10-Q 1 0001.txt FORM 10-Q DATED DECEMBER 31, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ____________________ Commission File Number 0-14665 DAILY JOURNAL CORPORATION --------------------------------- (Exact name of registrant as specified in its charter) South Carolina 95-4133299 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 355 South Grand Ave., 34th floor Los Angeles, California 90071-1560 ----------------------- ---------- (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: (213) 624-7715 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding at January 31, 2001 ------------------------------- ------------------------------ Common Stock, par value $ .01 per share 1,533,521 shares 1 of 10 DAILY JOURNAL CORPORATION INDEX
Page Nos. PART I Financial Information Item 1. Financial statements Consolidated Balance Sheets - December 31, 2000 and September 30, 2000 3 Consolidated Statements of Operations - Three months ended December 31, 2000 and 1999 4 Consolidated Statements of Cash Flows - Three months ended December 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II Other Information Item 6. Exhibits and Reports on Form 8-K 10
2 of 10 PART I Item 1. Financial Statements DAILY JOURNAL CORPORATION - CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31 September 30 2000 2000 ---------------- --------- ASSETS Current assets Cash and cash equivalents $ 684,000 $ 380,000 U.S. Treasury Bills, at cost plus discount earned -- 1,972,000 Accounts receivable, less allowance for doubtful account of $500,000 9,030,000 8,975,000 Income tax receivable 2,708,000 2,709,000 Inventories 19,000 61,000 Prepaid expenses and other assets 203,000 171,000 Deferred income taxes 544,000 1,143,000 ------------ ----------- Total current assets 13,188,000 15,411,000 ------------ ------------ Property, plant and equipment, at cost: Land, buildings and improvements 8,452,000 8,363,000 Furniture and office equipment 6,824,000 6,442,000 Machinery and equipment 1,400,000 1,385,000 ----------- ----------- 16,676,000 16,190,000 Less accumulated depreciation (7,019,000) (6,618,000) ------------ ----------- 9,657,000 9,572,000 Capitalized software, net 11,382,000 8,786,000 Intangible assets, at cost, less accumulated amortization of $608,000 and $506,000 respectively 1,287,000 1,281,000 ----------- ----------- $35,514,000 $ 35,050,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,336,000 $ 3,714,000 Accrued liabilities 3,499,000 2,058,000 Deferred subscription revenue and other revenues 7,433,000 7,908,000 ------------ ------------ Total current liabilities 15,268,000 13,680,000 ------------ ------------ Deferred income taxes 2,304,000 2,934,000 ------------ ------------ Minority Interest (7% and 9%, respectively) 641,000 578,000 ------------ ------------ Shareholders' equity Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued -- -- Common stock, $.01 par value, 5,000,000 shares authorized; 1,533,581 shares and 1,553,256 shares, respectively, outstanding 15,000 16,000 Other paid-in capital 1,950,000 1,974,000 Retained earnings 16,125,000 16,657,000 Less 43,271 treasury shares, at cost (789,000) (789,000) ------------ ------------- Total shareholders' equity 17,301,000 17,858,000 ------------ ------------- $ 35,514,000 $ 35,050,000 ============ =============
See accompanying notes to consolidated financial statements. 3 of 10 DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended December 31 ----------------- 2000 1999 ----------- ------------ Revenues: Advertising $ 4,481,000 $ 4,666,000 Circulation 2,889,000 2,996,000 Information systems and services 417,000 500,000 Advertising service fees and other 777,000 758,000 ------------ ------------ 8,564,000 8,920,000 ------------ ------------ Costs and expenses: Salaries and employee benefits 4,308,000 4,430,000 Newsprint and printing expenses 777,000 712,000 Commissions and other outside services 1,468,000 1,192,000 Postage and delivery expenses 486,000 537,000 Depreciation and amortization 655,000 483,000 Other, including interest expenses 949,000 896,000 ------------ ------------ 8,643,000 8,250,000 ------------ ------------ Income (Loss) before taxes (79,000) 670,000 (Benefits from) provision for income taxes (30,000) 315,000 ------------ ------------ Income (Loss) before minority interest in net loss of subsidiary (49,000) 355,000 Minority interest in net loss of subsidiary 46,000 80,000 ------------ ------------ Net income (loss) $ (3,000) $ 435,000 ============ ============ Weighted average number of common shares outstanding - basic and diluted 1,508,677 1,561,494 ------------ ------------ Basic and diluted net income (loss) per share $ (.00) $ .28 ------------ ------------
See accompanying notes to consolidated financial statements. 4 of 10 DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended December 31 -------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (3,000) $ 435,000 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 655,000 483,000 Minority interest in consolidated subsidiary (46,000) (80,000) Deferred income taxes (31,000) 309,000 Income tax receivable 1,000 -- Discount earned on U.S. Treasury Bills -- (98,000) Changes in assets and liabilities: (Increase) decrease in current assets Accounts receivable, net (55,000) 1,387,000 Inventories 42,000 (8,000) Prepaid expenses and other assets (32,000) 21,000 Increase (decrease) in current liabilities Accounts payable 622,000 (712,000) Accrued liabilities 1,441,000 (576,000) Income taxes payable -- 5,000 Deferred subscription and other revenues (475,000) (336,000) ----------- ----------- Cash provided by operating activities 2,119,000 830,000 ----------- ----------- Cash flows from investing activities: Net sales in U.S. Treasury Bills 1,972,000 396,000 Capital and capitalized software expenditures: Purchases of property, plant and equipment, net (487,000) (601,000) Capitalized software (2,746,000) -- ----------- ----------- Net cash used for investing activities (1,261,000) (205,000) ----------- ----------- Cash flows from financing activities: Purchase of common stock (554,000) (124,000) ----------- ----------- Cash used for financing activities (554,000) (124,000) ----------- ----------- Increase in cash and cash equivalents 304,000 501,000 Cash and cash equivalents: Beginning of period 380,000 181,000 ----------- ----------- End of period $ 684,000 $ 682,000 =========== =========== Interest paid during period $ -- $ --
See accompanying notes to consolidated financial statements. 5 of 10 DAILY JOURNAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - The Corporation and Operations: Daily Journal Corporation (the "Company") publishes newspapers in California, Washington, Arizona, Colorado and Nevada, as well as the California Lawyer and Corporate Counsel magazines and produces several specialized information services. It also publishes The Code of Colorado Regulations and serves as a newspaper representative specializing in public notice advertising. SUSTAIN Technologies, Inc. ("Sustain"), now a 93% owned subsidiary as of December 31, 2000, has been consolidated since it was acquired in January 1999. It provides the SUSTAIN(R) family of products which consist of technologies and applications to enable justice agencies to automate their operations and will in the future allow users to file cases electronically and the courts to publish information online. Essentially all of the Company's operations are based in California, Arizona, Colorado, Nevada, Washington and Virginia. Note 2 - Basis of Presentation: In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of its financial position as of December 31, 2000, the results of operations for the three-month periods ended December 31, 2000 and 1999 and its cash flows for the three months ended December 31, 2000 and 1999. The results of operations for the three months ended December 31, 2000 and 1999 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, 2000. Note 3 - Basic and Diluted Income (Loss) Per Share: The Company does not have any common stock equivalents, and therefore the basic and diluted income (loss) per share are the same. 6 of 10 Note 4 - Operating Segments: Summarized financial information concerning the Company's reportable segments is shown in the following table:
Operating Segments ------------------------------------------------------ Daily Journal Sustain Total ------------- ------- ----- Three months ended December 31, 2000 ------------------------------------ Revenues $ 8,137,000 $ 427,000 $ 8,564,000 Segment net income (loss) after minority interest 589,000 (592,000) (3,000) Total assets 17,282,000 18,232,000 35,514,000 Capital expenditures 440,000 2,793,000 3,233,000 Depreciation and amortization 348,000 307,000 655,000 Income tax expenses (benefits) 340,000 (370,000) (30,000) Daily Journal Sustain Total ------------- ------- ----- Three months ended December 31, 1999 ------------------------------------ Revenues $8,388,000 $ 532,000 $ 8,920,000 Segment net income (loss) after minority interest 741,000 (306,000) 435,000 Total assets 24,261,000 5,877,000 30,138,000 Capital expenditures 353,000 248,000 601,000 Depreciation and amortization 248,000 235,000 483,000 Income tax expenses (benefits) 490,000 (175,000) 315,000
Note 5 - Capitalized Software, net: Capitalized Software, net, represents software costs accounted for pursuant to Statement of Financial Accounts Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. It is comprised of purchased software of $3,023,000 capitalized upon the acquisition of Sustain and development costs of $9,689,000 for software products that have reached technological feasibility but are not available for general release. The purchased software is being amortized over five years. As of December 30, 2000 and September 30, 2000, capitalized software costs totaled $12,712,000 (less accumulated amortization of $1,330,000) and $9,966,0000 (less amortization of $1,180,000), respectively. Note 6 - Debt: In January 2001, the Company obtained a $4 million revolving bank line of credit bearing interest payable monthly at a quarter point under the prime rate and due in January 2002. Such line of credit is secured by substantially all of the Company's non-real estate assets. In January, the Company borrowed $3 million under this line of credit. In addition, the Company obtained a $2 million real estate loan on its current Los Angeles facilities. This loan bears interest at approximately 8% to be repayable in equal monthly installments through 2016. The real estate loan is secured by the Company's existing facilities in Los Angeles. 7 of 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues were $8,564,000 and $8,920,000 for the three months ended December 31, 2000 and 1999, respectively. This decrease of $356,000 (4%) was primarily attributable to the decline in revenues from display advertising and Sustain's consulting revenues, partially offset by the advertising and subscription rate increases. Display advertising and conference revenues were down by $303,000 primarily because of a downturn in .com advertising while classified advertising revenues increased by $96,000. Public notice advertising revenues increased by $22,000 primarily resulting from increased government notices. The Company's smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 92% of the total public notice advertising revenues. Public notice advertising revenues and related advertising and other service fees constituted about 27% of the Company's total revenues. Circulation revenues decreased an aggregate of $107,000 primarily because of fewer subscriptions to the court rule services; some courts are now providing their rules online. The Daily Journals accounted for about 72% of the Company's total circulation revenues, and their circulation levels decreased slightly. The court rule and judicial profile services generated about 18% of the total circulation revenues, with the other newspapers and services accounting for the balance. Sustain's revenues were down by $105,000. Costs and expenses increased by $393,000 (5%) to $8,643,000 from $8,250,000. Total personnel costs were $4,308,000, representing a decrease of $122,000 (3%). Newsprint and printing expenses increased by $65,000 (9%) primarily because of the newsprint price increases. Commissions and other outside services increased by $276,000 (23%) primarily for Sustain's additional outside service expenses of $202,000. Postage and delivery expenses declined by $51,000 (9%) mainly because of reduced newspaper bonus issues. Depreciation and amortization expenses increased by $172,000 (36%) primarily as a result of the amortization of Sustain's assets, including the Daily Journal's purchased computer software and goodwill of $179,000. The increase in other expenses of $53,000 (6%) primarily resulted from increased accounting and legal expenses. The Daily Journal's business segment pretax profit decreased by $349,000 to $897,000 from $1,246,000 primarily because of a decline in .com display advertising and fewer court rule subscriptions. Sustain's business segment pretax loss increased by $399,000 primarily because of reduced consulting revenues and increased depreciation and amortization and outside services. The consolidated net loss was $3,000 as compared with a net income of $435,000 in the comparable prior year period. Net income (loss) per share decreased to ($.00) from $.28. Liquidity and Capital Resources During the three months ended September 30, 2000, the Company's cash and cash equivalent position increased by $304,000, and the investments in U.S. Treasury Bills decreased by $1,972,000. Cash and cash equivalents were used for the net purchase of capital assets of $3,233,000, including significant investments in Sustain software and to purchase common stock for an aggregate amount of $554,000. The cash provided by operating activities of $2,119,000 included a net decrease in prepayments for subscriptions and others of $475,000. Proceeds from the sale of subscriptions from newspapers, court rule books and other publications and for software maintenance and other services are booked as deferred revenue and are included in earned revenue only when the services are provided. The cash flows from 8 of 10 operating activities increased by $1,289,000 during the three months ended December 31, 2000 primarily due to the changes in accounts payable and accrued liabilities. As of December 31, 2000, the Company had working capital of $5,353,000 before deducting the liability for deferred subscription revenues and other revenues of $7,433,000 which will be earned within one year. The Company expects its expenditures in fiscal 2001 to include an estimated $2 million for the construction of a new building in Los Angeles. The Company also expects its expenditures in support of the development of the Sustain software to continue at a rate in excess of cash flow. In January the Company obtained a $4 million revolving bank line of credit due in January 2002 and secured by substantially all of the Company's non-real estate assets. In January the Company borrowed $3 million under this line of credit. The Company expects that it will be able to extend or refinance the amounts outstanding under this line of credit on or before the maturity date. There can be no assurance, however, that a change in the Company's business or prospects will not result in an inability to refinance on the same or similar terms. The Company also obtained a $2 million real estate loan secured by its current Los Angeles facilities. The Company also has a commitment from a bank to loan the Company up to an additional $2 million when its new building is completed. The Company cannot predict whether the amounts received from these borrowings will be sufficient to fully fund its development of the Sustain software. If additional funds are required to support such development, the Company may, among other things, change its development strategy or attempt to secure additional financing, which may or may not be available to the Company on acceptable terms. Disclosure regarding Forward-Looking Statements This Report 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 without limitation those contained under the captions "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," are forward-looking statements. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management, are also forward-looking statements. 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 Report, including without limitation in conjunction with the forward-looking statements themselves. The Company has no specific intention to update these forward-looking statements. 9 of 10 DAILY JOURNAL CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K: (A) Exhibits - The following exhibit is filed herewith: 10.1 Note Secured by Deed of Trust, dated January 2, 2001, in the principal amount of $2,000,000 executed by Daily Journal Corporation in favor of City National Bank. 10.2 Deed of Trust, Assignment of Rents and Fixture Filing, dated January 2, 2001, executed by Daily Journal Corporation in favor of City National Bank. 10.3 Letter Agreement, dated January 2, 2001, regarding the Promissory Note dated January 2, 2001 in the principal amount of $4,000,000 executed by Daily Journal Corporation and Sustain Technologies, Inc. in favor of City National Bank. 10.4 Promissory Note, dated January 2, 2001, in the principal amount of $4,000,000 executed by Daily Journal Corporation and Sustain Technologies, Inc. in favor of City National Bank. 10.5 Commercial Security Agreement, dated January 2, 2001, executed by Daily Journal Corporation in favor of City National Bank. 10.6 Commercial Security Agreement, dated January 2, 2001, executed by Sustain Technologies, Inc. in favor of City National Bank. 27 Financial Data Schedule. 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. DAILY JOURNAL CORPORATION (Registrant) /s/ Gerald L. Salzman Gerald L. Salzman Chief Financial Officer DATE: February 9, 2001 10 of 10