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, 2001 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, 2002 - --------------------------------------- ------------------------------- Common Stock, par value $,01 per share 1,533,521 shares 1 of 17
DAILY JOURNAL CORPORATION INDEX <TABLE> Page Nos. <S> <C> PART I Financial Information Item 1. Financial statements Consolidated Balance Sheets - December 31, 2001 and September 30, 2001 3 Consolidated Statements of Operations - Three months ended December 31, 2001 and 2000 4 Consolidated Statements of Cash Flows - Three months ended December 31, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Other Information Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 </TABLE> 2 of 17
PART I Item 1. Financial Statements DAILY JOURNAL CORPORATION - CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> December 31 September 30 2001 2001 ------------ ------------ <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 630,000 $ 2,901,000 U.S. Treasury Bills, at cost plus discount earned 2,484,000 --- Accounts receivable, less allowance for doubtful account of $500,000 at December 31, 2001 and September 30, 2001 5,530,000 6,597,000 Inventories 57,000 67,000 Prepaid expenses and other assets 157,000 154,000 Deferred income taxes 736,000 696,000 ----------- ----------- Total current assets 9,594,000 10,415,000 ----------- ----------- Property, plant and equipment, at cost: Land, buildings and improvements 8,571,000 8,568,000 Furniture and office equipment 6,694,000 6,326,000 Machinery and equipment 1,470,000 1,533,000 ----------- ----------- 16,735,000 16,427,000 Less accumulated depreciation (7,294,000) (6,943,000) ----------- ----------- 9,441,000 9,484,000 Capitalized software, net 1,088,000 1,239,000 Deferred income taxes --- 29,000 ----------- ----------- $20,123,000 $21,167,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,670,000 $ 5,124,000 Accrued liabilities 1,580,000 2,080,000 Notes payable - current portion 84,000 75,000 Income taxes 204,000 298,000 Deferred subscription revenue and other revenues 7,886,000 7,777,000 ----------- ----------- Total current liabilities 14,424,000 15,354,000 ----------- ----------- Deferred income taxes 67,000 --- Notes payable - long-term portion 1,857,000 1,884,000 Minority interest in subsidiary (7%) --- --- 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; 1,533,521 shares outstanding 15,000 15,000 Other paid-in capital 1,949,000 1,949,000 Retained earnings 2,600,000 2,754,000 Less 43,271 treasury shares, at cost (789,000) (789,000) ----------- ----------- Total shareholders' equity 3,775,000 3,929,000 ----------- ----------- $20,123,000 $21,167,000 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 3 of 17
DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months ended December 31 ------------------------------------------ 2001 2000 ----------------- ----------------- <S> <C> <C> Revenues: Advertising $3,914,000 $4,481,000 Circulation 2,759,000 2,889,000 Information systems and services 508,000 417,000 Advertising service fees and other 821,000 741,000 ---------- ---------- 8,002,000 8,528,000 ---------- ---------- Costs and expenses: Salaries and employee benefits 4,417,000 4,308,000 Newsprint and printing expenses 574,000 777,000 Commissions and other outside services 1,272,000 1,468,000 Postage and delivery expenses 504,000 486,000 Depreciation and amortization 565,000 655,000 Other general and administrative expenses 803,000 949,000 ---------- ---------- 8,135,000 8,643,000 ---------- ---------- Loss from operations (133,000) (115,000) Other income and expense: Interest income 19,000 36,000 Interest expense (40,000) --- ---------- ---------- Loss before taxes (154,000) (79,000) Benefits from income taxes --- 30,000 ---------- ---------- Loss before minority interest in net loss of subsidiary (154,000) (49,000) Minority interest in net loss of subsidiary (7%) --- 46,000 ---------- ---------- Net loss $ (154,000) $ (3,000) ========== ========== Weighted average number of common shares outstanding - basic and diluted 1,490,250 1,508,677 ---------- ---------- Basic and diluted net income (loss) per share $ (.10) $ (.00) ---------- ---------- </TABLE> See accompanying notes to consolidated financial statements. 4 of 17
DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three months ended December 31 ----------------------------------- 2001 2000 -------- --------- <S> <C> <C> Cash flows from operating activities: Net loss $ (154,000) $ (3,000) Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 565,000 655,000 Minority interest in consolidated subsidiary --- (46,000) Deferred income taxes 56,000 (31,000) Income tax receivable --- 1,000 Discount earned on U.S. Treasury Bills (4,000) --- Changes in assets and liabilities: (Increase) decrease in current assets Accounts receivable, net 1,067,000 (55,000) Inventories 10,000 42,000 Prepaid expenses and other assets (3,000) (32,000) Increase (decrease) in current liabilities Accounts payable (454,000) 622,000 Accrued liabilities (500,000) 1,441,000 Income taxes payable (94,000) --- Deferred subscription and other revenues 109,000 (475,000) ------------ ----------- Cash provided by operating activities 598,000 2,119,000 ------------ ----------- Cash flows from investing activities: Net (purchases) sales in U.S. Treasury Bills (2,480,000) 1,972,000 Capital and capitalized software expenditures: Purchases of property, plant and equipment, net (371,000) (487,000) Capitalized software for Sustain --- (2,746,000) ----------- ----------- Net cash used for investing activities (2,851,000) (1,261,000) ----------- ----------- Cash flows from financing activities: Payment of loan principal (18,000) --- Purchase of common stock --- (554,000) ----------- ----------- Cash used for financing activities (18,000) (554,000) ----------- ----------- (Decrease) increase in cash and cash equivalents (2,271,000) 304,000 Cash and cash equivalents: Beginning of period 2,901,000 380,000 ------------ ----------- End of period $ 630,000 $ 684,000 ============ =========== Interest paid during period $ 40,000 $ --- ============ =========== </TABLE> See accompanying notes to consolidated financial statements. 5 of 17
DAILY JOURNAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - The Corporation and Operations: Daily Journal Corporation (the "Company") publishes newspapers in California, Arizona, Colorado and Nevada, as well as the California Lawyer magazine and produces several specialized information services. Both the Arizona and Washington Journals are now only published online. 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, 2001, has been consolidated since it was acquired in January 1999. Sustain 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 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, 2001, the results of operations for the three-month periods ended December 31, 2001 and 2000 and its cash flows for the three months ended December 31, 2001 and 2000. The results of operations for the three months ended December 31, 2001 and 2000 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, 2001. 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 17
Note 4 - Operating Segments: Summarized financial information concerning the Company's reportable segments is shown in the following table: <TABLE> <CAPTION> Reportable Segments Total Results ------------------- for both Non-Sustain Sustain Segments ----------- ------- -------- Three months ended December 31, 2001 - ------------------------------------ <S> <C> <C> <C> Revenues $ 7,495,000 $ 507,000 $ 8,002,000 Profit (loss) before taxes, net of minority interest 865,000 (1,019,000) (154,000) Total assets 18,751,000 1,372,000 20,123,000 Capital expenditures 350,000 21,000 371,000 Depreciation and amortization 364,000 201,000 565,000 Income tax benefits (expenses) (340,000) 340,000 --- Total after-tax income (loss) 525,000 (679,000) (154,000) Three months ended December 31, 2000 - ------------------------------------ Revenues $ 8,111,000 $ 417,000 $ 8,528,000 Profit (loss) before taxes, net of minority interest 929,000 (962,000) (33,000) 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 benefits (expenses) (340,000) 370,000 30,000 Total after-tax income (loss) 589,000 (592,000) (3,000) </TABLE> Note 5 - Capitalized Software, net: The Company's expenditures in support of the Sustain software are highly significant. The capitalized Sustain software costs consists of purchased software upon the acquisition of Sustain of $3,023,000, less accumulated amortization of $1,935,000 and $1,784,000 as of December 31, 2001 and September 30, 2001, respectively. The remaining capitalized software, net, represents software costs accounted for pursuant to Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Costs related to the research and development of new software products are expensed as incurred until technological feasibility of the product has been established, at which time such costs are capitalized, subject to expected recoverability. During fiscal 2001 and 2000, there were also capitalized costs of $15,048,000 for the development of Sustain software related to the use of an outside service provider. In April 2001, the Company determined that the purchased software was both seriously flawed and seriously behind schedule, and therefore the development efforts of the outside provider were discontinued, and its work was terminated. With its flaws and incompleteness, the software development project at the time of termination was of virtually zero commercial value. As a result, the Company wrote off and expensed in fiscal 2001 capitalized software development costs aggregating $15,048,000. In partial offset, the Company booked, through reported income, a net tax benefit of $2,000,000 in fiscal 2001 after taking into account management's estimate of the timing of the utilization of all tax benefits for financial statement purposes. At December 31, 2001, the Company has a net deferred tax asset of $5,095,000 primarily related to fiscal 2001's net operating loss and research and development credit carry-forwards which expire in years 2015 through 2021. Due to the uncertainty surrounding the timing of realizing the benefits of its 7 of 17
tax attributes in future tax returns, the Company has provided a valuation allowance against the asset of $4,359,000, resulting in a net deferred tax asset of $736,000. The Company has expanded its staff to meet its planned internal software development efforts and has also expanded relationships with other service providers. If these development programs are not successful, they will significantly and adversely impact the Company's ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. These Sustain incremental internal development costs ($486,000 during the period ended December 31, 2001 and none in the quarter ended December 31, 2000) are being expensed as incurred and accordingly will materially impact earnings at least through fiscal 2002, and very likely much longer. Management believes that both accounting for capitalized software costs and income tax accounting are critical accounting policies. Note 6 - Debt and Operating Lease Commitments: In January 2002, the Company renewed its $4 million revolving bank line of credit bearing interest payable monthly at a quarter point under the prime rate, which expires on April 1, 2003. Such line of credit is secured by substantially all of the Company's non-real estate assets. As of December 31, 2001, there was no borrowing under this line of credit. In addition, the Company has a real estate loan of $1,941,000, which bears interest at approximately 8% and is repayable in equal monthly installments through 2016. The real estate loan is secured by the Company's existing facilities in Los Angeles. The Company owns office and printing facilities in Los Angeles, office and storage facilities in Sacramento and leases space for its other offices under operating leases which expire at various dates through 2004. The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to certain leased property. Minimum rental payments required under the operating leases for fiscal 2002, 2003, and 2004 are $810,000, $768,000 and $481,000, respectively. 8 of 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues were $8,002,000 and $8,528,000 for the three months ended December 31, 2001 and 2000, respectively. This decrease of $526,000 (6%) was primarily attributable to a decline in revenues from display and classified advertising which was partially offset by the advertising and subscription rate increases. Display advertising and conference revenues declined by $416,000, and classified advertising revenues decreased by $159,000. Public notice advertising revenues increased by $8,000. 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 29% of the Company's total revenues. Circulation revenues decreased an aggregate of $130,000 primarily because the subscription revenues from the semi-annual California Directory of Attorneys were recognized in December 2000 and deferred to January 2002 because of a change in the production process. The Daily Journals accounted for about 71% 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. Information and system service revenues increased by $91,000 primarily because of increased consulting revenues of Sustain. The Company's revenues derived from Sustain's operations constituted about 6% and 5% of the Company's total revenues for the three months ended in December 31, 2001 and 2000, respectively. Costs and expenses decreased by $508,000 (6%), to $8,135,000 from $8,643,000. Total personnel costs were $4,417,000, representing an increase of $109,000 (3%), primarily because of the expanded staff to develop Sustain software. Newsprint and printing expenses decreased by $203,000 (26%) primarily because of the deferral of the printing of the California Directory of Attorneys and the reduction in newsprint usage and prices. Commissions and other outside services decreased by $196,000 (13%) primarily because of fewer commissionable commercial advertising sales. Depreciation and amortization expenses decreased by $90,000 (14%) primarily because the Sustain goodwill had all been written off as of September 30, 2001. Other expenses declined by $146,000 (15%) mainly resulting from less bad debt expenses and reduced legal fees. There was interest expense of $40,000 during this quarter for the Company's bank loans. The Company's expenditures in support of the Sustain software are highly significant and will grossly impact overall results at least through fiscal 2002, and very likely much longer. These Sustain incremental internal development costs aggregated $486,000 for the three months ended December 31, 2001 and none in the quarter ended December 31, 2000. During fiscal 2001 and 2000, there were about $15,048,000 of expenses, representing costs for the development of Sustain software related to the use of an outside service provider. In April 2001, the Company determined that the purchased software so provided was not functioning as intended, and therefore the development efforts of the outside provider were discontinued, and its work was terminated. The software development project was both seriously flawed and seriously behind schedule at the time of termination and was, therefore, of virtually zero commercial value. As a result, the Company wrote off and expensed in fiscal 2001 capitalized software development costs aggregating $15,048,000. The Company also booked a net tax benefit of $2,000,000 in fiscal 2001 based on management's estimate of the timing of the utilization of tax benefits, for financial statement purposes, from overall losses attributable to the Sustain segment. In future years, there may be substantial additional tax benefits from past Sustain-segment losses. 9 of 17
To replace work of the terminated outside service provider, the Company has expanded its staff to meet its planned internal development efforts and has expanded relationships with other service providers. If these replacement development programs are not successful, they will significantly and adversely impact the Company's ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. The Company's non-Sustain business segment pretax profit decreased by $64,000 (7%) to $865,000 from $929,000, primarily due to a downturn in commercial advertising revenues. Sustain's business segment pretax loss increased by $57,000 to $1,019,000 from $962,000 primarily because Sustain software development costs are now being expensed as incurred. The consolidated net loss for the three months ended December 31, 2001 was $154,000 as compared with $3,000 in the prior comparable period. Net loss per share increased to $0.10 from $0.00. Liquidity and Capital Resources During the three months ended December 31, 2001, the Company's cash and cash equivalent and U.S. Treasury Bill positions increased by $213,000. Cash and cash equivalents were used for the purchase of capital assets of $371,000. The cash provided by operating activities of $598,000 included a net increase in prepayments for subscriptions and others of $109,000. Proceeds from the sale of subscriptions from newspapers, court rule books and other publications and for software maintenance and other services are recorded as deferred revenue and are included in earned revenue only when the services are rendered. Cash flows from operating activities decreased by $1,521,000 during the three months ended December 31, 2001 when compared with the same prior year period primarily due to the changes in accounts receivable because of the decline in commercial advertising sales and accounts payable because of the timing of payments for services. There continue to be outstanding issues between Sustain and the terminated outside service provider, including the amounts due to each of them from the other. In addition, the Company has learned that on December 4, 2001, the terminated outside service provider filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Colorado. The bankruptcy of the terminated outside service provider complicates our ability to resolve outstanding issues with it, and there can be no assurance that Sustain and the service provider will come to a mutually acceptable resolution of the issues between them. It is the opinion of management, however, that adequate provision has been made for any amounts that may become due as a result of the dispute. Nonetheless, the pendency of these issues could have an impact on Sustain's ability to attract new customers or work with its existing customers. During fiscal 2002, the Company expects its total expenditures in support of the development of the Sustain software to continue to be very significant, but much below the level of the prior year. As of December 31, 2001, the Company had working capital of $3,056,000 before deducting the liability for deferred subscription revenues and other revenues of $7,886,000 which will be earned within one year. In January 2002, the Company renewed its $4 million revolving bank line of credit, which expires on April 1, 2003. This line of credit is secured by substantially all of the Company's non-real estate assets. As of December 31, 2001, there was no borrowing under this line of credit. The Company expects that it will be able to extend or refinance the amounts available or 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. If additional funds are required, the Company may, among other things, change Sustain's development strategy or attempt to secure additional financing, which may or may not be available to the Company on acceptable terms. The Company also has a real estate loan of $1,941,000 secured by its existing Los Angeles facilities. The Company intends to begin construction of a new building in Los Angeles estimated to cost 10 of 17
approximately $2.5 million possibly in fiscal 2002, and it has a commitment from a bank to loan the Company up to an additional $2 million when its new building is completed. The above discussion and analysis for the three months ended December 31, 2001 and 2000 should be read in conjuction with the unaudited consolidated financial statements and the notes thereto included in this report. 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. 11 of 17
DAILY JOURNAL CORPORATION PART II - OTHER INFORMATION Item 5. Other Information In January 2002, the Company renewed its $4 million revolving bank line of credit which expires on April 1, 2003. This line of credit is secured by substantially all of the Company's non real-estate assets. At the time of renewal, there was no borrowing under this line of credit. The documents evidencing the renewal are attached as exhibit hereto. The original Letter Agreement and Promissory Note were filed as exhibit to the Company's Form 10-Q for the quarter ended December 31, 2000. Item 6. Exhibits and Reports on Form 8-K: (A) Exhibits - The following exhibit is filed herewith: 10.1 Letter Agreement, dated January 28, 2002, regarding the Revolving Note dated January 2, 2001 in the original principal sum of $4,000,000 executed by Daily Journal Corporation and Sustain Technologies, Inc. in favor of City National Bank. 10.2 Disbursement Request and Authorization dated January 29, 2002 regarding the Revolving Note of $4,000,000 executed by Daily Journal Corporation and Sustain Technologies, Inc. in favor of City National Bank. 10.3 Change in Terms Agreement dated January 29, 2002 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. 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 14, 2002 12 of 17