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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NO. 1-9158
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MAI SYSTEMS CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2554549
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification No.)
9601 Jeronimo Road
Irvine, California 92618
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (949) 598-6000
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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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
X
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
X
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As of October 31, 2001, 13,691,085 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAI Systems Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
2000 2001
---- ----
(dollars in thousands)
ASSETS
Current assets:
Cash $ 1,019 $ 357
Receivables, less allowance for doubtful accounts of $2,154 in 2000
and $1,636 in 2001 4,338 3,892
Inventories 325 212
Notes receivable 2,700 --
Investment in subsidiary held for sale -- 1,700
Prepaids and other assets 807 823
--------- ---------
Total current assets 9,189 6,984
Furniture, fixtures and equipment, net 1,882 1,469
Intangibles, net 5,308 3,314
Other assets 66 69
--------- ---------
Total assets $ 16,445 $ 11,836
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Bridge loan $ 220 $ --
Current portion of long-term debt 274 138
Accounts payable 7,395 3,331
Customer deposits 2,234 1,340
Accrued liabilities 4,182 3,532
Income taxes payable 272 193
Unearned revenue 5,423 3,841
--------- ---------
Total current liabilities 20,000 12,375
Line of credit 2,579 2,597
Long-term debt 5,234 8,612
Other liabilities 742 768
--------- ---------
Total liabilities 28,555 24,352
Stockholders' deficiency:
Preferred Stock, par value $0.01 per share; 1,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, par value $0.01 per share; authorized 24,000,000 shares;
11,006,658 and 13,691,085 shares issued and issuable at December 31, 2000
and September 30, 2001, respectively 113 140
Additional paid-in capital 220,622 218,034
Accumulated other comprehensive income 80 136
Accumulated deficit (232,925) (230,826)
--------- ---------
Total stockholders' deficiency (12,110) (12,516)
--------- ---------
Total liabilities and stockholders' deficiency $ 16,445 $ 11,836
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-2-
MAI Systems Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
(in thousands, except (in thousands, except
per share data) per share data)
Revenue
Software, networks and professional services:
Software sales $ 2,503 $ 1,258 $ 5,867 $ 4,584
Network and computer equipment 435 375 1,353 821
Professional services 5,708 4,952 17,057 15,034
-------- -------- -------- --------
8,646 6,585 24,277 20,439
Legacy revenue 1,148 860 4,406 2,885
-------- -------- -------- --------
Total revenue 9,794 7,445 28,683 23,324
Direct costs 4,260 2,286 13,633 8,323
-------- -------- -------- --------
Gross profit 5,534 5,159 15,050 15,001
Selling, general and administrative expenses 2,500 2,474 8,757 7,318
Research and development costs 906 1,213 3,104 3,703
Amortization of intangibles 649 664 1,946 1,993
Other operating (income) expense, net 53 (10) 111 (1,406)
-------- -------- -------- --------
Operating income 1,426 818 1,132 3,393
Interest income 118 7 273 63
Interest expense (377) (413) (1,125) (1,278)
-------- -------- -------- --------
Income before income taxes 1,167 412 280 2,178
Provision for income taxes 38 1 38 79
-------- -------- -------- --------
Net income $ 1,129 $ 411 $ 242 $ 2,099
======== ======== ======== ========
Income per share:
Basic income per share $ 0.10 $ 0.03 $ 0.02 $ 0.16
======== ======== ======== ========
Diluted income per share $ 0.10 $ 0.03 $ 0.02 $ 0.16
======== ======== ======== ========
Weighted average common shares used in
determining income per share:
Basic 10,907 13,691 10,907 12,922
======== ======== ======== ========
Diluted 10,907 13,928 10,907 13,113
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
MAI Systems Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2000 2001
---- ----
(in thousands, except per
share data)
Net cash used in operating activities $ (293) $ (946)
------- -------
Cash flows from investing activities -
capital expenditures (216) (282)
------- -------
Cash flows from financing activities:
Net increase (decrease) in line of credit (205) 18
Proceeds received from sale of subsidiary -- 1,000
Repayments of long-term debt (285) (240)
Repayments of bridge loan (995) (220)
------- -------
Net cash provided by (used in) financing activities (1,485) 558
------- -------
Effect of exchange rate changes on cash and cash equivalents 52 8
------- -------
Net change in cash and cash equivalents (1,942) (662)
------- -------
Cash and cash equivalents at beginning of period 2,645 1,019
------- -------
Cash and cash equivalents at end of period $ 703 $ 357
======= =======
Supplemental disclosure of non-cash investing and financing activities (See
Notes 6 and 7)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine Months ended September 30, 2001
(Unaudited)
1. BASIS OF PRESENTATION
Companies for which this report is filed are MAI Systems Corporation and
its wholly-owned subsidiaries (the "Company"). The information contained
herein is unaudited, but gives effect to all adjustments (which are
normal recurring accruals) necessary, in the opinion of Company
management, to present fairly the condensed consolidated financial
statements for the interim period. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission
(the "SEC"), and these financial statements should be read in
conjunction with the financial statements included in the Company's
Annual Report on Form 10-K as amended for the year ended December 31,
2000, which is on file with the SEC.
2. INVENTORIES
Inventories are summarized as follows:
December 31, September 30,
2000 2001
---- ----
(dollars in thousands)
Finished goods $124 $145
Replacement parts 201 67
---- ----
$325 $212
==== ====
3. PLAN OF REORGANIZATION
In 1993, the Company emerged from a voluntary proceeding under the
bankruptcy protection laws. Notwithstanding the confirmation and
effectiveness of its Plan of Reorganization (the "Plan"), the Bankruptcy
Court continues to have jurisdiction to resolve disputed pre-petition
claims against the Company to resolve matters related to the
assumptions, assignment or rejection of executory contracts pursuant to
the Plan and to resolve other matters that may arise in connection with
the implementation of the Plan.
Shares of common stock may be distributed by the Company to its former
creditors. As of October 31, 2001, 6,758,251 shares of Common Stock had
been issued pursuant to the Plan and were outstanding.
4. BUSINESS ACQUISITIONS
HOTEL INFORMATION SYSTEMS, INC. ("HIS"):
During 1996, the Company entered into arbitration proceedings regarding
the purchase price of HIS. The Company placed approximately 1,100,000
shares of Common Stock issued in connection with the acquisition of HIS
in an escrow account to be released in whole, or in part, upon final
resolution of post closing adjustments.
In November 1997, the purchase price for the acquisition of HIS was
reduced by $931,000 pursuant to arbitration proceedings. As a result,
goodwill was reduced by $931,000 and approximately 100,650 shares will
be released from the escrow account and returned to the Company. In
addition, further claims by the Company against HIS relating to legal
costs and certain disbursements currently estimated at $650,000 are
presently pending. Resolution of such claims
-5-
may result in release of additional escrow shares to the Company. Upon
settlement, the Company may, as needed, pursuant to the asset purchase
agreement and related documents, issue additional shares of Common Stock
in order that the recipients ultimately receive shares worth a fair
value of $9.25 per share. This adjustment applies to a maximum of 73,466
shares of Common Stock. As of September 30, 2001, the fair market value
of the Company's common stock was $0.35 per share, which would result in
approximately 2,370,000 additional shares being issued. Also, included
in the escrow account at September 30, 2001 is 200,000 shares of Common
Stock which do not have a guarantee of value. The amount and number of
shares will be determined based on the final resolution of such claims.
Accordingly, as of September 30, 2001, the final purchase price has not
been determined.
5. BUSINESS DIVESTITURES
On June 19, 1999, the Company sold GSI for an amount in excess of the
book value of net assets sold. Assets sold of approximately $3,749,000
consisted of accounts receivable of $1,514,000, inventories of $364,000,
furniture, fixtures and equipment of $218,000, intangible assets of
$1,573,000 and prepaid expenses of $80,000. Liabilities assumed by the
buyer consisted of accounts payable and accrued liabilities of $197,000,
deposits of $100,000, unearned revenue of $351,000 and long-term debt of
446,000. The Company received three promissory notes totaling $4,925,000
with face values of $1,100,000, $1,500,000 and $2,325,000, respectively.
Interest was paid monthly at the rate of 10% per annum on both the
$1,100,000 and $1,500,000 notes, with the principal due and payable on
June 19, 2001 and June 19, 2003, respectively. The $1,100,000 promissory
note was guaranteed by a third party. Principal payments and interest,
at prime plus 1%, was to commence for the $2,325,000 promissory note on
October 1, 2002 in 48 monthly installments of approximately $48,000 of
principal, plus accrued interest.
Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 which resulted in a
combined carrying value of $4,282,000 for all three promissory notes.
The gain on sale of $1,227,000 had been deferred until collection of the
proceeds representing the gain can be assured. As of December 31, 2000,
the Notes were held for sale and were written down to an amount which
approximated their estimated net realizable value of $2,700,000.
On April 6, 2001 the Company entered into an agreement with the maker of
the Notes whereby the maker reconveyed 100% of the common stock of GSI
to the Company for the purpose of selling GSI to a third party. In
connection with the agreement, the Company canceled the Notes and
entered into a new $1.1 million secured promissory note with the same
party. The maker will be paid a commission of 30% of the future sale
price, which will be first applied to the $1.1 million note and paid in
cash to the maker thereafter. On July 27, 2001, the Company entered into
an Asset Purchase Agreement ("Agreement") with the third party for
approximately $3.2 million whereby all of the assets of GSI were
acquired and all of the liabilities assumed, except for approximately
$300,000 of obligations, which will remain with GSI. The payment terms
under the Agreement require a $1 million non-refundable cash payment to
the Company, which was received on July 27, 2001, and a $1.5 million
payment to be paid the earlier of 120 days from the Agreement date or
the date the buyer receives the requisite licenses and approvals in all
gaming jurisdictions. Upon receipt of the $1.5 million payment, the
third party will also be required to pay $500,000 in April 2002 and the
remaining $500,000 in January 2003 subject to a maximum of $250,000
reduction pursuant to the resolution of certain uncertainties as of the
date of the Agreement. As of July 27, 2001, current assets and current
liabilities of GSI were approximately $1.9 million and $2.7 million,
respectively. In the event that the buyer does not receive certain
licenses or approvals from the respective gaming authorities, the buyer
shall have the right to cancel the Agreement and return the GSI business
to the Company, including its assets and employees to the Company with
no further obligation. The Company has deferred any gain due to the
contingent nature of this sales transaction. The Company believes that
the $1.7 million carrying value is recoverable and, accordingly, is
classified as current in the accompanying consolidated balance sheets.
On October 9, 2001, the Company sold certain rights under customer
contracts together with the related assets and liabilities of its
domestic Legacy hardware maintenance division to the third party which
currently provides the on-site repair and warranty service to the
Company's Legacy hardware maintenance customers. Pursuant to the
agreement, the Company retained the software maintenance component of
the customer contracts and will continue to provide the software support
services directly to the domestic Legacy customer base. Additionally,
the third party will be required to pay the Company approximately 15% of
the third party's hardware maintenance revenue stream relating to the
hardware maintenance customer contracts subsequent to October 31, 2003.
In connection with the sale, the Company received $328,000 in cash and
sold approximately $119,000 of assets consisting of inventory, spare
parts, fixed assets and certain accounts receivable. The third party
also assumed approximately $978,000 of liabilities consisting of
-6-
accrued liabilities of approximately $366,000 and deferred revenue of
approximately $612,000. The sale resulted in a gain of approximately
$1,187,000 in October 2001.
6. LINE OF CREDIT, BRIDGE LOAN AND LONG-TERM DEBT
On July 28, 1999, the Company obtained a Bridge Loan from Coast Business
Credit ("Coast") in the amount of $2,000,000. The Bridge Loan originally
bore interest at prime plus 5% (prime plus 8% when default interest
rates apply) and was payable interest only on a monthly basis with all
accrued and unpaid principal and interest due on the earlier of June 30,
2000 or the date the Company receives a debt or equity infusion of at
least $10,000,000. Loan origination fees of $75,000 paid to Coast in
connection with the Bridge Loan are included in prepaids and other
assets and are being amortized to interest expense over the term of the
loan. Due to a temporary event of default on the Bridge Loan and the
secured revolving credit facility and pursuant to a forbearance
agreement with Coast, the Company began making weekly principal payments
of $25,000 on the Bridge Loan commencing in September 1999. During the
default period, the Company also paid $40,000 in default fees to Coast
in 1999 and $30,000 in 2000.
In April 1998, the Company negotiated a $5,000,000 secured revolving
credit facility with Coast. The availability of this facility is based
on a calculation using a rolling average of certain cash collections.
The facility was amended on July 28, 1999 to allow for aggregate
borrowings on an interest only basis under the credit facility and
Bridge Loan not to exceed $6,000,000. The facility is secured by all
assets, including intellectual property of the Company, and bears
interest at prime plus 2.25% (prime plus 5.25% when default interest
rates apply) and expires on April 30, 2003. The facility was again
amended on April 13, 2000 and September 12, 2000. In accordance with the
amendments, the Bridge Loan and the credit facility bear interest at
prime plus 4.5% and required $35,000 weekly principal payments on the
Bridge Loan, except for the period from September 12, 2000 through
December 8, 2000, which required monthly payments of $35,000, until it
was paid in full. During the first quarter of 2001, the remaining
balance of the Bridge Loan was repaid in full. Additionally, the credit
facility was amended to allow for aggregate borrowings on an interest
only basis under the credit facility not to exceed $3,360,000. In
connection with the amendment on April 13, 2000, Coast waived all
existing defaults. Additionally, the Company agreed to pay Coast a fee
of $300,000 ("Loan Fee") in weekly installments of $35,000 commencing
after the Bridge Loan is paid in full. The Loan Fee was fully paid by
April 23, 2001. The facility contains various restrictions and
covenants, including a minimum consolidated net worth, debt coverage
ratio and minimum quarterly profitability. The Company was in compliance
with these covenants as of September 30, 2001.
At December 31, 2000 and September 30, 2001, approximately $2,579,000
and $2,597,000, respectively, was available and drawn down under the
credit facility.
Loan restructuring fees of $300,000 were incurred in connection with the
line of credit and Bridge Loan, are classified in prepaids and other
current assets and are being amortized to interest expense over the term
of the facility.
In March 1997 the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). In September 1997 this indebtedness was
reduced to $5,250,000 through application of a portion of the proceeds
realized from the exercise of warrants by Canyon. The notes call for
semi-annual interest payments. On September 3, 1999, the Company failed
to make the semi-annual interest payment due on that date in the amount
of $288,750.
The Company and Canyon subsequently entered into a forbearance agreement
which provided that the Company pay Canyon weekly interest payments of
$12,500 effective January 1, 2000. In addition, the Company executed a
security agreement, which provided Canyon with a lien on all of the
Company's tangible and intangible property, which lien is junior to the
lien granted to Coast.
On April 13, 2000, the Company entered into an agreement with Canyon
which waived all existing events of default, accelerated the maturity
date to March 3, 2003 and provided for continued weekly interest
payments of $12,500. On January 31, 2001, the Company entered into an
agreement with Canyon whereby the specified accrued interest of $431,000
was added to the principal balance of the subordinated notes payable. As
part of this agreement, the Company also agreed to pay Canyon an
additional $79,000 loan fee, of which $29,000 was added to principal.
7. COMMON STOCK
-7-
In January and February of 2001, the Company entered into agreements
with several creditors to retire approximately $2.1 million of
obligations outstanding as of December 31, 2000 in exchange for 798,000
shares of Common Stock and $470,000 of cash. This resulted in a gain of
$1,377,000 in the first quarter of 2001. To fulfill its performance
under the agreement, the Company issued the 798,000 shares of its Common
Stock and filed an S-3 Registration statement in March 2001 to cause
them to become tradable with the effectiveness of the Registration
Statement. The S-3 Registration Statement was declared effective by the
Securities Exchange Commission on October 30, 2001. As of October 31,
2001 the Company has paid approximately $362,000 pursuant to these
agreements with the remainder to be paid over the next thirteen months.
In May 2001, the Company issued 35,000 shares of its Common Stock valued
at $12,000, its fair market value at the date of issuance, to a creditor
to satisfy certain of its obligations.
8. INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic and diluted income or loss per share is computed using the
weighted average shares of common stock outstanding during the period.
Consideration is also given in the diluted income per share calculation
for the dilutive effect of stock options and warrants.
The following table illustrates the computation of basic and diluted
earnings (loss) per share under the provisions of SFAS 128:
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
(in thousands, except per (in thousands, except per
share data) share data)
Numerator:
Numerator for basic and diluted earnings
per share - net income $ 1,129 $ 411 $ 242 $ 2,099
========== ======= ========= =======
Denominator:
Denominator for basic earnings per
Share-weighted average number of
Common shares outstanding during
the period 10,907 13,691 10,907 12,922
Incremental common shares attributable
To exercise of outstanding options -- 237 -- 191
---------- ------- --------- -------
Denominator for diluted earnings
Per share 10,907 13,928 10,907 13,113
========== ======= ========= =======
Basic earnings per share $ 0.10 $ 0.03 $ 0.02 $ 0.16
========== ======= ========= =======
Diluted earnings per share $ 0.10 $ 0.03 $ 0.02 $ 0.16
========== ======= ========= =======
9. ACCOUNTING PRONOUNCEMENTS
-8-
In July 2001, the FASB issued SFAS No. 141 "Business Combinations". This
statement requires that all business initiated after June 30,2001 be
accounted for by a single method - the purchase method. It also sets
forth criteria for the identification of intangible assets apart from
goodwill. At the same time, the FASB also issued SFAS No. 142 "Goodwill
and Other Intangible Assets". This statement addresses how goodwill and
other intangible assets should be accounted for after they have been
initially recognized in financial statements. Specifically, SFAS No. 142
requires that goodwill be tested for impairment annually and that
amortization of goodwill cease. SFAS No. 142 is required to be
implemented by the Company commencing on January 1, 2002. The Company is
currently assessing the impact these new standards will have on the
Company's results. Goodwill amortization was $413,000 and $142,000 for
the three months ended September 30, 2001 and 2000 respectively, and
$1,240,000 and $1,282,000 for the nine months ended September 30, 2001
and 2000 respectively.
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long
-Lived Assets, which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. While Statement No. 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long
-Lived Assets and for Long-Lived Assets for Be Disposed Of, it retains
many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraodinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. However, it
retains the requirement in Opinion 30 to report separately discounted
operations and extends that reporting to a component of an entity that
either has been disposed of (by sale, abandonment, or in a distribution
to owners) or is classified as held for sale. By broadening the
presentation of discounted operations to include more disposal
transactions, the FASB has enhanced managements ability to provide
information that helps financial statement users to assess the effects
of a disposal transaction on the ongoing operations of an entity.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Early
application is encouraged.
10. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At September 30, 2001, there was only one material claim to be settled
before the Company's Chapter 11 proceeding could be formally closed, a
tax claim with the United States Internal Revenue Service (the
"Service"). The amount of this claim is in dispute. The Company has
reserved $712,000 for settlement of this claim, which it is anticipated
would be payable to the Service in equal monthly installments over a
period of six (6) years from the settlement date at an interest rate of
6%.
CSA Private Limited
CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. ("HIS") substantially all their assets and
certain of their liabilities (the "HIS Acquisition"). At the time of
MAI's acquisition of HIS in 1996, CSA was a shareholder of HIS and, in
connection with the purchase, MAI agreed to issue to CSA shares of its
common stock worth approximately $4.8 million in August 1996, which
amount had increased to approximately $6.8 million as of December 31,
2000, pursuant to the agreement. MAI also granted CSA demand
registration rights with respect to such stock. CSA requested
registration of their shares, but MAI delayed registration based upon
its good faith exercise of its rights under its agreement with CSA. On
October 5, 1998, CSA filed a lawsuit against MAI in the U.S. District
Court for the Central District of California. Pursuant to a settlement
agreement entered into as of May 13, 1999 MAI agreed by November 1, 1999
to file, or at a minimum to commence the process to file, a registration
statement with the Securities and Exchange Commission ("SEC") for the
purpose of registering CSA's shares. CSA initiated another lawsuit in
December 1999 in the above-referenced court (a) seeking damages in
excess of $5 million; (b) enforcement of the settlement agreement; and
(c) and injunctive relief through court order to cause MAI to file with
the SEC. On March 6, 2000, the Company answered the complaint. Because
the Company did not conclude the registration statement filing by
November 1, 1999, CSA initiated a second lawsuit in January 2000 to
enforce the settlement agreement and secure injunctive relief through
court order to cause the Company to file a registration statement.
-9-
The Company entered into a second settlement agreement with CSA in
February 2001, whereby it agreed to take the following steps on or
before March 1, 2001: (i) issue CSA additional shares of its Common
Stock to bring CSA's total share ownership to 2,433,333 shares; (ii)
immediately file a registration statement for all of CSA's shares of our
common stock; and (iii) execute a secured debt instrument in favor of
CSA in the principal sum of $2,800,000 which is subordinate only to our
present group of three (3) senior secured leaders and requires cash
installment payments to commence June 1, 2002. The number of shares
which may be sold by the selling shareholder includes: (i) CSA's current
ownership of 517,319 shares, and (ii) 1,916,014 additional shares which
were issued to CSA pursuant to the settlement agreement. On October 30,
2001 the Securities and Exchange Commission declared the registration
statement effective and as of that date CSA's shares freely tradable.
In connection with the second settlement agreement with CSA, the Company
recorded the $2.8 million debt issuance as a reduction in paid in
capital and the 1,916,014 additional shares at par as an addition to
common stock and a reduction to additional paid in capital. The $2.8
million of debt accrues interest at 10% per annum and requires payments
of $37,500 commencing on March 1, 2002 through September 1, 2002 and
monthly payments of $107,500 commencing on October 1, 2002 until all
outstanding principal and accrued interest is paid in full. In any
event, payment of any unpaid principal and accrued interest is due by
October 1, 2003.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business. Management believes the ultimate outcome of
these matters will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of
the Company.
11. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and disclosure of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has presented the
information required by SFAS No. 130 as follows (in thousands):
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
Net income $ 1,129 $411 $242 $2,099
Change in cumulative translation
adjustments (194) 46 40 56
------- ---- ---- ------
Comprehensive income $ 935 $457 $282 $2,155
======= ==== ==== ======
Accumulated other comprehensive (loss) income in the accompanying
consolidated balance sheets consists of cumulative translation
adjustments.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, working capital improved from a working capital
deficiency of $10,811,000 at December 31, 2000 to a working capital deficiency
of $5,391,000. Excluding unearned revenue of $3,841,000, the Company's working
capital deficiency at September 30, 2001 would be $1,550,000 or a ratio of
current assets to current liabilities of 0.82 to 1.0. Excluding unearned
revenue, working capital deficiency at December 31, 2000 was $5,388,000, with a
current ratio of 0.63 to 1.0. Excluding unearned revenue, the decrease in the
working capital deficiency of $3,838,000 was primarily attributable to decreases
in the Coast Bridge Loan of $220,000, accounts payable of $4,064,000 (mainly due
to vendor settlements described in Note 7 to the consolidated financials
statements), deposits of $894,000, accrued liabilities of $650,000 and unearned
revenue of $1,582,000 offset by decreases in cash of $662,000, receivables of
$964,000 and notes receivable/investment in subsidiary held for sale of
$1,000,000 (which represents a non refundable deposit received from the sale of
GSI on July 27, 2001).
Cash was $357,000 at September 30, 2001, as compared to $1,019,000 at December
31, 2000. Availability under the Company's secured revolving credit facility is
based on a calculation using a rolling average of certain cash collections. At
September 30, 2001, approximately $2,597,000 was available and drawn down under
this facility. The facility expires on April 30, 2003.
Net cash used in investing activities for the nine months ended September 30,
2001, totaled $282,000, which represented capital expenditures.
Net cash provided by financing activities for the nine months ended September
30, 2001 totaled $558,000, which is comprised of a $1 million non-refundable
cash deposit received in connection with the sale of GSI on July 27, 2001 and an
$18,000 increase in the secured revolving credit facility offset by $240,000 and
$220,000 in repayments of long-term debt and Bridge Loan, respectively. The
revolving credit facility requires monthly interest only payments on the average
outstanding balance for the period. The Company is required to make weekly
payments of $12,500 on the subordinated debt. The facility, and subordinated
debt pursuant to an intercreditor agreement between Canyon Capital and Coast
Business Credit, contains various restrictions and convenants, including an
adjusted minimum consolidated net worth of ($4,466,000) as of September 30,
2001, minimum quarterly debt coverage ratio of 1.1:1 and minimum quarterly
profitability of $250,000. We were in compliance with these covenants as of
September 30, 2001. In the event that we are not in compliance with the various
restrictions and covenants and were unable to receive waivers for
non-compliance, the facility and subordinated debt would become immediately due
and payable. The restrictions and covenants are assessed quarterly.
Stockholders' deficiency increased from $12,110,000 at December 31, 2000 to
$12,516,000 at September 30, 2001, mainly as a result of a reduction to
additional paid in capital relating to final resolution of the settlement with
CSA. Principal and interest payments on $2.8 million of CSA debt commence on
March 1, 2002. The decrease was offset by net income for the period of
$2,099,000 and approximately $240,000 of common stock issued during the first
six months of 2001.
Net cash used in operating activities for the nine months ended September 30,
2001 totaled $946,000 and mainly related to decreases in accounts payable and
customer deposits of $3,392,000, accrued liabilities of $125,000, income taxes
payable of $79,000, unearned revenue of $1,582,000 and a gain recorded in the
first half of 2001 on the issuance of common stock for settlement of vendor
obligations of $1,377,000 offset by net income for the period of $2,099,000,
non-cash charges for depreciation and amortization of tangible and intangible
assets, of $2,817,000 and a provision for doubtful accounts receivable of
$411,000. The Company expects that it will generate cash from its operating
activities during the next twelve months.
Although the Company has a net stockholders' deficiency of $12,516,000 at
September 30, 2001, the Company believes it will generate sufficient funds from
operations and obtain additional financing, as needed, in 2001 to meet its
operating and capital requirements. The Company expects to generate positive
cashflow during 2001 from shipping out products and services from its $15
million backlog as of September 30, 2001 as well as new orders. Also, the
Company entered into an agreement for the sale of its investment in GSI for
approximately $3.2 million, subject to adjustment, and has received a $1 million
non-refundable cash deposit on July 27, 2001. Subject to certain contingencies
being resolved, the Company will receive $1,500,000 by December 2001, $500,000
in April 2002 and the balance in January 2003.
Lastly, the Company has historically been successful in securing additional
capital, when needed, to meet operating and capital requirements.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2000
Compared to Three Months Ended September 30, 2001
Three Months Ended Percentage Three Months Ended Percentage
September 30, 2000 of Revenue September 30, 2001 of Revenue
------------------ ---------- ------------------ ----------
(in thousands) (in thousands)
Revenues:
Hospitality $7,750 79.1% $ 6,103 82.0%
Process Manufacturing 849 8.7% 482 6.5%
Legacy 1,195 12.2% 860 11.5%
Total revenue 9,794 100.0% 7,445 100.0%
Gross profit 5,534 56.5% 5,159 69.3%
Selling, general &
Administrative expenses 2,500 25.5% 2,474 33.2%
Research and development
costs 906 9.3% 1,213 16.3%
Amortization of intangibles 649 6.6% 664 8.9%
Other operating (income)/expense 53 0.5% (10) (0.1)%
Revenue for the quarter ended September 30, 2001 was $7,445,000 compared to
$9,794,000 in 2000, a decrease of $2,349,000 or a 24.0% decrease. We continue to
transition from our legacy business to the sale of enterprise solutions as 88.4%
of our 2001 revenue resulted from our enterprise solutions business as compared
to 87.8% in 2000. Our revenue from our sales of enterprise solutions in
industries in which we compete (hospitality and process manufacturing),
decreased 23.4% compared to the prior quarter of 2000. Hospitality revenue
decreased 21.3% from $7,750,000 in 2000 to $6,103,000 in 2001, as a result of
decreased software sales and professional services mainly due to decreased
market spending on information technology in 2001 due to economic uncertainties
in the industry. Process Manufacturing decreased from $849,000 in 2000 to
$482,000 in 2001,a decrease of $367,000 or a 43.2% decrease, as the process
business unit transitioned from a direct selling model to a reseller model and
completed development of new products. During 2000, we focused on developing
enhancements to our CIMPRO V and CIMPRO classic process manufacturing products
which were released in the first quarter of 2001. Consistent with our strategy
to focus on providing software and services to our vertical markets, our legacy
revenue (traditional hardware contract service revenues and proprietary add-on
sales) declined 28.0% quarter over quarter, largely due to expected decreased
volume and customers replacing their legacy systems due to Year 2000 compliance.
The decrease in revenue for our hospitality, process manufacturing and legacy
business units from 2000 to 2001 were mainly attributable to a decrease in the
volume of sales. Our respective business units continue to generate sufficient
cash from operations to adequately fund the respective ongoing operating
activities.
Revenue in our Asian hospitality operations decreased from $1,402,000 in 2000 to
$835,000 in 2001. The deterioration of revenue from 2000 to 2001 is mainly due
to the continued generally depressed condition of the Asian economies resulting
in a decrease in sales in the region.
Gross profit increased to 69.3% in 2001 from 56.5% in 2000 due to a decrease of
professional and software support costs which generated gross margins of 42% and
93% respectively in 2001 and 25% and 68% respectively in 2000.
Selling, general and administrative expenses ("SG&A") decreased 1.04% from
$2,500,000 in 2000 to $2,474,000 in 2001. The decrease is mainly due to
decreased payroll and facilities costs and the reduction in the use of third
party service providers for the Company's hospitality division. As a result,
SG&A for the Company's hospitality division decreased from $1,937,000 in 2000 to
$1,817,000 in 2001.
Research and development costs increased 34% over the comparable period in 2000.
This is primarily a result of increased headcount in the Company's hospitality
division and an increase in the use of contracted research and development
personnel in 2001. Research and development costs for the hospitality division
increased from $653,000 in 2000 to $1,114,000 in 2001 as a result of the
Company's efforts and focus on new product development as well as enhancements
to its current products.
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The 2.3% increase in amortization of intangibles versus the comparable period of
2000 is due to the increased amortization expense associated with capitalized
software development costs at the Company's Process Manufacturing division.
Nine Months Ended September 30, 2000
Compared to Nine Months Ended September 30, 2001
Nine Months Ended Percentage Nine Months Ended Percentage
September 30, 2000 of Revenue September 30, 2001 of Revenue
------------------ ---------- ------------------ ----------
(in thousands) (in thousands)
Revenues:
Hospitality $20,403 71.1% $ 18,873 80.9%
Process Manufacturing 3,382 11.8% 1,566 6.7%
Legacy 4,898 17.1% 2,885 12.4%
Total revenue 28,683 100.0% 23,324 100.0%
Gross profit 15,050 52.5% 15,001 64.3%
Selling, general &
Administrative expenses 8,757 30.5% 7,318 31.4%
Research and development
Costs 3,104 10.8% 3,703 15.9%
Amortization of intangibles 1,946 6.8% 1,993 8.5%
Other operating (income) expense 111 0.4% (1,406) (6.02%)
Revenue for 2000 was $28,683,000 compared to $23,324,000 in 2001 or a 18.7%
decrease. We continue to transition from our legacy business to the sale of
enterprise solutions as 87.6% of our 2001 revenue resulted from our enterprise
solutions business as compared to 82.9% in 2000. Process Manufacturing decreased
from $3,382,000 in 2000 to $1,566,000 in 2001 as the process business unit
transitioned from a direct selling model to a reseller model and completed
development of new products. During 2000, we focused on developing enhancements
to our CIMPRO V and CIMPRO classic process manufacturing products which were
released in the first quarter of 2001. Consistent with our strategy to focus on
providing software and services to our vertical markets, our legacy revenue
(traditional hardware contract service revenues and proprietary add-on sales)
declined 41.1% year over year, largely due to expected decreased volume and
customers replacing their legacy systems due to Year 2000 compliance.
The decrease in revenue for our process manufacturing and legacy business units
from 2000 to 2001 were mainly attributable to a decrease in the volume of sales.
Our respective business units continue to generate sufficient cash from
operations to adequately fund the respective ongoing operating activities.
Revenue in our Asian hospitality operations decreased from $3,077,000 in 2000 to
$1,907,000 in 2001. The deterioration of revenue from 2000 to 2001 is mainly due
to the continued generally depressed condition of the Asian economies resulting
in a decrease in sales in the region.
Gross profit increased to 64.3% in 2001 from 52.5% in 2000 due to a decrease of
professional and software support services costs which generated gross margins
of 33% and 91% respectively in 2001 and 19% and 70% respectively in 2000.
Selling, general and administrative expenses ("SG&A") decreased 16.4% from
$8,757,000 in 2000 to $7,318,000 in 2001. The decrease is mainly due to
decreased payroll and facilities costs and the reduction in the use of third
party service providers for the Company's hospitality division. As a result,
SG&A for the Company's hospitality division decreased from $6,726,000 in 2000 to
$5,308,000 in 2001.
Research and development costs increased 19.3% over the comparable period in
2000. This is primarily a result of increased headcount in the Company's
hospitality division and an increase in the use of contracted research and
development personnel in 2001. Research and development costs for the
hospitality division increased from $2,345,000 in 2000 to $3,289,000 in 2001 as
a result of the Company's efforts and focus on new product development as well
as enhancements to its current products.
The 2.5% increase in amortization of intangibles versus the comparable period of
2000 is due to the increased amortization expense associated with capitalized
software development costs at the Company's Process Manufacturing division.
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Other operating income was $1,406,000 in 2001 mainly as a result of the Company
issuing common stock to certain creditors to satisfy its obligations which
resulted in a gain of $1,377,000 in the first quarter of 2001. There were no
such transactions in 2000.
ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141 "Business Combinations". This
statement requires that all business initiated after June 30,2001 be accounted
for by a single method - the purchase method. It also sets forth criteria for
the identification of intangible assets apart from goodwill. At the same time,
the FASB also issued SFAS No. 142 "Goodwill and Other Intangible Assets". This
statement addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in financial statements.
Specifically, SFAS No. 142 requires that goodwill be tested for impairment
annually and that amortization of goodwill cease. SFAS No. 142 is required to be
implemented by the Company commencing on January 1, 2002. The Company is
currently assessing the impact these new standards will have on the Company's
results. Goodwill amortization was $413,000 and $142,000 for the three months
ended September 30, 2001 and 2000 respectively, and $1,240,000 and $1,282,000
for the nine months ended September 30, 2001 and 2000 respectively.
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long -Lived
Assets, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long -Lived Assets and for Long-Lived
Assets for Be Disposed Of, it retains many of the fundamental provisions of that
Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraodinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion 30 to report separately
discounted operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discounted operations to include more disposal transactions, the FASB has
enhanced managements ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. Early application is
encouraged.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are
subject to risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements. The
Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates. The Company does not have
derivative financial instruments for hedging, speculative, or trading
purposes.
INTEREST RATE SENSITIVITY
Of the Company's $11.6 million principal amount of indebtedness at
September 30, 2001, $2.6 million bears interest at a rate that
fluctuates based on changes in prime rate. A one percentage point change
in the underlying prime rate would result in a $26,000 change in the
annual amount of interest payable on such debt. Of the remaining amount
of $9.0 million, $5.7 million bears interest at a fixed rate of 11%,
$2.9 million bears interest at a fixed rate of 10% and $436,000 bears
fixed interest rates ranging from 6% to 17.5%.
FOREIGN CURRENCY RISK
The Company believes that its exposure to currency exchange fluctuation
risk is insignificant because the Company's transactions with
international vendors are generally denominated in US dollars. The
currency exchange impact on intercompany transactions was immaterial for
the quarter ended September 30, 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At September 30, 2001, there was only one material claim to be settled
before the Company's Chapter 11 proceeding could be formally closed, a
tax claim with the United States Internal Revenue Service (the
"Service"). The amount of this claim is in dispute. The Company has
reserved $712,000 for settlement of this claim, which it is anticipated
would be payable to the Service in equal monthly installments over a
period of six (6) years from the settlement date at an interest rate of
6%.
CSA Private Limited
CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. ("HIS") substantially all their assets and
certain of their liabilities (the "HIS Acquisition"). At the time of
MAI's acquisition of HIS in 1996, CSA was a shareholder of HIS and, in
connection with the purchase, MAI agreed to issue to CSA shares of its
common stock worth approximately $4.8 million in August 1996, which
amount had increased to approximately $6.8 million as of December 31,
2000, pursuant to the agreement. MAI also granted CSA demand
registration rights with respect to such stock. CSA requested
registration of their shares, but MAI delayed registration based upon
its good faith exercise of its rights under its agreement with CSA. On
October 5, 1998, CSA filed a lawsuit against MAI in the U.S. District
Court for the Central District of California. Pursuant to a settlement
agreement entered into as of May 13, 1999 MAI agreed by November 1, 1999
to file, or at a minimum to commence the process to file, a registration
statement with the Securities and Exchange Commission ("SEC") for the
purpose of registering CSA's shares. CSA initiated another lawsuit in
December 1999 in the above-referenced court (a) seeking damages in
excess of $5 million; (b) enforcement of the settlement agreement; and
(c) and injunctive relief through court order to cause MAI to file with
the SEC. On March 6, 2000, the Company answered the complaint. Because
the Company did not conclude the registration statement filing by
November 1, 1999, CSA initiated a second lawsuit in January 2000 to
enforce the settlement agreement and secure injunctive relief through
court order to cause us to file a registration statement.
The Company entered into a second settlement agreement with CSA in
February, 2001 whereby we agreed to take the
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following steps on or before March 1, 2001: (i) issue CSA additional
shares of our common stock to bring CSA's total share ownership to
2,433,333 shares; (ii) immediately file a registration statement for all
of CSA's shares of our common stock; and (iii) execute a secured debt
instrument in favor of CSA in the principal sum of $2,800,000 which is
subordinate only to our present group of three (3) senior secured
leaders and requires cash installment payments to commence June 1, 2002.
The number of shares which may be sold by the selling shareholder
includes: (i) CSA's current ownership of 517,319 shares, and (ii)
1,916,014 additional shares which were issued to CSA pursuant to the
settlement agreement. On October 30, 2001 the Securities and Exchange
Commission declared the registration statement effective and as of that
date CSA's shares freely tradable.
In connection with the second settlement agreement with CSA, the Company
recorded the $2.8 million debt issuance as a reduction in paid in
capital and the 1,916,014 additional shares at par as an addition to
common stock and a reduction to additional paid in capital. The $2.8
million of debt accrues interest at 10% per annum and requires payments
of $37,500 commencing on March 1, 2002 through September 1, 2002 and
monthly payments of $107,500 commencing on October 1, 2002 until all
outstanding principal and accrued interest is paid in full. In any
event, payment of any unpaid principal and accrued interest is due by
October 1, 2003.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business. Management believes the ultimate outcome of
these matters will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of
the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None
(b) None
(c) None
(d) None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
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(b) Reports on Form 8-K.
None.
SIGNATURES
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.
MAI SYSTEMS CORPORATION
(Registrant)
Date: November 13, 2001 /s/James W. Dolan
----------------------------------------
James W. Dolan
Chief Financial and Operating Officer
(Chief Financial and Accounting Officer)
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