Legal Publisher's Software Project A Big Cash Drain

Staff Reporter

Daily Journal Corp. is known for its legal newspapers and magazines. But a good part of the L.A. company's efforts are now being focused on software development and that's resulting in the loss of millions of dollars.

The owner of the Los Angeles Daily Journal newspaper and California Lawyer magazine lost $15.6 million last year trying to develop a case-management system for courts. In a regulatory filing, the company expects the project to "grossly impact" the firm's financial results for years to come.

But the closely held public company doesn't have to worry about answering to lots of jittery investors. Chairman Charles Munger, the Los Angeles billionaire, owns nearly 40 percent of Daily Journal's shares.

"We thought it was going to be easier than it turned out to be," said Munger, who also heads Pasadena-based Wesco Financial Corp. and is vice chairman of Berkshire Hathaway Inc., the investment holding company headed by Warren Buffett. It was Buffett, ironically, who had been criticized in the late 1990s for not investing in tech stocks.

"Software is a game where a lot of people have made a lot of money and lost a lot of money," Munger said. "I think that just comes with the territory."

In 1999, Daily Journal bought out 80 percent of CHOICE Information Systems Inc., creator of a case-management system known as SUSTAIN that was being used by justice agencies in nine states. The software helps courts maintain court calendars, assign judges and track payments in child support and traffic cases.

The Newport News, Va.-based company's name was changed to SUSTAIN Technologies Inc. and Daily Journal has since increased its stake to 93 percent.

Daily Journal took over development of the software upgrade in April 2001 after the project had become plagued with expensive problems and delays. At the time, the software had "virtually zero commercial value," according to a 10-Q filing earlier this month. Daily Journal wrote off and expensed $15.1 million in capitalized software development costs for the year.

In the 10-Q, Daily Journal warned that "expenditures in support of the SUSTAIN software are highly significant and will grossly impact overall results at least through fiscal 2002, and very likely much longer." As part of that filing, the company reported a first quarter loss of $154,000, compared with a loss of $3,000 for the like period a year ago.

The company's first-quarter revenues were $8 million, down from $8.5 million in the like year-earlier period, a decline attributed to advertising sales slowdowns at its 19 business, legal and real estate publications.

For the year ended Sept. 30, the company lost $13.4 million vs. net income of $1.8 million in 2000.

Streamlining court work

Thousands of court houses and law enforcement agencies already have case-management systems in place but the technology varies widely and many systems are outdated and incompatible with others. Such systems bring major cost reductions by automating operations and cutting down on other expenses, such as printing and document retrieval services. They also help the gathering of statistical information.

"It's going to be a very large market," Munger said of the demand for the software. There is an "obvious need in all these courts and government agencies. They're in the Stone Age."

Daily Journal is using up most of its pre-tax earnings on software development, according to Munger, but he called the strategy "a good move."

"Having to transfer information from courthouse to courthouse manually is a nightmare, where as being able to access it through a universal interface is a huge time- and cost-saver," said Petra Klemmack, associate director of technology for Courtroom 21 Project. A joint effort of the William & Mary School of Law and the National Center for State Courts, the project studies the use of technology in the courts.

'It's a big market'

Given that only a dozen or so shareholders control 70 percent of the outstanding shares, Daily Journal is not widely watched. The company does not issue press releases, and a reporter's queries were directed to Munger himself.

"We haven't run out of money and we have reduced our expenses to where they roughly match our cash flow from other activities," Munger said. "It's a big market (for case-management software). If we win, there's a big reward."

Daily Journal is not the only company trying to capture the market. Competitors include Affiliated Computer Services Inc. and West Group, a division of Thomson Corp. LexisNexis Group, owned by Reed Elsevier Inc., recently purchased CourtLink Corp., which provides e-filing and electronic access services to judges and attorneys.

"Those folks have such deep pockets to invest in this software," William Pollak, president and chief executive of American Lawyer Media, said of West and LexisNexis. "It really takes an enormous investment and lawyers and judges are slow to adopt technology," he said. "(Daily Journal executives) have to be willing to stay with it for the long haul."

Munger views the software development as a natural extension of the company's efforts to serve the legal community. "We like helping judges. That's part of the ethos of the company," he said. "We could see that all the courts need all this automation desperately."

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