Business Context and Reporting Period
Daily Journal Corporation (Daily Journal) is a publisher of newspapers in California, Arizona, Colorado, and Nevada, and the California Lawyer magazine. It also operates Sustain Technologies, Inc., a 93% owned subsidiary providing case management software to justice agencies. This Form 10-Q covers the quarterly period ended June 30, 2002, and the nine-month period ended June 30, 2002.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended June 30, 2002)
- Total Revenues: $25,608,000 (Decreased 4% from $26,560,000 in the prior year).
- Net Income: $816,000 (Compared to a Net Loss of $7,760,000 in the prior year).
- Income from Operations: $711,000 (Compared to a Loss of $14,409,000 in the prior year).
- Earnings Per Share (Basic & Diluted): $0.55 (Compared to a loss of $5.19 in the prior year).
Liquidity and Balance Sheet
- Cash and Cash Equivalents: $402,000 (Decreased from $2,901,000 at Sept 30, 2001).
- U.S. Treasury Bills: $3,479,000 (New investment; none held at Sept 30, 2001).
- Total Current Assets: $11,080,000.
- Total Current Liabilities: $14,531,000.
- Working Capital: Negative $3,451,000 based on current assets/liabilities; however, management notes working capital of $4,019,000 before deducting deferred subscription revenues of $7,470,000.
- Debt: $1,902,000 in long-term real estate loans; $4,000,000 revolving line of credit (unused).
Cash Flow (Nine Months Ended June 30, 2002)
- Cash Provided by Operating Activities: $2,181,000.
- Cash Used in Investing Activities: $4,551,000 (Primarily purchases of U.S. Treasury Bills and property/equipment).
- Cash Used in Financing Activities: $129,000.
Material Changes Versus Prior Period
- Revenue Decline: Total revenue decreased by $952,000 (4%). Display advertising and classified advertising revenues declined, partially offset by rate increases and growth in public notice advertising.
- Profitability Improvement: The shift from a significant net loss to net income is primarily due to the absence of a $15,048,000 write-off of capitalized software costs that occurred in the prior year. Excluding that write-off, operating expenses decreased by 4%.
- Segment Performance: The non-Sustain segment pretax profit increased by 29% to $3,598,000 due to reduced newsprint costs and office closures. The Sustain segment pretax loss increased to $2,962,000 (excluding prior year write-offs) due to ongoing internal software development costs of $1,188,000.
- Cost Reductions: Newsprint and printing expenses dropped 29% ($659,000) due to reduced usage and the discontinuance of the House Counsel magazine.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
Management expects total expenditures for Sustain software development to remain "very significant" through fiscal 2002 and likely beyond, though at a level below the prior year. The company plans to begin construction of a new Los Angeles building in fiscal 2003, estimated to cost $2.5 million, with a bank commitment for an additional $2 million loan upon completion.
Risks and Contingencies
- Sustain Development Risk: If internal development programs are not successful, the company's ability to service customers and compete will be significantly and adversely impacted.
- Legal Proceedings: Interlink Group, the terminated outside service provider for Sustain, filed for Chapter 11 bankruptcy. While a motion to examine Sustain was denied, Interlink is considering a collection action. Sustain intends to assert counter-claims to offset any such claims.
- Tax Benefits: The company has a deferred tax asset of $4,838,000 related to net operating loss carry-forwards, but a valuation allowance of $4,108,000 has been recorded due to uncertainty regarding realization timing.
- Liquidity: The company relies on a $4 million revolving credit line (unused) and expects to refinance it upon maturity in April 2003. There is no assurance that refinancing will be available on acceptable terms.
Investor Verification Checklist
- Sustain Software Viability: Verify the progress and commercial viability of the internal Sustain software development efforts replacing the terminated outside provider.
- Legal Dispute Resolution: Monitor the status of the potential collection action by Interlink Group and the outcome of any counter-claims.
- Deferred Revenue Realization: Confirm the timing and certainty of recognizing the $7,470,000 in deferred subscription and other revenues.
- Capital Expenditures: Track the funding and timeline for the planned $2.5 million new building construction in Los Angeles.
- Advertising Trends: Assess the sustainability of the decline in display and classified advertising revenues versus the growth in public notice advertising.