DJCO

Daily Journal Corp. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Daily Journal Corporation for the three and nine months ended June 30, 2009. The Company operates two primary segments: a "Traditional Business" involving newspaper and magazine publishing (including the Los Angeles and San Francisco Daily Journals) and legal publications, and "Sustain Technologies," a subsidiary providing case management software to courts and justice agencies. The Company is classified as a smaller reporting company.

Key Financial Metrics

Investment Portfolio: The Company holds significant marketable securities ($46.27 million) and U.S. Treasury Notes ($3.31 million). As of June 30, 2009, these assets generated an unrealized gain of approximately $25.9 million, recorded in Accumulated Other Comprehensive Income.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 1% ($237,000) year-over-year. This was driven by a $2.2 million increase in public notice advertising (related to trustee foreclosure sales), which offset a $1.3 million decline in classified advertising and a $791,000 decline in display advertising.
• Profitability: Net income increased 12% to $5.77 million. Pretax income rose 13% to $9.38 million. The Traditional Business segment pretax profit increased 12% to $9.35 million, while the Sustain segment moved from a $25,000 loss to a $32,000 profit.
• Expense Reduction: Total costs and expenses decreased 4% ($891,000). Personnel costs dropped 5% due to departmental reorganizations, and newsprint/printing expenses fell 10% due to lower paper prices and fewer subscribers.
• Balance Sheet: Total assets increased from $46.1 million to $76.0 million, primarily due to the appreciation of marketable securities. Shareholders' equity grew to $49.1 million.

Outlook, Risks, and Contingencies

• Foreclosure Dependency: Management notes that the Traditional Business's profitability is heavily dependent on the volume of foreclosure sales in California and Arizona. A slowdown in foreclosures would likely reduce public notice advertising revenue.
• Sustain Development: The Sustain segment faces uncertainty regarding its internal software development programs. Significant costs ($1.65 million for the nine months) are expensed until technological feasibility is established. Success depends on securing new customers and the timing of consulting task acceptance.
• Tax Dispute: The IRS is auditing tax returns for 2002–2007 and has proposed disallowing approximately $700,000 in research and development credits. The Company is contesting this in Tax Court; the outcome is uncertain.
• Legal Contingency: A dispute with Ontario, Canada Ministries regarding a terminated software contract involves a claim of $20 million. Management cannot determine if this will have a material adverse effect, though no reserve has been established.
• Capital Allocation: The Company repurchased $1.97 million of its own common stock during the period and invested $20.4 million in marketable securities.

Investor Verification Checklist

• Foreclosure Trends: Verify current foreclosure sale volumes in California and Arizona to assess the sustainability of public notice advertising revenue.
• Tax Audit Status: Monitor the status of the IRS audit regarding the $700,000 R&D credit disallowance.
• Sustain Revenue Quality: Review the mix of Sustain's revenue between recurring software licenses and one-time consulting fees to evaluate future earnings stability.
• Investment Valuation: Note that a significant portion of the Company's asset growth ($25.9 million) is unrealized gains on marketable securities, which are subject to market volatility.
• Legal Exposure: Track any developments in the $20 million claim by the Ontario Ministries.