djc_10qa-123112.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2012
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 0-14665
DAILY JOURNAL CORPORATION
(Exact name of registrant as specified in its charter)
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South Carolina
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95-4133299
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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915 East First Street
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Los Angeles, California
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90012-4050
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(Address of principal executive offices)
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(Zip code)
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(213) 229-5300
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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: X No:
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes: X No:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer: |
Accelerated Filer: |
| Non-accelerated Filer: |
Smaller Reporting Company: X |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: No: X
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
| Class |
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Outstanding at January 31, 2013 |
| Common Stock, par value $ .01 per share |
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1,380,746 shares |
Explanatory Note
The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q for Daily Journal Corporation (the “Company”) for the period ended December 31, 2012, filed with the Securities and Exchange Commission on February 14, 2013 (the “Form 10-Q”), is to correct unrealized gain figures in Note 8 under Part I, Item 1. The unrealized gain as of September 30, 2012 should be $52,464,000 (consisting of gross unrealized gains of $54,653,000 and gross unrealized losses of $2,189,000), as reflected in the table. The previous reported unrealized gain of $31,047,000 (consisting of gross unrealized gains of $34,742,000 and gross unrealized losses of $3,695,000) was at December 31, 2011. This Amendment No. 1 only affects Note 8 under Part I, Item 1 of the Form 10-Q and does not otherwise change or update the disclosures or financial information set forth in the Form 10-Q as originally filed and does not otherwise reflect events occurring after the original filing of the Form 10-Q.
DAILY JOURNAL CORPORATION
INDEX
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Page Nos.
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PART I Financial Information
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Item 1. Financial Statements
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Consolidated Balance Sheets - December 31, 2012 and September 30, 2012
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3
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Consolidated Statements of Comprehensive Income - Three months ended December 31, 2012 and 2011
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4
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Consolidated Statements of Cash Flows - Three months ended December 31, 2012 and 2011
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5
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Notes to Consolidated Financial Statements
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6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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10
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Item 4. Controls and Procedures
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14
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Part II Other Information
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Item 6. Exhibits
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15
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PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$ |
4,388,000 |
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$ |
985,000 |
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U.S. Treasury Bills
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--- |
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800,000 |
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Marketable securities, including common stocks of $105,888,000 and bonds of $8,232,000 at December 31, 2012 and common stocks of $94,061,000 and bonds of $8,095,000 at September 30, 2012
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114,120,000 |
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102,156,000 |
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Accounts receivable, less allowance for doubtful accounts of $250,000 and $200,000 at December 31, 2012 and September 30, 2012, respectively
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5,058,000 |
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5,709,000 |
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Inventories
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47,000 |
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43,000 |
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Prepaid expenses and other assets
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373,000 |
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241,000 |
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Income tax receivable
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239,000 |
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196,000 |
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Total current assets
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124,225,000 |
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110,130,000 |
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Property, plant and equipment, at cost
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Land, buildings and improvements
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12,847,000 |
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12,819,000 |
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Furniture, office equipment and computer software
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2,560,000 |
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2,263,000 |
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Machinery and equipment
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2,082,000 |
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2,072,000 |
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17,489,000 |
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17,154,000 |
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Less accumulated depreciation
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(8,168,000 |
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(7,911,000 |
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9,321,000 |
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9,243,000 |
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Other assets
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Intangibles (net)
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9,364,000 |
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--- |
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Goodwill
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14,000,000 |
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--- |
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Deferred income taxes
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1,545,000 |
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1,591,000 |
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24,909,000 |
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1,591,000 |
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$ |
158,455,000 |
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$ |
120,964,000 |
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities
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Accounts payable
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$ |
2,235,000 |
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$ |
2,201,000 |
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Accrued liabilities
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4,031,000 |
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2,738,000 |
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Deferred income taxes
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24,079,000 |
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19,146,000 |
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Deferred subscriptions
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3,568,000 |
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3,649,000 |
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Deferred maintenance agreements and others
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3,481,000 |
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1,805,000 |
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Deferred installation contracts
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7,774,000 |
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--- |
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Total current liabilities
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45,168,000 |
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29,539,000 |
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Long term liabilities
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Investment margin account borrowing
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14,000,000 |
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--- |
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Accrued liabilities
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4,030,000 |
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4,200,000 |
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Total long term liabilities
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18,030,000 |
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4,200,000 |
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Commitments and contingencies (Notes 9 and 10)
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--- |
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--- |
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Shareholders' equity
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Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued
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--- |
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--- |
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Common stock, $.01 par value, 5,000,000 shares authorized; 1,380,746 at December 31, 2012 and September 30, 2012, outstanding
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14,000 |
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14,000 |
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Additional paid-in capital
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1,755,000 |
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1,755,000 |
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Retained earnings
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54,726,000 |
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53,891,000 |
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Accumulated other comprehensive income
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38,762,000 |
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31,565,000 |
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Total shareholders' equity
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95,257,000 |
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87,225,000 |
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$ |
158,455,000 |
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$ |
120,964,000 |
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See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three months
ended December 31
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2012
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2011
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Revenues
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Advertising
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$ |
4,245,000 |
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$ |
4,832,000 |
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Circulation
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1,634,000 |
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1,671,000 |
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Advertising service fees and other
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816,000 |
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709,000 |
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Information systems and services
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998,000 |
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708,000 |
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7,693,000 |
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7,920,000 |
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Costs and expenses
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Salaries and employee benefits
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4,204,000 |
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3,319,000 |
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Other outside services
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735,000 |
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704,000 |
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Postage and delivery expenses
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342,000 |
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345,000 |
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Newsprint and printing expenses
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345,000 |
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357,000 |
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Depreciation and amortization
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289,000 |
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119,000 |
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Other general and administrative expenses
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1,073,000 |
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816,000 |
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6,988,000 |
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5,660,000 |
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Income from operations
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705,000 |
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2,260,000 |
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Other income and (expense)
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Dividends and interest income
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567,000 |
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326,000 |
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Interest expense
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(8,000 |
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---
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Income before taxes
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1,264,000 |
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2,586,000 |
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Provision for income taxes
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430,000 |
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880,000 |
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Net income
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$ |
834,000 |
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$ |
1,706,000 |
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Weighted average number of common shares outstanding - basic and diluted
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1,380,746 |
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1,380,746 |
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Basic and diluted net income per share
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$ |
.60 |
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$ |
1.24 |
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Comprehensive income
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Net income
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$ |
834,000 |
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$ |
1,706,000 |
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Net change in unrealized appreciation of investments (net of taxes)
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7,197,000 |
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3,919,000 |
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Comprehensive income
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$ |
8,031,000 |
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$ |
5,625,000 |
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See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months
ended December 31
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2012
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2011
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Cash flows from operating activities
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Net income
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$ |
834,000 |
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$ |
1,706,000 |
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Adjustments to reconcile net income to net cash provided by operations
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Depreciation and amortization
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289,000 |
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119,000 |
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Deferred income taxes
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213,000 |
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99,000 |
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Net premium amortized and discount earned on bonds and U.S. Treasury Bills
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--- |
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(1,000 |
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Changes in assets and liabilities
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Decrease (increase) in current assets
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Accounts receivable, net
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1,311,000 |
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85,000 |
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Inventories
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(4,000 |
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5,000 |
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Prepaid expenses and other assets
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(12,000 |
) |
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(96,000 |
) |
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Increase (decrease) in current liabilities
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Accounts payable
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(184,000 |
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220,000 |
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Accrued liabilities
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(1,568,000 |
) |
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(1,617,000 |
) |
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Income taxes
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(43,000 |
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701,000 |
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Deferred subscriptions
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(81,000 |
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(187,000 |
) |
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Deferred maintenance agreements and others
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(523,000 |
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(394,000 |
) |
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Deferred installation contracts
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316,000 |
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--- |
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Net cash provided by operating activities
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548,000 |
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640,000 |
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Cash flows from investing activities
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Maturities and sales of U.S. Treasury Bills
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800,000 |
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12,600,000 |
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Acquisition of New Dawn Technologies, Inc. (net of cash acquired)
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(11,878,000 |
) |
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--- |
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Purchases of marketable securities
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--- |
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(13,581,000 |
) |
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Purchases of property, plant and equipment
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(67,000 |
) |
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(114,000 |
) |
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Net cash used in investing activities
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(11,145,000 |
) |
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(1,095,000 |
) |
| |
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Cash flows from financing activities
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Investment margin account borrowing
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14,000,000 |
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--- |
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Cash provided by financing activities
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14,000,000 |
|
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--- |
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| |
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Increase (decrease) in cash and cash equivalents
|
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3,403,000 |
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(455,000 |
) |
| |
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Cash and cash equivalents
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Beginning of period
|
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985,000 |
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3,058,000 |
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End of period
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|
$ |
4,388,000 |
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|
$ |
2,603,000 |
|
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Corporation and Operations
The Daily Journal Corporation (the “Company”) publishes newspapers and web sites covering California and Arizona, as well as the California Lawyer magazine, and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. Sustain Technologies, Inc. (“Sustain”), a wholly-owned subsidiary, supplies case management software systems and related products to courts and other justice agencies, including administrative law organizations. These courts and agencies use the Sustain family of products to help manage cases and information electronically and to interface with other critical justice partners. Sustain’s products are designed to help users manage electronic case files from inception to disposition, including calendaring and accounting, report and notice generation, the implementation of standards and business rules and other corollary functions, and to enable justice agencies to extend electronic services to the public and bar members.
In December 2012, the Company purchased all of the outstanding stock of New Dawn Technologies, Inc. (“New Dawn”) based in Logan, Utah, which provides products and services similar to those of Sustain to more than 350 justice agencies in 39 states, three U.S. territories and two other countries. The acquisition expands the Company’s position in the marketplace. Essentially all of the Company’s operations are based in California, Arizona, Utah and Colorado.
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 statement of its financial position as of December 31, 2012, and of its results of operations and cash flows for the three-month periods ended December 31, 2012 and 2011. The results of operations for the three months ended December 31, 2012 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, 2012.
Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.
Note 3 - Basic and Diluted Income Per Share
The Company does not have any common stock equivalents, and therefore the basic and diluted income per share are the same.
Note 4 – Acquisition of New Dawn Technologies, Inc
On December 4, 2012 the Company purchased all of the outstanding stock of New Dawn for $14 million in cash. The New Dawn acquisition was accounted for using the purchase method of accounting in accordance with the Statement of Financial Accounting Standards Board (FASB)’s Accounting Standards Codification (“ASC”) 805 Business Combination. The Company incurred legal and tax fees of about $93,000 associated with this acquisition. These costs were included in “Other general and administrative expenses” on the Company’s Consolidated Statements of Comprehensive Income. New Dawn’s results of operations from December 5 through December 31, 2012 have been included in the Company’s Consolidated Financial Statements: revenues were $247,000, expenses were $938,000, and the pretax loss was $691,000. During this period, New Dawn did not complete any installations with acceptance of its software products pursuant to existing contracts; the revenues were solely from annual maintenance agreements.
The Company preliminarily allocated the purchase price to the tangible assets ($3.1 million including cash of $2.2 million; accounts receivable, net, of $.66 million, and net fixed asset of $.14 million) and identifiable intangible assets (purchased software and customer relationships of $9.5 million) and liabilities ($12.6 million including accounts payable and accrued expenses of $2.8 million, deferred maintenance agreements of $2.2 million and deferred installation contracts of $7.5 million) based on their fair values with the remaining balance in excess of the net assets allocated to goodwill ($14 million). Deferred revenues on installation contracts primarily represent advances from customers for software licenses and installation services in various stages of completion; after customer's acceptance of the completed project, the advances would become no longer at risk of refund and earned.
Note 5 - Intangible Assets
At December 31, 2012, New Dawn’s purchased software and customer relationships costs of $9,364,000 (net of accumulated amortization of $158,000) are being amortized over five years based on their estimated useful lives.
The Company accounts for goodwill in accordance with ASC 350 Intangibles — Goodwill and Other. Goodwill is not amortized for financial statement purposes but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable.
Note 6 - Revenue Recognition
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 commissions.
The Company recognizes revenues from both the lease and sale of software products in accordance with ASC 985-605 Software Revenue Recognition. Revenues from leases of software products are recognized over the life of the lease while revenues from software product sales are recognized normally upon delivery, installation or acceptance pursuant to a signed agreement. Revenues from annual maintenance contracts generally call for the Company to provide software updates and upgrades to customers and are recognized ratably over the maintenance period. Consulting and other services are recognized upon acceptance by the customers.
Note 7 - Income Taxes
Because the Company only had financial results for New Dawn from December 5 through December 31, 2012, it cannot estimate the pretax income (loss) for the full fiscal year; consequently, the actual effective tax rate was used to calculate the tax provision for the quarter ended December 31, 2012.
On a pretax profit of $1,264,000 and $2,586,000 for the three months ended December 31, 2012 and 2011, respectively, the Company recorded a tax provision of $430,000 and $880,000 respectively, which was lower in each case than the amount computed using the statutory rate because of the available dividends received deduction and the domestic production activity deduction. Consequently, the Company’s effective tax rate was 34% for both the three months ended December 31, 2012 and 2011. The acquisition of New Dawn was structured as a stock acquisition with an Internal Revenue Code Section 338 (h)(10) election, which results in the acquisition being treated similarly to an acquisition of assets for income tax purposes. As such, the amounts allocated to purchased software and customer relationships as well as goodwill are amortized over a 15-year period on a straight-line basis for tax purposes. Differences in the amortization period and methods between book and tax useful lives will result in deferred tax assets or liabilities. The Company files federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for years before 2010 with regard to federal income taxes.
Note 8 - Investments in U.S. Treasury Notes and Bills and Marketable Securities
Investments in U.S. Treasury Bills and marketable securities categorized as “available-for-sale” are stated at fair value, with the unrealized gains and losses, net of taxes, reported in “Accumulated other comprehensive income”. As of December 31, 2012 and September 30, 2012, an unrealized gain of $64,427,000 (consisting of gross unrealized gains of $65,596,000 and gross unrealized losses of $1,169,000) and $52,464,000 (consisting of gross unrealized gains of $54,653,000 and gross unrealized losses of $2,189,000), respectively, net of taxes, was recorded in “Accumulated other comprehensive income” in the accompanying Consolidated Balance Sheets. 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.
Investments in equity securities and securities with fixed maturity as of December 31, 2012 and September 30, 2012 are summarized by type below.
| |
|
December 31, 2012
|
|
|
September 30, 2012
|
|
| |
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
| |
|
Aggregate
fair value
|
|
|
Amortized/Adjusted
cost basis
|
|
|
Pretax
unrealized
gains
|
|
|
Aggregate
fair value
|
|
|
Amortized/Adjusted
cost basis
|
|
|
Pretax
unrealized
gains
|
|
|
U.S. Treasury Bills
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
800,000 |
|
|
$ |
800,000 |
|
|
$ |
--- |
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
105,888,000 |
|
|
|
44,761,000 |
|
|
|
61,127,000 |
|
|
|
94,061,000 |
|
|
|
44,761,000 |
|
|
|
49,300,000 |
|
|
Bonds
|
|
|
8,232,000 |
|
|
|
4,932,000 |
|
|
|
3,300,000 |
|
|
|
8,095,000 |
|
|
|
4,931,000 |
|
|
|
3,164,000 |
|
|
Total
|
|
$ |
114,120,000 |
|
|
$ |
49,693,000 |
|
|
$ |
64,427,000 |
|
|
$ |
102,956,000 |
|
|
$ |
50,492,000 |
|
|
$ |
52,464,000 |
|
At December 31, 2012, all investments are classified as “Current assets” because they are available for sale at any time. The bonds mature in 2039.
As of December 31, 2012, the Company performed separate evaluations for impaired equity securities to determine if the unrealized losses were other-than-temporary. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer and the Company’s ability and intent to hold the securities until fair value recovers. The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management objectives and securities portfolio objectives. Based on the results of the evaluations, the Company concluded that as of December 31, 2012, all unrealized losses related to equity securities were temporary.
Note 9 - Debt and Commitments
On December 4, 2012, the Company borrowed the purchase price of $14 million for the New Dawn acquisition and pledged its marketable securities as collateral. The interest rate for this investment margin account borrowing will fluctuate based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. This investment margin account borrowing does not mature.
The Company owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through 2015. New Dawn’s Logan, Utah office lease requires a monthly rent of $41,500, with short-term sub-leases of approximately $5,000 per month, and will expire in 2015, subject to certain extension options. The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to certain leased property. Rental expenses for comparable three-month periods ended December 31, 2012 and 2011 were $160,000 and $124,000, respectively.
Note 10 - Contingencies
From time to time, the Company is subject to litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a material effect on the Company’s financial position or results of operations.
Note 11 - Operating Segments
The Company has two segments of business. The Company’s reportable segments are (i) the traditional business and (ii) Sustain and New Dawn. Summarized financial information for the Company’s reportable segments is shown in the following table:
| |
|
Reportable segments
|
|
|
|
|
|
|
|
Traditional
business
|
|
|
Sustain &
New Dawn*
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,695,000 |
|
|
$ |
998,000 |
|
|
$ |
7,693,000 |
|
|
Pretax income (loss)
|
|
|
2,755,000 |
|
|
|
(1,491,000 |
) |
|
|
1,264,000 |
|
|
Income tax benefit (expense)
|
|
|
(930,000 |
) |
|
|
500,000 |
|
|
|
(430,000 |
) |
|
Net income (loss)
|
|
|
1,825,000 |
|
|
|
(991,000 |
) |
|
|
834,000 |
|
|
Total assets
|
|
|
131,454,000 |
|
|
|
27,001,000 |
|
|
|
158,455,000 |
|
|
Capital expenditures
|
|
|
34,000 |
|
|
|
33,000 |
|
|
|
67,000 |
|
|
Depreciation and amortization
|
|
|
117,000 |
|
|
|
172,000 |
|
|
|
289,000 |
|
| |
|
Traditional business
|
|
|
Sustain
|
|
|
Total
|
|
|
Three months ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
7,212,000 |
|
|
$ |
708,000 |
|
|
$ |
7,920,000 |
|
|
Pretax income (loss)
|
|
|
3,030,000 |
|
|
|
(444,000 |
) |
|
|
2,586,000 |
|
|
Income tax benefit (expense)
|
|
|
(1,030,000 |
) |
|
|
150,000 |
|
|
|
(880,000 |
) |
|
Net income (loss)
|
|
|
2,000,000 |
|
|
|
(294,000 |
) |
|
|
1,706,000 |
|
|
Total assets
|
|
|
97,035,000 |
|
|
|
731,000 |
|
|
|
97,766,000 |
|
|
Capital expenditures
|
|
|
114,000 |
|
|
|
--- |
|
|
|
114,000 |
|
|
Depreciation and amortization
|
|
|
113,000 |
|
|
|
6,000 |
|
|
|
119,000 |
|
|
*
|
Includes New Dawn’s financial results from December 5 through December 31, 2012 with revenues of $247,000, expenses of $938,000 (including depreciation and amortization expenses of $163,000), and inter-company income tax benefits of $230,000.
|
Note 12 - 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.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company continues to operate as two different businesses: (1) The “traditional business”, being the business of newspaper and magazine publishing and related services that the Company had before 1999 when it purchased Sustain, and (2) the Sustain and New Dawn software businesses, which supply case management software systems and related products to courts and other justice agencies, including administrative law organizations.
On December 4, 2012 the Company purchased all of the outstanding stock of New Dawn Technologies, Inc. (“New Dawn”) for $14 million in cash. New Dawn provides products and services to more than 350 justice agencies in 39 states, three U.S. territories and other two countries. The acquisition expands the Company’s position in the marketplace. The results of operations of New Dawn from December 5 through December 31, 2012 have been included in the Company's Consolidated Financial Statements: revenues were $247,000; expenses were $938,000, and the pretax loss was $691,000. During this period, New Dawn did not complete any installations with acceptance of its software products pursuant to existing contracts; the revenues were solely from annual maintenance contracts. The acquisition was accounted for using the purchase method of accounting; accordingly, the Company preliminarily allocated the purchase price to tangible assets ($3.1 million including cash of $2.2 million; accounts receivable, net, of $.66 million, and net fixed assets of $.14 million) and identifiable intangible assets (purchased software and customer relationships of $9.5 million) and liabilities ($12.6 million including accounts payable and accrued expenses of $2.8 million, deferred maintenance agreements of $2.2 million and deferred installation contracts of $7.5 million) based on their fair values with the remaining balance in excess of the net assets allocated to goodwill ($14 million). The purchased software and customer relationships costs are being amortized over five years. Goodwill is not amortized for financial statement purposes but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Deferred revenues on installation contracts primarily represent advances from customers for software licenses and installation services in various stages of completion; after customer's acceptance of the completed project, the advances would become no longer at risk of refund and earned.
During the three months ended December 31, 2012, consolidated pretax income decreased by $1,322,000 (51%) to $1,264,000 from $2,586,000 in the comparable prior year period, primarily resulting from (i) a reduction in trustee sale notice and related service fee revenues of $567,000 and (ii) an increase in operating costs and expenses of $1,328,000, including $938,000 for New Dawn, partially offset by New Dawn’s additional revenues of $247,000 and an increase in dividends and interest income of $241,000.
The Company’s traditional business segment pretax income decreased by $275,000 (9%) to $2,755,000 from $3,030,000 primarily because of the reduction in trustee sale notice and related service fee revenues of $567,000, partially offset by a reduction in operating costs and expenses of $9,000. Sustain’s and New Dawn’s business segment had a pretax loss of $1,491,000 compared to $444,000 in the prior year period primarily due to (i) the addition of New Dawn’s pretax loss of $691,000 and (ii) an increase in Sustain’s personnel costs during the three months ended December 31, 2012.
Comprehensive income includes net income and net unrealized gains on investments, net of taxes.
|
Comprehensive Income
|
|
| |
|
|
|
| |
|
Three months ended December 31
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
Net income
|
|
$ |
834,000 |
|
|
$ |
1,706,000 |
|
|
Net change in unrealized appreciation of investments (net of taxes)
|
|
|
7,197,000 |
|
|
|
3,919,000 |
|
|
Comprehensive income
|
|
$ |
8,031,000 |
|
|
$ |
5,625,000 |
|
During the three months ended December 31, 2012, consolidated pretax income decreased by $1,322,000 (51%) to $1,264,000 from $2,586,000 in the prior year period.
| |
|
Reportable segments
|
|
|
|
|
|
|
|
Traditional
business
|
|
|
Sustain &
New Dawn*
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,695,000 |
|
|
$ |
998,000 |
|
|
$ |
7,693,000 |
|
|
Pretax income (loss)
|
|
|
2,755,000 |
|
|
|
(1,491,000 |
) |
|
|
1,264,000 |
|
|
Income tax benefit (expense)
|
|
|
(930,000 |
) |
|
|
500,000 |
|
|
|
(430,000 |
) |
|
Net income (loss)
|
|
|
1,825,000 |
|
|
|
(991,000 |
) |
|
|
834,000 |
|
| |
|
Traditional
business
|
|
|
Sustain
|
|
|
Total
|
|
|
Three months ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
7,212,000 |
|
|
$ |
708,000 |
|
|
$ |
7,920,000 |
|
|
Pretax income (loss)
|
|
|
3,030,000 |
|
|
|
(444,000 |
) |
|
|
2,586,000 |
|
|
Income tax benefit (expense)
|
|
|
(1,030,000 |
) |
|
|
150,000 |
|
|
|
(880,000 |
) |
|
Net income (loss)
|
|
|
2,000,000 |
|
|
|
(294,000 |
) |
|
|
1,706,000 |
|
|
*
|
Includes New Dawn’s financial results from December 5 through December 31, 2012 with revenues of $247,000, expenses of $938,000 (including depreciation and amortization expenses of $163,000), and inter-company income tax benefits of $230,000.
|
Consolidated revenues were $7,693,000 and $7,920,000 for the three months ended December 31, 2012 and 2011, respectively. This decrease of $227,000 (3%) was primarily from the reduction in trustee sale notice and related service fee revenues of $567,000, partially offset by New Dawn’s additional maintenance revenues of $247,000. The Company’s revenues derived from Sustain and New Dawn’s operations constituted about 13% and 9% (for Sustain only) of the Company’s total revenues for the three months ended December 31, 2012 and 2011, respectively.
Consolidated operating costs and expenses increased by $1,328,000 (23%) to $6,988,000 from $5,660,000, including an additional $938,000 from New Dawn. Total personnel costs increased by $885,000 (27%) to $4,204,000 from $3,319,000 primarily due to New Dawn’s additional personnel costs of $515,000, annual salary adjustments and a $70,000 decrease in the liability related to the Company’s Management Incentive Plan (“Incentive Plan”). The decrease in Incentive Plan liability consisted of a reduction of $170,000 in the Incentive Plan accrual during the three months ended December 31, 2012 due to reduced projected consolidated pretax profits before this accrual versus a bigger decrease of $240,000 in the prior comparable period. Depreciation and amortization costs increased by $170,000 (143%) to $289,000 mainly resulting from the amortization of New Dawn’s purchased software and customer relationships costs of $159,000. Other general and administrative expenses also increased by $257,000 (31%) primarily resulting from increased legal and tax fees associated with the New Dawn acquisition of approximately $93,000 and additional expenses, including rent, for New Dawn.
The traditional business segment revenues are very much dependant on the number of California and Arizona foreclosure notices. The number of foreclosure notices published by the Company decreased by 38% during the three months ended December 31, 2012 as compared to the prior comparable period. Although public notice advertising revenues were down compared to the prior year period, the Company still continued to benefit from the large number of foreclosures in California and Arizona for which public notice advertising is required by law. Because this slowing is expected to continue, we anticipate there will be fewer foreclosure notice advertisements and declining revenues in fiscal 2013. The wave of California and Arizona foreclosure notices has crested and is now receding. The new California Homeowner’s Bill of Rights effective January 1, 2013 will contribute to the slowdown and delay in the foreclosure process. It is inevitable that at some point, the number of foreclosure notices will grossly decline, and the Company’s print-based earnings will also grossly decline because it will be impractical for the Company to offset all revenue loss by expense reduction. The Company's smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 94% of the total public notice advertising revenues in the three-month period. Public notice advertising revenues and related advertising and other service fees constituted about 52% of the Company's total revenues during this period. Because of this concentration, the Company’s revenues would be significantly affected if California (and to a lesser extent Arizona) eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as has been proposed from time to time. It is also possible that the adjudication of one or more of the Company’s newspapers could be challenged and revoked, in which case those newspapers would no longer be eligible to publish public notice advertising, and it could have a material adverse effect on the Company’s revenues. We do not expect to experience an offsetting increase in commercial advertising as a result of this trend because of the continuing challenges in the commercial advertising business. 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 Daily Journals accounted for about 84% of the Company's total circulation revenues. The court rule and judicial profile services generated about 12% of the total circulation revenues, with the other newspapers and services accounting for the balance.
Sustain’s and New Dawn’s consulting, licensing and maintenance revenues are subject to uncertainty because they depend on (i) the timing of the acceptance of the completed installations, (ii) the unpredictable needs of their existing customers, and (iii) their ability to secure new customers. In most cases, revenues from their new installation projects will only be recognized, if at all, upon completion and acceptance of their services by the various customers. The Company’s expenses for the development of software products are significant and will materially impact overall results at least through the foreseeable future. These costs are expensed as incurred.
On a pretax profit of $1,264,000 and $2,586,000 for the three months ended December 31, 2012 and 2011, respectively, the Company recorded a tax provision of $430,000 and $880,000 respectively, which was lower in each case than the amount computed using the statutory rate because of the available dividends received deduction and the domestic production activity deduction. Consequently, the Company’s effective tax rate was 34% for both the three months ended December 31, 2012 and 2011. The acquisition of New Dawn was structured as a stock acquisition with an Internal Revenue Code Section 338 (h)(10) election, which results in the acquisition being treated similarly to an acquisition of assets for income tax purposes. As such, the amounts allocated to purchased software and customer relationships as well as goodwill are amortized over a 15-year period on a straight line basis for tax purposes. Differences in the amortization period and methods between book and tax useful lives will result in deferred tax assets or liabilities. The Company files federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for years before 2010 with regard to federal income taxes. Net income per share decreased to $.60 from $1.24, primarily due to the loss attributable to New Dawn.
Liquidity and Capital Resources
During the three months ended December 31, 2012, the Company's cash and cash equivalents, and marketable security positions increased by $14,567,000. Cash and cash equivalents were used primarily for the purchase of capital assets of $67,000 (mostly computer software and office equipment). During the first quarter of fiscal 2013, the Company borrowed $14 million from the investment margin account to purchase all of the outstanding stock of New Dawn and pledged its marketable securities to obtain favorable financing. During the first quarter of fiscal 2012, the Company bought shares of common stock of a Fortune 200 company. The investments in marketable securities, which cost approximately $49,693,000 and had a market value of about $114,120,000 at December 31, 2012, generated approximately $567,000 in dividends and interest income, which lowers the effective income tax rate because of the dividends received deduction. As of December 31, 2012, there were unrealized pretax gains of $64,427,000 as compared to $52,464,000 at September 30, 2012. Most of the unrealized gains were in the common stocks.
The cash provided by operating activities of $548,000 included a net decrease in deferred subscriptions of $81,000 and deferred maintenance agreements and installation contracts of $207,000. Proceeds from the sale of subscriptions from newspapers, court rule books and other publications and for software licenses and maintenance and other services are recorded as deferred revenue and are included in earned revenue only when the services are rendered and accepted. Cash flows from operating activities decreased by $92,000 during the three months ended December 31, 2012 as compared to the prior comparable period primarily resulting from (i) the decreases in accounts payable and accrued liabilities of $355,000 and net income of $872,000, and (ii) increase in prepaid expenses and others of $84,000, partially offset by the decreases in accounts receivable of $1,226,000.
As of December 31, 2012, the Company had working capital of $79,057,000, including the liabilities for deferred subscriptions and deferred maintenance agreements of $7,049,000 which are scheduled to be earned within one year, and the deferred tax liability of $25,664,000 for the unrealized gains described above.
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operating activities and its current working capital and expects that any such cash flows will be invested in its three businesses. The Company continues to have the ability to borrow against its marketable securities on favorable terms as it did for the New Dawn acquisition. The Company also may entertain business acquisition opportunities, as it did in acquiring New Dawn. Any excess cash flows could be used to reduce the investment margin account liability or invested as management and the Board of Directors deem appropriate at the time.
Such investments may include additional securities of the companies in which the Company has already invested, securities of other companies, government securities (including U.S. Treasury Notes and Bills) or other instruments. The decision as to particular investments will be driven by the Company’s belief about the risk/reward profile of the various investment choices at the time, and it may utilize government securities as a default if attractive opportunities for a better return are not available. The Company’s Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company’s Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company’s vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
As noted above, however, the investments are concentrated in just six companies. Accordingly, a significant decline in the market value of one or more of the Company’s investments may not be offset by the hypothetically better performance of other investments, and that could result in a large decrease in the Company’s shareholders’ equity and, under certain circumstances, in the recognition of impairment losses in the Company’s income statement.
Critical Accounting Policies
The Company’s financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Management believes that revenue recognition, accounting for capitalized software costs and income taxes are critical accounting policies.
The Company’s critical accounting policies are detailed in its Annual Report on Form 10K for the year ended September 30, 2012. The above discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the 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 Sustain’s internal software development efforts; Sustain’s and New Dawn’s reliance on professional services engagements with justice agencies, including California courts, for a substantial portion of their revenues; 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; a decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; collectibility of accounts receivable; the Company’s reliance on its president and chief executive officer; changes in accounting guidance; and declines in the market prices of the Company’s investments. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly in California) 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 disclosed 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 the Securities and Exchange Commission, including in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including Gerald L. Salzman, its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2012. Based on that evaluation, Mr. Salzman concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and (2) accumulated and communicated to the Company’s management, including Mr. Salzman, in such a way as to allow timely decisions regarding required disclosure. There have been no material changes in the Company’s internal control over financial reporting or in other factors reasonably likely to affect its internal control over financial reporting during the quarter ended December 31, 2012.
PART II
Item 6. EXHIBITS
|
31
|
Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
32
|
Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
101.INS**
|
XBRL Instance
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101.SCH**
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XBRL Taxonomy Extension Schema
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101.CAL**
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XBRL Taxonomy Extension Calculation
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101.DEF**
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XBRL Taxonomy Extension Definition
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101.LAB**
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XBRL Taxonomy Extension Labels
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101.PRE**
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XBRL Taxonomy Extension Presentation
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** XBRL
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information is furnished and not filed as a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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DAILY JOURNAL CORPORATION
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(Registrant)
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/s/ Gerald L. Salzman |
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Gerald L. Salzman
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Chief Executive Officer
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President
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Chief Financial Officer
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Treasurer
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(Principal Executive Officer and
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Principal Accounting Officer)
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DATE: February 14, 2013
Page 15 of 15