SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _____________________ Commission File Number 0-14665 DAILY JOURNAL CORPORATION ------------------------- (Exact name of registrant as specified in its charter) South Carolina 95-4133299 - -------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 355 South Grand Ave., 34th floor Los Angeles, California 90071-1560 - ----------------------- ---------- (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: (213) 624-7715 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding at July 31, 2001 - --------------------------------------- ---------------------------- Common Stock, par value $ .01 per share 1,533,521 shares 1 of 13
DAILY JOURNAL CORPORATION INDEX <TABLE> <CAPTION> Page Nos. <S> <C> PART I Financial Information Item 1. Financial statements Consolidated Balance Sheets - June 30, 2001 and September 30, 2000 3 Consolidated Statements of Operations - Three months ended June 30, 2001 and 2000 4 Consolidated Statements of Operations - Nine months ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Nine months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II Other Information Item 5. Other Information 13 </TABLE> 2 of 13
PART I Item 1. Financial Statements DAILY JOURNAL CORPORATION - CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> June 30 September 30 2001 2000 ------------- ------------- <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 1,199,000 $ 380,000 U.S. Treasury Bills, at cost plus discount earned --- 1,972,000 Accounts receivable, less allowance for doubtful accounts of $500,000 12,843,000 8,975,000 Income tax receivable 651,000 2,709,000 Inventories 70,000 61,000 Prepaid expenses and other assets 149,000 171,000 Deferred income taxes 524,000 1,143,000 ------------ ------------- Total current assets 15,436,000 15,411,000 ------------ ------------- Property, plant and equipment, at cost: Land, buildings and improvements 8,503,000 8,363,000 Furniture and office equipment 7,169,000 6,442,000 Machinery and equipment 1,483,000 1,385,000 ------------ ------------- 17,155,000 16,190,000 Less accumulated depreciation (7,563,000) (6,618,000) ------------ ------------- 9,592,000 9,572,000 ------------ ------------- Deferred income taxes 3,296,000 --- ------------ ------------- Capitalized software, net 1,390,000 8,786,000 ------------ ------------- Intangible assets, at cost, less accumulated amortization of $813,000 and $506,000 respectively 1,082,000 1,281,000 ------------ ------------- $ 30,796,000 $ 35,050,000 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,044,000 $ 3,714,000 Accrued liabilities 1,738,000 2,058,000 Notes payable, current portion 74,000 --- Deferred subscription revenue and other revenues 7,495,000 7,908,000 ------------ ------------- Total current liabilities 19,351,000 13,680,000 ------------ ------------- Deferred income taxes --- 2,934,000 ------------ ------------- Long-term notes payable 1,903,000 --- ------------ ------------- Minority interest (7% and 9%, respectively) --- 578,000 ------------ ------------- 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; 1,533,521 shares and 1,553,256 shares, respectively, outstanding 15,000 16,000 Other paid-in capital 1,949,000 1,974,000 Retained earnings 8,367,000 16,657,000 Less 43,271 treasury shares, at cost (789,000) (789,000) ------------ ------------- Total shareholders' equity 9,542,000 17,858,000 ------------ ------------- $ 30,796,000 $ 35,050,000 ============ ============= </TABLE> See accompanying notes to consolidated financial statements. 3 of 13
DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months Ended June 30 ------------- 2001 2000 ------------ ------------ <S> <C> <C> Revenues: Advertising $ 4,804,000 $ 5,324,000 Circulation 2,860,000 3,034,000 Information systems and services 681,000 158,000 Advertising service fees and other 949,000 1,141,000 ------------ ------------ 9,294,000 9,657,000 ------------ ------------ Costs and expenses: Salaries and employee benefits 4,309,000 4,420,000 Newsprint and printing expenses 676,000 792,000 Commissions and other outside services 1,218,000 1,054,000 Postage and delivery expenses 524,000 490,000 Depreciation and amortization 752,000 1,001,000 Other general and administrative expenses 1,026,000 1,386,000 Write-off of capitalized software 2,256,000 --- ------------ ------------ 10,761,000 9,143,000 ------------ ------------ (Loss) income from operations (1,467,000) 514,000 Other income and expenses: Interest income 8,000 73,000 Interest expense (45,000) --- ------------ ------------ (Loss) income before taxes (1,504,000) 587,000 (Benefits from) provision for income taxes (685,000) 350,000 ------------ ------------ (Loss) income before minority interest in net loss of subsidiary (819,000) 237,000 Minority interest in net loss of subsidiary 36,000 238,000 ------------ ------------ Net (loss) income (783,000) $ 475,000 ============ ============ Weighted average number of common shares outstanding - basic and diluted 1,490,250 1,537,581 ------------ ------------ Basic and diluted net (loss) income per share $ (.53) $ .31 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 4 of 13
DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Nine months ended June 30 ------------- 2001 2000 ----------- ----------- <S> <C> <C> Revenues: Advertising $13,914,000 $15,191,000 Circulation 8,529,000 8,800,000 Information systems and services 1,589,000 1,732,000 Advertising service fees and other 2,528,000 2,535,000 ----------- ----------- 26,560,000 28,258,000 ----------- ----------- Costs and expenses: Salaries and employee benefits 13,002,000 13,377,000 Newsprint and printing expenses 2,257,000 2,288,000 Commissions and other outside services 3,963,000 3,585,000 Postage and delivery expenses 1,532,000 1,547,000 Depreciation and amortization 2,103,000 2,196,000 Other general and administrative expenses 3,064,000 3,413,000 Write-off of capitalized software 15,048,000 --- ----------- ----------- 40,969,000 26,406,000 ----------- ----------- (Loss) income from operations (14,409,000) 1,852,000 Other income and expenses: Interest income 80,000 322,000 Interest expense (122,000) --- ----------- ----------- (Loss) income before taxes (14,451,000) 2,174,000 (Benefits from) provision for income taxes (6,005,000) 1,090,000 ----------- ----------- (Loss) income before minority interest in net loss of subsidiary (8,446,000) 1,084,000 Minority interest in net loss of subsidiary 686,000 372,000 ----------- ----------- Net (loss) income (7,760,000) $ 1,456,000 =========== =========== Weighted average number of common shares outstanding - basic and diluted 1,496,466 1,552,673 ----------- ----------- Basic and diluted net (loss) income per share $ (5.19) $ .94 ----------- ----------- </TABLE> See accompanying notes to consolidated financial statements. 5 of 13
DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine months ended June 30 ------------- 2001 2000 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net (loss) income $ (7,760,000) $ 1,456,000 Adjustments to reconcile net (loss) income to net cash provided by operations: Write-off of capitalized software 15,048,000 --- Depreciation and amortization 2,103,000 2,196,000 Minority interest in consolidated subsidiary (686,000) (372,000) Deferred income taxes (5,611,000) 147,000 Discount earned on U.S. Treasury Bills --- (28,000) Changes in assets and liabilities: (Increase) decrease in current assets Accounts receivable, net (3,868,000) (1,674,000) Income tax receivable 2,058,000 --- Inventories (9,000) 5,000 Prepaid expenses and other assets 22,000 90,000 Increase (decrease) in current liabilities Accounts payable 6,330,000 839,000 Accrued liabilities (320,000) 172,000 Income taxes payable --- 25,000 Deferred subscription and other revenues (413,000) (291,000) ------------ ------------ Cash provided by operating activities 6,894,000 2,565,000 ------------ ------------ Cash flows from investing activities: Net sales in U.S. Treasury Bills 1,972,000 6,259,000 Capital and capitalized software expenditures: Purchases of property, plant and equipment (1,363,000) (1,675,000) Capitalized software (8,105,000) (4,990,000) ------------ ------------ Net cash used for investing activities (7,496,000) (406,000) ------------ ------------ Cash flows from financing activities: Loan proceeds 2,000,000 --- Payment of loan principal (23,000) --- Purchase of common stock (556,000) (1,032,000) ------------ ------------ Net cash provided by (used for) financing activities 1,421,000 (1,032,000) ------------ ------------ Increase in cash and cash equivalents 819,000 1,127,000 Cash and cash equivalents: Beginning of period 380,000 181,000 ------------ ------------ End of period $ 1,199,000 $ 1,308,000 ============ ============ Interest paid during period $ 122,000 $ --- </TABLE> See accompanying notes to consolidated financial statements. 6 of 13
DAILY JOURNAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - The Corporation and Operations: 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"), now a 93% owned subsidiary as of June 30, 2001, has been consolidated since it was acquired in January 1999. It 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. Essentially all of the Company's operations are based in California, Arizona, Colorado, Nevada, Washington and Virginia. Note 2 - Basis of Presentation: In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of its financial position as of June 30, 2001, the results of operations for the three- and nine-month periods ended June 30, 2001 and 2000 and its cash flows for the nine-months ended June 30, 2001 and 2000. The results of operations for the three- and nine-months ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. Certain prior period amounts have been reclassified to conform to current period presentation. Note 3 - Basic and Diluted Net (Loss) Income Per Share: The Company does not have any common stock equivalents, and therefore basic and diluted net (loss) income per share are the same. Note 4 - Capitalized Software: The Company's expenditures in support of the Sustain software are significant. As of September 30, 2000, capitalized Sustain software costs consisted of purchased software of $3,023,000 that was capitalized upon the acquisition of Sustain and $6,943,000 for costs related to the use of an outside service provider for a software development project that had reached technological feasibility but required further development prior to being a commercial product. Through June 30, 2001, the Company invested an additional $8,105,000 in the development project, all of which represented costs related to 7 of 13
the use of the outside service provider. During April 2001, the Company determined that the software was not functioning as intended, and therefore the development efforts were discontinued, and the outside service provider's work was terminated. The software development project was not completed at the time of termination and was, therefore, of little commercial value. As a result, during the quarters ended March 31, 2001 and June 30, 2001, the Company wrote off the capitalized software development costs of $12,792,000 and $2,256,000, respectively, resulting in an aggregate writeoff in fiscal 2001 of $15,048,000 or $8,953,000 net of tax benefits of $6,095,000. The Company intends to continue its software development work, is expanding its staff to meet its planned internal development efforts and is also expanding relationships with other service providers. If these development programs are not successful, they will significantly and adversely impact the Company's ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. These development costs are being expensed as incurred and accordingly will materially impact earnings at least through fiscal 2002. 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. As of June 30, 2001 and September 30, 2000, capitalized software costs totaled $3,023,000 (less accumulated amortization of $1,633,000) and $9,966,000 (less amortization of $1,180,000), respectively. The purchased software is being amortized over five years. Note 5 - Debt: In January 2001, the Company obtained a $4 million revolving bank line of credit bearing interest payable monthly at a quarter point under the prime rate, which expires in January 2002. Such line of credit is secured by substantially all of the Company's non-real estate assets. As of June 30, 2001, there was no borrowing under this line of credit. In addition, the Company has a real estate loan of $1,977,000 which bears interest at approximately 8% to be repayable in equal monthly installments through 2016. The real estate loan is secured by the Company's existing facilities in Los Angeles. Note 6 - Effects of New Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of the Company's fiscal year ending September 30, 2003. Application of the nonamortization provisions of the Statements is expected to result in an increase in net income of about $250,000 ($.17 per share) in fiscal 2003. During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of September 30, 2002, and it has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 of 13
Note 7 - Operating Segments: Summarized financial information concerning the Company's reportable segments is shown in the following table: <TABLE> <CAPTION> Operating Segments ------------------------------------------------ Daily Journal Sustain Total ------------- ------- ----- <S> <C> <C> <C> Nine months ended June 30, 2001 - ------------------------------- Revenues $ 24,971,000 $ 1,589,000 $ 26,560,000 Segment net income (loss) after minority interest 1,758,000 (9,518,000) (7,760,000) Total assets 20,911,000 9,885,000 30,796,000 Capital expenditures 1,226,000 8,242,000 9,468,000 Write-off of capitalized software --- 15,048,000 15,048,000 Depreciation and amortization 1,173,000 930,000 2,103,000 Income tax expenses (benefits) 1,035,000 (7,040,000) (6,005,000) Nine months ended June 30, 2000 - ------------------------------- Revenues $ 26,526,000 $ 1,732,000 $ 28,258,000 Segment net income (loss) after minority interest 2,632,000 (1,176,000) 1,456,000 Total assets 21,360,000 11,092,000 32,452,000 Capital expenditures 1,165,000 5,500,000 6,665,000 Depreciation and amortization 911,000 1,285,000 2,196,000 Income tax expenses (benefits) 1,755,000 (665,000) 1,090,000 Three months ended June 30, 2001 - -------------------------------- Revenues $ 8,612,000 $ 682,000 $ 9,294,000 Segment net income (loss) after minority interest 752,000 (1,535,000) (783,000) Total assets 20,911,000 9,885,000 30,796,000 Capital expenditures 429,000 2,321,000 2,750,000 Write-off of capitalized software --- 2,256,000 2,256,000 Depreciation and amortization 437,000 315,000 752,000 Income tax expenses (benefits) 465,000 (1,150,000) (685,000) Three months ended June 30, 2000 - -------------------------------- Revenues $ 9,441,000 $ 216,000 $ 9,657,000 Segment net income (loss) after minority interest 1,055,000 (580,000) 475,000 Total assets 21,360,000 11,092,000 32,452,000 Capital expenditures 413,000 3,112,000 3,525,000 Depreciation and amortization 351,000 650,000 1,001,000 Income tax expenses (benefits) 700,000 350,000 (350,000) </TABLE> 9 of 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues were $26,560,000 and $28,258,000 for the nine months ended June 30, 2001 and 2000, respectively. This decrease of $1,698,000 (6%) was primarily attributable to the decline in revenues from display advertising and Sustain's consulting revenues, partially offset by the advertising and subscription rate increases. (Revenues were $9,294,000 and $9,657,000 for the three months ended June 30, 2001 and 2000, respectively.) Display advertising and conference revenues declined by $876,000, and classified advertising revenues also decreased by $341,000. Public notice advertising revenues declined by $60,000 primarily resulting from decreased trustee notice sales. The Company's smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 93% of the total public notice advertising revenues. Public notice advertising revenues and related advertising and other service fees constituted about 27% of the Company's total revenues. Circulation revenues decreased an aggregate of $271,000 primarily because of fewer subscriptions to the court rule services; some courts are now providing their rules online. The Daily Journals accounted for about 71% of the Company's total circulation revenues, and their circulation levels decreased slightly. The court rule and judicial profile services generated about 18% of the total circulation revenues, with the other newspapers and services accounting for the balance. Sustain's revenues were down by $143,000 primarily because of reduced consulting revenues. Costs and expenses, excluding the write-off of capitalized Sustain software costs, decreased by $485,000 to $25,921,000 from $26,406,000 for the nine months ended June 30, 2001 and 2000, respectively. Total personnel costs were $13,002,000, representing a decrease of $375,000 (3%). Newsprint and printing expenses decreased by $31,000 (1%) primarily because of the reduction of newspaper bonus issues, partially offset by the newsprint price increases. Commissions and other outside services increased by $378,000 (11%) primarily because of the increases in computer and other services. Depreciation and amortization expenses, including the amortization of the Daily Journal's purchased computer software and goodwill of $453,000, decreased by $93,000 (4%). (Costs and expenses, excluding the write-off of capitalized Sustain software costs, were $8,505,000 and $9,143,000 for the three months ended June 30, 2001 and 2000, respectively.) In January 1999, the Company purchased 80% of the capital stock of Sustain from Sustain and its shareholders. As of June 30, 2001, the Company owned 93% 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 constituted about 6% of the Company's total revenues for the first nine months of fiscal 2000 and of fiscal 2001. The Company's expenditures in support of the Sustain software are significant. As of September 30, 2000, capitalized Sustain software costs consisted of purchased software of $3,023,000 that was capitalized upon the acquisition of Sustain and $6,943,000 for expenses related to the use of an outside service provider for a software development project that had reached technological feasibility but required further development prior to being a commercial product. Through June 30, 2001, the Company invested an additional $8,105,000 in the development project, all of which represented costs related to the use of the outside service provider. During April 2001, the Company determined that the software 10 of 13
was not functioning as intended, and therefore the development efforts were discontinued, and the outside service provider's work was terminated. The software development project was not completed at the time of termination and was, therefore, of little commercial value. As a result, during the quarters ended March 31, 2001 and June 30, 2001, the Company wrote off the capitalized software development costs of $12,792,000 and $2,256,000, respectively, resulting in an aggregate writeoff in fiscal 2001 of $15,048,000 or $8,953,000 net of tax benefits of $6,095,000. The Company intends to continue its software development work, is expanding its staff to meet its planned internal development efforts and is expanding relationships with other service providers. If these development programs are not successful, they will significantly and adversely impact the Company's ability to maximize its existing investment in the Sustain software, to service its existing customers, and to compete for new opportunities in the case management software business. These development costs are being expensed as incurred and accordingly will materially impact earnings at least through fiscal 2002. Interest income decreased by $242,000 (75%) to $80,000 from $322,000 during the nine months ended June 30, 2001 and 2000, respectively, primarily resulting from the investment in Sustain software. There was interest expense of $122,000 for the nine months ended June 30, 2001 on the bank loans. The Daily Journal's business segment pretax profit decreased by $1,536,000 to $2,793,000 from $4,329,000, primarily due to a downturn in commercial advertising and fewer court rule subscriptions. Sustain's business segment pretax loss increased by $15,090,000 primarily because of the write-off of the capitalized Sustain software development costs of $15,048,000 and reduced consulting revenues. The consolidated net loss for the nine months ended June 30, 2001 was $7,760,000 as compared with a consolidated net income of $1,456,000 in the comparable prior year period. (Consolidated net loss was $783,000 for the three months ended June 30, 2001 as compared with a consolidated net income of $475,000 for the three months ended June 30, 2000.) Net loss per share was $5.19 as compared with net income per share of $.94 for the nine month comparable period. Liquidity and Capital Resources During the nine months ended June 30, 2001, the Company's cash and cash equivalent position increased by $819,000, and the investments in U.S. Treasury Bills decreased by $1,972,000. Cash and cash equivalents were used for the purchase of capital assets of $9,468,000, including significant investments in Sustain software which were written off, and to purchase common stock for an aggregate amount of $556,000. The cash provided by operating activities of $6,894,000 included a net decrease in prepayments for subscriptions and others of $413,000. Proceeds from the sale of subscriptions from newspapers, court rule books and other publications and for software maintenance and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided. Cash flows from operating activities increased by $4,329,000 during the nine months ended June 30, 2001 primarily due to the changes in Sustain's operations as more fully discussed in Item 5. Both the Company's accounts receivable and payable increased during fiscal 2001 primarily because of amounts billed by Sustain's prior outside service provider. See Item 5 for a discussion of the potential impact of these events. The increase in deferred income taxes primarily represents the net operating loss carry-forward resulting from the Sustain losses. As of June 30, 2001, the Company had working capital of $3,580,000 before deducting the liability for deferred subscription revenues and other revenues of $7,495,000 which will be earned within one year. The Company expects its expenditures in support of the development of the Sustain software to continue at a rate in excess of cash flow but below the level of the prior year. In January, the Company obtained a $4 million revolving bank line of credit, which expires in January 2002 and is secured by substantially all of the Company's non-real estate assets. As of June 30, 2001, there was no borrowing under this line of credit. The Company expects that it will be able to extend or refinance the amounts 11 of 13
available or 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 cannot predict whether the amounts available 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. The Company also has a real estate loan of $1,977,000 secured by its existing Los Angeles facilities. The Company intends to begin construction of a new building in Los Angeles estimated to cost about $2 million possibly by fiscal yearend, and it has a commitment from a bank to loan the Company up to an additional $2 million when its new building is completed. Disclosure regarding Forward-Looking Statements This Report 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 without limitation those contained under the captions "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," 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 Report, including without limitation in conjunction with the forward-looking statements themselves. The Company has no specific intention to update these forward-looking statements. 12 of 13
DAILY JOURNAL CORPORATION PART II - OTHER INFORMATION Item 5. Other Information: On May 14, 2001, Sustain formally notified its primary software development service provider that Sustain was terminating the service provider's work as the result of performance-related issues, including significant delays resulting in escalating costs. The incomplete work and the delays were not acceptable to Sustain's customers. Sustain has begun the process of working with its customers on the appropriate adjustments necessary to complete its projects, and intends to continue its software development work. At this time, however, Sustain cannot predict whether any adjustments will be required; or how much of the cost of any such adjustments will be borne by Sustain, the customers and the terminated service provider, respectively; or whether the projects can be completed to the customers' reasonable satisfaction. Sustain is currently expanding its staff to provide the services previously provided by the terminated service provider, and it is expanding relationships with other service providers. Such internal development efforts and the use of outside service providers will have a significant impact on Sustain's costs and accordingly will materially impact earnings at least through fiscal 2002. Sustain is in the process of attempting to resolve certain issues between it and the terminated service provider, including the amounts due to each of them from the other. In addition, Sustain's financial statements include a receivable from an important customer and a corresponding payable to the terminated service provider which provided the services that are now being questioned. If adjustments to the accounts receivable are made without a corresponding adjustment to the accounts payable to the terminated service provider, the amount of that difference, if material, will have a material adverse effect on the Company. There can be no assurance that Sustain, the service provider and the customer will come to a mutually acceptable resolution of these issues or that the pendency of these issues will not impact Sustain's ability to attract new customers or work with its existing customers. SIGNATURE Pursuant to the requirements 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 (Registrant) /s/ Gerald L. Salzman Gerald L. Salzman Chief Financial Officer DATE: August 14, 2001 13 of 13