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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
for the fiscal year ended September 30, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 0-14665
DAILY JOURNAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 95-4133299
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
355 South Grand Avenue
34th Floor
Los Angeles, California 90071-1560
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (213) 624-7715
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 18, 1998 the approximate aggregate market value of Daily
Journal Corporation's voting stock held by nonaffiliates was $26,339,000.
As of December 18, 1998 there were outstanding 1,618,570 shares of Common
Stock of Daily Journal Corporation.
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Documents incorporated by reference: Portions of the Proxy Statement for the
Annual Meeting of Shareholders to be held during February 1999 are
incorporated by reference into Part III.
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Disclosure Regarding Forward-Looking Statements
This Form 10-K 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 Items 1 and 7 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 Form 10-K,
including without limitation in conjunction with the forward-looking
statements themselves. The Company has no specific intention to update these
forward-looking statements.
PART I
Item 1. Business
The Daily Journal Corporation (the "Company") is primarily a gatherer and
distributor of information through its publications and specialized
information services. The Company also serves as a newspaper representative
specializing in public notice advertising. Essentially all of the Company's
operations are based in Arizona, California, Colorado, Nevada and Washington.
The Daily Journal Corporation was reincorporated in 1987 under the laws of
South Carolina.
Products
Newspapers. The Company publishes 19 newspapers of general circulation. Each
newspaper, in addition to news of interest to the general public, has a
particular area of in-depth focus with regard to its news coverage, thereby
attracting readers interested in obtaining information about that area through
a newspaper format. The newspapers are based in the following cities:
<TABLE>
<CAPTION>
Newspaper Base of Publication
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<S> <C>
The Los Angeles Daily Journal Los Angeles, California
Daily Commerce Los Angeles, California
California Real Estate Journal Los Angeles, California
San Francisco Daily Journal San Francisco, California
The Daily Recorder Sacramento, California
The Inter-City Express Oakland, California
Marin County Court Reporter San Rafael, California
San Jose Post-Record San Jose, California
Sonoma County Herald-Recorder Santa Rosa, California
Orange County Reporter Santa Ana, California
San Diego Commerce San Diego, California
Business Journal Riverside, California
Antelope Valley Journal Palmdale, California
Ventura Journal Ventura, California
Arizona Journal Phoenix, Arizona
The Record Reporter Phoenix, Arizona
Colorado Journal Denver, Colorado
Nevada Journal Las Vegas, Nevada
Washington Journal Seattle, Washington
</TABLE>
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The Daily Journals. The Los Angeles Daily Journal and the San Francisco Daily
Journal are each published every weekday except certain holidays and were
established in 1888 and 1893, respectively. In addition to covering state and
local news of general interest, these newspapers focus particular coverage on
law and its impact on society. (The Los Angeles Daily Journal and the San
Francisco Daily Journal are referred to collectively herein as "The Daily
Journals".) Generally The Daily Journals seek to be of special utility to
lawyers and judges and to gain wide multiple readership of newspapers sent to
law firm subscribers.
The Los Angeles Daily Journal and the San Francisco Daily Journal are geared
toward their respective regions, but contain much materials and render much
services in a common endeavor. The Los Angeles Daily Journal is the largest
newspaper published by the Company, both in terms of revenues and circulation.
At September 30, 1998, the Los Angeles Daily Journal had approximately 12,700
paid subscribers and the San Francisco Daily Journal had approximately 6,600
paid subscribers as compared with a combined paid subscriptions of 19,600 at
September 30, 1997. In addition, The Daily Journals are sold on some
newsstands. The Daily Journals carry commercial advertising (display and
classified) and public notice advertising required or permitted by law to be
published in a newspaper of general circulation. The main source of commercial
advertising revenue has been local advertisers, law firms and businesses in or
wishing to reach the legal professional community. The gross revenues
generated directly by The Daily Journals are attributable approximately 44% to
subscriptions and 56% to the sale of advertising and other revenues. Revenues
from The Daily Journals constituted approximately 46% of the Company's total
revenue during fiscal 1998, 47% during fiscal 1997 and 48% during fiscal 1996.
The Daily Journals also contain the Daily Appellate Report which provides the
full text of all opinions certified for publication and certain unpublished
opinions by the California Supreme Court, the California Courts of Appeal, the
U.S. Supreme Court, the U.S. Court of Appeals for the Ninth Circuit, the U.S.
Bankruptcy Appellate Panel for the Ninth Circuit, the State Bar Court and
certain opinions of the U.S. District Courts in California and the Federal
Circuit Court of Appeals. Inserted in "pull-out" booklet format in the Daily
Appellate Report is the monthly Court Directory, a comprehensive list of
sitting judges in all California courts as well as courtroom assignments,
phone numbers and courthouse addresses. The Court Directory includes "Judicial
Transitions" which lists judicial appointments, elevations, confirmations,
resignations, retirements and deaths. The Daily Appellate Report, indexed
monthly, also includes, when such courts are in session, monthly supplements
summarizing all cases pending before the U.S. Supreme Court and the California
Supreme Court. The Sacramento Digest is a periodic insert which summarizes
bills passing through the state legislature when it is in session. It contains
summaries of the opinions of the California Attorney General, and the January
issue provides a roundup of all newly effective laws.
The Daily Journals also include several other features or supplements.
California Law Business, a weekly supplement, is printed in tabloid format and
features in-depth coverage of current topics of interest to lawyers with a
focus on the business aspects of the practice of law. Verdicts and Settlements
is a weekly tabloid featuring important settlements and verdicts along with
the attorneys and experts representing each party.
It is the policy of The Daily Journals (1) to take no editorial position on
the legal and political controversies of the day but instead to publish an
"op-ed" page consisting of well-written editorial views of others on many
sides of a controversy and (2) to try to report on factual events with
technical competence and with objectivity and accuracy. It is believed that
this policy suits a professional readership of exceptional intelligence and
education, which is the target readership for the newspapers. Moreover, The
Daily Journals believe that they bear a duty to their readership, particularly
judges and justices, as a self-imposed public trust, regardless, within
reason, of short-term income penalties. The Company believes that this policy
of The Daily Journals is in the long-term interest of the Company's
shareholders.
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The Company publishes the Directory of California Lawyers (the "Directory"),
which is updated and published semiannually, in January and July. The
Directory includes in a single volume names, addresses, fax and telephone
numbers of California lawyers and many informational sections including
listings of corporate counsel, private judges and arbitrators, and federal and
state courts and governmental offices. In addition, the Directory includes
commercial advertising and specialty listings. The Directory is provided as
part of normal newspaper service to subscribers of The Daily Journals and The
Daily Recorder. In addition, there are about 8,300 directories sold. The
regular annual rate is $27. In due course the Company plans to provide an
option of subscription service for The Daily Journals at a lower price for
subscribers who do not wish to receive the Directory.
The Daily Journals are distributed primarily by mail, with subscribers in the
Los Angeles and San Francisco areas usually receiving copies the same day.
Certain subscribers in Los Angeles, San Francisco, Santa Clara, Alameda,
Orange and San Diego counties receive copies by hand delivery, and additional
copies are distributed through newsstands and by microfilm subscriptions. The
regular yearly subscription rate for each of The Daily Journals is $495.
Daily Commerce. Published since 1917, the Daily Commerce, in addition to
covering news of general interest, devotes substantial coverage to items
designed to serve real estate investors and brokers, particularly those
interested in Southern California distressed properties. The nature of the
news coverage enhances the effectiveness of public notice advertising in
distributing information about foreclosures to potential buyers at foreclosure
sales. The features of the paper include default listings, probate estate
sales and real estate examination applicants. The Daily Commerce carries both
public notice and commercial advertising and is published in the afternoon
each business day. It had approximately 1,200 paid subscriptions at September
30, 1998. A subscription to the Daily Commerce is $199 per year, and it is
primarily distributed by mail.
California Real Estate Journal. The California Real Estate Journal (the "Real
Estate Journal") is a monthly newspaper directed primarily to persons
interested in the commercial real estate market, including real estate
brokers, developers, bankers and real estate lawyers. The Real Estate Journal
carries news and features such as the status of commercial projects, financial
information and articles on brokers and transactions, including defaults and
new financings. It carries display and classified advertising. At September
30, 1998 the California Real Estate Journal had a circulation of approximately
1,800 subscribers. The annual subscription rate is $94. The Real Estate
Journal is distributed primarily by mail.
The Daily Recorder. The Daily Recorder, based in Sacramento, began operations
in 1911. It is published each business day. In addition to general news items,
it focuses on the Sacramento legal and real estate communities and on
California state government and activities ancillary to it, such as
administrative agency developments and lobbying. Among the regular features of
The Daily Recorder are news about government leaders and lobbyists, as well as
the Daily Appellate Report for those who request it. Advertising in The Daily
Recorder consists of both commercial and public notice advertising. The Daily
Recorder currently has approximately 1,200 paid subscribers, all of whom
receive the paper by mail. The current subscription rate is $230 per year.
The Inter-City Express. The Inter-City Express (the "Express") has been
published since 1909. Published each business day, the Express covers general
news of local interest and focuses its coverage on news about the real estate
and legal communities in the Oakland/San Francisco area. The Express carries
both commercial and public notice advertising. The Express is mailed to its
approximately 500 subscribers, and the annual subscription rate is $137.
Marin County Court Reporter. The Marin County Court Reporter (the "Marin
Reporter") began publishing in the mid-1960's. The Marin Reporter covers
general news of local interest, emphasizing local and statewide news of
interest to the legal and real estate communities in Marin County, and carries
primarily public notice advertising. The Marin Reporter is published each
Tuesday and Friday.
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Approximately 300 subscribers presently receive the Marin Reporter, all by
mail delivery. The annual subscription rate is currently $99.
San Jose Post-Record. The San Jose Post-Record (the "Post-Record") has been
published since 1910. In addition to general news of local interest, the Post-
Record, which is published on business days, focuses on legal and real estate
news and carries commercial and public notice advertising. A yearly
subscription to the Post-Record is $116. The Post-Record has approximately 300
subscribers, all of whom receive it by mail.
Sonoma County Herald-Recorder. The Sonoma County Herald-Recorder (the
"Herald-Recorder") has been in existence since 1899. The newspaper carries
general news of local interest and is designed to be of special interest to
members of the legal and real estate professions. Advertising in the newspaper
consists of both public notice and commercial advertising. Its approximately
200 subscribers receive the newspaper every business day by mail, at a rate of
$188 annually.
Orange County Reporter. The Orange County Reporter ("Orange Reporter") has
been an adjudicated newspaper of general circulation since 1922. In addition
to general news of local interest, the Orange Reporter reports local and state
legal news, including the court calendars and court directories for Orange
County, and carries primarily public notice advertising. The Orange Reporter
is mailed every business day to approximately 900 paid and requester
subscribers. The annual subscription rate is $79.
San Diego Commerce. The San Diego Commerce is a thrice-weekly newspaper which
carries general news of local interest and public notice advertising and has
been an adjudicated newspaper of general circulation since 1970. The San Diego
Commerce also serves the legal and real estate professional in San Diego
County. The San Diego Commerce has approximately 700 subscribers. The annual
subscription rate is $59, covering distribution by mail.
Business Journal. The Business Journal publishes news of general interest and
provides coverage of the business and professional communities in Riverside
County. It is mailed twice weekly with about 600 paid subscribers. The annual
subscription rate is $49.
Antelope Valley Journal. Started in 1997, the Antelope Valley Journal is a
weekly newspaper carrying general news of local interest. It also serves the
real estate professional in north Los Angeles County. It has a small number of
paid subscribers, and the annual subscription rate is $40.
Ventura Journal. Started in November 1997, the Ventura Journal is a weekly
newspaper carrying general news of local interest. It also serves the real
estate professional. It has a small number of paid subscribers, and the annual
subscription rate is $40.
The Record Reporter and Arizona Journal. The Record Reporter was acquired in
1995. In addition to general news of local interest, The Record Reporter,
which is published on business days, focuses on real estate news and public
record information and carries primarily public notice advertising. It is
mailed to approximately 200 paid subscribers. The annual subscription rate is
$135 for most subscribers. In 1995 the Company also began publishing the
weekly Arizona Journal including the Arizona Appellate Report which provides
in a pull-out section of the newspaper summaries of the opinions of the U.S.
Supreme Court, 9th U.S. Circuit Court of Appeals, the U.S. Bankruptcy
Appellate Panel and summaries and full-text of the opinions of the Arizona
Supreme Court and Arizona Court of Appeals. The Arizona Journal seeks to be of
special utility to lawyers and judges with news and features somewhat similar
to those of The Daily Journals. It carries classified and display advertising,
and it is mailed to about 400 paid subscribers. The annual subscription rate
is $106.
Colorado Journal. In 1995, the Company acquired The Public Record Corporation
which published The Brief Times Reporter, The Code of Colorado Regulations and
three bankruptcy
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reporting publications, with the Code and the bankruptcy publications now part
of the Company's "Information Services". The Brief Times Reporter provided
weekly the full-text and summaries of all opinions of the Colorado Supreme
Court and Colorado Court of Appeals. In 1995 the Company began publishing the
weekly Colorado Journal, including the Colorado Appellate Report which
provides the full-text and summaries of all the opinions of the U.S. Supreme
Court, 10th U.S. Circuit Court of Appeals, and the full-text of the 10th
Circuit Orders. In 1997 The Public Record Corporation was merged into the
Daily Journal Corporation, and The Brief Times Reporter and the Colorado
Appellate Report were consolidated in a "pull-out" booklet format that is
inserted into the Colorado Journal. In addition to general news of local
interest, the Colorado Journal seeks to be of special utility to lawyers and
judges with news and features somewhat similar to those of The Daily Journals.
It carries classified, display and public notice advertising. The Colorado
Journal is mailed to approximately 800 paid subscribers and all of the judges
in Colorado. The annual subscription price is $271.
Nevada Journal. The Company acquired the Nevada Supreme Court Reporter in
1994, and the name was changed to the Nevada Journal. Besides stories of local
interest concerning the courts and legal communities, the Nevada Journal
features full-text opinions issued by the Nevada Supreme Court and a list of
all orders issued. Also included are summaries of federal and state supreme
court opinions. Special features include local verdicts and settlements, bar
examination results and articles on federal opinions. The semi-monthly Nevada
Journal as of September 30, 1998 had approximately 200 subscribers. The yearly
subscription rate is $126
Washington Journal. The Company began publishing the weekly Washington
Journal in 1992. In addition to providing general news of state and local
interest, it seeks to be of special utility to professionals, including
lawyers, business and government leaders. Summaries of federal, state and
local court cases are included as a pull-out section of the newspaper. The
Washington Journal, which is distributed by mail, had approximately 900 paid
subscribers at September 30, 1998. The annual subscription rate is $122, and
it carries classified and display advertising.
Magazine. Since 1988, the Company has published the California Lawyer, a
legal affairs magazine formerly produced by the State Bar of California (the
"State Bar"). The magazine was published by the Company in cooperation with
the State Bar until December 1993 when the agreement was terminated and the
State Bar commenced publishing its own monthly newspaper. The magazine is
mailed free to the active members of the State Bar of California, and the
magazine also has approximately 700 paid subscribers. An annual subscription
to California Lawyer is $69. The termination of the contract with the State
Bar and the State Bar's new publication have not had a material impact on the
Company's operations.
Information Services. The specialized information services offered by the
Company have grown out of its newspaper operations or have evolved in response
to a desire for such services primarily from its newspaper subscribers.
The Company has several court rules services. One is Court Rules, a multi-
volume, loose-leaf set which had approximately 7,100 subscribers at September
30, 1998 paying $255 per year. Court Rules reproduces court rules for certain
state and federal courts in California. The Court Rules appear in two
versions, one of which covers Northern California courts (eight volumes) and
one of which covers Southern California courts (seven volumes). The Company
updates Court Rules on a monthly basis. In addition, the Company publishes a
single volume of rules known as Local Rules for major counties of California.
Six versions are published for Southern California, each a single bound volume
for the rules of: (1) Los Angeles County; (2) Orange County; (3) San Diego
County; (4) San Bernardino County; (5) Riverside County; and (6) Ventura,
Santa Barbara and San Luis Obispo counties. In addition, the Company publishes
single-volume rules for the Federal District Court in the Southern and Central
District of California and California Probate Rules. In Northern California,
three versions of the
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Local Rules appear in loose-leaf books for Santa Clara/San Mateo,
Alameda/Contra Costa and San Francisco counties. The regular subscription
price for Local Rules volumes ranges from $40 to $90 per year and volumes are
normally updated or replaced whenever there are rule changes. At September 30,
1998, the Company had approximately 7,700 subscribers for its Local Rules
publications. In addition, the Company publishes a two-volume, loose-leaf set
of court rules for Colorado. These court rules were first distributed to the
subscribers of the Colorado Journal and are now being transferred to a
subscription basis.
The Judicial Profiles services contain biographical and professional
information concerning nearly all judges in California, both active and
retired, many of whom are available for private judging. Most of the profiles
have previously appeared in The Daily Journals as part of a regular feature.
The Judicial Profiles include biographical data on judges and information
supplied by each judge regarding the judge's policies and views on various
trial and appellate procedures and the manner in which appearances are
conducted in his or her courtroom. Subscribers may purchase either the five
volume set for Southern California or the four volume set for Northern
California. The approximately 1,000 subscribers to Judicial Profiles receive
updates on a quarterly basis. A subscription is $482 per year. In 1997 the
Company assumed certain publishing responsibilities from the King County
(Washington) Bar Association Young Lawyers Division for the publishing of
Judges Books for King, Pierce and Snohowish counties. The approximately 80
subscribers receive updates yearly. The annual subscription for new
subscribers is $125 for the combined set.
The Company now has four bankruptcy publications. The Fourth Circuit
Bankruptcy Court Reporter, the Texas Bankruptcy Court Reporter, the Colorado
Bankruptcy Court Reporter and the California Bankruptcy Reporter. These
publications had an aggregate of approximately 300 subscribers at September
30, 1998. Annual subscription rates range from $199 to $316 a year. Each of
these publications contains summaries and full-text bankruptcy rulings by the
governing federal court of appeals, district courts, bankruptcy appellate
panel and bankruptcy courts. Selected state court opinions are also
summarized. The Bankruptcy Court Reporters serve the bankruptcy legal
community throughout the Fourth Circuit, Texas, Colorado and California.
Periodic indices are published to assist the bars in referencing applicable
case law.
The Company publishes the Code of Colorado Regulations pursuant to an
agreement that extends through July 2002 with the State of Colorado. The
approximately 1,600 subscribers to various sections of the Code receive
updates normally on a monthly basis. Annual subscription rates range from $80
to $712.
The Company also provides computer on-line foreclosure information to about
300 customers. This service primarily provides distressed property
information, some of which also appear in some of the Company's newspapers, as
well as expanded features. Consolidation of both newspapers and on-line
products more effectively utilizes the costs of gathering such information.
Advertising and Newspaper Representative. The Company's publications carry
commercial advertising, and most also contain public notice advertising.
Commercial advertising consists of display and classified advertising. Public
notice advertising consists of about 100 different types of legal notices
required by law to be published in an adjudicated newspaper of general
circulation, including notices of death, fictitious business names, trustee
sale notices and notices of governmental hearings. The major types of public
notice advertisers are real estate-related businesses and trustees,
governmental agencies, attorneys and businesses or individuals filing
fictitious business name statements. In 1990 the Company acquired California
Newspaper Service Bureau, Inc. ("CNSB"), a statewide newspaper representative
(commission-earning selling agent) specializing since 1934 in public notice
advertising. CNSB placed notices and other forms of advertising with
adjudicated newspapers of general circulation, many of which are not owned by
the Company. CNSB was liquidated as of fiscal 1995 year-end with its servicing
subsequently provided by a division of the Company.
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Public notice advertising revenues and related advertising and other service
fees for the Company constituted about 30% of the Company's total revenues in
fiscal 1998, 34% in fiscal 1997 and 37% in fiscal 1996. In many states,
including California, legislatures have considered various proposals which
would result in the elimination or reduction of the amount of public notice
advertising required by statute. There is a risk that such laws could change
in a manner that would have a significant adverse impact on the Company's
public notice advertising revenues. The acquisition of CNSB, a marginal and
threatened enterprise with a negative book net worth when purchased, improved
the Company's ability to protect continued existence of public notice
advertising. CNSB is a logical locus for effective representation of small
newspapers before legislative bodies because it serves many newspapers all
over California.
Printing. The Company's main printing facilities are located in Los Angeles,
which currently are used primarily to print the Los Angeles Daily Journal
including supplements, the Daily Commerce, the Post-Record, The Express, The
Daily Recorder, the Orange Reporter, the Herald-Recorder, the Washington
Journal, the Marin Reporter, the Real Estate Journal, the Colorado Journal,
the Arizona Journal and the monthly updates for the multi-volume sets of Court
Rules. The Daily Appellate Report is printed in Los Angeles and shipped to
Sacramento and San Francisco for inclusion in The Daily Recorder and the San
Francisco Daily Journal. Concurrent with the Company's move to its new
Los Angeles facility in 1990, the Company purchased a new printing press with
color capabilities. The San Francisco Daily Journal, San Diego Commerce, the
Business Journal, the Record Reporter, the Antelope Valley Journal, the
Ventura Journal, the Directory, the Judicial Profiles, the Bankruptcy
Journals, The Code of Colorado Regulations, and certain Court Rules are
printed by outside contractors. The Company has a small offset press for in-
house printing of items such as legal advertising forms, letterhead and
envelopes, promotional flyers and other material for its publications. This
small press is operated by a local printer as an independent contractor.
Materials
After personnel costs, postage and paper costs are typically the Company's
next two largest expenses.
The Company is subject to periodic increases in postal rates. During the past
several years, the Company has instituted changes in an attempt to mitigate
higher postage costs. These changes have included contracting for hand
delivery in selected sections of the San Francisco Bay area, San Diego, Orange
County and Los Angeles, delivering pre-sorted newspapers to the post office on
pallets, which facilitates delivery and improves service, and implementing a
method of bundling newspapers which reduces the per piece charges. In
addition, the Company has an ink jet labeler which eliminates paper labels and
enables the Company to receive bar code discounts from the postal service on
some of its newspapers.
An adequate supply of newsprint and other paper is important to the Company's
operations. The Company currently does not have a contract with paper
suppliers. The Company has always been able to obtain sufficient newsprint for
its operations, although in the past, shortages of newsprint have sometimes
resulted in higher prices. In 1996 and 1997 newsprint prices declined, but in
1998 the price of paper increased moderately. Paper prices may fluctuate
substantially in the future, and this could significantly impact income from
operations.
Marketing
The Company actively promotes both its individual newspapers and its multiple
newspaper network as well as its other publications. The Company's staff
includes a number of employees whose primary responsibilities include
attracting new subscribers and advertisers. The specialization of each
publication creates both target subscribers and target advertisers.
Subscribers are likely to be attracted because of
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the nature of the information carried by the particular publication, and
likely advertisers are those interested in reaching such consumer groups. In
marketing products, the Company also focuses on its ancillary products which
can be of service to subscribers, such as its specialized information
services.
The Company receives, on a non-exclusive basis, public notice advertising
from a number of agencies. Such agencies ordinarily receive a commission of
15% to 25% on their sales of advertising in Company publications. Recent
developments in the foreclosure industry which places trustee sale notices
will probably reduce the role of certain agencies in the future. Commercial
advertising agencies also place advertising in Company publications and
receive commissions for advertising sales.
Competition
Competition for readers and advertisers is very intense, both by established
publications and by new entries into the market. For example, shortly before
the Company purchased the San Francisco Daily Journal, Associated Newspapers,
the owner of a controlling interest in a number of American law-oriented
publications including the American Lawyer, purchased a law-oriented San
Francisco newspaper and thereafter pursued subscribers and advertisers with
more skill and determination than were employed by the former publisher. In
1989 Associated Newspapers sold a controlling interest to Time Warner Inc.,
the largest U.S. media company, which continued very aggressive competition,
including amazingly low "price-war" type prices for multiple-copy
subscriptions. In 1997 these publications were sold by Time Warner Inc. to a
group headed by the investment firm of Wasserstein Perella, Inc., which
subsequently also purchased the National Law Publishing, publishers of the
New York Law Journal, among others. All of the Company's real estate and
business publications and products face strong competition from other
publications and service companies.
Readers of specialized newspapers focus on the amount and quality of general
and specialized news, amount and type of advertising, timely delivery and
price. The Company designs its newspapers to fill niches in the news
marketplace that are not covered as well by major metropolitan dailies. The
in-depth news coverage which the Company's newspapers provide along with
general news coverage attracts readers who, for personal or professional
reasons, desire to keep abreast of topics to which a major newspaper cannot
devote significant news space. Other newspapers do provide some of the same
subject coverage as does the Company, but the Company believes its coverage,
particularly that of The Daily Journals, is more complete and therefore
attracts more readers. The Company believes that The Daily Journals are the
most important newspapers serving California lawyers on a daily basis. The
Colorado Journal and the Arizona Journal are beginning to build readership in
their respective markets.
In attracting commercial advertisers, the Company competes with other
newspapers and magazines, television, radio and other media, including
electronic network systems for employment-related classified advertising.
Factors which may affect competition for advertisers are the cost for such
advertising compared with other media, and the size and characteristics of the
readership of the Company's publications. The Company competes with anywhere
from one serious competitor to several competing newspapers for public notice
advertising revenue in all of its markets. Large metropolitan general interest
newspapers normally do not carry a significant amount of legal advertising,
although recently they too have solicited certain types of public notice
advertising. The Company estimates its market share of public notice
advertising revenues ranges from 10% to 75% in the various areas where its
adjudicated newspapers are published except for Colorado where the Company's
marketshare is nominal. CNSB, a division of the Company, faces competition
from a number of other companies based in California, some of which specialize
in placing certain types of notices.
Commencing in 1994, the Company's California Lawyer magazine faced additional
competition from a new State Bar of California publication that is discussed
in the Products-Magazine section above.
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The Company's court rules publications face competition in both the Southern
California market as well as in Northern California. In addition, the Company
expects increased competition from online and CD-ROM court rules services and
the Courts. Subscriptions to the multi-volume Court Rules and Local Rules
volumes have declined during fiscal 1998. The Company's Judicial Profile
services have direct competition and also indirect competition, since some of
the same information is available through other sources.
The pricing of the Company's products is reviewed every year. Subscription
price increases have in recent years exceeded inflation, as have advertising
rate increases.
Employees
The Company employs approximately 330 full-time employees and about 60 part-
time employees. The Company is not a party to any collective bargaining
agreements. Certain benefits, including medical insurance, are provided to all
full-time employees. Management considers its employee relations to be good.
Working Capital
Traditionally, the Company has generated sufficient cash flow from operations
to cover all needs including capital expenditures without significant
borrowing. To a very considerable extent, the Company benefits in this regard
from the fact that subscriptions are generally paid a year in advance.
Inflation
The effects of inflation are not significantly any more or less adverse on
the Company's businesses than they are on other publishing companies. The
Company has experienced the effects of inflation primarily through increases
in costs of personnel, newsprint, postage and services. These costs have
generally been offset by periodic price increases for advertising and
subscription rates, but with frequent exceptions during several years when the
Company has experienced substantial increases in postage and newsprint
expenses and additional costs related to acquisitions.
Executive Officers of the Registrant
The table below sets forth certain information with regard to the executive
officer who is not a director of the Company. All of the executive officers of
the Company serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Principal Occupation Last Five Years
- ---- --- ------------------------------------
<S> <C> <C>
Ira A. Marshall, Jr......... 75 Secretary of the Company since 1977; Mr.
Marshall is a private investor and businessman
making investments for his own account and is a
Trustee of Mesabi Trust, which collects and
distributes royalties from the Mesabi Trust's
interests in mining properties.
</TABLE>
Item 2. Properties
The Company owns office and printing facilities in Los Angeles and office and
storage facilities in Sacramento and leases space for its other offices under
operating leases which expire at various dates through 2004.
10
<PAGE>
The Los Angeles property is comprised of a two-story, 34,000 square foot
building constructed in 1990, of which approximately 75% is devoted to office
space and the remainder houses printing and production equipment and
facilities. In 1996 the Company purchased about 40,000 square feet of land
near the Los Angeles facility which is used for additional parking. In 1998
the Company purchased land and an 11,300 square foot building adjacent to the
new parking lot. After remodeling, this will be used in lieu of the current
leased production facilities with the excess space to be rented to a local
printing company. The Company owns two buildings aggregating about 9,500
square feet in Sacramento, which provide space for its offices and storage.
The Company has agreed to a new five year lease for approximately 11,000
square feet for its San Francisco office. The new facility will be available
during the first quarter of 1999. This lease may be canceled in 2002 upon the
payment of certain fees. In addition, the Company rents facilities in each of
the remaining cities where its staff is located on a month-to-month basis or
pursuant to leases generally of no longer than four years remaining duration.
See Note 4 of Notes to Consolidated Financial Statements for information
concerning rents payable under leases.
Item 3. 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 also 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 is
defending it vigorously.
On November 22, 1996, Metropolitan News Company, a Los Angeles company that
publishes various small newspapers that rely for revenues mostly on public
notice advertising, filed a lawsuit against the Company in Los Angeles County
Superior Court alleging that the Company violated certain provisions of the
California Business and Professions Code by virtue of its agreement with
Federal National Mortgage Association ("Fannie Mae") and arrangements with
others relating to the publication of trustee sales notices. Under the various
arrangements, the Company agreed to provide advertising placement services for
the publication of notices at one price. Metropolitan News claimed this
practice results in pricing below the Company's cost. Metropolitan News also
challenged the Company's practice of charging different prices for publishing
trustee sales notices in different newspapers depending upon the geographic
locality in which the notices are published. This challenge was made even
though Metropolitan News followed exactly the same practice. Metropolitan News
sued for injunctive relief and damages. A jury trial in this matter concluded
on December 17, 1998, and as of December 28, 1998, the jury had not yet
reached a verdict. The Company intends to continue to defend this action
vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
The Securities and Exchange Commission recently amended Rule 14a-4, which
governs the use by the Company of discretionary voting authority with respect
to shareholder proposals. SEC Rule 14a-14(c)(1) provides that if the proponent
of a shareholder proposal fails to notify the Company at least 45 days prior
to the month and day of mailing the prior year's proxy statement, the proxies
of the Company's management would be permitted to use their discretionary
authority at the Company's next annual meeting of shareholders if the proposal
were raised at the meeting without any discussion of the matter in the proxy
statement.
No matters were submitted to a vote of shareholders during the last quarter
of the Company's fiscal year ended September 30, 1998.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
The following table sets forth the sales prices of the Company's common stock
for the periods indicated. Quotations are as reported by Nasdaq (Small-Cap
Issues), the automated quotation system of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
Fiscal 1998
Quarter ended December 31, 1997.............................. 43.25 37
Quarter ended March 31, 1998................................. 40.5 32
Quarter ended June 30, 1998.................................. 41.5 35
Quarter ended September 30, 1998............................. 39.5 33.5
<CAPTION>
High Low
----- -----
<S> <C> <C>
Fiscal 1997
Quarter ended December 31, 1996.............................. 33.5 28
Quarter ended March 31, 1997................................. 31.5 27.5
Quarter ended June 30, 1997.................................. 34.25 29
Quarter ended September 30, 1997............................. 44.5 32.38
</TABLE>
As of December 18, 1998 there were approximately 1,700 holders of record of
the Company's common stock, and the last trade was at $36.75 per share.
The Company did not declare or pay any dividends during fiscal 1997 or 1998.
A determination by the Company whether or not to pay dividends in the future
will depend on numerous factors, including the Company's earnings, cash flow,
financial condition, capital requirements, future prospects, acquisition
opportunities, and other relevant factors. The Board of Directors does not
expect that the Company will pay any dividends or other distributions to
shareholders in the foreseeable future.
From time to time, the Company has purchased shares, including treasury
shares, of its Common Stock and may continue to do so. See Note 2 to
consolidated financial statements. Stock purchases are made primarily to
reduce dilution of earnings per share caused by the deferred management
incentive plan under which selected employees are paid, subject to certain
conditions, supplemental compensation tied to future pre-tax earnings. During
fiscal 1998 the Company purchased 7,258 shares of Common and Treasury Stock at
an average price per share of $37.40.
12
<PAGE>
Item 6. Selected Financial Data
The following sets forth selected financial data for the Company as of, and
for each of the five years ended September 30, 1998. Such data should be read
in conjunction with, and is qualified in its entirety by reference to, the
Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each included herein.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollar amounts in thousands,
except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income
Data:
Revenues
Advertising....................... $21,109 $21,454 $21,423 $20,254 $18,801
Circulation....................... 11,449 11,506 10,951 10,686 10,031
Advertising service fees and
other............................ 3,547 3,436 3,595 3,638 4,502
------- ------- ------- ------- -------
36,105 36,396 35,969 34,578 33,334
------- ------- ------- ------- -------
Costs and expenses
Salaries and employee benefits.... 15,551 14,749 14,438 14,202 13,539
Newsprint and printing expenses... 3,377 3,424 3,886 4,084 3,362
Commissions and other outside
services......................... 4,254 4,299 4,793 4,553 4,197
Postage and delivery costs........ 2,266 2,316 2,364 2,461 2,314
Depreciation and amortization..... 1,696 1,897 1,837 2,078 2,325
Other, including interest
expense.......................... 3,553 4,693 4,286 3,759 3,921
------- ------- ------- ------- -------
30,697 31,378 31,604 31,137 29,658
------- ------- ------- ------- -------
Income before taxes................. 5,408 5,018 4,365 3,441 3,676
Provision for income taxes.......... 2,150 2,000 1,800 1,400 1,500
------- ------- ------- ------- -------
Net income.......................... $ 3,258 $ 3,018 $ 2,565 $ 2,041 $ 2,176
======= ======= ======= ======= =======
Net income per share................ $ 2.05 $ 1.89 $ 1.59 $ 1.26 $ 1.34
======= ======= ======= ======= =======
<CAPTION>
September 30
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital as conventionally
reported........................... $ 8,008 $ 4,763 $ 1,552 $ (166) $ (922)
Working capital before deduction of
a specified item (1)............... 14,910 11,165 8,076 5,632 4,757
Total assets........................ 28,965 25,967 22,489 20,752 19,932
Management termination fee payable.. -- -- -- -- 20
Long term notes payable............. -- -- -- 725 1,264
Shareholders' equity................ 16,285 13,298 10,728 8,377 6,489
</TABLE>
- --------
(1) Before deducting for each of the five years the liability for deferred
subscription revenue which will be earned within one year.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
1998 Compared to 1997
Revenues were $36,105,000 and $36,396,000 for the fiscal years 1998 and 1997,
respectively. This decrease of less than 1% was primarily attributable to a
decrease in public notice advertising revenues partially offset by increases
in display advertising lineage as well as advertising and subscription rate
increases.
During fiscal 1998, classified advertising revenues increased by $573,000,
and display advertising revenues were up by $522,000. Public notice
advertising revenues decreased by $1,386,000 primarily resulting from
decreased foreclosure notices, and the Company anticipates this trend 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 91% of
the total public notice advertising revenues. Public notice advertising
revenues and related advertising and other service fees constituted about 30%
of the Company's total revenues. Circulation revenues decreased an aggregate
of $57,000. The Daily Journals accounted for about 64% of the Company's total
circulation revenues, and their circulation levels decreased slightly. The
Rule Book and Judicial Profile services generated about 23% of the total
circulation revenues, with the other newspapers and services accounting for
the balance.
Costs and expenses decreased by $681,000 (2%) from $31,378,000 to
$30,697,000. Personnel costs increased an aggregate of $802,000 (5%) primarily
due to the normal annual salary adjustments. Newsprint and printing expenses
decreased by $47,000 primarily because of the reduction of issue volume in the
Company's smaller papers, partially offset by the increase in newsprint
prices. Commissions and other outside services decreased by $45,000 primarily
because of less agency foreclosure notice sales. The decrease in other
expenses of $1,140,000 primarily resulted from reduced legal and bad debt
expenses.
Pretax income in fiscal 1998 increased by $390,000 (8%) to $5,408,000 from
$5,018,000 in fiscal 1997. The Company's smaller newspapers and its newspaper
representative, which specializes in public notice advertising, accounted for
about 32% of the Company's pretax income. Net income was $3,258,000 compared
to $3,018,000 in the prior year. Net income per share increased to $2.05 from
$1.89.
1997 Compared to 1996
Revenues were $36,396,000 and $35,969,000 for fiscal years 1997 and 1996,
respectively. This increase of 1% is primarily attributable to subscription
and advertising rate increases partially offset by a decrease in public notice
advertising lineage.
During fiscal 1997, classified advertising revenues increased by $549,000,
and display advertising revenues were up by $367,000 including revenues from a
legal conference. Public notice advertising revenues decreased by $885,000
primarily resulting from decreased trustee sale notices, and we anticipate
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 86%
of the total public notice advertising revenues. Public
14
<PAGE>
notice advertising revenues and related advertising and other service fees
constituted about 34% of the Company's total revenues. Circulation revenues
increased an aggregate of $555,000. The Daily Journals accounted for about 62%
of the Company's total circulation revenues, and their circulation levels
decreased slightly. The Rule Book and Judicial Profile services generated
about 24% of the total circulation revenues, with the other newspapers and
services accounting for the balance.
Costs and expenses decreased by $226,000 (1%) from $31,604,000 to
$31,378,000. Personnel costs increased an aggregate of $311,000 (2%) primarily
due to the normal annual salary adjustments. Newsprint and printing expenses
decreased by $462,000 primarily because of lower newsprint costs. Commissions
and other outside services decreased by $494,000 primarily because of less
agency sales of trustee sale notices. Depreciation and amortization expenses
increased by $60,000 mainly due to the accelerated write-off of intangible
assets and computer assets. The increase in other expenses of $407,000
included additional legal expenses, partially offset by a decrease in bad debt
expenses.
Pretax income in fiscal 1997 increased $653,000 (15%) to $5,018,000 from
$4,365,000 in fiscal 1996. The Company's smaller newspapers and its newspaper
representative, which specializes in public notice advertising, accounted for
about 60% of the Company's pretax income. Net income in fiscal 1997 was
$3,018,000 compared to $2,565,000 in the prior year. Net income per share
increased to $1.89 from $1.59.
Liquidity and Capital Resources
During fiscal 1998, the Company's cash and cash equivalent position increased
by $189,000, and the investments in U.S. Treasury Bills increased by
$2,836,000. In addition, cash and cash equivalents were used for the purchase
of net capital assets of $1,125,000 including land, building and the
development of a parking lot for employees in Los Angeles, and to purchase the
Company's common and treasury stock for an aggregate of $271,000. The land and
building in Phoenix were sold for $428,000. The gain on this sale of $106,000
about offset the write-off of the unamortized intangible assets acquired in
the purchase of The Record Reporter which has moved to leased facilities. The
cash provided by operating activities of $4,292,000 included a net increase in
prepayments for subscriptions of $622,000. 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 $677,000 during fiscal 1998 primarily because of the
decrease in some current liabilities. As of September 30, 1998, the Company
had working capital of $14,910,000 before deducting the liability for deferred
subscription revenues of $6,902,000 which will be earned within one year. The
cash and short-term investments in U.S. Treasury Bills, aggregating about $13
million at September 30, 1998, and the current level of cash provided by
operating activities appear adequate to meet the obligations of the Company.
In July 1998 the Company purchased land and building adjacent to our new
parking lot in Los Angeles for $516,000. After remodeling this will be used in
lieu of the current leased production facilities with the excess space to be
rented to a local printing company.
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.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 462,000 $ 273,000
U.S. Treasury Bills, at cost plus discount earned... 12,668,000 9,832,000
Accounts receivable, less allowance for doubtful
accounts of $700,000 .............................. 6,594,000 6,073,000
Inventories......................................... 51,000 58,000
Prepaid expenses and other assets................... 113,000 160,000
Deferred income taxes............................... 800,000 1,036,000
----------- -----------
Total current assets............................. 20,688,000 17,432,000
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements.................... 8,068,000 7,763,000
Furniture and office equipment...................... 4,812,000 5,468,000
Machinery and equipment............................. 1,355,000 1,342,000
----------- -----------
14,235,000 14,573,000
Less accumulated depreciation....................... (6,396,000) (6,451,000)
----------- -----------
7,839,000 8,122,000
Deferred income taxes................................ 438,000 231,000
Intangible assets, at cost, less accumulated
amortization of $673,000 and $491,000................ -- 182,000
----------- -----------
$28,965,000 $25,967,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 2,741,000 $ 2,947,000
Accrued liabilities................................. 2,755,000 3,046,000
Income taxes........................................ 282,000 274,000
Deferred subscription revenue....................... 6,902,000 6,402,000
----------- -----------
Total current liabilities........................ 12,680,000 12,669,000
----------- -----------
Commitments and contingencies (note 4)............... -- --
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 and 1,621,870 shares,
respectively, outstanding.......................... 16,000 16,000
Other paid-in capital............................... 2,058,000 2,062,000
Retained earnings................................... 14,708,000 11,571,000
Less 34,387 and 30,429 treasury shares, at cost..... (497,000) (351,000)
----------- -----------
Total shareholders' equity....................... 16,285,000 13,298,000
----------- -----------
$28,965,000 $25,967,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Advertising................................ $21,109,000 $21,454,000 $21,423,000
Circulation................................ 11,449,000 11,506,000 10,951,000
Advertising service fees and other......... 3,547,000 3,436,000 3,595,000
----------- ----------- -----------
36,105,000 36,396,000 35,969,000
----------- ----------- -----------
Costs and expenses:
Salaries and employee benefits............. 15,551,000 14,749,000 14,438,000
Newsprint and printing expenses............ 3,377,000 3,424,000 3,886,000
Commissions and other outside services..... 4,254,000 4,299,000 4,793,000
Postage and delivery expenses.............. 2,266,000 2,316,000 2,364,000
Depreciation and amortization.............. 1,696,000 1,897,000 1,837,000
Other, including interest expense.......... 3,553,000 4,693,000 4,286,000
----------- ----------- -----------
30,697,000 31,378,000 31,604,000
----------- ----------- -----------
Income before taxes......................... 5,408,000 5,018,000 4,365,000
Provision for income taxes.................. 2,150,000 2,000,000 1,800,000
----------- ----------- -----------
Net income.................................. $ 3,258,000 $ 3,018,000 $ 2,565,000
=========== =========== ===========
Net income per share........................ $ 2.05 $ 1.89 $ 1.59
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Other Total
Common Paid-in Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1995................... $16,000 $2,093,000 $ 6,619,000 $(351,000) $ 8,377,000
Net income.............. 2,565,000 2,565,000
Purchase of common
stock.................. (11,000) (203,000) (214,000)
------- ---------- ----------- --------- -----------
Balance at September 30,
1996................... 16,000 2,082,000 8,981,000 (351,000) 10,728,000
Net income.............. 3,018,000 3,018,000
Purchase of common
stock.................. (20,000) (428,000) (448,000)
------- ---------- ----------- --------- -----------
Balance at September 30,
1997................... 16,000 2,062,000 11,571,000 (351,000) 13,298,000
Net Income.............. 3,258,000 3,258,000
Purchase of common
stock.................. (4,000) (121,000) (125,000)
Purchase of treasury
stock.................. (146,000) (146,000)
------- ---------- ----------- --------- -----------
Balance at September 30,
1998................... $16,000 $2,058,000 $14,708,000 $(497,000) $16,285,000
======= ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $3,258,000 $3,018,000 $2,565,000
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization.......... 1,696,000 1,897,000 1,837,000
Deferred income taxes.................. 29,000 (293,000) 199,000
Discount earned on U.S. Treasury
Bills................................. (129,000) (80,000) (35,000)
Loss (gain) on sales of capital
assets................................ (106,000) -- 1,000
Changes in assets and liabilities:
(Increase) decrease in current assets
Accounts receivable, net.............. (521,000) (640,000) 1,098,000
Inventories........................... 7,000 (10,000) 69,000
Prepaid expenses and other assets..... 47,000 169,000 49,000
Increase (decrease) in current
liabilities
Accounts payable...................... (206,000) 172,000 285,000
Accrued liabilities................... (291,000) 584,000 (364,000)
Income taxes payable.................. 8,000 274,000 --
Deferred subscription revenue......... 500,000 (122,000) 726,000
---------- ---------- ----------
Cash provided by operating
activities.......................... 4,292,000 4,969,000 6,430,000
---------- ---------- ----------
Cash flows from investing activities:
Investments in U.S. Treasury Bills, net.. (2,707,000) (4,159,000) (2,624,000)
Capital expenditures, net................ (1,125,000) (1,182,000) (1,811,000)
---------- ---------- ----------
Cash used for investing activities... (3,832,000) (5,341,000) (4,435,000)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments under management
termination fee payable and notes
payable................................. -- -- (1,261,000)
Purchase of common and treasury stock.... (271,000) (448,000) (214,000)
---------- ---------- ----------
Cash used for financing activities... (271,000) (448,000) (1,475,000)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents................................ 189,000 (820,000) 520,000
Cash and cash equivalents:
Beginning of year........................ 273,000 1,093,000 573,000
---------- ---------- ----------
End of year.............................. $ 462,000 $ 273,000 $1,093,000
---------- ---------- ----------
Interest paid during year.................. $ -- $ -- $ 102,000
Income taxes paid during year.............. $2,112,000 $1,930,000 $1,604,000
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND OPERATIONS
The Daily Journal Corporation (the "Company") is primarily a gatherer and
distributor of information through its publications and specialized
information services. In addition, the Company 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. The Daily Journal Corporation was reincorporated in 1987 under
the laws of South Carolina.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of the Daily Journal Corporation and its wholly-owned subsidiary
which was merged into the Company in 1997. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash equivalents: The Company considers all highly liquid investments,
including U.S. Treasury Bills with a maturity of three months or less when
purchased, to be cash equivalents.
Fair Value of Financial Instruments: The carrying amounts of cash,
investments in U.S. Treasury Bills, accounts receivable and accounts payable
approximate fair value because of the short maturity of these financial
instruments.
Inventories: Inventories, comprised of newsprint and paper, are stated at
cost, on a first-in, first-out basis, which does not exceed current market
value.
Income taxes: Deferred income taxes are provided when revenues and expenses
are reported in different periods for financial statement and income tax
purposes.
Property, plant and equipment: Property, plant and equipment are carried on
the basis of cost. Depreciation of assets is provided in amounts sufficient to
depreciate the cost of related assets over their estimated useful lives.
Assets have been depreciated using an accelerated method for both financial
statement and tax purposes.
Significant expenditures which extend the useful lives of existing assets are
capitalized. Maintenance and repair costs are expensed as incurred. Gains or
losses on dispositions of assets are reflected in current earnings.
Intangible assets: Intangible assets consisted of goodwill and subscription
lists acquired in prior years. These assets were normally being amortized over
ten years and five years.
Deferred subscription revenue: Proceeds from the sale of subscriptions for
newspapers, court rule books or other publications are deferred as unexpired
subscriptions and are included in revenue over the duration of the
subscriptions.
Supplemental Employee Compensation Plan: In fiscal 1987 the Company
implemented a Plan for Supplemental Employee Compensation that entitles an
employee to participate in pre-tax earnings of the Company for the lesser of
(i) ten years or (ii)) as long as that employee remains employed or is in
retirement following employment to age 65. Non-negotiable certificates of
employee participant interests entitled employees to receive 11.75% (amounting
to about $720,000) of income before taxes
19
<PAGE>
and supplemental compensation expenses in fiscal year 1998, 11.28% (amounting
to about $640,000) in fiscal 1997 and 10.59% (amounting to about $518,000) in
fiscal 1996. In addition, the employee holders of certificates are entitled to
receive the same percentage of pre-tax earnings in each of the next nine years
subsequent to the year of the grant of the certificate provided they remain
employed or are in retirement following employment to age 65.
Treasury stock and net income per common share: As of September 30, 1998 and
1997 the Company owned 34,387 and 30,429 of the 599,409 units of a limited
partnership that has no known liabilities and owns as its sole asset 599,409
shares of common stock of Daily Journal Corporation. This investment, at a
total cost of $497,000, is considered treasury stock and is excluded from the
calculation of weighted average shares. The net income per common share is
based on the weighted average number of shares outstanding during each year.
The shares used in the calculation were 1,589,971 for 1998, 1,594,403 for 1997
and 1,612,766 for 1996.
Use of Estimates: The presentation of the Company's financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Accounting for Long-Lived assets: Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of"established accounting standards for long-
lived assets to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In addition, SFAS No. 121 requires that certain long-lived assets
be reported at the lower of the carrying amount or fair value less cost to
sell. The Company has adopted SFAS No. 121 effective October 1, 1996, as
required, and there was no significant impact on its financial position or
results of operations.
3. INCOME TAXES
The provision for income taxes consists of the followings:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................... $1,749,000 $1,827,000 $1,252,000
State................................. 371,000 459,000 324,000
---------- ---------- ----------
2,120,000 2,286,000 1,576,000
---------- ---------- ----------
Deferred:
Federal............................... 25,000 (234,000) 166,000
State................................. 5,000 (52,000) 58,000
---------- ---------- ----------
30,000 (286,000) 224,000
---------- ---------- ----------
$2,150,000 $2,000,000 $1,800,000
========== ========== ==========
</TABLE>
The deferred income tax provision (tax benefit) which results from temporary
differences in the recognition of revenues and expenses for tax and financial
reporting purposes, includes (i) the amounts related to provisions for accrued
liabilities not deductible for tax purposes until paid of ($223,000),
($147,000) and $167,000, (ii) the amounts related to the allowance for
doubtful accounts not deductible until the accounts receivable become
worthless for tax purposes of $0, ($40,000) and $0 in 1998, 1997 and 1996,
respectively, plus (iii) the amount of tax depreciation and amortization
(under) over book depreciation of ($241,000), ($46,000) and $42,000 in 1998,
1997, and 1996, respectively.
20
<PAGE>
At September 30, 1998, the Company had net operating loss carry-forwards of
approximately $144,000 that are available in segments over the next six years
to reduce future provisions for income taxes.
The difference between the statutory federal income tax rate and the
Company's effective rate is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................... 34.0% 34.0% 34.0%
State franchise taxes (net of federal tax benefit).... 4.6% 5.3% 5.8%
Other, net, including amortization of goodwill........ 1.2% 0.6% 1.4%
---- ---- ----
Effective tax rate................................... 39.8% 39.9% 41.2%
==== ==== ====
</TABLE>
The Company's deferred income tax assets were comprised of the following at
September 30, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Deferred tax assets attributable to:
Accrued liabilities, including
vacation pay accrual and
litigation reserves not yet
deductible.............................. $ 416,000 $ 638,000 $479,000
Bad debt reserves not yet deductible.... 303,000 303,000 260,000
Depreciation and amortization........... 428,000 187,000 137,000
Other, net.............................. 91,000 140,000 98,000
---------- ---------- --------
$1,238,000 $1,268,000 $974,000
========== ========== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
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.
Future minimum rental payments required under the above operating leases at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
September 30 Commitment
------------ ----------
<S> <C>
1999................ $ 545,000
2000................ 451,000
2001................ 405,000
2002................ 332,000
2003................ 328,000
2004................ 164,000
----------
$2,225,000
==========
</TABLE>
Rental expenses for the fiscal years 1998, 1997 and 1996 were $481,000,
$460,000 and $456,000, respectively.
21
<PAGE>
Management has received information furnished by legal counsel on the current
stage of all outstanding legal proceedings and the development of these
matters to date. Based upon its review, it is the opinion of management that
adequate provision has been made for all reasonably estimable costs and that
the ultimate liability, if any, should not materially affect the consolidated
financial statements.
5. RESULTS OF OPERATIONS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
(in thousands except per share
amounts)
<S> <C> <C> <C> <C>
1998
Revenues................................. $8,687 $9,029 $9,532 $8,857
Costs and expenses....................... 7,470 7,780 7,878 7,569
Income before taxes...................... 1,217 1,249 1,654 1,288
Net income............................... 732 724 1,019 783
Net income per share..................... .46 .45 .64 0.50
1997
Revenues................................. $8,863 $8,767 $9,405 $9,361
Costs and expenses....................... 7,705 7,644 7,952 8,077
Income before taxes...................... 1,158 1,123 1,453 1,284
Net income............................... 698 673 873 774
Net income per share..................... .44 .42 .55 .48
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth in the tables, the notes thereto, and the
paragraphs under the caption "Election of Directors-Directors," in the
Company's Proxy Statement for Annual Meeting of Shareholders to be held on or
about February 10, 1999 (the "Proxy Statement"), is incorporated herein by
reference. The information set forth under Item 1 of this Form 10-K under the
caption "Executive Officers of Registrant" is also incorporated herein by
reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Executive Compensation-
Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement is incorporated herein by reference.
23
<PAGE>
PART IV
Item 14(a). Exhibits, Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K
The following documents are filed as part of this Report:
(1) Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheet at September 30, 1998 and 1997
Consolidated Statement of Income for each of the three years in the
period ended September 30, 1998
Consolidated Statement of Changes in Shareholders' Equity for each of the
three years in the period ended September 30, 1998
Consolidated Statement of Cash Flows for each of the three years in the
period ended September 30, 1998
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules for the three years ended
September 30, 1998:
II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
3.1 Articles of Incorporation of Daily Journal Corporation, as amended. (*)
3.2 Bylaws of Daily Journal Corporation. (+)
10.5 Form of Non-Negotiable Certificate Representing an Employee Participant
Interest in the Daily Journal Corporation ("DJC") Plan for Supplemental
Compensation to an Employee as long as that Employee Remains Employed by
DJC, Based on Pre-Tax Earnings of Common Shares of DJC. (*)(++)
10.6 Resolution of Board of Directors of Daily Journal dated November 7, 1985,
pursuant to which Daily Journal Company assumed certain liabilities of
New America Fund, Inc. (*)
10.8 Lease dated March 12, 1987 between Daily Journal Company and Calfox,
Inc., as Managing Agent, including Amendments One through Four thereto.
(+)
21.0 Subsidiary of Daily Journal Corporation. (+)
(*) Filed as an Exhibit bearing the same number to the Annual Report of Form
10-K on the Company for the year ended September 30, 1993.
(+) Filed as an Exhibit bearing the same number to the Annual Report of Form
10-K on the Company for the year ended September 30, 1994.
(++) Management Compensatory Plan.
Item 14(b). Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the Company's
fiscal year ended September 30, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Gerald L. Salzman
By __________________________________
Gerald L. Salzman
President
Date: December 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles T. Munger Chairman of the Board December 28, 1998
____________________________________
Charles T. Munger
/s/ Gerald L. Salzman President, Treasurer, December 28, 1998
____________________________________ Chief Financial Officer,
Gerald L. Salzman Principal Accounting
Officer
and Director
/s/ J.P. Guerlin Director December 28, 1998
____________________________________
J.P. Guerin
Director
____________________________________
Donald W. Killian, Jr.
Director
____________________________________
George C. Good
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
of the Daily Journal Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Items 14(a)(1) and (2) on page 24 present fairly, in all
material respects, the financial position of the Daily Journal Corporation and
its wholly owned subsidiaries at September 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
December 10, 1998
26
<PAGE>
DAILY JOURNAL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Accounts Balance
Balance at Charged to Charged at End
Beginning Costs and off less of
Description of Period Expenses Recoveries Period
- ----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts...... $700,000 $217,000 $(217,000) $700,000
======== ======== ========= ========
1997
Allowance for doubtful accounts...... $600,000 $339,000 $(239,000) $700,000
======== ======== ========= ========
1996
Allowance for doubtful accounts...... $600,000 $732,000 $(732,000) $600,000
======== ======== ========= ========
</TABLE>
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 462,000
<SECURITIES> 12,668,000
<RECEIVABLES> 7,294,000
<ALLOWANCES> 700,000
<INVENTORY> 51,000
<CURRENT-ASSETS> 20,688,000
<PP&E> 14,235,000
<DEPRECIATION> 6,396,000
<TOTAL-ASSETS> 28,965,000
<CURRENT-LIABILITIES> 12,680,000
<BONDS> 0
0
0
<COMMON> 16,000
<OTHER-SE> 16,269,000
<TOTAL-LIABILITY-AND-EQUITY> 28,965,000
<SALES> 35,479,000
<TOTAL-REVENUES> 36,105,000
<CGS> 0
<TOTAL-COSTS> 30,480,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 217,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,408,000
<INCOME-TAX> 2,150,000
<INCOME-CONTINUING> 3,258,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,258,000
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
</TABLE>
