Daily Journal Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended December 31, 2013, the first quarter of fiscal 2014, with comparisons to the three months ended December 31, 2012. Daily Journal operates a Traditional Business in newspaper and magazine publishing and related services, and Technology Companies supplying case-management software to courts and other government agencies. The technology segment now includes Sustain, New Dawn, and ISD; ISD was acquired in September 2013 and New Dawn in December 2012.
The report was signed and filed on August 13, 2014, and states that it was not filed timely. The company also indicated it had not filed all required reports during the preceding 12 months.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $9.951 million | $7.693 million |
| Operating income (loss) | $(1.269) million | $0.701 million |
| Pretax income (loss) | $(0.650) million | $1.264 million |
| Net income (loss) | $(0.640) million | $0.834 million |
| Basic and diluted earnings (loss) per share | $(0.46) | $0.60 |
| Operating cash flow | $(1.131) million | $0.548 million |
Revenue increased 29%, mainly reflecting $3.980 million of additional revenue from New Dawn and ISD, partly offset by lower traditional-business revenue. Costs and expenses rose 60% to $11.220 million, primarily due to the acquired businesses and higher personnel and amortization costs. Intangible amortization was $1.195 million, versus $0.159 million a year earlier. The filing does not provide a clear consolidated gross-margin measure.
Traditional Business revenue was $5.064 million and pretax income was $1.287 million, down from $6.695 million and $2.755 million, respectively. Technology Companies revenue was $4.887 million and pretax loss was $1.937 million; the prior-year comparison includes New Dawn for less than one month and excludes ISD.
At December 31, cash and cash equivalents were $10.116 million and marketable securities were $150.747 million. Working capital was $107.366 million. Total liabilities included $29.493 million of investment-margin borrowings, secured by marketable securities; these borrowings have no stated maturity and bear a floating rate. Cash and marketable securities together totaled $160.863 million. Operating cash use included decreases in accrued liabilities and deferred revenue-related balances.
Marketable securities had $102.770 million of unrealized gains before tax, concentrated largely in common stocks of three financial institutions; the broader portfolio was concentrated in six companies. The quarter’s $8.199 million after-tax increase in unrealized investment appreciation contributed to comprehensive income of $7.559 million despite the net loss.
Material changes, outlook, and risks
- Traditional advertising revenue fell 33% year over year. Public notice advertising was sensitive to foreclosure activity, and foreclosure notices published by the company declined 60%. Management expected fewer notices and declining Traditional Business revenue during fiscal 2014, with a significant earnings impact and limited ability to offset it through cost reductions.
- Technology Companies revenue increased substantially following acquisitions, but the segment remained loss-making. Installation and consulting revenue depends on project completion and customer acceptance; advances may remain at risk of refund until acceptance.
- Management said it expected to fund operations for the foreseeable future with operating cash flows and working capital, and could borrow against securities or consider further acquisitions. No specific earnings or revenue guidance was provided.
- Investment-price declines could materially reduce shareholders’ equity and could lead to impairment charges. The portfolio’s concentration and use as collateral increase the importance of monitoring its value.
- Other risks include changes to laws requiring public notices, challenges to newspapers’ adjudicated status, declining circulation and commercial advertising, paper and postage cost increases, government budget constraints, software-development costs, and competition.
- The company disclosed late SEC filings, including its fiscal 2013 Form 10-K and quarterly reports. It said NASDAQ had granted it until August 21, 2014 to regain listing-rule compliance, or its shares could be subject to delisting. Management considered disclosure controls effective, while also disclosing that the former auditor had issued an adverse opinion on internal control over financial reporting for fiscal 2013 due to material weaknesses.
- Management said ordinary-course litigation was not expected to have a material effect. The filing reported no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether the company met the August 21, 2014 NASDAQ compliance deadline and subsequently filed all overdue reports.
- Current operating performance and integration costs of Sustain, New Dawn, and ISD, including installation-contract acceptance and the path to technology-segment profitability.
- Foreclosure-related advertising trends and any legislative or adjudication changes affecting public-notice revenue.
- Current market value, concentration, and collateral exposure of the investment portfolio, as well as the terms and balance of margin borrowings.
- Remediation and auditor status concerning the disclosed internal-control material weaknesses.