<PAGE>
DRAFT OF DECEMBER 20, 2000
--------------------------
================================================================================
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, 2000
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 offices) (Zip Code)
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[_]
----------------------------------------
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 15, 2000 the approximate aggregate market value of Daily
Journal Corporation's voting stock held by non-affiliates was $19,105,000.
As of December 15, 2000 there were outstanding 1,552,256 shares of Common
Stock of Daily Journal Corporation.
----------------------------------------
Documents incorporated by reference: Portions of the Proxy Statement for the
Annual Meeting of Shareholders to be held during February 2001 are incorporated
by reference into Part III.
1
<PAGE>
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.
2
<PAGE>
PART I
Item 1. Business
The Company publishes newspapers in California, Washington, Arizona, Colorado
and Nevada, as well as the California Lawyer and Corporate Counsel magazines,
and produces several specialized information services. It also publishes The
Code of Colorado Regulations and serves as a newspaper representative
specializing in public notice advertising. SUSTAIN Technologies, Inc.
("Sustain"), a 91% owned subsidiary as of September 30, 2000, has been
consolidated since it was acquired in January 1999. It provides the SUSTAIN(R)
family of products which consists of technologies and applications to enable
justice agencies to automate their operations and will in the future allow users
to file cases electronically and the courts to publish information online.
Essentially all of the Company's operations are based in California, Arizona,
Colorado, Nevada, Washington and Virginia. The financial information of the
Company and Sustain is set forth in Item 8 ("Financial Statements and
Supplementary Data.")
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:
Newspaper Base of Publication
--------- -------------------
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
3
<PAGE>
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 material and render many
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, 2000, the Los Angeles Daily Journal had approximately 11,600
paid subscribers and the San Francisco Daily Journal had approximately 5,600
paid subscribers as compared with total paid subscriptions of 18,500 at
September 30, 1999. 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 45% to subscriptions and 55%
to the sale of advertising and other revenues. Revenues from The Daily Journals
constituted approximately 47% of the Company's total revenue during fiscal 2000,
46% during fiscal 1999 and fiscal 1998.
The Daily Journals also contain the Daily Appellate Report which provides the
full text of all opinions certified for publication 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 selected 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 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. CyberEsq., a quarterly
supplement, is printed in magazine format and features coverage of law firm
technology.
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
4
<PAGE>
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.
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 7,300 directories sold. The regular annual rate is
$35. 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 $557.
Much of the information contained in The Daily Journals is available to
subscribers online. There is a charge to use some parts of this service.
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 1,100 paid subscriptions at September 30, 2000. A subscription
to the Daily Commerce is $209 per year, and it is primarily distributed by mail.
California Real Estate Journal. The California Real Estate Journal (the
"Real 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, 2000 the Real
Estate Journal had a circulation of approximately 1,500 paid and requester
subscribers at an annual subscription rate of $94. It is distributed primarily
by mail.
In addition, there is an online news service for the California commercial and
real estate community.
5
<PAGE>
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 $246 per year.
The Inter-City Express. The Inter-City Express (the "Express") has been
published since 1909. It 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 published three days a week and is mailed to its
approximately 500 subscribers. 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. Published each Tuesday and Friday, it is mailed to
approximately 200 subscribers. 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 three days a week, focuses on legal and real estate
news and carries commercial and public notice advertising. A yearly subscription
to the Post-Record is $116. It 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 300
subscribers receive the newspaper three days a week 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 three days a week to approximately 500 paid and requester subscribers.
The annual subscription rate is $83.
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 legal and real estate professionals in San Diego County. It
has approximately 200 paid subscribers. The annual subscription rate is $59,
covering distribution by mail.
6
<PAGE>
Business Journal. The Business Journal publishes news of general interest and
provides coverage of the business and professional communities in Riverside
County. It carries public notice advertising, and its approximately 100 paid
subscribers receive it by mail twice weekly. The annual subscription rate is
$51.
Antelope Valley Journal. Started in 1997, the Antelope Valley Journal is a
weekly newspaper carrying general news of local interest, as well as public
notice advertising. 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 $20.
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 $20.
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 $155 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 $109.
Much of the information contained in the Arizona Journal is available to its
subscribers online.
Colorado Journal. During 1995 the Company acquired The Public Record
Corporation which published The Brief Times Reporter, The Code of Colorado
Regulations and three bankruptcy reporting publications. The Code and the
bankruptcy publications are 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 also began publishing the weekly Colorado Journal, including the
Colorado Appellate Report which provided 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 700 paid subscribers at an annual
subscription price of $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 general
interest and those concerning the courts and legal communities, the Nevada
Journal features full-text opinions issued
7
<PAGE>
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. Both commercial and public notice advertising appear in the newspaper.
The weekly Nevada Journal, as of September 30, 2000, had approximately 100
subscribers. The yearly subscription rate is $152.
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 600 paid subscribers at
September 30, 2000. The annual subscription rate is $122, and it carries
classified and display advertising.
Magazines. 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 also has
approximately 600 paid subscribers. An annual subscription to California Lawyer
is $75. The termination of the contract with the State Bar and the State Bar's
new publication has not had a material impact on the Company's operations. In
addition, six times a year, the Company publishes its House Counsel magazine,
which is mailed free to about 22,100 in-house lawyers.
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 5,800 subscribers at September
30, 2000 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 (nine volumes) and one of which
covers Southern California courts (eight 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
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, 2000, the Company had
approximately 7,000 subscribers for its Local Rules publications. In addition,
the Company publishes a two-volume, loose-leaf set of Colorado court rules for a
small number of subscribers.
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
8
<PAGE>
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 seven-volume set for Southern California or the six-volume set for
Northern California. The approximately 1,100 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 100 subscribers
receive updates yearly. The annual subscription is $125.
The Company now has two bankruptcy publications after discontinuing the Fourth
Circuit Bankruptcy Court Reporter and the Texas Bankruptcy Court Reporter in
fiscal 1999. The Colorado Bankruptcy Court Reporter and the California
Bankruptcy Reporter had an aggregate of approximately 300 subscribers at
September 30, 2000. Annual subscription rates range from $131 to $199 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.
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 1,800 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 online 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 online 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.
Public notice advertising revenues and related advertising and other service
fees for the Company constituted about 26% of the Company's total revenues in
fiscal 2000, 30% in fiscal 1999 and 30% in fiscal 1998. In many states,
including California, legislatures have considered various proposals which would
result in the elimination or reduction of the amount of public
9
<PAGE>
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.
Information Systems and Services. In January 1999, the Company purchased 80%
of the capital stock of Sustain from Sustain and certain of its shareholders. As
of September 30, 2000, the Company owned 91% of Sustain. The Sustain family of
products consists 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. Sustain has
installations in nine states and three countries, and many of its clients have
more than a decade of experience with the Sustain product line. The Company's
revenues derived from Sustain's operations (net of minority interest)
constituted about 5% of the Company's total revenues in fiscal 2000, and 3% in
fiscal 1999, the first year in which the Company held an interest in Sustain.
The Company's expenditures in support of the Sustain software is significant.
Capitalized Sustain software costs totaled $9,966,000 (less accumulated
amortization of $1,180,000) as of September 30, 2000 and $3,275,000 (less
accumulated amortization of $491,000) as of September 30, 1999. As a technology
based company, Sustain's success depends on the continued development and
improvement of its products. The Company therefore expects that significant
expenditures will continue to be necessary to maintain and increase Sustain's
revenues, and that in many years, such expenditures may exceed Sustain's net
income. The Company intends to borrow funds in fiscal 2001 to support the
development of the Sustain software, but it cannot predict whether such
borrowings will provide sufficient funding for all necessary or desirable
development. If the Company is unable to fund all such development, that may
impact the Company's ability to maximize its existing investment in the Sustain
software and to compete for new opportunities in the case management software
business.
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
10
<PAGE>
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 1997 and 1999 newsprint prices declined, but in 1998 and
2000 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 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 has reduced the
role of certain agencies. Commercial advertising agencies also place advertising
in Company publications and receive commissions for advertising sales.
Sustain's staff includes several employees who provide marketing and
consulting services which may also result in the licensing of Sustain products.
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
11
<PAGE>
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 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.
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
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-Magazines section above. In 1999 the State Bar started a statewide
directory that competes with the Company's Directory. This new publication has
not had a material impact on the Company's operations.
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 court rules services and the Courts.
Subscriptions to the multi-volume Court Rules and Local Rules volumes have
declined during fiscal 2000. The Company's Judicial Profile services have direct
competition and also indirect competition, since some of the same information is
available through other sources.
12
<PAGE>
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.
There is significant competition among a limited number of companies to
provide services and software to the courts, and some of these companies are
much larger and have greater access to capital and other resources than Sustain.
Others provide services for a limited number of courts. Normally, the vendor is
selected through a bidding process. Many courts now desire Internet solutions to
facilitate electronic filing and the publishing of certain information from case
management systems. The Sustain product line provides a version of these
services, but there are many uncertainties in the process of courts migrating to
newer electronic based systems, including whether Sustain's version of case
management systems will find general acceptance and whether the development and
modification of such systems can be done in a cost effective manner. The Company
intends to borrow funds in fiscal 2001 to support the development of the Sustain
software, but it cannot predict whether such borrowings will provide sufficient
funding for all necessary or desirable development. If the Company is unable to
fund all such development, that could impact the Company's ability to compete in
the case management software business.
Employees
The Company employs approximately 340 full-time employees and about 45 part-
time employees including about 15 employees at Sustain. 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. In fiscal 2000,
expenditures to develop Sustain software exceeded cash flow from all other
sources, thus triggering borrowing plans for the first time in many years. The
Company expects its expenditures in support of the development of Sustain
software to continue at a rate in excess of cash flow, and therefore expects to
incur borrowings for this purpose commencing in fiscal 2001.
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.
13
<PAGE>
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................. 77 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.
The Los Angeles property is comprised of a two-story, 34,000 square foot
building constructed in 1990, of which approximately 75% are devoted to office
space and the remainder to printing and production equipment and facilities. In
1996 the Company purchased about 40,000 square feet of land near the Los Angeles
facility which was used for additional parking. In 1998 the Company purchased
land and an 11,300 square foot building adjacent to the new parking lot. It was
used for storage. The Company is constructing a new 37,000 square foot building
and parking facilities on these properties. The Company owns two buildings
aggregating about 9,500 square feet in Sacramento, which provide space for its
offices and storage.
In San Francisco the Company has approximately 11,000 square feet of office
space under a lease expiring in 2004. This lease may be canceled in 2002 upon
payment of certain fees. In Denver, Sustain has approximately 9,400 square feet
of office space under a lease expiring in September 2004. This lease may be
canceled in 2002 upon 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 5 of Notes to Consolidated Financial Statements for information
concerning rents payable under leases.
Item 3. Legal Proceedings
No material legal proceedings.
14
<PAGE>
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, 2000.
15
<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.
High Low
--------- --------
Fiscal 2000
Quarter ended December 31, 1999 $ 36.875 $ 32.5
Quarter ended March 31, 2000 34 30
Quarter ended June 30, 2000 30.25 28.25
Quarter ended September 30, 2000 29.5 27
High Low
---------- --------
Fiscal 1999
Quarter ended December 31, 1998 $ 39.50 $ 33.75
Quarter ended March 31, 1999 41.25 36.75
Quarter ended June 30, 1999 38.75 30
Quarter ended September 30, 1999 37.0625 36.625
As of December 15, 2000, there were approximately 1,600 holders of record of
the Company's common stock, and the last trade was at $29.375 per share.
The Company did not declare or pay any dividends during fiscal 2000 or 1999. 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 3 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 2000,
the Company purchased 54,287 shares of Common and Treasury Stock at an average
price per share of $30.37.
16
<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, 2000. 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
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands,
except per share amounts)
Consolidated Statement of Income Data:
Revenues
Advertising......................... $ 19,992 $ 20,267 $ 21,109 $ 21,454 $ 21,423
Circulation......................... 11,651 11,675 11,449 11,506 10,951
Information systems and
service............................ 2,328 1,213 --- --- ---
Advertising service fees and other.. 3,812 3,696 3,547 3,436 3,595
---------- ---------- ---------- ---------- ----------
37,783 36,851 36,105 36,396 35,969
---------- ---------- ---------- ---------- ----------
Costs and expenses
Salaries and employee benefits...... 17,598 16,461 15,551 14,749 14,438
Newsprint and printing expenses..... 3,089 3,232 3,377 3,424 3,886
Commissions and other outside
services......................... 5,907 4,508 4,254 4,299 4,793
Postage and delivery costs.......... 2,061 2,254 2,266 2,316 2,364
Depreciation and amortization....... 2,517 1,767 1,696 1,897 1,837
Other, including interest expense... 4,520 5,155 3,553 4,693 4,286
---------- ---------- ---------- ---------- ----------
35,692 33,377 30,697 31,378 31,604
---------- ---------- ---------- ---------- ----------
Income before taxes................... 2,091 3,474 5,408 5,018 4,365
Provision for income taxes............ 700 1,550 2,150 2,000 1,800
---------- ---------- ---------- ---------- ----------
Income before minority interest in
net loss of subsidiary............... 1,391 1,924 3,258 3,018 2,565
Minority interest in net loss of
subsidiary
(9% and 20%, respectively)........ 447 199 --- --- ---
---------- ---------- ---------- ---------- ----------
Net income............................ $ 1,838 $ 2,123 $ 3,258 $ 3,018 $ 2,565
========== ========== ========== ========== ==========
Weighted average number of common
shares outstanding - basic and
diluted.......................... 1,546,319 1,579,251 1,589,971 1,594,403 1,612,766
Basic and diluted net income per share $ 1.19 $ 1.34 $ 2.05 $ 1.89 $ 1.59
========== ========== ========== ========== ==========
September 30
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Consolidated Balance Sheet Data:
Working capital as conventionally
reported............................. $ 1,731 $ 6,040 $ 8,008 $ 4,763 $ 1,552
Working capital before deductions of
specified items (1)............... 9,639 13,858 14,910 11,165 8,076
Total assets.......................... 35,050 31,525 28,965 25,967 22,489
Shareholders' equity.................. 17,858 17,668 16,285 13,298 10,728
</TABLE>
(1) Before deducting for each of the five years the liability for deferred
subscription revenue and other revenues which will be earned within one year.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
2000 Compared to 1999
Revenues were $37,783,000 and $36,851,000 for the fiscal years ended September
30, 2000 and 1999, respectively. This increase of $932,000 (3%) was primarily
attributable to the acquisition of 80% of Sustain in January 1999 (and the
subsequent acquisition of about 6% of Sustain in March 2000 and 5% in June 2000)
which accounted for additional revenues of $1,087,000 and to advertising and
subscription rate increases, partially offset primarily by the decline in
revenues from publishing foreclosure notices.
During fiscal 2000, display advertising and conference revenues were down by
$339,000 while classified advertising revenues increased by $638,000. Public
notice advertising revenues decreased by $574,000 primarily resulting from
decreased foreclosure notices, and the Company anticipates this decline to
continue because of a lower volume. The Company's smaller newspapers, those
other than the Los Angeles and San Francisco Daily Journals ("The Daily
Journals"), accounted for about 92% of the total public notice advertising
revenues. Public notice advertising revenues and related advertising and other
service fees constituted about 26% of the Company's total revenues. Circulation
revenues decreased an aggregate of $24,000. The Daily Journals accounted for
about 69% of the Company's total circulation revenues, and their circulation
levels decreased slightly. The Rule Book and Judicial Profile services generated
about 20% of the total circulation revenues, with the other newspapers and
services accounting for the balance.
Costs and expenses increased by $2,315,000 (7%) from $33,377,000 to
$35,692,000. Sustain accounted for additional expenses of $3,066,000. Total
personnel costs were $17,598,000, representing an increase of $1,137,000 (7%) of
which $1,167,000 were from Sustain. Newsprint and printing expenses decreased by
$143,000 (4%) primarily because of the decrease in bonus issues, partially
offset by the newsprint price increases beginning in April 2000. Commissions and
other outside services increased by $1,399,000 (31%) primarily due to Sustain's
additional outside service expenses of $1,613,000, partially offset by the
decline in commission expenses because of fewer agency commissionable
foreclosure notice sales. Postage and delivery expenses declined by $193,000
(9%) mainly because of less postage expenses as the Company reduced the bonus
issue volume. Depreciation and amortization expenses increased by $750,000 (42%)
primarily as a result of the amortization of Sustain's assets, including
$800,000 for the amortization of Daily Journal's purchased computer software and
goodwill. The decrease in other expenses of $635,000 (12%) primarily resulted
from lower legal expenses, partially offset by an increase of $255,000 in bad
debt expenses.
Pretax income in the year ended September 30, 2000 decreased by $1,383,000
(40%) to $2,091,000 from $3,474,000 in fiscal 1999, primarily because of
Sustain's loss of $3,572,000 before the minority interest. (The Daily Journal
business segment's pretax profit increased by $799,000 (16%) to $5,663,000 from
$4,864,000.) The Company's smaller newspapers and its newspaper representative,
which specializes in public notice advertising, accounted for about 44%
18
<PAGE>
of the Company's pretax income. Net income was $1,838,000 compared to $2,123,000
in the comparable prior year period. Net income per share decreased to $1.19
from $1.34.
Because of the deductibility for income tax purposes of the Sustain software,
which was capitalized for book purposes, and the consequent decrease in the
Company's taxable income, the Company anticipates an income tax refund as of
September 30, 2000 of approximately $2.7 million.
1999 Compared to 1998
Revenues were $36,851,000 and $36,105,000 for the fiscal years ended
September 30, 1999 and 1998, respectively. This increase of 2% is primarily
attributable to the recent acquisition of 80% of Sustain which accounted for
additional revenues of $1,324,000 and to advertising and subscription rate
increases, partially offset by the decline in revenues from publishing
foreclosure notices.
During fiscal 1999, display advertising revenues went down by $54,000 and
classified advertising revenues decreased by $132,000. Public notice advertising
revenues decreased by $656,000 primarily resulting from decreased foreclosure
notices, and the Company anticipates this decline to continue because of a
combination of lower prices and lower volume. The Company's smaller newspapers,
those other than The 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 28% of the Company's total
revenues. Circulation revenues increased an aggregate of $226,000. The Daily
Journals accounted for about 67% of the Company's total circulation revenues,
and their circulation levels decreased slightly. The Rule Book and Judicial
Profile services generated about 21% of the total circulation revenues, with the
other newspapers and services accounting for the balance.
Costs and expenses increased by $2,680,000 (9%) from $30,697,000 to
$33,377,000. Sustain accounted for additional expenses of $2,714,000, including
$566,000 for the amortization of Daily Journal's purchased computer software and
goodwill. Total personnel costs were $16,461,000, representing an increase of
$910,000 (6%), of which $1,304,000 were from Sustain. Newsprint and printing
expenses decreased by $145,000 primarily because of the decrease in newsprint
prices. Commissions and other outside services increased by $254,000 primarily
because of increased outside printing services, partially offset by fewer agency
commissionable foreclosure notice sales. Depreciation and amortization expenses
increased by $71,000 as a result of more fully depreciated assets, offset by the
amortization of Sustain assets. The increase in other expenses of $1,602,000
included increased legal expenses of about $868,000 primarily to defend a
lawsuit that resulted in two jury trials and a verdict in favor of the Company.
Pretax income in the year ended September 30, 1999 decreased by $1,934,000
(36%) to $3,474,000 from $5,408,000 in fiscal 1998, primarily because of
Sustain's loss and increased legal fees. The Company's smaller newspapers and
its newspaper representative, which specializes in public notice advertising,
accounted for about 38% of the Company's pretax income. Net income was
$2,123,000 compared to $3,258,000 in the prior fiscal year. Net income per share
decreased to $1.34 from $2.05.
19
<PAGE>
Liquidity and Capital Resources
During fiscal year ended September 30, 2000, the Company's cash and cash
equivalent position increased by $199,000, and the investments in U.S. Treasury
Bills decreased by $7,203,000. Cash and cash equivalents were used for the net
purchase of capital assets of $9,172,000, including significant investments in
Sustain software and to purchase treasury and common stock for an aggregate
amount of $1,648,000. The cash provided by operating activities of $3,786,000
included a net decrease in prepayments for subscriptions and others of $90,000.
Proceeds from the sale of subscriptions from newspapers, court rule books and
other publications and for software maintenance and other services are booked as
deferred revenue and are included in earned revenue only when the services are
provided. The cash flows from operating activities increased by $2,085,000
during the fiscal year ended September 30, 2000 primarily due to the changes in
accounts receivable and accounts payable. As of September 30, 2000, the Company
had working capital of $9,639,000 before deducting the liability for deferred
subscription revenues and other revenues of $7,908,000 which will be earned
within one year. The cash and short-term investments in U.S. Treasury Bills,
aggregating about $2.4 million at September 30, 2000, and the current level of
cash provided by operating activities appear adequate to meet the Company's
current operating obligations.
The Company expects its expenditures in fiscal 2001 to require borrowing by
the Company. These expenditures include an estimated $2 million for the
construction of a new building in Los Angeles. The Company also expects its
expenditures in support of the development of the Sustain software to continue
at a rate in excess of cash flow. The Company intends to arrange for a $4
million revolving bank line of credit due in January 2002 and secured by
substantially all of the Company's non-real estate assets. The Company expects
that it will be able to refinance the amounts outstanding under this line of
credit on or before the maturity date. There can be no assurance, however, that
a change in the Company's business or prospects will not result in an inability
to refinance on the same or similar terms. The Company also intends to enter
into a $2 million real estate loan secured by its current Los Angeles
facilities. The Company also has a commitment from a bank to loan the Company up
to an additional $2 million when its new building is completed. The Company
cannot predict whether the amounts received from these borrowings will be
sufficient to fully fund its development of the Sustain software. If additional
funds are required to support such development, the Company may, among other
things, change its development strategy or attempt to secure additional
financing, which may or may not be available to the Company on acceptable terms.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
The Company does not use derivative financial instruments. The Company does
maintain a portfolio of cash equivalents maturing in three months or less as of
the date of purchase and of U.S. Treasury Bills maturing within one year. Given
the short-term nature of these investments, and the fact that in fiscal 2000 the
Company had no outstanding borrowings, the Company was not subject to
significant interest rate risk during such period.
In fiscal 2001, the Company anticipates that it will borrow money under its $4
million revolving line of credit and under two real estate loans. The first of
these real estate loans is for $2 million on the Company's current Los Angeles
facilities. The Company also has a commitment from a bank to loan the Company up
to an additional $2 million when its new building is completed.
20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DAILY JOURNAL CORPORATION
We have audited the accompanying consolidated balance sheet of Daily Journal
Corporation as of September 30, 2000, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the year then ended.
Our audit also included the financial statement schedule listed in the Index at
Item 14(a) for the year ended September 30, 2000. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit. The consolidated financial statements and schedule of Daily Journal
Corporation for the years ended September 30, 1999 and 1998, were audited by
other auditors whose report dated December 10, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the fiscal 2000 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Daily
Journal Corporation at September 30, 2000, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Los Angeles, California
November 16, 2000
21
<PAGE>
Item 8. Financial Statements and Supplementary Data
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30
------------------------------------
<S> <C> <C> <C>
2000 1999
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 380,000 $ 181,000
U.S. Treasury Bills, at cost plus discount earned 1,972,000 9,175,000
Accounts receivable, less allowance for doubtful accounts
of $500,000 and $800,000, respectively 8,975,000 8,471,000
Income tax receivable 2,709,000 ---
Inventories 61,000 45,000
Prepaid expenses and other assets 171,000 329,000
Deferred income taxes 1,143,000 801,000
----------- -----------
Total current assets 15,411,000 19,002,000
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 8,363,000 8,104,000
Furniture, office equipment and computer software 6,442,000 6,086,000
Machinery and equipment 1,385,000 1,364,000
----------- -----------
16,190,000 15,554,000
Less accumulated depreciation (6,618,000) (6,679,000)
----------- -----------
9,572,000 8,875,000
Capitalized software, net 8,786,000 2,784,000
Intangible assets, at cost, less accumulated amortization
of $506,000 and $74,000 respectively 1,281,000 482,000
Deferred income taxes --- 382,000
----------- -----------
$35,050,000 $31,525,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,714,000 $ 3,025,000
Accrued liabilities 2,058,000 1,997,000
Income taxes --- 122,000
Deferred subscription revenue and other revenues 7,908,000 7,818,000
----------- -----------
Total current liabilities 13,680,000 12,962,000
----------- -----------
Deferred income taxes 2,934,000 ---
----------- -----------
Commitments and contingencies (note 5)
Minority Interest (9% and 20%, respectively) 578,000 895,000
----------- -----------
Shareholders' equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized and no shares issued --- ---
Common stock, $.01 par value, 5,000,000 shares
authorized; 1,553,256
shares and 1,601,816 shares, respectively, outstanding 16,000 16,000
Other paid-in capital 1,974,000 2,036,000
Retained earnings 16,657,000 16,233,000
Less 43,271 and 37,544 treasury shares, respectively, at cost (789,000) (617,000)
----------- -----------
Total shareholders' equity 17,858,000 17,668,000
----------- -----------
$35,050,000 $31,525,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE>
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended September 30
----------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 1998
----------- ----------- -----------
Revenues:
Advertising $19,992,000 $20,267,000 $21,109,000
Circulation 11,651,000 11,675,000 11,449,000
Information systems and services 2,328,000 1,213,000 ---
Advertising service fees and other 3,812,000 3,696,000 3,547,000
----------- ----------- -----------
37,783,000 36,851,000 36,105,000
----------- ----------- -----------
Costs and expenses:
Salaries and employee benefits 17,598,000 16,461,000 15,551,000
Newsprint and printing expenses 3,089,000 3,232,000 3,377,000
Commissions and other outside services 5,907,000 4,508,000 4,254,000
Postage and delivery expenses 2,061,000 2,254,000 2,266,000
Depreciation and amortization 2,517,000 1,767,000 1,696,000
Other, including interest expense 4,520,000 5,155,000 3,553,000
----------- ----------- -----------
35,692,000 33,377,000 30,697,000
----------- ----------- -----------
Income before taxes 2,091,000 3,474,000 5,408,000
Provision for income taxes 700,000 1,550,000 2,150,000
----------- ----------- -----------
Income before minority interest in net loss
of subsidiary 1,391,000 1,924,000 3,258.000
Minority interest in net loss of subsidiary
(9% and 20%, respectively) 447,000 199,000 ---
----------- ----------- -----------
Net income $ 1,838,000 $ 2,123,000 $ 3,258,000
=========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 1,546,319 1,579,251 1,589,971
Basic and diluted net income per share $ 1.19 $ 1.34 $ 2.05
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Other Treasury Total
-------------------- Paid-in Retained -------- Shareholders'
Share Amount Capital Earnings Stock Equity
--------- ------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 1,621,870 $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 (3,300) --- (4,000) (121,000) --- (125,000)
Purchase of treasury stock --- --- --- --- (146,000) ( 146,000)
--------- ------- ---------- ----------- --------- -----------
Balance at September 30, 1998 1,618,570 16,000 2,058,000 14,708,000 (497,000) 16,285,000
Net income --- --- --- 2,123,000 --- 2,123,000
Purchase of common stock (16,754) --- (22,000) (598,000) --- (620,000)
Purchase of treasury stock --- --- --- --- (120,000) (120,000)
--------- ------- ---------- ----------- --------- -----------
Balance at September 30, 1999 1,601,816 16,000 2,036,000 16,233,000 (617,000) 17,668,000
Net income --- --- --- 1,838,000 --- 1,838,000
Purchase of common stock (48,560) --- (62,000) (1,414,000) --- (1,476,000)
Purchase of treasury stock --- --- --- --- (172,000) (172,000)
--------- ------- ---------- ----------- --------- -----------
Balance at September 30, 2000 1,553,256 $16,000 $1,974,000 $16,657,000 $(789,000) $17,858,000
========= ======= ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE>
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30
---------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,838,000 $ 2,123,000 $ 3,258,000
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 2,517,000 1,767,000 1,696,000
Minority interest in consolidated subsidiary (447,000) (199,000) ---
Deferred income taxes 2,261,000 55,000 29,000
Income tax receivable (2,709,000) --- ---
Discount earned on U.S. Treasury Bills (30,000) (240,000) (129,000)
Gain on sales of capital assets --- --- (106,000)
Changes in assets and liabilities:
(Increase) decrease in current assets
Accounts receivable, net (504,000) (1,877,000) (521,000)
Inventories (16,000) 6,000 7,000
Prepaid expenses and other assets 158,000 (216,000) 47,000
Increase (decrease) in current liabilities
Accounts payable 689,000 284,000 (206,000)
Accrued liabilities 61,000 (758,000) (291,000)
Income taxes payable (122,000) (160,000) 8,000
Deferred subscription and other revenues 90,000 916,000 500,000
----------- ----------- -----------
Cash provided by operating activities 3,786,000 1,701,000 4,292,000
----------- ----------- -----------
Cash flows from investing activities:
Net sales (investments) in U.S. Treasury Bills 7,233,000 3,733,000 (2,707,000)
Capital and capitalized software expenditures,
including acquisitions, net of cash acquired:
Purchases of property, plant and equipment, net (2,219,000) (2,141,000) (1,125,000)
Capitalized software (6,943,000) --- ---
Acquisitions, net of cash acquired (10,000) (2,834,000) ---
----------- ----------- -----------
Net cash used for investing activities (1,939,000) (1,242,000) (3,832,000)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of common and treasury stock (1,648,000) (740,000) (271,000)
----------- ----------- -----------
Cash used for financing activities (1,648,000) (740,000) (271,000)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 199,000 (281,000) 189,000
Cash and cash equivalents:
Beginning of year 181,000 462,000 273,000
----------- ----------- -----------
End of year $ 380,000 $ 181,000 $ 462,000
=========== =========== ===========
Interest paid during year $ $ $
=========== =========== ===========
Income taxes paid during year, net $ 1,035,000 $ 1,830,000 $ 2,112,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE>
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND OPERATIONS
The Daily Journal Corporation (the "Company") publishes newspapers in
California, Washington, Arizona, Colorado and Nevada, as well as the California
Lawyer and Corporate Counsel magazines and produces several specialized
information services. It also publishes The Code of Colorado Regulations and
serves as a newspaper representative specializing in public notice advertising.
SUSTAIN Technologies, Inc. ("Sustain"), a 91% owned subsidiary as of September
30, 2000, has been consolidated since it was acquired in January 1999. See Note
2. Essentially all of the Company's operations are based in California,
Arizona, Colorado, Nevada, Washington and Virginia.
2. ACQUISITIONS
In January 1999 the Company acquired an 80% equity interest in Sustain for
cash of $6.67 million. 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. During March 2000 and June 2000,
the Company acquired additional equity interests in Sustain of 6% and 5%,
respectively, for cash of about $4 million primarily paid to Sustain. The
results of operations for the additional ownership interests have been included
in the financial statements from the dates of such acquisitions. The
acquisitions were accounted for using the purchase method of accounting;
accordingly, the purchase price in excess of the net assets was allocated to
purchased software ($3,275,000) and goodwill ($948,000). Both the purchased
software and goodwill are being amortized over five years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
---------------------
accounts of the Daily Journal Corporation and its 91% owned subsidiary, Sustain.
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: The Company accounts for income taxes using an asset and
------------
liability approach which requires the recognition of deferred tax liabilities
and assets for the expected future
25
<PAGE>
consequences of temporary differences between the carrying amounts for financial
reporting purposes and the tax basis of the assets and liabilities.
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
ranging from three to thirty-one and a half years. Leasehold improvements are
amortized over the term of the related leases or the useful life of the assets,
whichever is shorter. 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.
Capitalized Software, net: Capitalized Software, net, represents software
-------------------------
costs accounted for pursuant to Statement of Financial Accounts Standards No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. It is comprised of purchased software of $3,023,000
capitalized upon the acquisition of Sustain (see Note 2) and development costs
of $6,943,000 incurred in the current year for software products that have
reached technological feasibility but are not available for general release.
The purchased software is being amortized over five years. As of September 30,
2000 and 1999, capitalized software costs totaled $9,966,000 (less accumulated
amortization of $1,180,000) and $3,275,000 (less accumulated amortization of
$491,000), respectively. Amortization expenses for capitalized software was
$689,000, $491,000 and none for fiscal years 2000, 1999 and 1998, respectively.
Intangible assets: Intangible assets consist of goodwill resulting from
-----------------
the acquisitions of Sustain in 1999 and 2000. These assets are being amortized
on a straight-line basis over five years.
Revenue Recognition: Proceeds from the sale of subscriptions for
-------------------
newspapers, court rule books and other publications and other services are
booked as deferred revenue and are included in earned revenue only when the
services are provided.
The Company recognizes revenues from both the lease and sale of software
products. Revenues from leases of software products are recognized pro rata
over the life of the lease while revenues from software product sales are
recognized normally upon delivery, installation or acceptance pursuant to a
signed agreement. Revenues from annual maintenance contracts generally call for
the Company to provide software updates and upgrades to customers and are
recognized ratably over the maintenance period. Consulting and other services
are recognized as performed.
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 11.69% (amounting to about
$343,000) of income before taxes and supplemental compensation expenses in
fiscal year 2000, 11.58% (amounting to about $493,000) in fiscal 1999 and 11.73%
(amounting to about $719,000) in fiscal 1998. In addition, the employee holders
of certificates are entitled to receive
26
<PAGE>
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, 2000
----------------------------------------------
and 1999, the Company owned 43,271 and 37,544, respectively, 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 $789,000, 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 1,546,319 for 2000,
1,579,251 for 1999 and 1,589,971 for 1998.
Use of Estimates: The presentation of the Company's financial statements
----------------
in conformity with accounting principles generally accepted in the United States
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.
Reclassifications: Certain reclassifications of previously reported
-----------------
amounts have been made to conform to the current year's presentation.
Effects of New Accounting Pronouncements: In December 1999, the Securities
----------------------------------------
and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 provides guidance for
revenue recognition under various circumstances. The accounting and disclosure
prescribed by SAB 101 will be effective for the fourth quarter of the Company's
fiscal year ending September 30, 2001. The effect of adopting SAB 101 is
currently being evaluated, however, the Company does not believe the effects of
adoption will be material to its financial position or results of operations.
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.
27
<PAGE>
4. INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
----------- ---------- ----------
Current:
Federal $(1,307,000) $1,194,000 $1,749,000
State (254,000) 302,000 371,000
----------- ---------- ----------
(1,561,000) 1,496,000 2,120,000
----------- ---------- ----------
Deferred:
Federal 1,848,000 71,000 25,000
State 413,000 (17,000) 5,000
----------- ---------- ----------
2,261,000 54,000 30,000
----------- ---------- ----------
$ 700,000 $1,550,000 $2,150,000
=========== ========== ==========
The difference between the statutory federal income tax rate and the
Company's effective rate is summarized below:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State franchise taxes (net of federal tax benefit) 5.1% 5.4% 4.6%
Research and development tax credit (7.9%) -- --
Other, net, primarily amortization of goodwill 2.3% 5.2% 1.2%
---- ---- ----
Effective tax rate 33.5% 44.6% 39.8%
==== ==== ====
The Company's deferred income tax assets/(liability) were comprised of the
following at September 30, 2000, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets/(liability)
attributable to:
Accrued liabilities, including vacation
pay accrual $ 1,099,000 $ 435,000 $ 416,000
Bad debt reserves not yet deductible 214,000 303,000 303,000
Depreciation and amortization 338,000 428,000
Other, net 77,000 107,000 91,000
----------- ---------- ----------
Total deferred tax assets 1,390,000 1,183,000 1,238,000
----------- ---------- ----------
Depreciation and amortization (3,181,000) -- --
----------- ---------- ----------
Total deferred tax liabilities (3,181,000) -- --
----------- ---------- ----------
Net deferred tax asset (liability) $(1,791,000) $1,183,000 $1,238,000
=========== ========== ==========
</TABLE>
5. 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.
28
<PAGE>
Future minimum rental payments required under the above operating leases at
September 30, 2000 are as follows:
Year ending
September 30 Commitment
------------ ----------
2001 $ 810,000
2002 730,000
2003 660,000
2004 423,000
----------
$2,623,000
==========
Rental expenses for the fiscal years 2000, 1999 and 1998 were $886,000,
$646,000 and $481,000, respectively.
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 and that the ultimate liability, if any, should
not materially affect the consolidated financial statements.
6. OPERATING SEGMENTS
As a result of its acquisition of Sustain, the Company now has two segments
of business. The Company's reportable segments of Daily Journal and Sustain are
strategic business units that offer different products and/or services. The
Daily Journal segment publishes the Company's newspapers and magazine and
produces several specialized information services. The Sustain segment provides
the SUSTAIN 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. The accounting policies of the reportable segments are the same as those
described in Note 3 of Notes to Consolidated Financial Statements. Inter-segment
transactions were eliminated, and the reported segment loss of Sustain was net
of the minority interest. Summarized financial information concerning the
Company's reportable segments is shown in the following table:
Daily Journal Sustain Total
------------- ------- -----
(in thousands)
2000
Revenues $35,372 $ 2,411 $37,783
Segment profit (loss) 3,733 (1,895) 1,838
Total assets 19,104 15,946 35,050
Capital expenditures 1,647 7,525 9,172
Depreciation and amortization 1,355 1,162 2,517
Income tax expenses (benefits) 1,930 (1,230) 700
1999
Revenues $35,527 $ 1,324 $36,851
Segment profit (loss) 2,919 (796) 2,123
Total assets 23,771 7,754 31,525
Capital expenditures 1,959 182 2,141
Depreciation and amortization 1,147 620 1,767
Income tax expenses (benefits) 1,945 (395) 1,550
29
<PAGE>
7. 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>
2000
Revenues $8,920 $9,930 $9,730 $9,203
Costs and expenses 8,250 9,013 9,143 9,286
Income/(loss) before taxes 670 917 587 (83)
Income before minority interest in net
loss of subsidiary 355 492 237 307
Minority interest in net loss of subsidiary 80 54 238 75
Net income 435 546 475 382
Basic and diluted net income per share .28 .35 .31 .25
1999
Revenues $8,780 $9,313 $9,582 $9,176
Costs and expenses 7,528 8,223 8,928 8,698
Income before taxes 1,252 1,090 654 478
Income before minority interest in net
loss of subsidiary 752 650 394 128
Minority interest in net loss of subsidiary -- 36 56 107
Net income 752 686 450 235
Basic and diluted net income per share .47 .44 .28 .15
</TABLE>
8. Subsequent Event (Unaudited)
The Company is currently in negotiations to obtain a $4 million revolving
bank line of credit. Such line of credit is expected to bear interest payable
monthly at a quarter point under the prime rate and be due in January 2002. The
Company also intends to obtain a $2 million real estate loan on its current Los
Angeles facilities. This loan will bear interest at about 8% to be repayable in
equal monthly installments through 2015. The real estate loan will be secured by
the Company's existing facilities, and the bank line of credit will be secured
by substantially all of the Company's non-real estate assets. In addition, the
Company has a bank commitment for a real estate loan up to an additional $2
million when the Company's new building is completed in 2001. The Company
expects the new loans will prohibit dividends but will be repayable at any time
without penalty.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On June 29, 2000, the Company received confirmation that its independent
accountant, PricewaterhouseCoopers LLP ("PwC"), had resigned. PwC's resignation
was not recommended or approved by the Company's Board of Directors or by the
audit committee. The reports of PwC on the financial statements of the Company
for fiscal years 1998 and 1999 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty,
30
<PAGE>
audit scope or accounting principle. In connection with its audits for fiscal
years 1998 and 1999 and through the date of its resignation, there were no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would have caused them
to make reference thereto in their report on the Company's financial statements
for those years. During fiscal years 1998 and 1999 and through June 29, 2000,
there were no "reportable events" (as defined in the regulations of the
Securities and Exchange Commission). The Company requested and received a letter
from PwC confirming that there were no such disagreements or reportable events.
On July 26, 2000, the Company engaged Ernst & Young LLP as its independent
accountant. During fiscal years 1998 and 1999 and during the period prior to
the engagement of Ernst & Young LLP, neither the Company nor anyone else acting
on its behalf consulted Ernst & Young LLP regarding the application of
accounting principles to a specified transaction (or the type of audit opinion
that might be rendered on the Company's financial statements) or any matter that
was either the subject of a disagreement or a reportable event.
31
<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 7, 2001 (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.
32
<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 Ernst & Young LLP Independent Auditors
Consolidated Balance Sheets at September 30, 2000 and 1999
Consolidated Statements of Income for each of the three years in
the period ended September 30, 2000
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended September 30, 2000
Consolidated Statements of Cash Flows for each of the three years
in the period ended September 30, 2000
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule for the three years ended
September 30, 2000:
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
2.1 Stock Purchase Agreement, dated as of January 22, 1999, by and
among Daily Journal Corporation, Choice Information Systems, Inc.,
Michael W. Payton and Terence E. Hahm. (**)
2.2 Asset Purchase Agreement, dated as of January 22, 1999, by and
among Choice Information Systems, Inc., Quindeca Corporation and
Jerry L. Short. (**)
3.1 Articles of Incorporation of Daily Journal Corporation, as amended.
(+)
3.2 Bylaws of Daily Journal Corporation.
10.1 Employment Agreement, dated as of January 22, 1999, between Choice
Information Systems, Inc. and Michael W. Payton. (**)
10.2 Employment Agreement, dated as of January 22, 1999, between Choice
Information Systems, Inc. and Jerry L. Short. (**)
10.3 Employment Agreement, dated as of January 22, 1999, between Choice
Information Systems, Inc. and Terence E. Hahm. (**)
10.4 Shareholder's Agreement, dated as of January 22, 1999, among Choice
Information Systems, Inc., Daily Journal Corporation, Quindeca
Corporation, Michael W. Payton and Terence E. Hahm. (**)
33
<PAGE>
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. (++)
10.7 Lease dated December 9, 1998 between Daily Journal Corporation and
One Trinity Center. (+)
10.8 Lease dated August 26, 1999 between Sustain Technologies, Inc. and
The Prudential Insurance Company of America. (+)
16.0 Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission, dated July 6, 2000, confirming the statements
contained in Item 4 of the Company's current report on Form 8-K
dated July 6, 2000. (*)
21.0 SUSTAIN Technologies, Inc., a Virginia Corporation ("Sustain"), is
a 91% owned subsidiary of the Daily Journal Corporation that was
acquired in January 1999. Prior to September 28, 1999, Sustain did
business as Choice Information Systems, Inc.
27.0 Financial Data Schedule.
99.1 Press Release of Daily Journal Corporation issued January 27,
1999. (**)
(+) Filed as an Exhibit bearing the same number to the Annual Report on
Form 10-K for the year ended September 30, 1999.
(++) Management Compensatory Plan.
(**) Filed as an Exhibit bearing the same number to the current report on
Form 8-K dated January 27, 1999.
(*) Filed as Exhibit 16.2 to the current report on Form 8-K dated July 6,
2000.
Item 14(b). Reports on Form 8-K
The Company filed two current reports on Form 8-K during the last quarter
of fiscal 2000. The first, filed on July 6, 2000, reported in Item 4 the
resignation of PricewaterhouseCoopers LLP as the Company's independent auditor.
The second, filed on August 4, 2000, reported in Item 4 the engagement of Ernst
& Young LLP as the Company's independent auditor. No financial statements were
filed with either report.
34
<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
By /s/ Gerald L. Salzman
_________________________________
Gerald L. Salzman
President
Date: December 28, 2000
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, 2000
Charles T. Munger
/s/ Gerald L. Salzman
________________________ President, Treasurer, December 28, 2000
Gerald L. Salzman Chief Financial Officer,
Principal Accounting Officer
and Director
/s/ J.P. Guerin
________________________ Director December 28, 2000
J.P. Guerin
________________________ Director
Donald W. Killian, Jr.
________________________ Director
George C. Good
</TABLE>
35
<PAGE>
Daily Journal Corporation
Schedule II --- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Accounts
Balance at Charged to Charged Balance
Beginning Costs and off less at End
Description of Period Expenses Recoveries of Period
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
2000
Allowance for doubtful accounts........ $800,000 $401,000 $(701,000) $500,000
======== ======== ========= ========
1999
Allowance for doubtful accounts........ $700,000 $186,000 $ (86,000) $800,000
======== ======== ========= ========
1998
Allowance for doubtful accounts........ $700,000 $217,000 $(217,000) $700,000
======== ======== ========= ========
</TABLE>
36
