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, 1998
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
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(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
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(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, 1999
- --------------------------------------- -------------------------------
Common Stock, par value $ .01 per share 1,618,570 shares
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DAILY JOURNAL CORPORATION
INDEX
Page Nos.
PART I Financial Information
Item 1. Financial statements
Consolidated Balance Sheet -
December 31, 1998 and September 30, 1998 3
Consolidated Statement of Income -
Three months ended December 31, 1998 and 1997 4
Consolidated Statement of Cash Flows -
Three months ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
PART II Other Information
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10-11
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PART I
Item 1. Financial Statements
DAILY JOURNAL CORPORATION - CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31 September 30
1998 1998
------------------------ ------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 987,000 $ 462,000
U.S. Treasury Bills, at cost plus discount earned 12,090,000 12,668,000
Accounts receivable, less allowance for
doubtful accounts of $700,000 6,097,000 6,594,000
Inventories 72,000 51,000
Prepaid expenses and other assets 325,000 113,000
Deferred income taxes 707,000 800,000
------------ ------------
Total current assets 20,278,000 20,688,000
------------ ------------
Property, plant and equipment, at cost:
Land, buildings and improvements 8,093,000 8,068,000
Furniture and office equipment 5,390,000 4,812,000
Machinery and equipment 1,365,000 1,355,000
------------ ------------
14,848,000 14,235,000
Less accumulated depreciation (6,544,000) (6,396,000)
------------ ------------
8,304,000 7,839,000
Deferred income taxes 307,000 438,000
------------ ------------
$ 28,889,000 $ 28,965,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,558,000 $ 2,741,000
Accrued liabilities 1,862,000 2,755,000
Income taxes 559,000 282,000
Deferred subscription revenue 6,873,000 6,902,000
------------ ------------
Total current liabilities 11,852,000 12,680,000
------------ ------------
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; 1,618,570 shares, outstanding 16,000 16,000
Other paid-in capital 2,058,000 2,058,000
Retained earnings 15,460,000 14,708,000
Less 34,387 treasury shares, at cost (497,000) (497,000)
------------ ------------
Total shareholders' equity 17,037,000 16,285,000
------------ ------------
$ 28,889,000 $ 28,965,000
============ ============
See accompanying notes to consolidated financial statements.
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DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three months
ended December 31
-------------------------------------------------
1998 1997
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Revenues:
Advertising $4,837,000 $4,968,000
Circulation 3,033,000 2,906,000
Advertising service fees and other 910,000 813,000
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8,780,000 8,687,000
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Costs and expenses:
Salaries and employee benefits 3,825,000 3,782,000
Newsprint and printing expenses 874,000 849,000
Commissions and other outside services 1,018,000 1,033,000
Postage and delivery expenses 588,000 600,000
Depreciation and amortization 234,000 417,000
Other 989,000 789,000
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7,528,000 7,470,000
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Income before taxes 1,252,000 1,217,000
Provision for income taxes 500,000 485,000
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Net income $ 752,000 $ 732,000
========== ==========
Weighted average number of common
shares outstanding 1,584,183 1,591,441
Net income per share $.47 $.46
See accompanying notes to consolidated financial statements.
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DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months
ended December 31
---------------------------------------------------
1998 1997
------------------------ ------------------------
Cash flows from operating activities:
Net income $ 752,000 $ 732,000
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 234,000 417,000
Deferred income taxes 224,000 203,000
Discount earned on U.S. Treasury Bills (189,000) (157,000)
Changes in assets and liabilities:
(Increase) decrease in current assets
Accounts receivable, net 497,000 492,000
Inventories (21,000) (25,000)
Prepaid expenses and other assets (212,000) (71,000)
Increase (decrease) in current liabilities
Accounts payable (183,000) (350,000)
Accrued liabilities (893,000) (842,000)
Income taxes 277,000 277,000
Deferred subscription revenue (29,000) (210,000)
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Cash provided by operating activities 457,000 466,000
---------- ----------
Cash flows from investing activities:
Net sales (investments) in U.S. Treasury Bills 767,000 (407,000)
Capital expenditures (699,000) (273,000)
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Cash provided (used) for investing activities 68,000 (680,000)
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Increase (decrease) in cash and cash equivalents 525,000 (214,000)
Cash and cash equivalents:
Beginning of period 462,000 273,000
---------- ----------
End of period $ 987,000 $ 59,000
========== ==========
Income taxes (refunded) paid during period $ (1,000) $ 4,000
See accompanying notes to consolidated financial statements.
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DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Corporation and Operations:
The Company publishes newspapers in California, Washington, Arizona, Colorado
and Nevada and the California Lawyer magazine 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.
Essentially all of the Company's operations are based in California, Arizona,
Colorado, Nevada and Washington.
Note 2 - Basis of Presentation:
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly its financial position as of
December 31, 1998 and September 30, 1998, the results of operations for the
three month periods ended December 31, 1998 and 1997 and its cash flows for the
three months ended December 31, 1998 and 1997.
The results of operations for the three months ended December 31, 1998 and
1997 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, 1998.
Note 3 - Subsequent Event:
In January 1999, the Company invested a total of $6.67 million (a) to purchase
80% of the capital stock of CHOICE Information Systems, Inc. from CHOICE and
certain of its shareholders, (b) to cause CHOICE to purchase substantially all
of the assets of QUINDECA Corporation, the consulting and implementation arm of
CHOICE, and (c) to leave approximately $4 million in working capital at CHOICE
immediately following these transactions. In addition, CHOICE has entered into
employment agreements with the principal owners of CHOICE and QUINDECA, and
these officers will continue to own 20% of CHOICE.
CHOICE provides the SUSTAIN(R) family of products which consist of
technologies and applications to enable justice agencies to automate their
operations. The latest product released from CHOICE is the SUSTAIN(R) eCourt(TM)
system which is an electronic commerce platform for the justice community and
allows users to file cases electronically and publish information online. CHOICE
has installations in nine states and three countries, and many of its clients
have more than a decade of experience with the SUSTAIN(R) product line.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues were $8,780,000 and $8,687,000 for the three months ended December
31, 1998 and 1997, respectively. This increase of 1% is primarily attributable
to advertising and subscription rate increases, partially offset by the decline
in revenues from publishing foreclosure notices.
During the three months ended December 31, 1998, display advertising revenues
were up by $105,000 while classified advertising revenues decreased by $88,000.
Public notice advertising revenues decreased by $148,000 primarily resulting
from decreased foreclosure notices, and the Company anticipates this decline to
continue because of a combination of lower prices and lower volume. 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 28% of the
Company's total revenues. Circulation revenues increased an aggregate of
$127,000. The Daily Journals accounted for about 67% of the Company's total
circulation revenues, and their circulation levels decreased slightly. The Rule
Book and Judicial Profile services generated about 21% of the total circulation
revenues, with the other newspapers and services accounting for the balance.
Costs and expenses increased by $58,000 (1%) from $7,470,000 to $7,528,000.
Personnel costs increased an aggregate of $43,000 (1%) primarily due to the
normal annual salary adjustments. Newsprint and printing expenses increased by
$25,000 primarily because of larger updates in court rule books, partially
offset by the decrease in newsprint prices. Commissions and other outside
services decreased by $15,000 primarily because of less agency foreclosure
notice sales. Depreciation and amortization expenses went down by $183,000 as a
result of more fully depreciated assets. The increase in other expenses of
$200,000 primarily resulted from increased legal expenses.
Pretax income in the three months ended December 31, 1998 increased by $35,000
(3%) to $1,252,000 from $1,217,000 in fiscal 1998. The Company's smaller
newspapers and its newspaper representative, which specializes in public notice
advertising, accounted for about 37% of the Company's pretax income. Net income
was $752,000 compared to $732,000 in the comparable prior year period. Net
income per share increased to $.47 from $.46.
Liquidity and Capital Resources
During the three months ended December 31, 1998, the Company's cash and cash
equivalent position increased by $525,000, and the investments in U.S. Treasury
Bills decreased by $578,000. In addition, cash and cash equivalents were used
for the purchase of capital assets of $699,000. The cash provided by operating
activities of $457,000 included a net decrease in prepayments for subscriptions
of $29,000. Proceeds from the sale of subscriptions from newspapers, court rule
books and other publications are booked as deferred subscription revenue and are
included in earned revenue only over the duration of the subscription. The cash
flows from operating activities decreased by $9,000 during the three months
ended December 31, 1998. As of December 31, 1998, the Company had working
capital of $15,299,000 before deducting the liability for deferred subscription
revenues of $6,873,000 which will be earned within one year. The cash and
short-term investments in U.S. Treasury Bills, aggregating about $13 million at
December 31, 1998, and the current level of cash provided by operating
activities appear adequate to meet the obligations of the Company.
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In January 1999, the Company invested a total of $6.67 million (a) to purchase
80% of the capital stock of CHOICE Information Systems, Inc. from CHOICE and
certain of its shareholders, (b) to cause CHOICE to purchase substantially all
of the assets of QUINDECA Corporation, the consulting and implementation arm of
CHOICE, and (c) to leave approximately $4 million in working capital at CHOICE
immediately following these transactions. In addition, CHOICE has entered into
employment agreements with the principal owners of CHOICE and QUINDECA, and
these officers will continue to own 20% of CHOICE.
CHOICE provides the SUSTAIN(R) family of products which consist of
technologies and applications to enable justice agencies to automate their
operations. The latest product released from CHOICE is the SUSTAIN(R) eCourt(TM)
system which is an electronic commerce platform for the justice community and
allows users to file cases electronically and publish information online. CHOICE
has installations in nine states and three countries, and many of its clients
have more than a decade of experience with the SUSTAIN(R) product line.
The Company recognizes the need to ensure that its operations are not
adversely affected by Year 2000 problems. The Company has determined that its
major internal systems and equipment are Year 2000 compliant. The cost of
achieving compliance in the Company's software is estimated to be a minor
increase over the cost of normal software upgrades and replacements. The
Company has sent Year 2000 inquiries to its significant suppliers and vendors.
Based on the responses to these inquiries, the Company expects that Year 2000
issues will pose no significant operational or financial problems for the
Company. However, due to the general uncertainty inherent in the Year 2000
problem, the Company cannot ensure its ability to timely and cost-effectively
resolve unforeseen Year 2000 problems that may affect its operations and
business or expose it to third-party liability.
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.
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DAILY JOURNAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
On August 25, 1995, Jeffrey Barge, an individual, filed a lawsuit captioned
Barge v. Daily Journal Corporation, et al., in the Supreme Court of the State of
New York. The action subsequently was removed to federal court and transferred
to the United States District Court for the Central District of California. The
complaint alleges, among other things, that Mr. Salzman, the Company's
President, had conversations with Mr. Barge about buying a newspaper Mr. Barge
owned in Seattle, Washington prior to the date on which the Company started a
competing newspaper in the Seattle area, and that in doing so, Mr. Salzman
caused the Company to misuse certain confidential information allegedly provided
to Mr. Salzman by Mr. Barge and to engage in unfair competition. Mr. Barge
alleges that various present and former employees of the Company caused
defamatory statements to be made about Mr. Barge. The complaint seeks, among
other things, damages in the amount of approximately $4.6 million. The Company
believes that the action is without merit and intends to continue to defend it
vigorously.
On November 22, 1996, Metropolitan News Company, ("Metropolitan News") a Los
Angeles company that publishes various small newspapers that rely for revenues
mostly on public notice advertising, filed a lawsuit (later amended) against the
Company and Charles T. Munger in Los Angeles County Superior Court alleging that
the Company violated certain provisions of the California Business and
Professions Code. The substance of all claims by Metropolitan News is that the
Company's prices for publishing foreclosure notices are too low and that
Metropolitan News could make more money if the Company's prices were higher.
One Metropolitan News complaint was that the Company had made an agreement
with Federal National Mortgage Association ("Fannie Mae") and arrangements with
a few other lenders relating to the publication of trustee sales notices.
Metropolitan News alleged that the agreements resulted in impermissible sales
below cost by the Company. The agreements in question were entered in response
to needs and programs of lenders, some of them chartered by the Federal
Government to help increase home ownership. So motivated, the lenders were
pushing a wide program of foreclosure-cost reductions, particularly reductions
that would prevent some home foreclosures. Under the few arrangements involved,
the Company agreed to provide advertising placement services for the publication
of notices both in its own and in other newspapers at one standard statewide
price. Metropolitan News sued over the Company's business conduct in these
arrangements even though such conduct was pro-social in a cost-of-foreclosure-
reducing way that improved the general image of service providers in
foreclosures. Moreover, Metropolitan News sued even though the Company's action
was sure to provide business gains to Metropolitan News. These business gains
occurred because the wide foreclosure-practice reforms sought by the lenders
were hated by many foreclosure-notice processing providers that had much
profited in California's recent recession-caused foreclosure expansion.
Therefore the Company's cooperation with cost-reduction efforts of lenders had
the consequence, which was predictable, that Metropolitan News enjoyed for a
long time an increase in its share of the market in foreclosure notice
publications, directed by angry former foreclosure-notice processing customers
of the Company. Consequently, the Metropolitan News has suffered no injury from
the alleged below cost sales. In addition, the average total cost of the
placement of a notice under every agreement was less than the standard statewide
price charged, making each agreement comply, in the opinion of the Company and
its counsel, with laws forbidding sales below cost.
Another Metropolitan News complaint challenged as forbidden price
discrimination by locality the Company's ordinary practice of charging different
prices for publishing trustee sales notices in different
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newspapers depending upon the geographic locality in which the notices are
published. This locality-discrimination challenge was made even though (i) in
charging for foreclosure advertising at different prices in its different
newspapers, Metropolitan News followed exactly the same practice as the Company
(ii) every other owner of multiple newspapers, not only in California but
throughout the nation, also imitates both Metropolitan News and the Company by
using different prices in selling advertising service in different newspapers,
and (iii) all rational economic definitions of "same product" (used in finding
locality discrimination which must involve sale of a "same product" at different
prices in different localities) require that "same products" must be products
that are substitutable in use, one for the other, whereas foreclosure notice
publications can not be substituted, one for the other, across locality-of-
publication lines.
Metropolitan News sued for injunctive relief and damages. A jury trial ended
in mistrial in January 1999. The Company believes that the action is without
merit and intends to continue to defend it vigorously.
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DAILY JOURNAL CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits - The following exhibit is filed herewith:
10.9 San Francisco lease agreement dated December 9, 1998
27 Financial Data Schedule
(B) Reports on Form 8-K - None
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 12, 1999
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