What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-12-19 compared with 2021-12-17 · 55 added, 65 removed, 113 unchanged (52% of the section changed)

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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”

Unprecedented actions were taken by public health and other 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”.

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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 Delta and Omicron 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 even though some banks have recently started to increase their dividends.

It is also possible that governments may again take extreme actions in response to the pandemic and the Delta and Omicron variants, 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 due to the impacts of COVID-19 and its aftermath, as advertising and subscription revenues decrease.

Management believes that the COVID-19 pandemic has had, and, with the Delta and Omicron variant cases, and most recently the more contagious BA.4.6 and BA.5 sub-variant cases, will continue to have, a significant impact on the Company’s business operations.

It is also possible that governments may again take actions in response to the pandemic and new variants and sub-variants, such as a 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, which 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 related changes in business operations and personal behaviors, 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 general trend to continue due to the impacts of COVID-19 and its aftermath, including fewer lawyers receiving our newspapers at their offices as they continue to work from home.

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.

Also, although we have been able to complete some existing projects remotely, we have been delayed in finishing 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 primarily due to lower headcount and reduced business travel.

Reportable Segments

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies.

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.

(In August 2022, the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in Victoria BC, Canada.

Except for a nominal founding cost of approximately $4,000, there were no business activities for this new Canadian company during fiscal 2022.) All inter-segment transactions were eliminated.

Additional details about each of the reportable segments and its corporate income and expenses is set forth below:

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Salaries and employee benefits

Increase to the long-term Supplemental compensation accrual

Total operating expenses

Income (loss) from operations

Income from operations

Dividends and interest income

Gains on sale of land

Interest expenses on note payable collateralized by real estate and other

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Gains on sales of marketable securities, net

Net unrealized gains (losses) on marketable securities

Net unrealized (losses) gains on marketable securities

Pretax income (loss)

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Consolidated revenues were $54,009,000 and $49,925,000 for fiscal 2022 and 2021, respectively.

This decrease of $553,000 (1%) was primarily from decreases in (i) Journal Technologies’

license and maintenance fees of $603,000 and consulting fees of $1,399,000, and (ii) the Traditional Business’

trustee sale notice advertising net revenues of $264,000, display advertising net revenues of $92,000 and circulation revenues of $514,000, partially offset by increases in (i) Journal Technologies’ public service fees of $1,249,000 and (ii) the Traditional Business’

classified advertising net revenues of $13,000, legal notice advertising net revenues of $663,000 and government notice advertising net revenues of $158,000.

This increase of $4,084,000 (8%) was primarily from increases in Journal Technologies’

consulting fees of $5,546,000 and the Traditional Business’

advertising revenues of $420,000 and advertising service fees and other of $253,000, partially offset by decreases in (i) Journal Technologies’

license and maintenance fees of $1,852,000 and other public service fees of $101,000, and (ii) the Traditional Business’

circulation revenues of $182,000.

Approximately 71% of the Company’s revenues during fiscal 2022 were derived from Journal Technologies, as compared with 69% in the prior fiscal year.

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revenues are from governmental agencies.

Consolidated operating expenses decreased by $3,988,000 (8%) to $47,237,000 from $51,225,000.

Total salaries and employee benefits decreased by $1,737,000 (5%) to $36,065,000 from $37,802,000 primarily resulting from lower headcount.

Outside services decreased by $344,000 (10%) to $3,084,000 from $3,428,000 mainly because of decreased independent contractor costs for Journal Technologies.

Postage and delivery expenses decreased by $58,000 (8%), and newsprint and printing expenses also decreased by $74,000 (11%) to $625,000 from $699,000 primarily resulting from reduced subscribers.

Depreciation and amortization costs decreased by $44,000 (8%) to $480,000 from $524,000 because of more fully-depreciated assets.

Rent expenses decreased by $326,000 (53%) to $286,000 from $612,000 because of the closures of the Colorado office in August 2020 and the Corona, California office in March 2021.

Equipment maintenance and software decreased by $229,000 (18%) to $1,039,000 from $1,268,000 primarily resulted from reduced maintenance and software costs due to the above-mentioned office closures.

Other general and administrative expenses decreased by $1,612,000 (42%) to $2,236,000 from $3,848,000 mainly resulting from reduced business travel expenses due to the pandemic.

The Company’s non-operating income, net of expenses, increased by $145,389,000 to a gain of $150,898,000 from $5,509,000 in the prior fiscal year primarily because of the realized gains on sales of marketable securities of $41,749,000 and the recording of net unrealized gains on marketable securities of $106,499,000 during fiscal 2021, as compared with realized gains of $4,193,000 and unrealized losses of $3,099,000 during the prior fiscal year.

During fiscal 2021, consolidated pretax income was $153,050,000, as compared to $4,226,000 in the prior fiscal year.

There was consolidated net income of $112,900,000 ($81.77 per share) for fiscal 2021, as compared with $4,041,000 ($2.93 per share) in the prior fiscal year.

During fiscal 2021, the Company’s cash and cash equivalents and restricted cash decreased by $14,324,000 to $14,639,000 from $28,963,000, primarily because of the purchase of additional marketable securities.

Consolidated operating expenses increased by $4,247,000 (9%) to $52,020,000 from $47,773,000.

Total salaries and employee benefits increased by $2,705,000 (8%) to $36,935,000 from $34,230,000 primarily because of salary adjustments.

Agency commissions increased by $369,000 (69%) to $905,000 from $536,000 primarily due to increased display advertising agency commissions during fiscal 2022.

Outside services increased by $917,000 (30%) to $4,001,000 from $3,084,000 mainly because of increased third-party hosting fees which were billed to clients.

Newsprint and printing expenses increased by $114,000 (18%) to $739,000 from $625,000 primarily resulting from newsprint price increases and additional purchases of printing supplies.

Other general and administrative expenses increased by $1,122,000 (50%) to $3,358,000 from $2,236,000 mainly because there were increased miscellaneous office equipment and software license purchases and business travel expenses as compared to the prior fiscal year.

The Company’s non-operating income, net of expenses, decreased by $255,436,000 to a loss of $104,538,000 from a gain of $150,898,000 in the prior fiscal year primarily because of the recordings of (i) net unrealized losses on marketable securities of $123,401,000 during fiscal 2022 as compared with net unrealized gains of $106,499,000 in the prior year, and (ii) realized net gains on sales of marketable securities of $14,249,000 during fiscal 2022 as compared with $41,749,000 in the prior year, partially offset by gains of $272,000 on a partial land sale associated with the City of Logan’s street widening project during fiscal 2022 and increases in dividends and interest income of $2,543,000.

During fiscal 2022, the Company’s consolidated pretax loss was $102,549,000, as compared to pretax income of $153,050,000 in the prior fiscal year.

There was consolidated net loss of $75,624,000 (-$54.81 per share) for fiscal 2022, as compared with consolidated net income of $112,900,000 ($81.77 per share) in the prior fiscal year.

At September 30, 2022, the aggregate fair market value of the Company’s marketable securities was $275,529,000.

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financial institutions and one foreign manufacturer.

 During fiscal 2022, the Company recorded an income tax benefit of $26,925,000 on the pretax loss of $102,549,000.  

The income tax benefit consisted of a tax benefit of $32,840,000 on the unrealized losses on marketable securities and a benefit of $340,000 for the dividends received deduction and other permanent book and tax differences, offset by tax provisions of $3,790,000 on the realized gains on marketable securities, $1,735,000 on income from operations, and $730,000 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 fiscal 2022 was 26.3%, after including the taxes on the realized gains and unrealized losses on marketable securities.

For fiscal 2021, the Company recorded a provision for income taxes of $40,150,000 on pretax income of $153,050,000.  

The effective rate of 26% was higher than the statutory rate of 21% primarily due to the recording of (i) state taxes, which were offset by the dividends received deduction (“DRD”), resulting in a tax provision of $1,260,000 on pretax income before the unrealized and realized gains on marketable securities, (ii) a tax provision of $27,938,000 on the unrealized gains on marketable securities and (iii) a tax provision of $10,952,000 on the realized gains on marketable securities.  The Company was able to utilize all of its federal and certain state net operating losses (“NOLs”) carryforward in fiscal 2021.

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 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.

The CARES Act, which was signed into law on March 27, 2020, contained two federal tax provisions beneficial to the Company:

(i) net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, were allowed to be carried back to the five previous years, and (ii) any alternative minimum tax credits carried forward from prior years could be claimed as a refund in years beginning in 2018.

Consequently, the Company recorded a tax benefit, in fiscal 2020, resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014. 

The Company received refunds 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 was 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 marketable securities 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.

The effective rate of 26.2% was higher than the statutory rate of 21% primarily due to the recording of (i) state taxes, which were offset by the dividends received deduction, resulting in a tax provision of $1,260,000 on pretax income before the unrealized and realized gains on marketable securities, (ii) a tax provision of $27,938,000 on the unrealized gains on marketable securities and (iii) a tax provision of $10,952,000 on the realized 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 2019 with regard to federal income taxes and fiscal 2018 for state income taxes. 

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The Traditional Business’

pretax income increased by $955,000 (187%) to $443,000 from a pretax loss of $512,000 in the prior fiscal year.

Advertising revenues increased by $531,000 (7%) to $7,635,000 from $7,104,000, primarily because of increased legal notice advertising net revenues of $663,000 mainly from fictitious business name publishing (as counties have tried to catch up with their backlogs), government notice advertising net revenues of $158,000 and classified advertising net revenues of $13,000.

These increases were partially offset by decreased display advertising net revenues of $92,000 and trustee sale notice advertising net revenues of $264,000 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 in February 2020 and expired in July 2021 with the eviction portion extended through the end of September 2021.

In addition, although the national eviction ban has lapsed, many states or cities continue to have their own moratoriums.

For example, Los Angeles County’s “COVID-19 Tenant Protection”

essentially prevents evictions for residential and commercial tenants through January 31, 2022.

pretax income increased by $259,000 (58%) to $702,000 from $443,000 in the prior fiscal year, primarily resulting from a decrease to the long-term supplemental compensation accrual of $665,000 (37%) to $1,130,000 from $1,795,000 in the prior fiscal year.

During fiscal 2022, the Traditional Business had total operating revenues of $15,922,000, as compared with $15,431,000 in the prior fiscal year.

Advertising revenues increased by $420,000 (5%) to $8,591,000 from $8,171,000, primarily because of increased commercial advertising revenues of $227,000, legal notice advertising revenues of $104,000 and trustee sale notice advertising revenues of $234,000 primarily resulting from the lifting of the foreclosure moratoriums relative to the “Eviction and Foreclosure Orders”

and lenders’

processing files that were already in the pipeline when the pandemic struck.

These increases were offset by decreased government notice advertising revenues of $145,000.

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 43% during the twelve months ended September 30, 2021 as compared to the prior fiscal year, primarily because of limited foreclosures, as discussed above.

The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 87% of the total public notice advertising revenues in fiscal 2021.

Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 17% of the Company's total operating revenues in fiscal 2021 and 15% in 2020.

The number of foreclosure notices published by the Company increased by 53% during fiscal 2022 as compared to the prior fiscal year, primarily because of the lifting of foreclosure moratoriums, as discussed above.

The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 88% of the total public notice advertising revenues during fiscal 2022.

The Daily Journals accounted for about 92% of the Traditional Business’

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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 $755,000 (5%) to $14,452,000 from $15,207,000, primarily resulting from reduced outside services.

The Traditional Business segment operating expenses, excluding the adjustments to the long-term supplemental compensation accrual, increased by $897,000 (7%) to $14,090,000 from $13,193,000, primarily resulting from the salary adjustments.

Journal Technologies

During fiscal 2022, Journal Technologies’

business segment pretax income increased by $2,480,000 (322%) to $1,709,000 from a pretax loss of $771,000 in the prior fiscal year.

Revenues decreased by $753,000 (2%) to $34,494,000 from $35,247,000 in the prior fiscal year.

business segment pretax income decreased by $422,000 (25%) to $1,287,000 from $1,709,000 in the prior fiscal year.

Revenues increased by $3,593,000 (10%) to $38,087,000 from $34,494,000 in the prior fiscal year.

Licensing and maintenance fees decreased by $1,852,000 (9%) to $19,192,000 from $21,044,000 primarily resulting from the reduction in legacy software products’

maintenance and support revenues as the Company ended effective July 1, 2021 the maintenance of these legacy software products, so as to focus on supporting the Company’s main eSeries products.

Consulting fees decreased by $1,399,000 (18%) to $6,319,000 from $7,718,000 due to fewer go-lives.

Other public service fees increased by $1,249,000 (21%) to $7,131,000 from $5,882,000 primarily due to increased traffic citation fee revenues and efiling fee revenues.

Consulting fees increased by $5,546,000 (88%) to $11,865,000 from $6,319,000 mainly resulting from a few long-term projects that went live during the last quarter of fiscal 2022.

Other public service fees decreased by $101,000 (1%) to $7,030,000 from $7,131,000 primarily due to decreased traffic citation 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 $3,233,000 (9%) to $32,785,000 from $36,018,000 primarily because of decreased personnel costs primarily due to lower headcount and reduced business travel expenses.

Operating expenses increased by $4,015,000 (12%) to $36,800,000 from $32,785,000 primarily because of (i) increased personnel costs resulting from the salary adjustments, (ii) increased third-party hosting fees which were billed to clients and (iii) additional miscellaneous office equipment and software license purchases and increased business travel expenses.

Journal Technologies continues to update and upgrade its software products.

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Liquidity and Capital Resources

During fiscal 2021, the Company’s cash and cash equivalents, restricted cash, and marketable security positions increased by $153,881,000, after additional net borrowing of $2,507,000 and net pretax unrealized gains on marketable securities of $106,499,000.

Cash, cash equivalents and the proceeds from the sales of marketable securities were primarily used to purchase additional marketable securities of $64,990,000 and pay down the real estate loan principal of $131,000.

During fiscal 2022, the Company’s cash and cash equivalents, restricted cash, and marketable security positions decreased by $71,215,000, after the sales of marketable securities of approximately $80,570,000 and additional net borrowing of $43,000,000 from the margin loan account, partially offset by the recording of net pretax unrealized losses on marketable securities of $123,401,000.

Cash, cash equivalents, the proceeds from the sales of marketable securities and additional net borrowing were primarily used to purchase additional marketable securities of $117,678,000.

The investments in marketable securities, which had an adjusted cost basis of approximately $154,837,000 and a market value of about $275,529,000 at September 30, 2022, generated approximately $5,451,000 in dividends income during fiscal 2022.

These securities had approximately $120,692,000 of net unrealized gains before estimated taxes of $32,120,000 which will become due only when we sell securities in which there is unrealized appreciation.

Cash flows from operating activities increased by $950,000 during fiscal 2021 as compared to the prior fiscal year, primarily due to (i) decreases in the Company’s income tax receivable of $1,049,000 and deferred tax assets of $31,305,000, (ii) increases in the Company’s income tax payable of $6,244,000;

accounts payable and accrued liabilities of $1,055,000 (because of the timing difference in remitting efiling fees to the courts) and the additional accrual to the long-term supplemental compensation accrual of $1,835,000 and (iii) a net increase in deferred revenues of $757,000.

This was partially offset by (i) a decrease in net income of $38,295,000, excluding the additional realized gains on sales of marketable securities of $37,556,000 and increases in unrealized gains on marketable securities of $109,598,000 and (ii) an increase in accounts receivable of $3,106,000 primarily resulting from more billings.

Cash provided from operating activities of $3,286,000 included net decreases of $1,051,000 in total current and long-term deferred revenues of $18,325,000.

Cash flows from operating activities decreased by $8,547,000 during fiscal 2022 as compared to the prior fiscal year, primarily due to (i) increases in deferred tax benefit of $62,716,000, the Company’s income tax receivable of $1,620,000, and accounts receivable of $4,610,000 mainly resulting from additional billings for go-live projects, (ii) decreases in the Company’s income tax payable of $12,488,000 and (iii) decreases in net accounts payable and accrued liabilities of $212,000 (because of the timing difference in remitting efiling fees to the courts).

This was partially offset by (i) increases in net income of $68,604,000, excluding the gains on land sale of $272,000, the increases in unrealized losses on marketable securities of $229,900,000 and decreases in realized net gains on sales of marketable securities of $27,500,000 and (ii) increases in deferred revenues of $4,441,000.

As of September 30, 2022, the Company had working capital of $275,835,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $21,345,000.

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In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly. 

(Also see “Risks Associated with Our Holdings of Marketable Securities”

mentioned above.)

The Company is not a smaller version of Berkshire Hathaway Inc. 

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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, income taxes and segment reporting are critical accounting policies and estimates.

Management believes that revenue recognition, accounting for software costs, fair value measurement and disclosures (including the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates.

The Company recognizes revenues in accordance with the provisions of ASU No.

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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.

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.

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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.

This accounting guidance also prescribes recognition thresholds and measurement attributes for the financial statement 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis