertising business, plus Sustain Technologies, a court case-management software business. Operations are concentrated primarily in California and Arizona.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $34.513 million | $37.580 million |
| Operating income | $10.802 million | $11.441 million |
| Income before taxes | $12.000 million | $12.272 million |
| Net income | $7.840 million | $7.672 million |
| Diluted EPS | $5.68 | $5.56 |
| Operating cash flow | $10.317 million | $9.324 million |
- Revenue fell 8%. Operating margin was approximately 31.3%, versus 30.4%; net margin was approximately 22.7%, versus 20.4%.
- Advertising revenue was $21.337 million, circulation revenue $6.767 million, and information systems and services revenue $2.981 million. Advertising service fees and other revenue were $3.428 million.
- Cash, Treasury bills and marketable securities totaled $72.274 million at year-end, including marketable securities of $56.116 million. The filing reports $69.216 million as the combined fair value of Treasury bills and marketable securities; cash and cash equivalents are separate.
- Working capital was $58.378 million. Total liabilities were $25.937 million, including $5.170 million of long-term accrued liabilities. The balance sheet lists no borrowings; interest expense was $36,000.
- Investing cash outflow was $10.874 million, including $11.154 million of marketable-security purchases and $129,000 of capital expenditures. Cash and equivalents declined $557,000.
Material changes versus FY2010
- Trustee-sale notice and related service-fee revenue declined $2.135 million (14%); the number of foreclosure notices published fell 17%.
- Circulation revenue declined $304,000 (4%), classified advertising declined $196,000 (11%), and Sustain consulting revenue declined $172,000 (20%). Display advertising increased $47,000 (2%).
- Traditional-business pretax income increased 3% to $13.622 million, while Sustain’s pretax loss widened to $1.622 million from $932,000. Consolidated pretax income fell 2%, but net income rose 2% and EPS increased from $5.56 to $5.68.
- Costs and expenses decreased 9%, with personnel costs down 16%, including lower management incentive-plan expense. Dividends and interest income rose to $1.233 million from $867,000.
- Net unrealized investment gains fell to $24.532 million from $29.655 million; accumulated other comprehensive income declined to $14.760 million. Comprehensive income was $4.213 million versus $5.347 million.
Outlook, risks and other notable matters
- Management expects fewer foreclosure notices and declining related advertising revenue in FY2012, with no expected offset from commercial advertising. Public-notice advertising and related fees were about 58% of FY2011 revenue; trustee-sale advertising alone was about 37%.
- Sustain’s Web-based case-management development and implementation costs were $2.864 million in FY2011, up from $2.316 million. Management said these costs would materially affect earnings at least through FY2012. Adoption, successful development, project acceptance and constrained government budgets remain risks.
- The company expects paper prices to continue rising in FY2012. Postal costs, competition from online services, possible legal reductions in required public notices, subscriber declines and customer collections are additional risks.
- Investments were concentrated in five companies. Their $24.532 million of pretax unrealized gains were subject to market fluctuation and possible impairment. The company said it had adequate resources for the foreseeable future and may consider acquisitions; it gave no quantified earnings or revenue guidance.
- The IRS was contesting approximately $700,000 of research-credit claims for 2002–2007; the company was challenging the proposed assessment in Tax Court. Management did not believe ordinary-course litigation would materially harm financial position or results.
- The company relies heavily on CEO/CFO Gerald Salzman and had no key-person life insurance or employment agreement with him. No dividends were paid in FY2011 or FY2010, and the board did not expect distributions in the foreseeable future.
- Ernst & Young issued an unqualified opinion on the financial statements. The auditor did not express an opinion on internal-control effectiveness; management concluded controls were effective.
Key facts for investors to verify
- Whether foreclosure-related public-notice revenues continue to decline in FY2012 and how that affects traditional-business profitability.
- Whether Sustain’s new system installations progress to customer acceptance and recurring revenue, and how development spending affects results.
- The valuation, concentration and potential impairment exposure of the investment portfolio, including the movement in unrealized gains.
- The outcome of the IRS research-credit dispute and the status of the related reserve and accrued interest.
- Changes in circulation, commercial advertising, paper costs and postage, as well as any legislative changes to public-notice requirements.