<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NO. 1-9158
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.)
9600 Jeronimo Road
Irvine, California 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 580-0700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by a 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 /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The registrant's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of $.01 par value Common Stock. As more fully described in
this report, shares of Common Stock are currently being distributed by the
registrant to its former creditors pursuant to its Chapter 11 Plan of
Reorganization. At March 22, 1996, the number of issued and outstanding shares
of the Company's Common Stock was 6,728,401 shares. The aggregate market value
of all of the shares of Common Stock held by non-affiliates of the registrant as
of March 22, 1996 was approximately $29,489,000. Directors and officers and ten
percent or greater stockholders are considered affiliates for the purposes of
this calculation but should not necessarily be deemed affiliates for any other
purpose.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 /x/ No / /
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's 1994 Annual Report on Form 10-K are incorporated
herein by reference in Part I; portions of registrant's 1995 Annual Report are
incorporated herein by reference in Part II; and portions of registrant's
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held May 21, 1996 are incorporated
herein by reference into Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MAI Systems Corporation designs, sells, installs and supports total
information system solutions featuring complex wide and local area networks
("WANs" and "LANs"), primarily in the hospitality and gaming industries and for
mid-size manufacturers and distributors. It provides a wide array of products
and services to its customers who continue to use the Company's proprietary
host-based computer systems, including field engineering services, new and
replacement equipment, operating systems and software application products.
These products and services upgrade, enhance and integrate these legacy systems
with currently available computer technologies. The Company also provides
on-site warranty service, maintenance service, remanufacturing and depot
service to third-party computer distributors and manufacturers.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four, Inc. to
MAI Systems Corporation on November 6, 1990. As used herein, the terms
"Company" and "MAI" include MAI Systems Corporation and its subsidiaries
(including its 70%-owned subsidiary, Gaming Systems International) unless the
context indicates otherwise. The Company commenced operations on January 29,
1985.
DESCRIPTION OF THE BUSINESS
MAI's mission is to put in place long-term information technology
partnerships with its customers by designing, installing and supporting
customer-specific total information management solutions. Focusing primarily in
the hospitality and gaming industries and with mid-size manufacturers and
distributors, it designs, sells, installs and supports information management
solutions featuring complex WANs and LANs. It provides a wide array of
products and services to its installed base of approximately 2,000 hospitality
and gaming customers and 5,000 customers who continue to use the Company's
proprietary host-based systems, including field engineering services, new and
replacement equipment, operating systems and software applications products.
These products and services upgrade, enhance and integrate legacy systems with
currently available computer technologies. The Company also provides on-site
warranty service, maintenance service, remanufacturing and depot service for
third-party computer distributors and manufacturers.
MAI markets its products and services primarily through a team selling
approach, which utilizes the Company's nationwide network of sales and service
offices, field service engineers and its telephonic account sales
representatives. The Company also markets certain products and services
through a limited number of independent value-added resellers ("VARs"),
authorized services representatives and independent software vendors ("ISVs").
The Company's activities are conducted principally in the United States
and Canada, but it also operates subsidiaries in Puerto Rico, Venezuela and the
Netherlands. Additionally, the Company sells its products through indirect
channels in the United States and abroad. These independent channels include
VARs, distributors, ISVs and local sales agents.
The Company provides on-site and help desk services to its customers in
the United States, Canada, the Netherlands, Puerto Rico and Venezuela. The
Company's foreign distributors provide support services to their customers in
countries where the Company does not have its own support organization.
PRODUCTS AND SERVICES
In 1995, the Company's revenue was derived from the following sources:
<TABLE>
<CAPTION>
Percentage of Total
Revenue
-------------------
<S> <C>
Network products and services.... 29%
Non-network products and services 69
Third-party support services..... 2
---
Total........................... 100%
===
</TABLE>
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Networking Products and Services
MAI designs, implements, maintains and supports total information system
solutions utilizing complex WANs and LANs primarily for customers in the
hospitality, gaming, manufacturing and distribution businesses. In conjunction
with these solutions, the Company's approach is to analyze a customer's
information system requirements, propose a solution and then design, integrate,
install and maintain the system. One of the principal objectives of the
Company is to help its customers utilize their data across their entire
enterprise so that information that was once limited to one area of a business
can now be available to other areas where it can be utilized for new purposes.
Once a system is on-line, the Company typically continues its relationship with
the customer by providing around-the-clock field service and telephonic
support. The systems designed by the Company utilize industry-standard
hardware and software products from leading technology vendors including Cisco
Systems, Compaq Computer, Hewlett Packard, IBM, Larscom, Microsoft, Novell and
Sun Microsystems. Additionally, the Company resells telecommunication services
and equipment, including wide bandwidth T1 lines, which enable its customers to
achieve maximum utilization of their networks.
CLS Software, the Company's hospitality product line and the products
marketed by Gaming Systems International ("GSI"), the Company's gaming
solutions subsidiary, have been designed to take advantage of network
connectivity. CLS Software's Hotel CompuSystem II provides one of the leading
information systems in the hotel and resort industry. Running under UNIX,
Hotel CompuSystem II is full-featured and provides customers with front-desk,
night audit, housekeeping and numerous other functions. Additionally, the CLS
Software products interface to more than 250 other hospitality-related
information system products, such as point-of-sale systems, telephone call
monitoring systems and minibar maintenance systems. The ease of connectivity
with third-party products is one of CLS Software's competitive advantages. CLS
Software is installed in over 2,000 sites worldwide.
GSI's on-line slot accounting and player tracking product is comprised of
a proprietary circuit board which is installed inside electronic slot machines,
and database software which gathers and maintains data collected by the circuit
boards. The Company utilizes Novell-based LANs to link the slot machines. The
GSI system monitors the activity in the individual gaming machines in real
time, providing information on the activity of each machine, the amount of
money in the machine, whether or not the machine is operating properly and
alerting the casino management if the machine has been tampered with. The
software modules include stand-alone player tracking, cage/pit management,
table games accounting, slot maintenance, employee time and attendance, and
numerous other functions.
For its customers in the manufacturing and distribution businesses, the
Company designs total information systems featuring its proprietary software
applications products and those of various third parties, and designs LANs and
WANs which enable data to be accessed across entire business enterprises.
These networks often involve implementation of frame relays, links with
telecommunications providers and advanced information storage and retrieval
technologies including document imaging.
The Company offers various communication and networking products that
permit interactive local and wide area networking for the Company's products.
These products include Novell NetWare and LAN WorkPlace for DOS, which
facilitate inter-networking of personal computers ("PC's") and the Company's
and other vendors' UNIX-based systems; Sun Microsystems' NFS, which allows
transparent file sharing between UNIX Systems; and MAI MAGNET and Open BASIC
NetServer, which allow the Company's host-based proprietary systems to
communicate with UNIX-based systems.
The Company offers around-the-clock on-site and telephonic support to its
network customers. The Company also provides a range of customer education,
training and consulting services for its application software packages and
hardware and horizontal software products. These services are offered to the
Company's customers as part of the Company's strategy of supplying the total
information solution to its customers.
Non-Networked Products and Services
The Company continues to provide products and services to its installed
base of customers who continue to use the Company's host-based proprietary
information management systems. These products and services are designed to
enable customers to benefit from their investments in the Company's products.
The Company's OpenBASIC application environment permits customers using
application software written in the Business BASIC programming language to
continue to use such application software on selected hardware platforms
designed for the UNIX, MS-DOS and Novell environments thus enabling the Company
to license its application software solutions for use on industry-standard
platforms as well as to market such platforms to certain resellers, specific
industry segments and its existing customer base. Optional OpenBASIC modules
permit developers to enhance their Business BASIC applications by integrating
them with popular UNIX and MS-DOS/Microsoft Windows software.
For its customers in the manufacturing and distribution businesses, the
Company licenses application software, such as MANBASE, ASG, Medical
Management, BFMS and TriBASE.
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The Company offers around-the-clock on-site and telephonic support, and
customer education, training and consulting services to its non-network
customers as part of the Company's strategy of supplying the total information
solution to all of its customers.
The Company markets a family of upgradeable, industry-standard platforms
based upon IBM RISC and Intel Corporation microcomputer technology and featuring
the Company's OpenBASIC application environment running under various UNIX-based
operating systems. These products, manufactured by leading companies such as
Compaq Computer, Hewlett Packard and IBM, provide cost-effective, multi-user
solutions for customers whose needs range from entry-level systems to mid-size,
multiprocessor systems that support up to 500 users.
Third-Party Support Services
In addition to providing on-site service for products which it sells, the
Company has also entered into agreements with a number of third parties to
provide field warranty service, maintenance service, remanufacturing and depot
services. The Company has an agreement with Remanco Corporation, a leading
provider of point-of-sale systems for the fine-dining industry, to provide
maintenance, remanufacturing, depot and support throughout the United States.
The Company also provides these services to several manufacturers and
distributors of Intel-based microcomputers in the United States and Canada.
MARKETING AND SALES
MAI markets its products and services primarily through a team-selling
approach, which utilizes the Company's nationwide network of sales and service
offices, field service engineers and its Irvine, California-based account
representatives. The Company also markets certain products and services through
a limited number of VARs, authorized service representatives and ISVs.
In the United States, the Company's systems are marketed by a direct sales
and marketing organization which included, as of February 29, 1996, 46 sales and
marketing personnel located in seven offices and the corporate headquarters. In
addition, the Company markets its systems internationally through its
subsidiaries which operate in Canada, Puerto Rico, Venezuela and the Netherlands
and through seven distributors that are exclusive in their jurisdictions. The
Company's international subsidiaries employed, as of February 29, 1996, 76 sales
and marketing personnel who are engaged in the marketing of MAI products from
seven sales locations in Canada and nine other sales locations abroad.
Additionally, the Company also sells its products through indirect channels both
within and outside the United States. These indirect channels include VARs,
distributors, ISVs and local sales agents.
During 1995, the Company's aggregate revenue was derived from geographic
areas as follows:
<TABLE>
<CAPTION>
Percentage of Total
Revenue
-------------------
<S> <C>
United States.......... 85.1%
Canada................. 11.3
Other areas............ 3.6
-----
Total................. 100.0%
=====
</TABLE>
The financial performance of the Company is affected by the fluctuation in
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including
import and export restrictions, possible expropriation or other governmental
actions, taxes and political changes. However, as only 3.6% of the Company's
1995 revenues were generated outside the United States and Canada, the risk
associated with these foreign operations in relation to the Company's overall
financial performance is low.
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MAINTENANCE AND SUPPORT SERVICE
The provision of around-the-clock customer service is a cornerstone of the
Company's business operations. As of February 29, 1996, the Company had
maintenance and support contracts with approximately 4,800 customers and
employed approximately 220 trained field service engineers. The Company also
had approximately 60 technical employees who provide telephonic support to the
Company's customers.
The Company's field service support is provided throughout the United
States, Canada and Puerto Rico from 100 service locations. Field service
engineers are trained in the latest products and technologies and have access
to on-line technical support. Telephonic support, which is primarily to assist
licensees of the Company's software applications products, is provided from the
Company's response centers located in Irvine, California and Dallas, Texas.
Recently, the Company began utilizing artificial intelligence-enhanced
technology to enable its support technicians to quickly identify and resolve
customer's software-related computing problems.
The Company's international subsidiaries and distributors offer repair,
preventative maintenance and reconditioning services for substantially all of
the systems marketed by the Company. As of February 29, 1996, the Company's
international subsidiaries had approximately 60 trained service technicians at
25 service locations in the countries in which they operated. The Company's
seven foreign distributors furnish maintenance service to their respective
customers. Such distributors obtain spare parts, training and technical
support from the Company.
The Company's maintenance services are generally provided pursuant to
individual maintenance contracts with customers, although time and material
services are provided in some areas. Such maintenance contracts are of varying
duration, provide annual cancellation rights and frequently require advance
payment of fees to the Company. Substantially all of the revenue earned by
maintenance operations was invoiced to customers in advance.
PRODUCTION AND PROCUREMENT
In response to market demand for standardized hardware and software
products, all of the Company's current systems offerings utilize open systems
architecture, which means that they will operate on a wide variety of
third-party hardware equipment. At present, the Company has relationships with
a number of suppliers including Cisco Systems, Compaq Computer, Hewlett
Packard, IBM and Sun Microsystems and distributors such as MicroAge and Ingram
Micro. Management believes that these relationships have enabled the Company
to reduce product costs, permit earlier availability of new technology and
offer customers products with superior performance at competitive prices. The
Company no longer manufactures proprietary hardware products but does refurbish
for resale previously owned MAI equipment.
Delay or failure in the delivery of products or components purchased from
third parties could adversely affect shipments by the Company and its ability
to conclude sales. The Company has purchased many products and components from
single sources of supply. Because the Company's current products are industry
standard, or are comprised of industry-standard components, management believes
that alternative sources of supply of similar products would be available to
the Company in the event of any interruption of delivery of a single source
supplier.
ORDER, SHIPMENT AND BACKLOG
The Company records and enters into backlog a purchase order for equipment
and software when it receives a customer's written order requesting delivery
within six months, and systems configuration and contract provisions are
verified. In the United States and in some areas outside the United States, a
deposit is also required from a customer before the order is recorded and
entered into backlog. Orders that are canceled by the customer and orders that
are not shipped within one year are removed from backlog. Orders that are
removed from backlog for non-shipment are restored if they are reinstated by
the customers.
Set forth below is certain information concerning orders, shipments and
backlog for 1995:
<TABLE>
(dollars in thousands)
<S> <C>
Orders received (net of cancellations)...... $22,848
Shipments (net of equipment returns)........ 24,898
Backlog (at period end)..................... 3,002
</TABLE>
The Company's backlog is not necessarily indicative of future revenues.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the
development of products for hospitality and gaming information management
systems and on extending and enhancing OpenBASIC. The Company's use of the
OpenBASIC
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application environment and its system integration capability permits it to have
substantial independence from individual hardware manufacturers and minimizes
the need for hardware research and development.
As of February 29, 1996, the Company employed 21 engineers, programmers
and other technical personnel in research and development activities. During
1993, 1994 and 1995, the Company spent $2,901,000, $2,698,000 and $2,667,000,
respectively, on research and development activities. The Company's research
and development expenditures related primarily to support and enhancement of
existing software products.
CUSTOMERS
The Company's customers are generally small and medium-sized manufacturing
and distribution companies, with 50 to 500 employees, hotels and resorts with
50 or more rooms, and casinos with electronic gaming equipment, such as slot
machines. During 1995, no single customer accounted for ten percent or more of
the Company's revenues.
COMPETITION
Competition is vigorous in all sectors of the worldwide market for
computer-based applications systems, networked solutions and the maintenance
and support of the software and hardware which comprise those systems. The
Company has numerous competitors (and potential competitors, including the
manufacturers of products which the Company distributes) varying widely in
their size, capabilities, market segment and geographical area, many of which
are larger and have financial resources far greater than the Company.
Within its targeted application markets, the Company has positioned itself
to sell complete solutions featuring WANS and LANs to mid-size businesses.
Within this marketplace, competition comes primarily from local VARs and ISVs
who usually resell hardware or networking products of larger original equipment
manufacturers. These VARs and ISVs are typically smaller organizations that
are usually dependent on one or two specialized software application products
targeted for specific industry market segments. Although certain of these
suppliers have national (or international) capability, most are regional and
unable to provide the full range of technical support and maintenance services
offered by the Company.
The Company also competes with independent service organizations ("ISOs"),
which provide service to end users of the Company's software products, and
third-party maintenance organizations ("TPMs"), which provide service to users
of the Company's hardware products. In addition to competing with these
companies on the basis of price and quality of service and support, the Company
has also sought to enforce its copyrights when these organizations infringe
upon the Company's proprietary rights. For example, the Company's application
software licenses prohibit end users or their agents from porting its software
to different hardware platforms, an act which is sometimes performed by an ISO.
The Company has prevailed in litigation against TPMs who have utilized the
Company's proprietary diagnostic software to provide maintenance services to
customers of the Company's hardware products. Many of the Company's services
are also provided by in-house MIS departments.
TRADEMARKS, COPYRIGHTS AND LICENSES
The Company is the owner or licensee of certain trademarks, copyrights and
other property rights associated with its businesses, including rights
associated with its proprietary application software. The Company owns or has
licensing rights, generally with terms of three years, to the principal
application software products marketed by the Company. Such licensing rights
are generally renewable. Although there is some risk that independent vendors
who own such products may elect not to renew their licensing agreements with
the Company and enter into exclusive arrangements with, or elect to install
their software on systems sold by competitors of the Company, such vendors
generally tend to continue to support the Company's marketing efforts so long
as the Company's systems provide a good opportunity for them to market their
products.
The Company is party to license agreements with IBM relating to a variety
of patents, with Novell, Inc. relating to UNIX and with a number of other
suppliers of software products. These licenses are terminable at the Company's
option and certain of the licenses require the Company to make royalty
payments.
OpenBASIC and certain other intellectual property formerly owned by the
Company is currently owned by Triple P Management BV ("Triple P"), a
corporation organized under the laws of the Netherlands, which acquired the
rights from Application Systems, Inc., a Delaware corporation controlled by the
Company's former bank lenders (the "Banks"), which held the stock of certain of
the Company's former European subsidiaries, originally acquired by the Banks in
connection with the foreclosure described under "Chapter 11 Bankruptcy
Proceedings". MAI retained an exclusive license to use OpenBASIC and other
intellectual property in the western hemisphere and has a nonexclusive license
to use it in certain other parts of the world. The license is perpetual and
royalty-free, but subject to termination under certain circumstances.
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EMPLOYEES
As of February 29, 1996, the Company had approximately 630 employees, of
which approximately 470 were employed in the United States, 80 in Canada, 10 in
Puerto Rico and 70 in other foreign locations. In March 1995 a petition for
election of a collective bargaining representative was filed with regard to
field service engineers at the Company's Chicago, Illinois, office, but the
petition was withdrawn prior to the election. The Company has not experienced
any work stoppages and considers its relationship with its employees to be
good.
CHAPTER 11 BANKRUPTCY PROCEEDINGS
Prior to its Chapter 11 bankruptcy proceedings, the Company had followed
certain business strategies that eventually led to its defaulting on its and
its Canadian subsidiary's US and Canadian Credit Agreements (the "Credit
Agreements"). Thereafter, shortly before the Company filed for bankruptcy
protection, the Banks, parties to the Credit Agreements, foreclosed on all of
the outstanding capital stock of certain of the Company's former European
subsidiaries, on certain intellectual property of the Company and on amounts
due to the Company from the European subsidiaries (the "Foreclosure") in
satisfaction of all amounts due under the Credit Agreements, which, at such
date, amounted to approximately $84,500,000.
The business strategies of the Company that led to the Foreclosure
reflected the nature of the information technology industry as it existed at
that time. Historically, organizations relied upon proprietary, host-based
computing systems to implement software applications, accounting and financial
functions. The Company, like others in the industry, manufactured and serviced
its own host-based information system. However, with the declining costs of
the personal computer and developments in the design and implementation of WANs
and LANs, the information technology industry shifted away from the
centralized, host-based information system to a system of workstations or
personal computers sharing data and networked resources over WANs and LANs.
This occurred when the Company had become highly leveraged due to the leveraged
acquisition of a computer maintenance business that the Company had previously
owned. Eventually, the Company and its subsidiary were in default under its
Credit Agreements, which indebtedness matured on November 16, 1992.
EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS
On November 18, 1993, the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court") entered an order confirming the Company's
Plan of Reorganization. The Company had been operating under Chapter 11
protection since April 12, 1993. The order was not appealed and became final
and nonappealable on November 29, 1993. On January 27, 1994, the Bankruptcy
Court entered an order which fixed January 27, 1994 as the effective date (the
"Effective Date") of the Plan of Reorganization. The summary of the material
features of the Plan of Reorganization contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 under the heading, "CHAPTER
11 BANKRUPTCY PROCEEDINGS" is included herein by this reference.
The Plan of Reorganization provided for, among other things, (i) the
satisfaction of substantially all of the unsecured (non-priority) indebtedness
of MAI, Brooke Acquisition Corporation and CLS Software, Inc., the Company's
wholly-owned subsidiaries which were parties to the bankruptcy proceeding (all
of which are collectively referred to as the "Debtors"), through the issuance of
the Company's Common Stock and (ii) the cancellation of existing equity
interests in the Debtors. The Plan of Reorganization also provided for the
substantive consolidation and merger of the Debtors and the corresponding
extinguishment of intercompany liabilities and contracts among the Debtors. At
December 31, 1995, the aggregate amount of tax claims had been reduced to
$1,019,000 and the Company continues to dispute certain tax claims.
The Company commenced distribution of Common Stock to holders of unsecured
claims on April 14, 1994. The Common Stock is issued pursuant to section 1145
of the Bankruptcy Code, which contains an exemption from registration under the
Securities Act of 1933, as amended. Through December 31, 1995, the Company had
distributed 6,688,749 shares of Common Stock to its former creditors, and the
Company has estimated that an additional 667,500 shares will be issued in
settlement of other creditor claims. The Plan of Reorganization provided
holders of unsecured claims the right to elect a limited cash recovery, and
through December 31, 1995, $790,000 in cash had been distributed pursuant to
such provision.
Under the Plan of Reorganization there is no recovery for holders of the
Company's $0.01 par value old Common Stock, and all classes of Preferred Stock
outstanding prior to the Effective Date. The interests evidenced by these
securities were extinguished by operation of the Plan of Reorganization on the
Effective Date.
Pursuant to the terms of the Plan of Reorganization, the Company filed an
Amended Certificate of Incorporation pursuant to which 10,000,000 shares of new
Common Stock were authorized for issuance. Such shares are being issued to
holders of allowed unsecured claims as described above and will also be issued
to optionees under the Company's stock option plans. The number of shares of
Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option
Plan will equal ten percent of the number of shares of Common Stock issued to
holders of allowed unsecured claims pursuant to the Plan of Reorganization and
the number of shares reserved for issuance upon the exercise of the options. Due
to the fact that the Company is still resolving certain disputed trade claims,
it is unable to calculate with certainty the number of shares that will be
reserved for the 1993 Stock Option
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Plan. On a pro forma basis, assuming $34,900,000 in allowed trade claims,
approximately 7,356,250 shares of Common Stock (adjusted for the August 1995 25%
stock split) would be issued to unsecured creditors and approximately 817,500
shares would be reserved for issuance upon the exercise of options granted
pursuant to the 1993 Stock Option Plan.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion should be read in conjunction with the audited
consolidated financial statements incorporated herein by reference to the
Company's 1995 Annual Report. In addition to the factors set forth herein,
there may be other factors, or factors which arise in the future, which may
affect the future results of the Company.
COMPETITION
Competition is vigorous in all sectors of the market for computer-based
solutions and support and maintenance services which the Company offers. The
Company has numerous competitors in each of its business lines, which vary
widely in their size, capabilities, market segments and geographical areas,
many of which are larger and have financial resources far greater than the
Company. Within its markets, competition comes primarily from local VARs and
ISVs, who usually resell hardware or networking products of larger original
equipment manufacturers, ISOs, which provide service to end users of the
Company's software products, and TPMs, which provide service to users of the
Company's hardware products. Many of the Company's services are also provided
by in-house MIS departments. There can be no assurance that the Company can
effectively compete with any or all of its competitors in any of its business
lines.
PRODUCTION AND PROCUREMENT
The networking products and services implemented, maintained and
supported by the Company utilize hardware and software products from
technology vendors. Accordingly, the Company is and will remain dependent on
the demand for products from such vendors. In addition, delay or failure in
the delivery of products or components purchased from third parties could
adversely affect shipments by the Company and its ability to conclude sales.
The Company has purchased many products and components from single sources of
supply. Because the Company's current products are industry standard,
management believes that alternative sources of supply of similar products
would be available to the Company in the event of any interruption of delivery
of a single source supplier. However, there can be no assurances that any
such products will be available or be accepted by the Company's customers.
EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS
On November 18, 1993, the Bankruptcy Court entered an order confirming
the Plan of Reorganization of the Company, BAC and CLS. The Company had been
operating under the protection of Chapter 11 since April 12, 1993. On January
27, 1994, the Bankruptcy Court entered an order which among other things fixed
January 27, 1994 as the Effective Date. The following summary of some of the
features of the Plan of Reorganization is qualified in its entirety by
reference to the Plan of Reorganization, which is an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993, and by the
more detailed description of the Plan of Reorganization that is contained in
the 1994 Form 10-K.
The Plan of Reorganization provides for, among other things, (i) the
satisfaction of substantially all of the Debtors' unsecured (non-priority)
indebtedness through the issuance of Common Stock, and (ii) the cancellation
of existing equity interests in the Debtors. The Plan of Reorganization also
provides for the substantive consolidation and merger of the Debtors and the
corresponding extinguishment of intercompany liabilities and intercompany
contracts among the Debtors.
Under the Plan of Reorganization, (i) holders of approximately $1,300,000
aggregate amount of administrative claims and approximately $100,000 aggregate
amount of priority claims receive cash distributions and (ii) holders of
approximately $3,019,000 aggregate amount of tax claims receive deferred cash
payments over periods up to six years. At December 31, 1995, the aggregate
amount of tax claims had been reduced to $1,019,000 and the Company continues
to dispute certain tax claims.
The Company commenced distribution of Common Stock to holders of unsecured
claims on April 14, 1994. The settlement of certain claims is subject to
approval by the Bankruptcy Court. The Common Stock is being issued pursuant to
Section 1145 of the Bankruptcy Code, which contains an exemption from
registration under the Securities Act. Through February 29, 1996, the Company
has distributed 6,690,986 shares of Common Stock to its former creditors. The
Company continues to contest certain claims in the Bankruptcy Court. The
Company believes that approximately 7,356,250 shares in total may be issued to
creditors, although the number could vary based on its success in pursuing
certain claim objections. The Plan of Reorganization provides holders of
unsecured claims the right to elect a limited cash recovery, and through
February 29, 1996, approximately $790,000 in cash has been distributed pursuant
to such provision.
Under the Plan of Reorganization there is no recovery for holders of the
Company's $0.01 par value old Common Stock,
- 8 -
<PAGE> 9
and all classes of Preferred Stock outstanding prior to the Effective Date.
LIMITED HISTORY OF PROFITABILITY
The Company has only had five consecutive quarters of positive operating
income since it emerged from bankruptcy in 1994. Prior to the bankruptcy the
Company incurred significant operating losses. There can be no assurance that
the Company will be able to achieve or maintain profitability or avoid losses on
a quarterly or annual basis in the future.
FLUCTUATIONS IN OPERATING RESULTS
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the timing of significant orders, the
timing of product enhancements and new product introductions by the Company, its
technology vendors and its competitors, the pricing of the Company's products
and services, competitive conditions and general economic conditions. Many of
the Company's systems sales involve lengthy sales cycles and installations.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or revenue will be recognized. As a result, the
operating results of the Company may be materially skewed if a single
transaction is completed earlier or later than expected. The Company has
experienced fluctuations in its operating results and expects to continue to
experience such fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Quarterly Results of Operations"
incorporated herein by reference to the Company's 1995 Annual Report.
Fluctuations in operating results may also result in volatility in the market
price of the Common Stock.
LIQUIDITY; VOLATILITY OF STOCK PRICE
Historically, trading volume of the Company's Common Stock has been small,
and the market for the Common Stock has been less liquid than that of many other
publicly traded companies. In August 1995, however, the Company's Common Stock
became listed on the AMEX under the symbol "NOW." Nevertheless, there can be no
assurance that a stockholder who desires to sell shares of Common Stock can sell
all of the shares that the stockholder desires to sell, either at all or at the
desired times or prices. Like the stock of other technology companies, the
market price of the Common Stock has been and may continue to be volatile.
Factors such as quarterly fluctuations in the Company's results of operations,
trading volume, the announcement of technological innovations or new products by
the Company or its competitors, general conditions in the computer hardware and
software industries, economic conditions generally, the Company's ability
to successfully increase its market share with its existing products while
expanding its product base into other markets, the strength of the Company's
distribution channels, variances between actual results of operations and the
results expected by securities analysts, and the factors mentioned under
"Fluctuations in Operating Results," among other factors, may have a significant
impact on the market price of the Common Stock.
RISKS OF CONTRACT SERVICES BUSINESS
The Company is subject to the risks associated with a contract services
business, including dependence on reputation with existing customers, volatility
of workload and dependence on ability to retain qualified technical personnel.
Also, a substantial portion of the Company's contract services revenue may be
derived from the performance of services under fixed-price contracts. There can
be no assurance that the Company can consistently perform in a profitable manner
under these contracts, especially in the field of software development, where
cost overruns are common-place.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND MARKETS
The Company expects that the market for hospitality and gaming information
management systems and network hardware and software products will continue to
be subject to frequent and rapid changes in technology and customer preferences.
Customers may delay purchases in anticipation of technological changes. In
addition, the Company's ability to develop and market information management and
network systems and other new products is dependent upon its ability to attract
and retain qualified employees. Any failure by the Company to anticipate or
respond adequately to the changes in technology and customer preferences, or to
develop and introduce new products in a timely fashion, could materially
adversely affect the Company's business and operating results.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is dependent upon its proprietary application
software and its licensing rights to the principal application software products
marketed by it. The Company relies on a combination of contractual rights,
trademarks, copyrights and other property rights to establish or protect its
proprietary rights in its products. There can be no assurance that the steps
taken by the Company in this regard will be adequate to deter misappropriation
of its proprietary rights or independent third party development of functionally
equivalent technology. Although the Company does not believe that it is
infringing on the intellectual
- 9 -
<PAGE> 10
property rights of others, there can be no assurance that such a claim will not
be asserted against the Company in the future or that any attempt to protect its
technology will not be challenged.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified personnel in the software industry is intense
and there can be no assurance that the Company will be able to attract and
retain a sufficient number of qualified employees. As the business of the
Company grows, it may become increasingly difficult for it to hire, train and
assimilate the new employees needed. The Company's success depends to a
significant degree upon the continued contributions of its key management,
marketing, product development and operational personnel, including Richard S.
Ressler or George G. Bayz. The Company does not maintain key man insurance for
any of such officers.
The services of Richard S. Ressler, Chairman of the Board, Chief Executive
Officer and Director of the Company, are provided on a non-exclusive basis
pursuant to an agreement which expires in August 1996. There can be no
assurances that Mr. Ressler will continue with the Company after such date or
that the Company will be able to find a replacement in the event that either
the Company or Mr. Ressler determines not to continue their relationship.
RISK OF FOREIGN OPERATIONS
The financial performance of the Company is affected by the fluctuation in
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including
import and export restrictions, possible expropriation or other governmental
actions, taxes and political changes. Most of the Company's foreign operations
are located in Canada.
- 10 -
<PAGE> 11
ITEM 2. PROPERTIES
As of February 29, 1996, the principal properties utilized by the Company
were as follows:
<TABLE>
<CAPTION>
Approximate Total
Type Square Footage Location
- ----- ----------------- --------------------
<S> <C> <C>
Headquarters, warehousing, administration, marketing and sales 44,538 Irvine, California
Headquarters, software development and support, training and
engineering 32,518 Irvine, California
Administration, sales, education, warehousing, test and Markham, Ontario,
repair and maintenance services 24,110 Canada
Gaming Systems International headquarters, marketing, sales,
development, support and warehousing 12,150 Las Vegas, Nevada
Administration, sales and maintenance services 4,500 Caracas, Venezuela
</TABLE>
All of the properties noted above were occupied by the Company pursuant to
leases with various expiration dates. The Company's lease for its headquarters
facility expires in December 1996. The Company believes that it can obtain
suitable space at prevailing market rates in the general vicinity of its
current location to house its headquarters' operations. In December 1995, the
Company sold a portion of its Caracas, Venezuela facility that was excess but
continues to own and occupy the remaining portion of the premises. The Company
also leases sales and service offices in 10 locations in the United States, 8
sales and service offices in Canada and 6 sales and service offices in Latin
America and the Netherlands. Generally, such leases are for terms of five
years or less, although several of the leases in the United States are for
terms of one year or less. In 1995, the Company instituted a parts management
program which reduced the number of offices maintained by the Company in the
United States from 49 to 10.
ITEM 3. LEGAL PROCEEDINGS
The Company has filed and will continue to file objections to claims
asserted in its Chapter 11 bankruptcy proceedings. The majority of these
claims would, if upheld, give rise to allowed unsecured claims entitling the
respective claimants to distributions of new Common Stock. A number of filed
objections in respect of secured claims, administrative claims, priority
claims, tax claims, convenience claims and cure claims were still outstanding
at December 31, 1995. To the extent the Company's objections to such claims
are not sustained, the Company will be obligated to pay such claims in a lump
sum in the case of convenience claims and administrative claims, and in the
case of secured claims, priority claims, tax claims and cure claims, on a
deferred basis over six to seven years, depending on the type of claim, at an
interest rate of 6% in accordance with the Plan of Reorganization. The Company
does not believe the outcome of these objections to be material.
The Company is also involved in various other legal proceedings which 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 or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 11 -
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 29, 1995 the Company received approval from the American Stock
Exchange to list its common stock ("Common Stock") on AMEX under the AMEX
symbol "NOW." Between April 10, 1994 (the date the Company's Common Stock was
first issued pursuant to the Plan of Reorganization) and August 29, 1995, the
Company's Common Stock was not listed or quoted on any national securities
exchange or in any automated interdealers quotation system. However, the
Common Stock was traded over-the-counter by various market makers under the
ticker symbol "MAIS."
The Company's Common Stock was issued pursuant to an order of the
Bankruptcy Court dated January 27, 1994. In addition, all previously
outstanding equity interests were canceled. Until April 10, 1993, the
principal market for the Company's previously outstanding common stock (the
"Old Common Stock") was the New York Stock Exchange, where the common stock was
traded under the ticker symbol "MCO." Thereafter, until November 18, 1993, the
Company's Old Common Stock was traded over-the-counter by various market
makers.
No cash dividends have been paid to date on the Common Stock. At February
29, 1996, there were approximately 618 stockholders of record.
Reference is made to the table entitled "Quarterly Data" which is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL INFORMATION
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Selected Financial Information".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Company's Annual Report under the headings, "Consolidated Balance Sheets",
"Consolidated Statements of Operations", "Consolidated Statements of
Stockholders' Equity (Deficiency)", "Consolidated Statements of Cash Flows",
"Notes to Consolidated Financial Statements" and "Independent
Auditors' Report".
Schedule II Valuation and Qualifying Accounts is set forth in this Annual
Report on Form 10-K.
All other schedules and financial statements are omitted because they are
not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be found
in the section captioned "Election of Directors" appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held May 21, 1996. Information required by this
Item with respect to executive officers may be in found in the section
captioned "Proposal I Election of Directors, Executive Officers" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held May 21, 1996. Such
information is incorporated herein by reference.
- 12 -
<PAGE> 13
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held May 21, 1996. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Management" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held May 21, 1996. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Executive CompensationEmployment Contracts and Change of Control
Arrangements; Certain Transactions with Management" appearing in the definitive
Proxy Statement to be delivered to Stockholders in connection with the Annual
Meeting of Stockholders to be held May 21, 1996. Such information is
incorporated herein by reference.
- 13 -
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements
The consolidated financial statements of the Company, the notes thereto
and the Independent Auditors' Report are incorporated herein by reference to
the Company's 1995 Annual Report.
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
(3) Exhibits:
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
2.1 First Amended Joint Chapter 11 Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as
confirmed by the United States Bankruptcy Court for the District of
Delaware on November 13, 1993, filed as Exhibit 2.1 to the
registrant's Current Report on Form 8-K dated January 15, 1994.
2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for
the District of Delaware on January 27, 1994, filed as Exhibit 2.2
to the registrant's Current Report on Form 8-K dated February 9,
1994.
3.1 Amended and Restated Certificate of Incorporation of MAI Systems
Corporation filed as Exhibit 2(a) to the registrant's Registration
Statement on Form 8-A/A filed with the Securities and Exchange
Commission on February 24, 1994.
3.2 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
registrant's Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.
10.1 Services Agreement between Remanco International, Inc. and MAI
Systems Corporation dated as of October 1, 1995.
MANAGEMENT CONTRACTS, COMPENSATORY PLANS AND ARRANGEMENTS REQUIRED TO
BE FILED AS AN EXHIBIT HERETO PURSUANT TO ITEM 14 OF FORM 10-K
10.2 MAI Systems Corporation 1993 Stock Option Plan, filed as Exhibit (f)
to the registrant's Registration Statement on Form 8-A, filed with
the Securities and Exchange Commission on January 27,1994.
10.3 Employment Agreement, dated as of August 15, 1994 as amended as of
October 17, 1994, by and between the registrant and Orchard Capital
Corporation, relating to the services of Richard S. Ressler,
Chairman and Chief Executive Officer of the Company, filed as
Exhibit 10.2 to the registrant's 1994 Annual Report on Form 10-K
11.1 Computation of Income Per Share
13.1 The Company's Annual Report to Stockholders for the year ended
December 31, 1995, but only to the extent such report is expressly
incorporated by reference into Item 5, 6, 7, 8 and 14(a)(1) of this
report and such report is not otherwise deemed to be filed as part
of this Annual Report on Form 10-K.
21.1 Subsidiaries of MAI Systems Corporation
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
</TABLE>
- 14 -
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
By: /s/ Richard S. Ressler
-----------------------
Richard S. Ressler
Chairman and Chief Executive Officer
Dated: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 1996.
<TABLE>
Signatures Title
- ---------- -----
<S> <C>
/s/Richard S. Ressler Chairman of the Board of Directors
- --------------------------
Richard S. Ressler
/s/George G. Bayz Director, President and Chief Operating Officer
- --------------------------
George G. Bayz
/s/Alan A. Gleicher Director
- --------------------------
Alan A. Gleicher
/s/ Morton O. Schapiro Director
- --------------------------
Morton O. Schapiro
/s/ William Brian Kretzmer Vice President, Chief Financial Officer and
- -------------------------- Treasurer
William Brian Kretzmer (Chief Accounting Officer)
</TABLE>
- 15 -
<PAGE> 16
MAI SYSTEMS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Additions
----------------------
Balances Charged to Charged to Balances
Beginning Costs of Other End of
<S> <C> <C> <C> <C> <C>
Descriptions of Year Expenses Accounts Write-offs Year
- --------------------------------------- --------- ---------- ---------- ---------- -------
Year ended December 31, 1993:
Allowance for doubtful accounts $8,314 $1,101 $- $(6,148)* $3,267
========= ========== ========== ========== =======
Provision for inventory obsolescence $17,304 $2,845 $- $(4,389)* $15,760
========= ========== ========== ========== =======
Year ended December 31, 1994:
Allowance for doubtful accounts $3,267 $137 $- $(816) $2,588
========= ========== ========== ========== =======
Provision for inventory obsolescence $15,760 $1,400 $- $(1,180) $15,980
========= ========== ========== ========== =======
Year ended December 31, 1995:
Allowance for doubtful accounts $2,588 $613 $- $(2,109) $1,092
========= ========== ========== ========== =======
Provision for inventory obsolescence $15,980 $734 $- $(1,578) $15,136
========= ========== ========== ========== =======
</TABLE>
*Includes effect of the foreclosure of certain European subsidiaries on March
22, 1993.
<PAGE> 1
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
EXHIBIT 10.1
SERVICES AGREEMENT
between
REMANCO INTERNATIONAL, INC.
and
MAI SYSTEMS CORPORATION
This SERVICES AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of October, 1995 (the "Effective Date") by and between REMANCO
INTERNATIONAL, INC., a Delaware corporation ("Remanco"), having is principal
place of business at 260 Fordham Road, Wilmington, Massachusetts 01887, and MAI
SYSTEMS CORPORATION ("MAI"), a Delaware corporation, having its principal place
of business at 9600 Jeronimo Road, Irvine, California 92718.
In consideration of the mutual premises and covenants contained herein,
Remanco and MAI hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following words and terms
shall be defined as indicated below.
"Customers" means a user of Remanco Equipment who has entered into a
Services Agreement for said Equipment with Remanco, which Services Agreements
are listed in Exhibit A attached hereto, and all other users of Remanco
Equipment.
"Employees" means those employees of Remanco in Remanco's field service
and depot repair operations listed in Exhibit B attached hereto.
"Equipment" means hardware and firmware supplied by Remanco to an end user
and listed in Exhibit C attached hereto.
"Parts" means those repairable spare parts, including whole Equipment
units, necessary, used or useful in performing Services and listed in Exhibit D
attached hereto.
"Remanco Products" means Equipment and Software as defined herein.
"Service Assets" means the Parts and T/R Equipment as defined herein.
"Services" means hardware maintenance and/or repair services provided in
accordance with the terms of Remanco's Services Agreement or on a time and
materials basis in accordance with Remanco's policies and procedures.
"Services Agreement" means Remanco's standard System Maintenance and
Software Support Agreement pursuant to which Remanco provides hardware and
software maintenance, repair services and support. The current standard
Services Agreement is attached hereto as Exhibit E.
"Software" means Remanco's software licensed with Remanco Equipment to
comprise Remanco Products and Remanco Diagnostic Programs, which Software is
listed in Exhibit C attached hereto.
"T/R Equipment" means Remanco's test fixtures, technicians' tool boxes,
equipment, diagnostics software and equipment, documentation, procedures,
manuals and the like necessary, used or useful in performing Services and
listed in Exhibit F attached hereto.
2. TRANSFER OF SERVICE AND REPAIR BUSINESS.
2.1 Employees. At 12:01 A.M. on the Effective Date, MAI shall offer
employment to the Employees listed in Exhibit B attached hereto who are
employees of Remanco at the salaries listed in such Exhibit. Remanco shall use
its
<PAGE> 2
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
good faith, best efforts to secure the agreement of the Employees to become an
employee of MAI. Remanco will, with effect from the close of business on
October 1, 1995, terminate the employment of the Employees and pay to all the
Employees all amounts due and owing to them in respect of salary, commissions,
holiday and vacation pay, business and travel expenses, and other amounts
due, less any amounts owed to Remanco by the Employees. Any Employees hired by
MAI shall be new hires of MAI, shall have no accrued MAI retirement, vacation or
pension benefits and MAI shall not be deemed to be a successor employer of such
new hires for any purpose. However, each of such Employees hired by MAI shall
be covered by MAI's medical, dental, life insurance and other standard employee
benefit programs as of the Effective Date and shall be credited with their years
of service with Remanco solely for purposes of determining their vacation
accrual rates and their eligibility for participation in MAI's benefit programs.
[**]
2.3 Service Assets. Remanco shall furnish MAI with an inventory of Parts
sufficient to maintain the Customers and shall during the Term of this
Agreement, maintain such inventory at appropriate levels. On the Effective
Date, Remanco shall furnish to MAI the T/R Equipment listed in Exhibit F. All
Parts and T/R Equipment remain the property of Remanco. The initial cost to
ship and insure all Parts and T/R Equipment to MAI shall be borne by Remanco.
The parties agree to file the appropriate UCC statements and notices to protect
each other's rights in the Service Assets.
3. PERFORMANCE OF SERVICES.
3.1 Appointment. Remanco hereby appoints MAI, and MAI hereby accepts
appointment, as the exclusive Authorized Service Representative of Remanco to
provide Services to Customers under Service Agreements on a subcontract basis,
except Remanco National Accounts located in Remanco distributor territories
listed in Exhibit L. MAI may not appoint a secondary or sub-authorized service
representative to service Remanco Products without Remanco's prior written
consent, which consent will not be unreasonably withheld. MAI may not provide
support of Remanco Products, in any manner, to unauthorized providers of
Remanco hardware, software, or service.
3.2 Contract Maintenance Services. Commencing on the Effective Date,
during the Term of this Agreement, MAI shall perform Services on Remanco
Equipment under Services Agreements upon the request of Remanco as follows:
(a) Remanco shall maintain a first call telephone desk for its
Customers and shall take directly all calls requesting Services. Remanco shall
screen each call to determine whether the Customer requires software support to
be provided by Remanco, the problem can be resolved during the telephone call or
Services are required. If Services are required, Remanco shall contact MAI. MAI
will perform all Services, including hardware field maintenance, depot repair
and Consigned Service Assets management. In addition, MAI will perform
warranty, installation and time and materials Services as requested by Remanco.
(b) MAI shall maintain a 7 day-24 hour dedicated national Remanco
telephone number to receive all requests for Services.
(c) MAI shall perform Services hereunder in a good, competent,
professional manner, consistent with industry standards and in material
conformance with the requirements of Service Agreements and Remanco's service
policy and procedures, attached hereto as Exhibit K.
3.3 Non-Contract Services. Any services or repairs performed on site by
MAI upon the authorization of Remanco which are not subject to coverage under
the terms of a Service Agreement between the Customer and Remanco shall be
subject to the hourly fee portal to portal as listed in Exhibit G attached
hereto. MAI will not perform any non-contract Services without first receiving
Remanco's authorization therefor. Such repairs include but are not limited to
engineering change orders, systems abuse/misuse and service during
Non-Contracted Hours of Coverage (as defined in Section 3.4 hereof).
3.4 Hours of Coverage. "Contracted Hours of Coverage" are those hours
listed in the Services Agreements corresponding to the respective contracts
during which the Customer has subscribed for on site maintenance coverage.
"Non-Contracted Hours of Coverage" are all other times except the time
identified above for the respective Customer.
4. TERM. This Agreement shall be for an initial term (the "Initial Term") of
five (5) years, commencing on the Effective Date. During the first three (3)
years of the Initial Term or until earlier prepayment of Loan, the payment
provisions in Section 6.2 and the Loan in 6.3 shall be in effect. Thereafter,
for the remaining years of the Initial Term, provided Remanco is not then in
default, the payment provisions would revert to a standard subcontract basis,
where Remanco pays to MAI monthly in advance for Contract Services to be
performed in the immediately following month. Thereafter, this Agreement shall
automatically be renewed for subsequent one (1) year terms ("Renewal Term")
unless written notice of either party's desire not to renew is sent 90 days
prior to the respective anniversary date. This Section is subject to the early
termination pursuant to Article 15.
<PAGE> 3
5. SOFTWARE LICENSE.
5.1 License. Subject to the terms and conditions of this Agreement,
Remanco grants to MAI a nonexclusive license to access and use the Software to
provide Services to Customers under this Agreement. MAI acknowledges and agrees
that the Diagnostic Programs, which form a part of the Software being provided
by Remanco, are licensed and not sold to MAI hereunder. MAI agrees that the
Diagnostic Programs shall be used only by Remanco or MAI's employees, provided
such employees have executed a Confidentiality Agreement, to provide Services to
Customers. Neither MAI nor its employees, shall access, copy or use such
Diagnostic Programs unless this Agreement remains in force. MAI acknowledges
and agrees that such Diagnostic Programs may form a part of the Software
residing on the Remanco Products delivered to MAI hereunder or in the possession
of Customers and hereby grants Remanco the right to install and maintain the
Diagnostic Programs on the Remanco Products. In addition, MAI acknowledges and
agrees that Remanco may remove all or part of such Diagnostic Programs at any
time and from time to time. MAI hereby acknowledges that it is not permitted,
nor shall it permit anyone else, in any circumstances to decode, reverse
engineer, decompile or disassemble any Software.
5.2 Copyright/Trade Secret. MAI acknowledges that the Software is
protected by the copyright laws of the United States and other countries and/or
that it embodies valuable expenditure of considerable time and money by Remanco.
MAI shall hold the Software in confidence and shall not, without the prior
written consent of Remanco, disclose or otherwise make available such Software
in any form to any person, except to MAI's own employees and Customers only for
purposes specifically authorized herein, and in accordance with the appropriate
valid Software License Agreement, and confidentiality agreements. MAI agrees
that it shall obtain all copies of the Software from Remanco and, accordingly,
that the Software may not be copied or modified, in whole or in part, without
the prior written consent of Remanco, except for a reasonable number of backup
or archival copies for its own internal use pursuant to this Section 5. MAI
shall not remove or obscure any copyright, patent, trademark, trade secret or
similar notice affixed to any Software and shall reproduce and affix such notice
on any copies or modifications of the Software made with the prior written
consent of Remanco, and the inclusions of such notice shall be a condition of
that consent. MAI shall take appropriate action, by instruction, agreement or
otherwise, with respect to any persons permitted access to the Software in order
to enable MAI to satisfy its obligations hereunder. MAI agrees to cause each of
its employees having access to the Software or other confidential information of
Remanco to execute confidentiality agreements.
5.3 Escrow. On the Effective Date, Remanco shall deposit into an escrow
account with a third party escrow, or add MAI as a party to such escrow,
Remanco's proprietary Software source code, proprietary hardware and firmware
drawings and specifications and vendors list. During the Term of the Agreement,
Remanco shall promptly add to such escrow account any releases, additions,
modifications, changes or enhancements to such deposited items. The escrow
agreement is attached hereto as Exhibit J. Upon bankruptcy or a material
default by Remanco, the escrow agreement would provide access to MAI to all
items deposited into the escrow solely in order to permit MAI to perform its
obligations under the Services Agreement.
<PAGE> 4
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
6. FEES.
6.1 Fees. MAI will receive [**] the contract price for hardware
maintenance for Remanco Equipment under contract maintenance. Based upon the
current Customer Service Agreements listed in Exhibit A, MAI will receive [**]
monthly. Such amount will be adjusted quarterly or earlier as required to
reflect additions or deletions from such Exhibit A. MAI will perform
installation, warranty and such other non-contract hardware maintenance services
for Remanco as authorized by Remanco on a time and material basis at the rates
set forth in Exhibit G attached hereto.
6.2 Payment of Fees. On or before the Effective Date, Remanco shall
establish a lock-box ("Remanco Daily Lock-Box") into which all Customer receipts
from Services Agreements and performance of Services shall initially be
deposited. Such Remanco Daily Lock-Box shall be under the control of Remanco,
so long as no Event of Default as defined in Section 15 of this Agreement has
occurred and is continuing, and all sums deposited therein shall be cleared on a
daily basis. Remanco shall provide to MAI a daily cash report thereof or direct
on-line access to the daily cash report. [**]Remanco shall pay to MAI, due on
the 1st of each month and payable on or before the 15th of each month,
commencing January 15, 1996, [**] (representing the estimated monthly percentage
due to MAI for hardware contract maintenance, and subject to adjustment as
provided below). If any payment due hereunder is more than ten (10) days late,
in addition to all other rights and remedies available to MAI, Remanco shall pay
to MAI a late charge of One Hundred Dollars ($100.00) per day such payment is
late calculated from the payment due date. At the end of each quarter prior to
the 15th of the first month of the next quarter, Remanco and MAI will conduct a
reconciliation to determine the proper amount to have been paid by Remanco for
the hardware maintenance contract receipts during the preceding quarter and to
adjust the monthly amount for the following quarter depending upon additions
and/or deletions to the Customer Schedule. If Remanco has underpaid such
amount, Remanco will pay to MAI such underpayment. If Remanco has overpaid, the
parties will apply such overpayment against the next payment to MAI. For all
installation, warranty and other non-contract hardware maintenance services
authorized by Remanco, MAI will invoice Remanco at the contract rate on a
monthly basis and Remanco will pay to MAI the invoiced amount.
[**]
7. REMANCO WARRANTIES AND REPRESENTATIONS. Remanco represents, warrants and
covenants that, as of the Effective Date:
7.1 No Conflicts. The execution and delivery of this Agreement by
Remanco, the consignment of the Service Assets to MAI, the assignment of the
Services Agreements to MAI, and the performance of its obligations hereunder
will not violate or conflict with any terms of the Articles of Incorporation or
the Bylaws of Remanco or constitute a breach of or (with the giving of notice or
lapse of time, or both) a default under, or result in the termination of any
right or license or the acceleration of any obligation under or the creation of
any lien, charge or other restriction on the Service Assets or Service
Agreements, or impair or terminate any licenses, permits or other contractual
relations that Remanco has with any party; and will not conflict with or, to the
best of Remanco's knowledge, violate any applicable law, regulation, judgment,
order or decree of any government, governmental instrumentality or court having
jurisdiction over Remanco.
7.2 Service Assets, Liens and Encumbrances. The Service Assets are usable
for their respective intended purposes and are adequate to perform the Services
hereunder consistent with the manner performed by Remanco prior to the Effective
Date. Remanco shall have good and marketable title to the Service Assets and
shall deliver to MAI evidence of the subordination of any liens or security
interests therein within ten (10) days after the Effective Date, and shall
deliver the Service Assets to MAI hereunder free and clear of all liens, claims,
encumbrances, restrictions, easements, security interests, charges or equities
of any nature whatsoever.
7.3 Litigation, Disputes, Claims and Investigations. To the best of
Remanco's knowledge, neither Remanco, nor any officer, director or employee of
Remanco, is a party to any pending or threatened litigation, action, suit,
dispute, investigation, claim or proceeding relating in any way to Remanco,
including, without limitation, any matters relating to Remanco's employees,
customers or taxes that would in any material way adversely affect MAI's rights
and obligations under the Agreement.
<PAGE> 5
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
7.4 Employees. Exhibit B sets forth the names and addresses of all
employees of Remanco to be offered employment by MAI and lists for each (i)
their current salary; (ii) the years of service with Remanco (including any
predecessor entities; (iii) their current titles; and (iv) work locations.
Remanco shall deliver to MAI copies of all agreements with or relating to such
Employees and copies of relevant documents in their personnel files and
employee records for the past year, conditional upon consent of such Employees.
7.5 Service Agreements. Exhibit E consists of a complete list of all
agreements, contracts, licenses, commitments and proposals, oral or written, for
the provision of hardware maintenance and repair services to which Remanco is a
party and that currently are in whole or in part active or executory or pursuant
to which Remanco is or may be obligated [**]. Remanco has made and will make
available to MAI prior to the Effective Date complete and correct copies of all
written Service Agreements listed in Exhibit E (together with all amendments and
supplements thereto). Such Service Agreements are in full force and effect, and
Remanco has, and, to the best of its knowledge, all other parties to such
Service Agreements have, in all respects, performed all obligations required to
be performed by it or them and are not in default in any material respect or
condition which, after notice or lapse of time or both, is or would constitute a
material default thereunder, except as noted on Exhibit E.
7.6 No Adverse Fact and Disclosure. To the best of Remanco's knowledge,
Remanco has disclosed all facts which it reasonably believes could materially
and adversely affect the Service Assets or the Service Agreements. Remanco has
no information, nor is it aware of any facts, indicating that any of its
customers intend to cease doing business with Remanco other than in the regular
course. Further, to the best of its knowledge neither this Agreement nor any
letter, certificate or other document furnished by Remanco to MAI pursuant
hereto contains any untrue statement of a material fact or, omits to state a
material fact necessary to make the statement contained therein and in this
Agreement and its Exhibits not misleading.
8. AUDIT RIGHTS. Once per year either party may, upon reasonable notice,
audit the records of the other only to the extent that same relates directly to
the calculation of fees under this Agreement. All audits will be conducted at a
mutually convenient time and date during normal business hours. All audits are
at the expense of the party conducting same except in the case where the total
fee for the period in question (not less than a 12 month period) was incorrectly
understated by at least 5% in which case all reasonable costs to conduct the
audit shall be borne by the party being audited.
9. DISTRIBUTION OF REMANCO PRODUCTS. Subject to the terms and conditions of
this Agreement, Remanco shall appoint MAI as Remanco's nonexclusive value added
reseller to market, sell, distribute and support Remanco Products in North
America to MAI customers or prospective customers in the hotel or gaming systems
markets pursuant to a distribution agreement to be negotiated and signed prior
to October 31, 1995, incorporating the business points set forth in Exhibit M
attached hereto.
10. REMANCO RESPONSIBILITIES.
10.1 Training. During the Term of this Agreement, at the request of MAI,
Remanco shall train MAI personnel in training courses for the maintenance,
service and repair of Remanco Products. The schedule for such courses shall be
as mutually determined by Remanco and MAI. For all courses held at Remanco's
facilities, such courses shall be at no cost to MAI for the course, Remanco
trainer and course materials, provided that MAI will be responsible for all
costs of travel, lodging and expenses for its personnel in attending such
courses. For all courses held at non-Remanco locations, MAI shall pay or
reimburse Remanco for the coach-class travel and reasonable lodging and expenses
incurred by Remanco in providing its trainers for such courses.
10.2 Software Support. During the Term of this Agreement, Remanco shall
be solely responsible for providing all Software support to Customers under
Service Agreements. In consideration of MAI's agreements and covenants
hereunder, Remanco shall provide to MAI at no cost by telephone or modem
Software support required by MAI to complete any Services for Customers under
Service Agreements.
10.3 Help Desk. During the Term of this Agreement, Remanco shall
establish and maintain a telephone help desk pursuant to the terms and
conditions of Services Agreements to provide technical assistance to Customers
and to MAI personnel.
11. COVENANTS.
11.1 Non Solicitation of Employees. During the Initial Term and any
Renewal Term hereof, MAI and Remanco agree that, unless prior written approval
is obtained from the other in writing, neither shall solicit, directly or
indirectly, the services of any employees of the other, including, in the case
of Remanco, any Employees hired by MAI.
11.2 Competitive Products. In partial consideration for the agreements
and covenants of Remanco hereunder, MAI shall not, during the Term of this
Agreement, sell any POS equipment in North America competitive with Remanco
Products, without Remanco's prior written consent, other than for sale to gaming
institutions by Gaming Systems International.
12. USE OF REMANCO'S TRADE NAME AND TRADEMARKS; PUBLIC RELEASE.
<PAGE> 6
12.1 License to Use Trademarks. Remanco hereby grants to MAI a
nonexclusive license during the Initial Term or any Renewal Term, as applicable,
to use the Trademarks in the United States, provided that they are used solely
in connection with the servicing of the products and in accordance with
Remanco's specifications as to style, color and typeface. Upon expiration or
termination of this Agreement, MAI will immediately take all action necessary to
transfer and assign to Remanco, or its nominee, any right, title or interest in
or to any of the Trademarks, and the goodwill related thereto, which MAI may
have acquired in any manner as a result of the handling and selling of Products
under this Agreement and MAI shall immediately cease to use any Trademark of
Remanco. MAI hereby agrees to notify Remanco immediately of any infringement or
potential infringement of any Trademark in the United States.
12.2 Registration. MAI agrees not to apply for registration of any
Trademarks in the United States or for any mark confusingly similar thereto.
Remanco may elect to apply for registration of any of the Trademarks in the
United States at its expense, and, in such event, Remanco shall so notify MAI
and MAI shall assist and cooperate with Remanco in connection therewith, so long
as no costs are incurred by MAI.
12.3 Public Release. Any advertising or promotional literature or
announcement to the press by either party regarding its relationship with the
other or otherwise utilizing the other's name must be approved by both parties
hereto in advance in writing. The only authorized representation to third
parties by MAI is to identify itself as "Remanco Authorized Service
Representative" for Remanco's Systems. Such use shall be preceded by MAI's own
name.
13. INDEMNIFICATION.
13.1 MAI Indemnification. To the extent a claim or action is brought
against Remanco by a third party based on or related to MAI's failure to observe
or perform its obligations under this Agreement, MAI shall indemnify and hold
Remanco harmless from and against any and all damages, costs and expenses,
including reasonable attorney's fees, suffered by or awarded against Remanco.
13.2 Remanco Indemnification. To the extent a claim or action is brought
against MAI by a third party based on or related to: (i) Remanco's failure to
observe or perform its obligations under this Agreement; or (ii) copyright or
patent infringement, Remanco shall indemnify and hold MAI harmless from and
against any and all damages, costs and expenses, including reasonable attorney's
fees, suffered by or awarded against MAI.
13.3 Intellectual Property Infringement. Infringement Indemnification by
Remanco. At its expense, Remanco will defend any action brought against MAI or
its validly licensed Customers, and pay all reasonable expenses and damages of
MAI or its Customers, as applicable, for any claims that the Products infringe a
United States or Canadian patent or copyright ("Infringement"). MAI must notify
Remanco promptly in writing of the action (and all prior claims relating to such
action) and give Remanco sole control of the defense and negotiations for its
settlement or compromise. Remanco shall pay all damages and costs awarded
therein against MAI but shall not be responsible for any compromise made without
its consent. In the event of a final judgment which prohibits MAI's or its
Customers'
<PAGE> 7
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
continued use of any Product by reason of an Infringement, or if at any time
Remanco is of the opinion that any Products are likely to become the cause of an
action for Infringement, Remanco's sole obligation will be to use reasonable
commercial efforts to (a) obtain the rights to continue use of any such Products
or (b) replace or modify such Products so that they are no longer infringing.
Remanco shall have no liability for any claim of Infringement based on the
Products having been modified by MAI without the express authorization by
Remanco. THIS SECTION STATES THE ENTIRE RESPONSIBILITY OF REMANCO CONCERNING
INFRINGEMENT OF PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS,
OR PART THEREOF, OR BY THEIR OPERATION.
14. DISCLAIMERS.
(a) IN NO EVENT WILL REMANCO BE LIABLE FOR ANY (i) DAMAGES CAUSED BY
MAI's FAILURE TO PERFORM ITS COVENANTS AND RESPONSIBILITIES; (ii) DAMAGES
CAUSED BY REPAIRS OR ALTERATIONS DONE OUTSIDE OF THE SCOPE OF THIS AGREEMENT;
(iii) DAMAGES DUE TO DETERIORATION DURING PERIODS OF STORAGE BY MAI; or (iv)
LOST PROFITS, INCIDENTAL, SPECIAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES.
(b) IN NO EVENT WILL MAI BE LIABLE FOR ANY (i) DAMAGES CAUSED BY
REMANCO'S FAILURE TO PERFORM ITS COVENANTS AND RESPONSIBILITIES; (ii) DAMAGES
CAUSED, RESULTING FROM OR CONTRIBUTED TO BY REPAIRS OR ALTERATIONS DONE BY ANY
OTHER PARTY AUTHORIZED BY REMANCO; (iii) DAMAGES DUE TO A CHANGE IN
SPECIFICATIONS WHERE MAI WAS NOT ADEQUATELY INFORMED OF SUCH CHANGE IN ADVANCE;
(iv) DAMAGES DUE TO DEFECTIVE PARTS AND/OR DIAGNOSTIC PROGRAMS SUPPLIED BY
REMANCO; or (v) LOST PROFITS, INCIDENTAL, SPECIAL, INDIRECT, PUNITIVE OR
CONSEQUENTIAL DAMAGES.
(c) MAI will undertake all reasonable and necessary action permitted or
required by laws and regulations to ensure that Remanco's limits of
responsibility as set forth above are valid and enforceable against whomever
they are applicable, so longs as such action is at no cost to MAI. MAI will
immediately inform Remanco as soon as MAI becomes aware of liability claims by
a third party against the Products.
15. TERMINATION AND REMEDIES.
15.1 Default. Upon a material breach of either party of any of its
obligations or covenants herein agreed to, the non-defaulting party shall send
the defaulting party notice detailing the default. The defaulting party shall
have 30 days to cure said default unless said party commences to cure said
default within the 30 days, acting in good faith, and it is reasonably
necessary that the cure period be extended. In such case the cure period shall
be extended to a reasonable period not to exceed an additional 30 days. Should
the default not be cured within the time period identified above, an "Event of
Default" will be said to have occurred.
15.2 Default by Remanco. In the event of (i) bankruptcy (ii) insolvency
or (iii) Event of Default by Remanco for failure to pay to MAI amounts due
under the Agreement and failure to cure such default in full within thirty (30)
days of MAI's written notice, [**] MAI will at MAI's option either perform the
Software support or will pay to Remanco a fee as determined by MAI and Remanco
for Remanco's performance of Software support. MAI will be responsible for
purchasing all necessary replacement Equipment and Parts necessary to perform
Services and perform or pay Remanco for performing Customer invoicing and first
call support. [**]The above remedies are not exclusive and are cumulative and
are in addition to all other remedies hereunder, at law or in equity.
15.3 Termination by Remanco. Upon the occurrence of (i) bankruptcy;
(ii)insolvency or (iii) an Event of Default by MAI, Remanco may send written
notice to MAI terminating the Agreement at any time after (5) business days.
Upon the expiration or termination of this Agreement for any reason the
following shall occur:
(i) MAI shall immediately cease from acting as an Authorized Service
Representative.
(ii) MAI shall promptly return to Remanco any and all Remanco-owned
Parts or other equipment, materials, documentation or data, including without
limitation all software, firmware, and all Remanco confidential information in
the possession of MAI for whatever reason or purpose.
(iii) The parties shall immediately pay to each other all monies due and
payable under the terms of the Agreement.
<PAGE> 8
15.4 Injunctive Relief. Because unauthorized use or transfer of the
Software or the Diagnostic Programs, or any information contained therein, or
any other Remanco confidential information would diminish substantially the
value of such materials and would irrevocably harm Remanco, if MAI breaches the
provisions of Sections 5.1, 5.2 or 16.3 of this Agreement, Remanco shall
(without limiting its other rights or remedies) be entitled to equitable relief
(including but not limited to injunctive relief) to protect its interests and,
if MAI has not returned the Software, Diagnostic Programs or any other Remanco
confidential information, to Remanco, or certified to Remanco's satisfaction
that the Software, Diagnostic Programs or any other Remanco confidential
information has been destroyed. Remanco shall have the right to enter and take
possession of the Software, Diagnostic Programs or any other Remanco
confidential information, wherever located, without liability for damage, so
long as Remanco shall have acted reasonably and in good faith.
16. GENERAL.
16.1 Assignment. The rights and obligations under this Agreement are
personal in character. Neither this Agreement nor any rights granted hereunder
may be assigned by either party voluntarily or by operation of law without the
other party's prior written consent, not to be unreasonably withheld, and any
such attempted assignment shall be null and void. The Agreement shall inure to
the benefit of and be binding upon any successors or assigns of the parties.
16.2 Force Majeure. Neither party shall be liable for any loss, injury,
delay or damage suffered or incurred by such other party for causes beyond its
reasonable control.
16.3 Confidentiality. Remanco and MAI agree that in addition to the
software, certain information, whether in oral, written and/or any other form,
supplied by one party under this Agreement to the other party during the course
of this Agreement is proprietary, secret or confidential. This information
includes, without limitation, all information with respect to the Remanco
Products, including marketing plans, product developmental materials, training
documentation, Software documentation and maintenance manuals and drawings. All
such information shall be held in confidence for a period of five (5) years
following the date of disclosure and shall be used only for the purposes of this
Agreement.
16.4 Relationship of the Parties. Remanco and MAI hereby acknowledge that
both parties hereto are independent contractors. Neither party shall represent
itself as a partner, joint-venture, agent, employee or general representative of
the other. Both parties hereto acknowledge that they shall have no right power
or authority to, in any way, obligate the other party to any contract or other
obligation.
16.5 Entire Agreement. This Agreement is the exclusive statement of the
terms and conditions between the parties with respect to its subject matter as
of its date, supersedes all prior agreements, negotiations, representations and
proposals, written or oral.
16.6 Notices. All notices and other communications in connection with the
Agreement shall be in writing and shall be sent to the respective parties
following addresses, or to such other addresses as may be designated by the
parties in writing from time to time in accordance with this Section, by hand,
or by registered or certified air mail, postage prepaid, or by express courier
service, service fee prepaid. In the case of Remanco, no such notice, waiver or
other written notice from Remanco under the terms of this Agreement shall have
any force or effect unless it is signed by either the President, Chief Executive
Officer or Chief Operating Officer of Remanco.
TO REMANCO: Remanco International, Inc.
260 Fordham Road
Wilmington, MA 01887
Fax: (508)658-5998
Attention: Chief Operating Officer
TO MAI: MAI Systems Corporation
9600 Jeronimo Road
Irvine, CA 92718
Fax: (714)580-2378
Attention: Vice President and General Counsel
All notices shall be deemed received (i) if given by hand, (ii) if given
by air mail three (3) business days after posting, or (iii) if given by express
courier service, the next business day in the jurisdiction of the recipient.
<PAGE> 9
16.7 Severability. If any provision of this Agreement or the application
thereof to any party or circumstances shall be declared void, illegal or
unenforceable, the remainder of this Agreement shall be valid and enforceable
to the extent permitted by law. In such event, the parties shall use their
best efforts to replace the invalid or unenforceable provision by a provision
that, to the extent permitted by the applicable law, achieves the purposes
intended under the invalid or unenforceable provision. Any deviation by either
party from the terms and provisions of this Agreement in order to comply with
applicable laws, rules or regulations shall not be considered a breach of the
Agreement.
IN WITNESS WHEREOF, Remanco and MAI hereby have duly executed this
Agreement as of the Effective Date.
REMANCO INTERNATIONAL, INC. MAI SYSTEMS CORPORATION
By:____________________________ By:_____________________________
Roy S. Roberts George G. Bayz
Chief Operating Officer President and
Chief Operating Officer
Date:__________________________ Date:___________________________
Attest:________________________ Attest:_________________________
<PAGE> 1
EXHIBIT 11.1
MAI SYSTEMS CORPORATION
COMPUTATION OF INCOME PER SHARE
Years ended December 31, 1993, 1994 and 1995
<TABLE>
1993 1994 1995
(in thousands except per share data)
<S> <C> <C> <C>
Income before extraordinary item $ 28,177 $3,628 $ 8,623
Extraordinary item 117,312 916 1,566
-------- ------ -------
Net income $145,489 $4,544 $10,189
-------- ------ -------
Number of shares of Common Stock expected
to be issued pursuant to the Plan of
Reorganization 7,356 7,356 7,356
Weighted average number of shares of Common
Stock equivalents outstanding - - 904
-------- ------ -------
7,356 7,356 8,260
-------- ------ ------
Primary and Fully diluted income per share
of Common Stock:
Income before extraordinary item $ 3.83 $ 0.49 $ 1.04
Extraordinary item 15.95 0.12 0.19
-------- ------ ------
Net income $ 19.78 $ 0.61 $ 1.23
-------- ------ ------
</TABLE>
<PAGE> 1
EXHIBIT 13.1
Sections of the Registrant's Annual Report to Stockholders Incorporated by
Reference:
<TABLE>
<S> <C>
13.1.1 Selected Financial Information
13.1.2 Management's Discussion and Analysis of Financial Condition and Results of Operations
13.1.3 Independent Auditors' Report
13.1.4 Consolidated Balance Sheets
13.1.5 Consolidated Statements of Operations
13.1.6 Consolidated Statements of Stockholders' Equity (Deficiency)
13.1.7 Consolidated Statements of Cash Flows
13.1.8 Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 2
Exhibit 13.1.1 SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE-MONTH
TRANSITIONAL
PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, Year Ended December 31,
-------------------------- ------------ -----------------------------
(dollars in thousands except per share data) 1991 1992 1992(1) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2)
Revenues $ 336,297 $ 279,370 $ 63,821 $115,291 $66,095 $66,294
Operating Income (Loss) $ (40,589) $(159,608) $ (83,992) $ 34,993 $ 1,741 $ 9,399
Income (loss) before extraordinary items $ (73,846) $(181,962) $ (92,755) $ 28,177 $ 3,628 $ 8,623
Net income (loss) $ (73,846) $(181,962) $ (92,755) $145,489 $ 4,544 $10,189
Primary and fully diluted income per
share of Common Stock (3):
Income before extraordinary items $ 3.83 $ 0.49 $ 1.04
Net income $ 19.78 $ 0.61 $ 1.23
BALANCE SHEET DATA
Working capital (deficiency) $(177,613) $(217,700) $(251,232) $ (5,744) $(4,974) $ 337
Total assets $ 321,713 $ 136,937 $ 121,071 $ 21,784 $16,016 $21,033
Long-term debt $ 9,606 $ 3,857 $ 3,909 $ 3,853 $ 1,742 $ 1,021
Stockholders' equity (deficiency) $ (9,747) $(191,709) $(222,557) $(19,787) $(7,542) $ 2,472
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective October 1, 1992, the Company changed its fiscal year from
September 30 to December 31.
(2) No cash dividends have been declared by the Company.
(3) Income per share of Common Stock is computed using the weighted average
number of common and common stock equivalents outstanding during the
period. The weighted average number of shares reflects shares expected to
be issued in accordance with the Plan of Reorganization (adjusted to give
effect to the Company's August 1995 25% stock split) and options and
warrants to purchase shares of Common Stock granted to employees,
directors and officers of the Company. Per share data for periods prior
to January 1, 1993, have been omitted as these amounts do not reflect the
current capital structure.
QUARTERLY DATA (Unaudited)
<TABLE>
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1995
(dollars in millions except ------------------------------------------------- ---------------------------------------------
per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $16.3 $ 15.8 $16.8 $17.2 $17.0 $ 16.5 $15.6 $17.2
Gross profit 6.0 5.1 6.5 6.6 6.2 6.3 5.6 6.9
Operating income
(loss) 1.1 (1.5) 1.4 0.7 2.2 1.4 2.5 3.3
Income (loss) before
extraordinary
items 3.4 (1.2) 1.0 0.4 2.2 0.8 2.7 2.9
Net income (loss) $ 4.3 $ (1.2) $ 1.0 $ 0.4 $ 2.2 $ 2.4 $ 2.7 $ 2.9
Primary and fully
diluted income
per share of
Common Stock:
Income before
extraordinary
item $0.47 $(0.17) $0.14 $0.05 $0.27 $ 0.10 $0.33 $0.39
----- ------ ----- ----- ----- ------ ----- -----
Net income $0.59 $(0.17) $0.14 $0.05 $0.27 $ 0.29 $0.33 $0.39
----- ------ ----- ----- ----- ------ ----- -----
- -----------------------------------------------------------------------------------------------------------------------------
Share Prices (1)
High $3.20 $ 3.20 $2.00 - (2) $9.38 $10.76 $5.80 $3.20
Low $1.60 $ 1.80 $1.60 - (2) $6.00 $ 5.60 $2.60 $0.80
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to August 23, 1995, prices reflect interdealers' prices in the
over-the-counter market.
(2) The Company's Common Stock was issued on April 10, 1994, pursuant to the
Plan of Reorganization.
<PAGE> 3
EXHIBIT 13.1.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain important factors and risks, including the
rapid change in hardware and software technology, market conditions, the
anticipation of growth of certain market segments and the positioning of the
Company's products and services in those segments, seasonality in the buying
cycles of certain of the Company's customers, the timing of product
announcements, the release of new or enhanced products, the introduction of
competitive products and services by existing or new competitors and the
significant risks associated with the acquisition of new products, product
rights, technologies, businesses, the management of growth, MAI's ability to
retain highly skilled technical, managerial and sales and marketing personnel,
and the other risks detailed from time to time in the Company's SEC reports,
including reports on Form 10-K and Form 10-Q, that could cause results to differ
materially from those anticipated by the statements made herein. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period. See "Factors that May
Affect Future Results."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, working capital increased from negative working
capital of $4,974,000 at December 31, 1994 to $337,000. Excluding deferred
revenue (which will not give rise to cash disbursements) of $3,181,000, the
Company's working capital is $3,518,000 or a ratio of current assets to current
liabilities of 1.27 to 1.0. The improvement in the Company's working capital is
attributable to the improved operating results of the business during 1995.
The changes in the components of working capital during 1995 reflect an
increase in inventory of approximately $1,024,000 and accounts receivable of
$973,000 at the Company's gaming solutions subsidiary due to an increase in the
level of business conducted during 1995 compared to 1994, the payment and
settlement of restructuring liabilities during 1995 and a reduction in customer
deposits at December 31, 1995.
Cash and cash equivalents increased from $3,151,000 at December 31, 1994,
to $4,086,000 at December 31, 1995. In addition, the Company negotiated a
$4,000,000 secured revolving credit facility in May 1995. The availability of
this line of credit is based on a calculation reflecting the age and nature of
certain accounts receivable. At December 31, 1995, the available balance was
approximately $2,600,000, however, no balances were drawn down at December 31,
1995.
Net cash used in investing activities in 1995 totaled $1,514,000 and mainly
related to capital expenditures comprising the completion of leasehold
improvements begun in 1994 and the upgrading of telephone and other computer
equipment, offset by the proceeds from the disposal of a building.
Net cash used in financing activities in 1995 totaled $1,882,000 which is
comprised of $1,077,000 used to repay long-term debt and $805,000 relating to
notes receivable that arose in connection with the expansion of the Company's
third-party product support business and the discontinuance of the direct sale
of its process manufacturing solutions business in favor of an exclusive
worldwide distributor.
Stockholders' equity increased from a deficit of $7,542,000 at
December 31, 1994, to $2,472,000 at December 31, 1995, mainly due to net
income of $10,189,000 for the year.
The Company believes it will continue to generate sufficient cash flows
from operations to fund its operating and capital requirements through 1996.
As of February 29, 1996, the Company had issued 6,690,986 shares of Common
Stock to its former unsecured creditors in satisfaction of their claims against
the Company.
<PAGE> 4
RESULTS OF OPERATIONS
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995.
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1994 Revenues December 31, 1995 Revenues
----------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Revenues $66,095 100.0% $66,294 100.0%
Gross profit 24,190 36.6 25,045 37.8
Selling, general and
administrative expenses 19,751 29.9 12,979 19.6
Research and development
costs 2,698 4.1 2,667 4.0
Other non-operating
income 2,007 3.0 - -
Interest expense, net 57 0.1 228 0.3
Minority interest - - 165 0.2
Provision for income taxes 63 0.1 383 0.6
Extraordinary item 916 1.4 1,566 2.4
</TABLE>
Revenues for 1994 were $66,095,000 compared to $66,294,000 in 1995.
Revenues in 1994 and 1995 included approximately $6,900,000 and approximately
$800,000, respectively, of revenues generated by operations that were disposed
or closed in 1994 or prior to March 31, 1995. Excluding those operations that
were disposed or closed, revenue increased approximately $6,300,000 (10.6%) on
a comparable basis, comprised of an increase in sales to the Company's network
solutions customers in various industries (hotel, resort, gaming, manufacturing
and distribution), partially offset by a decrease in the Company's traditional
hardware contract service revenues.
Gross profit for 1994 was $24,190,000 (36.6%) which is comparable with
$25,045,000 (37.8%) in 1995.
Selling, general and administrative expenses declined 34.3% from
$19,751,000 in 1994 to $12,979,000 in 1995. Selling, general and administrative
expenses in 1994 included charges of approximately $2,168,000 (relating to
restructuring costs of $1,814,000 and foreign exchange losses of $354,000) and
credits of approximately $2,400,000 (relating to the reversal of certain
litigation reserves no longer required of $1,818,000 and a settlement (net of
expenses) of $582,000 for software copyright infringements). Selling, general
and administrative expenses for 1995 included charges of approximately
$1,830,000 (relating to a bad debt reserve of approximately $642,000 established
in connection with a transaction by the Company's gaming solutions subsidiary
and a reserve established for a contingent incentive bonus of $1,188,000
pursuant to a consulting agreement with an officer of the Company) and credits
of approximately $1,991,000 (relating to restructuring costs no longer required
of $1,088,000, a gain on the disposal of a property net of foreign currency
losses of approximately $346,000 and approximately $557,000 relating to the
resolution of disputed accounts). Excluding those adjustments, selling, general
and administrative expenses decreased by approximately $6,800,000, which is
attributable to cost savings resulting from the restructuring of the Company's
activities along functional lines of business rather than independent business
units, the consolidation of the Company's operations by reducing the number of
locations from which it conducts business and the reduction in the workforce in
the United States, Canadian and Latin American operations.
Research and development costs were $2,698,000 in 1994, compared to
$2,667,000 in 1995. Excluding the operations that were disposed or closed,
research and development costs increased by approximately $800,000, primarily,
as a result of increased research and development costs incurred at the
Company's gaming solutions subsidiary.
Other non-operating income in 1994 of $2,007,000 related to a purchase
price settlement comprising a reduction in the note payable of $1,614,000 and
accrued interest of $393,000. See Note 5 to the consolidated financial
statements.
Interest expense, net, was $57,000 in 1994 compared to $228,000 for 1995.
The increase in 1995 relates to interest on current debt (as renegotiated) and
interest and amortization of loan fees in connection with a revolving line of
credit which the Company negotiated in May 1995.
The minority interest reflects the share of income in 1995, offset by
prior year losses incurred, attributable to the minority shareholders in the
Company's gaming solutions subsidiary.
The income tax provision reflects a tax provision for the Company's
domestic and foreign operations (including the Company's majority owned
subsidiary) offset by net operating losses and certain other tax benefit
carryforwards available.
The extraordinary item in both 1994 and 1995 related to the favorable
settlement of certain tax liabilities pursuant to the Company's bankruptcy
proceedings and, as such, have been classified as an extraordinary item.
<PAGE> 5
Year Ended December 31, 1993 Compared to Year Ended December 31, 1994.
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1993 Revenues December 31, 1994 Revenues
----------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Revenues $115,291 100.0% $66,095 100.0%
Gross profit 42,536 36.9 24,190 36.6
Selling, general and
administrative expenses 26,829 23.3 19,751 29.9
Research and development
costs 2,901 2.5 2,698 4.1
Gain on transfer of assets 22,187 19.2 - -
Other non-operating
(expense) income (2,744) (2.4) 2,007 3.0
Interest expense, net 3,965 3.4 57 0.1
Provision for income taxes 107 0.1 63 0.1
Extraordinary items 117,312 101.8 916 1.4
</TABLE>
Revenues declined 42.7% from $115,291,000 in 1993 to $66,095,000 in 1994.
The decline in revenues was principally attributable to the fact that the
Company discontinued its operations in Europe on March 22, 1993, as a
consequence of the Foreclosure. See Note 12 to the consolidated financial
statements. Excluding the impact of the Foreclosure, revenues for 1994
decreased $13,071,000 (16.5%) compared to the prior year. The decreased
revenues were primarily due to the shift by many of the Company's customers from
the Company's proprietary hardware and software products to open systems
products.
Gross profit declined 43.1% from $42,536,000 in 1993 to $24,190,000 in
1994. Excluding the European subsidiaries, the comparable gross profit in 1993
was $28,936,000; this represented a gross profit percentage of 36.6% for 1993
compared to a gross profit of 36.6% for 1994.
Selling, general and administrative expenses declined 26.4% from
$26,829,000 in 1993 to $19,751,000 for 1994. For 1993, selling, general and
administrative expenses included charges of $9,929,000 (relating to the
foreclosed European subsidiaries of $9,306,000 and $623,000 associated with
software copyright infringement) and credits of $1,700,000 (relating to the
reduction in liabilities no longer required for guaranteed residuals on certain
sales of $1,643,000 and a foreign exchange gain of $57,000). Selling, general
and administrative expenses for 1994 included charges of approximately
$2,168,000 (relating to restructuring costs of $1,814,000 and foreign exchange
losses of $354,000) and credits of approximately $2,400,000 (relating to the
reversal of certain litigation reserves no longer required of $1,818,000 and a
settlement net of expenses of $582,000 for software copyright infringements).
Excluding these adjustments, selling, general and administrative expenses
increased $1,383,000 compared to 1993 primarily on account of increased
marketing activities.
Research and development costs declined 7% from $2,901,000 in 1993 to
$2,698,000 in 1994. Excluding the impact of the European operations, research
and development costs increased $159,000 during 1994 compared to 1993 primarily
on account of increased research and development costs for the Company's gaming
solutions subsidiary. The increase in research and development costs as a
percentage of revenue from 2.5% in 1993 to 4.1% in 1994 related to the
relatively fixed nature of such costs and increased research and development
costs for the Company's gaming solutions subsidiary. At December 31, 1993, all
capitalized software costs were written off and the 1994 expense is the actual
expense incurred in the period rather than amortized costs in the comparable
period of the prior year. See Note 1 to the consolidated financial statements.
The gain on transfer of assets of $22,187,000 in 1993 represented the
difference between the carrying amount and management's estimated fair market
value of assets surrendered when the Company's European subsidiaries were
foreclosed upon by the Banks. See Note 12 to the consolidated financial
statements.
Other non-operating income in 1993 related to reorganization expenses of
$2,744,000 associated with the Company's bankruptcy proceedings. See Note 12 to
the consolidated financial statements. Other non-operating income in 1994
related to a purchase price settlement of $2,007,000 comprising a reduction in
the note payable of $1,614,000 and interest accrued of $393,000. See Note 5 to
the consolidated financial statements.
<PAGE> 6
Interest expense, net, in 1993 was $3,965,000 compared to $57,000 in 1994.
The decrease of $3,908,000 in 1994 related to the existence of debt (which was
canceled pursuant to the Plan of Reorganization) in the first quarter of 1993.
See Notes 5 and 12 to the consolidated financial statements.
The provision for income taxes for 1993 was $107,000 compared to $63,000
for 1994. The 1993 provision reflects taxes at the statutory rates on domestic
income offset by net operating loss carryforwards and alternative minimum taxes.
The 1994 provision represents estimated foreign taxes payable.
The extraordinary items of $117,312,000 in 1993 and $916,000 in 1994 relate
to gains recognized in connection with the Company's bankruptcy proceedings. See
Notes 5 and 12 to the consolidated financial statements. The gain of
$117,312,000 in 1993 comprised a foreclosure gain of $56,952,000 which
represented the difference between the debt that was forgiven and management's
estimated fair value of assets surrendered and a reorganization gain of
$60,360,000 which represented the difference between the debt that was forgiven
and the estimated enterprise value of the Company at that time of $50,000,000.
The $916,000 in 1994 relates to the favorable settlement of certain tax
liabilities pursuant to the Company's bankruptcy proceedings.
During 1995, the Financial Accounting Standards Board issued FAS 121,
"Accounting for the Impairment of Long-Lived Assets," and FAS 123, "Accounting
for Stock-Based Compensation." FAS 121 will be adopted in 1996 and is not
expected to have a material impact on the Company's financial position or
results of operations. The Company plans to continue to measure compensation
cost of employee stock option plans using the intrinsic value method prescribed
by APB Opinion No. 25, and starting in 1996, to make pro forma disclosures of
net income and income per share as if the fair value method prescribed by FAS
123 had been applied.
<PAGE> 7
EXHIBIT 13.1.3 INDEPENDENT AUDITORS' REPORT
Independent Auditors' Report
The Board of Directors
MAI Systems Corporation:
We have audited the accompanying consolidated balance sheets of MAI Systems
Corporation and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAI Systems
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orange County, California
February 9, 1996
<PAGE> 8
Exhibit 13.1.4 Consolidated Balance Sheets
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(dollars in thousands except share data)
<TABLE>
<CAPTION>
ASSETS 1994 1995
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $682 in 1994
and $1,883 in 1995 $3,151 $4,086
Receivables, less allowance for doubtful accounts
of $2,588 in 1994 and $1,092 in 1995 6,256 7,662
Inventories 2,411 3,769
Prepaids 943 913
------------- -------------
Total current assets 12,761 16,430
Furniture, fixtures and equipment, net 2,954 3,766
Other assets 301 837
------------- -------------
Total assets $16,016 $21,033
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- ---------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $783 $620
Accounts payable 3,647 4,778
Customer deposits 1,986 745
Accrued liabilities 8,611 6,432
Income taxes payable 112 337
Unearned revenue 2,596 3,181
------------- -------------
Total current liabilities 17,735 16,093
Long-term debt 1,742 1,021
Deferred income taxes 60 132
Minority interest in consolidated subsidiary - 165
Other liabilities 4,021 1,150
------------- -------------
Total liabilities 23,558 18,561
------------- -------------
Stockholders' equity (deficiency):
Common Stock, par value $.01 per share; authorized
10,000,000 shares; 7,356,250 shares issuable 59 74
Additional paid-in capital 199,366 199,364
Cumulative translation adjustment 201 28
Accumulated deficit (207,168) (196,994)
------------- -------------
Total stockholders' equity (deficiency) (7,542) 2,472
------------- -------------
Total liabilities and stockholders' equity (deficiency) $16,016 $21,033
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 9
EXHIBIT 13.1.5 CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
Year Ended December 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Computer products and other contract services $115,291 $ 66,095 $66,294
Direct costs:
Computer products and other contract services 72,755 41,905 41,249
---------- -------- -------
Gross profit 42,536 24,190 25,045
Selling, general and administrative expenses 26,829 19,751 12,979
Research and development costs 2,901 2,698 2,667
Gain on transfer of assets (22,187) - -
---------- -------- -------
Operating income 34,993 1,741 9,399
Other non-operating (expense) income (2,744) 2,007 -
Interest income 742 110 120
Interest expense (excluding contractual interest of
$4,512 in 1993) (4,707) (167) (348)
Minority interest in consolidated subsidiary - - (165)
---------- -------- -------
Income before income taxes and
extraordinary items 28,284 3,691 9,006
Provision for income taxes 107 63 383
---------- -------- -------
Income before extraordinary item 28,177 3,628 8,623
Extraordinary items (net of taxes
of $1,332 in 1993) 117,312 916 1,566
---------- -------- -------
Net income $145,489 $ 4,544 $10,189
========== ======== =======
Primary and fully diluted income per
share of Common Stock:
Income before extraordinary item $ 3.83 $ 0.49 $ 1.04
Extraordinary item 15.95 0.12 0.19
---------- -------- -------
Net income $ 19.78 $ 0.61 $ 1.23
========== ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE> 10
EXHIBIT 13.1.6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(dollars in thousands)
<TABLE>
<CAPTION>
TOTAL
OLD ADDITIONAL CUMULATIVE STOCKHOLDERS'
COMMON PREFERRED COMMON PAID-IN TRANSLATION ACCUMULATED EQUITY
STOCK STOCK STOCK CAPITAL ADJUSTMENT DEFICIT (DEFICIENCY)
------ --------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $ - $ 35,047 $ 325 $106,553 $ - $(364,482) $(222,557)
Income from foreign operations for the
the three-month period ended
December 31, 1992 due to year-
end change (Note 1) - - - - - 7,281 7,281
Recapitalization adjustments:
Cancellation of old common and
preferred stock - (35,047) (325) 35,372 - - -
Issuance of Common Stock
in connection with discharge
of debt 59 - - 49,941 - - 50,000
Net income - - - 145,489 145,489
--- -------- ----- -------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1993 59 - - 191,866 - (211,712) (19,787)
Reclassification of deferred gain on
foreclosure - - - 7,500 - - 7,500
Foreign currency gains - - - - 201 - 201
Net income - - - - - 4,544 4,544
--- -------- ----- -------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1994 59 - - 199,366 201 (207,168) (7,542)
Capitalization in connection with stock
split in August 1995 15 - - (2) - (15) (2)
Foreign currency translation losses - - - - (173) - (173)
Net income - - - - - 10,189 10,189
--- -------- ----- -------- ----- --------- ---------
BALANCE AT DECEMBER 31, 1995 $74 $ - $ - $199,364 $ 28 $(196,994) $ 2,472
--- -------- ----- -------- ----- --------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 11
EXHIBIT 13.1.7 CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1993* 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 145,489 $ 4,544 $10,189
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain (117,312) (916) (1,566)
Minority interest in consolidated subsidiary - 165
Gain on sale of assets - - (346)
Other non-operating income - (2,007) -
Gain on transfer of assets, including cash surrendered
of $10,726 (32,913) - -
Depreciation and amortization 4,735 3,239 1,909
Write-off of furniture, fixtures and equipment - 506 -
Write down of previously capitalized license fees
and software 765 - -
Provision for doubtful accounts receivable 1,101 137 613
Net loss (gain) from foreign currency (941) 354 (258)
Changes in assets and liabilities:
(Increase) decrease in receivables (3,556) 1,301 (1,750)
(Increase) decrease in inventories (347) 107 (2,092)
Decrease in prepaids and other current
assets 1,830 297 30
Decrease in other assets - 375 -
(Decrease) increase in accounts payable
and customer deposits (5,979) 1,364 (110)
(Decrease) in accrued liabilities (126) (4,959) (1,848)
(Decrease) increase in income taxes payable (56) (492) 225
Increase in unearned revenue 13,525 160 585
Increase (decrease) in deferred income taxes 279 (202) 72
(Decrease) in other liabilities (1,640) (1,507) (1,290)
--------- ------- -------
Net cash provided by operating activities
before reorganization items 4,854 2,301 4,528
Payments for reorganization items (2,215) (1,517) (153)
--------- ------- -------
Net cash provided by operating activities 2,639 784 4,375
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (846) (1,104) (2,029)
Proceeds from sale of assets - - 515
Payments for business assets - (300) -
Disposal of capitalized software 1,817 - -
--------- ------- -------
Net cash (used in) provided by investing activities 971 (1,404) (1,514)
========= ======= =======
</TABLE>
(Continued)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993* 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (7,382) (352) (1,077)
Receipt of notes receivable - - (805)
Net (decrease) increase in short-term borrowings 609 (85) -
-------- -------- --------
Net cash used in financing activities (6,773) (437) (1,882)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 308 (66) (44)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,855) (1,123) 935
EFFECT OF CHANGE IN FOREIGN SUBSIDIARIES' YEAR-END
ON CASH AND CASH EQUIVALENTS 2,063 - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,066 4,274 3,151
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,274 $ 3,151 $ 4,086
======== ======== ========
Cash paid during the period for:
Interest $ 782 $ 99 $ 171
======== ======== ========
Income taxes $ 2,340 $ 142 $ 25
======== ======== ========
</TABLE>
* The statement of cash flows for the year ended December 31, 1993 includes
the effect of certain of the Company's European subsidiaries that were
surrendered in connection with the Foreclosure through the March 22, 1993
Foreclosure date.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 13
EXHIBIT 13.1.8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
MAI Systems Corporation (the "Company" or "MAI") designs, sells, installs
and supports total information system solutions featuring complex wide and
local area networks primarily in the hospitality and gaming industries, for
mid-size manufacturers and distributors. The Company provides a wide array
of products and services to its customers who continue to use its
proprietary host-based computer systems, including field engineering
services, new and replacement equipment, operating systems and software
application products. These products and services upgrade, enhance and
integrate these legacy systems with currently available computer
technologies. The Company also provides on-site warranty service,
remanufacturing and depot service to third-party computer distributors and
manufacturers.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four,
Inc. to MAI Systems Corporation on November 6, 1990.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of its domestic operations and its majority and wholly-owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated
in consolidation. The consolidated financial statements in 1993 include
the results of operations and cash flows of certain European subsidiaries
that were surrendered on March 22, 1993 in connection with the Foreclosure
(see Note 12). The minority interest relates to Gaming Systems
International ("GSI"), the Company's 70% owned gaming solutions subsidiary.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance
sheets and revenues and expenses for the periods. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Sales of hardware products are generally recorded when the hardware is
shipped. Software revenue is recorded when the application software
programs are installed. Hardware and software service fees are recognized
as income on a time-apportioned basis over the period in which the services
are provided. For certain fixed-price contracts, revenue is recognized
upon installation.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments which are readily
convertible into known amounts of cash and have original maturities of
three months or less.
INVENTORIES
Inventories other than replacement parts are valued at the lower of cost or
market using the first-in, first-out ("FIFO") method. Replacement parts
used for hardware maintenance are valued at cost and are amortized to
expense over the period of benefit.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3 to 10 years
for furniture, fixtures and equipment and 3 to 5 years for equipment held
for demonstration and administrative purposes. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term or
their estimated useful lives.
<PAGE> 14
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
In 1993, the Company was included in the consolidated U.S. Federal income
tax group of BGLS Inc. ("BGLS"). Income taxes were provided on a separate
company basis, except that no tax benefits were recognized for operating
losses that were utilized by the Company's affiliates. Effective January
1, 1994, the Company ceased to be a member of the BGLS tax group. Tax
benefits for operating losses reattributed from BGLS are available when
determining the income tax for future periods.
FOREIGN CURRENCY TRANSLATION
Since January 1, 1994, as a result of the reorganization of the Company's
operations, the functional currency for all foreign subsidiaries is the
applicable local currency except for MAI de Venezuela, S.A. ("Venezuela"),
which operates in a highly inflationary economy and uses the U.S. dollar as
its functional currency in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Accordingly,
in 1994 and 1995, all translation gains and losses for foreign
subsidiaries, except Venezuela and gains and losses on intercompany foreign
currency transactions that are of a long-term nature, are included in the
cumulative translation adjustment as a separate component of stockholders'
equity.
For 1993, the functional currency for all the foreign subsidiaries was the
U.S. dollar and translation gains and losses were reflected in the
consolidated statement of operations.
Assets and liabilities outside the United States are translated into
dollars at the rate of exchange in effect at the balance sheet date except
for inventories and noncurrent assets which are translated at historical
rates. Income and expense items are translated at the weighted average
exchange rates prevailing during the period.
Net foreign exchange (gains) losses for 1993, 1994 and 1995 were
$(941,000), $354,000 and $155,000, respectively, and are included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
CAPITALIZED SOFTWARE COSTS
In 1994 and 1995, all software development costs (consisting of the cost to
purchase software and to develop software internally) were expensed when
incurred, as part of research and development costs.
During 1993, the Company wrote off all remaining capitalized software
costs based upon management's assessment of the recoverability of such
costs. Amortization of capitalized software costs in 1993 was $2,345,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107, "Disclosure about Fair Value of Financial Statements,"
("SFAS 107"). SFAS 107 requires all entities to disclose the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS 107 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. As of December 31, 1995, fair value of all
financial instruments approximates carrying value.
INCOME PER SHARE OF COMMON STOCK
Income per share is computed using 7,356,250 shares of common stock (as
adjusted for the Company's 25% stock split in August 1995) expected to be
issued in accordance with the Plan of Reorganization ("Common Stock") as
discussed in Note 12 and the weighted average number of Common Stock
equivalents outstanding during the period. Common Stock equivalents
consist of dilutive outstanding stock options and warrants and are
calculated using the treasury stock method. For all periods presented,
fully diluted income per share approximates primary income per share. As
of December 31, 1995, 6,688,749 shares had been issued pursuant to the Plan
of Reorganization.
<PAGE> 15
RECLASSIFICATION
Certain prior years' amounts have been reclassified to conform with the
1995 presentation.
NOTE 2 INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1994 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $1,167 $2,649
Replacement parts 1,244 1,120
-----------------------------------------------------------------------------------
$2,411 $3,769
-----------------------------------------------------------------------------------
</TABLE>
NOTE 3 FURNITURE, FIXTURES AND EQUIPMENT
The major classes of furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1994 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and
equipment $ 1,607 $ 2,006
Equipment held for
administrative purposes 9,470 10,751
Leasehold improvements 424 432
------- -------
11,501 13,189
Less accumulated depreciation
and amortization (8,547) (9,423)
----------------------------------------------------------------------------------------
$2,954 $3,766
----------------------------------------------------------------------------------------
</TABLE>
NOTE 4 LINE OF CREDIT
In 1995, the Company negotiated a $4,000,000 secured revolving credit
facility. The availability of this line of credit is based on a
calculation reflecting the age and nature of certain accounts receivable.
The facility is secured by domestic and Canadian accounts receivable and
inventory and bears interest at prime plus 2%. The facility expires in May
1997. At December 31, 1995, the available balance was approximately
$2,600,000, however, at that date no balances were drawn down under the
facility.
Loan origination fees of approximately $121,000 were incurred in connection
with this line of credit and are being amortized to interest expense over
24 months.
NOTE 5 LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1994 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Note payable $1,700 $1,167
Tax claims 91 261
Other 734 213
- ---------------------------------------------------------------------------
2,525 1,641
Less: current installments (783) (620)
- --------------------------------------------------------------------------
Non-current portion $1,742 $1,021
- ---------------------------------------------------------------------------
</TABLE>
<PAGE> 16
Aggregate maturities of long-term debt during the next five years are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------
<S> <C>
Year ending December 31:
1996 $ 620
1997 773
1998 80
1999 83
2000 and thereafter 85
-----------------------------------------------
$1,641
-----------------------------------------------
</TABLE>
NOTE PAYABLE
The note payable arose in connection with the acquisition of a business in
April 1990. In November 1994, an agreement was reached whereby the purchase
price of the business acquired was reduced by $1,614,000 and a new note was
issued in the amount of $1,700,000. The note is payable over three years on
a quarterly basis. Interest is compounded monthly at prime plus 1%. The
note is guaranteed by BGLS (the Company's former parent).
The reduction in the purchase price of the business acquired of $1,614,000
together with the interest accrued on the original note for 1993 of $393,000
are included in other non-operating income in the consolidated statement of
operations for 1994. Interest expense for 1994 is net of the interest
accrued throughout the year on the original note. The underlying assets
(mainly goodwill and capitalized software) acquired in April 1990 were
written off in the year ended December 31, 1993 and prior periods.
TAX CLAIMS
Tax claims include pre-petition unsecured tax claims for income and property
taxes from various taxing authorities. Under the terms of the Plan of
Reorganization (see Note 12), such amounts are to be paid in full in cash in
annual installments over six years with interest at 6%. Upon agreement with
the respective taxing authority, tax claims are classified as debt,
otherwise such claims are classified as accrued liabilities and other
long-term liabilities in the accompanying consolidated balance sheets at
December 31, 1994 and 1995. Currently, the Company is disputing tax claims
of $758,000 of the remaining tax claims of approximately $1,019,000.
During 1994 and 1995, certain of these claims were settled and paid and
others were expunged by the Bankruptcy Court. The favorable settlement of
these claims of $916,000 and $1,566,000 are classified as extraordinary
gains in the accompanying consolidated statements of operations for 1994 and
1995, respectively.
OTHER
Other long-term debt of $734,000 at December 31, 1994, primarily included
notes issued pursuant to the Plan of Reorganization to settle certain
secured claims. The notes were fully repaid during 1995.
CANCELED DEBT
Certain debt was canceled pursuant to the Plan of Reorganization (see Note
12).
Interest expense on this debt prior to April 12, 1993, including
amortization of debt issued costs, amounted to approximately $4,427,000 in
1993. Unamortized original issue discount of $284,000 and debt issue costs
of $937,000 as of April 12, 1993 were written off to other non-operating
expense in 1993 (see Note 12).
<PAGE> 17
NOTE 6 ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1994 1995
-----------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and commissions $1,970 $1,361
Accrued bonus (including related party bonus of
$1,188 in 1995) 460 2,280
Accrued vacation 1,266 992
Restructuring 1,735 448
Other 3,180 1,351
-----------------------------------------------------------------------------
$8,611 $6,432
-----------------------------------------------------------------------------
</TABLE>
Other long-term liabilities mainly comprise of costs for lease commitments
in connection with vacating certain business premises and disputed tax
claims which would be payable in 1996 and beyond.
NOTE 7 INCOME TAXES
The components of income before income taxes and extraordinary items are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(dollars in thousands) 1993 1994 1995
------------------------------------------------------
<S> <C> <C> <C>
U.S. $26,447 $1,874 $7,952
Foreign 1,837 1,817 1,054
------------------------------------------------------
Total $28,284 $3,691 $9,006
------------------------------------------------------
</TABLE>
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(dollars in thousands) 1993 1994 1995
----------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. Federal $404 - $331
State 144 - 27
Foreign (357) 265 (47)
----------------------------------------------------
Total 191 265 311
Deferred:
U.S. Federal - - -
Foreign (84) (202) 72
----------------------------------------------------
Total (84) (202) 72
----------------------------------------------------
107 63 $383
----------------------------------------------------
</TABLE>
<PAGE> 18
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities. The significant components of the deferred income tax
assets and deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
(dollars in thousands) 1994 1995
------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,854 $ 9,869
Property, plant and equipment 1,548 1,614
Restructuring and other reserves 1,212 799
Inventory reserves 751 540
Allowance for doubtful accounts 829 296
Capitalized software and intangibles 3,574 6,178
Other 905 748
------------------------------------------------------------
17,673 20,044
Less valuation allowance (17,673) (20,044)
------------------------------------------------------------
Net deferred tax assets - -
------------------------------------------------------------
Deferred tax liabilities:
Foreign earnings (60) (132)
------------------------------------------------------------
Total deferred tax liabilities (60) (132)
------------------------------------------------------------
Net deferred tax liabilities $ (60) $ (132)
------------------------------------------------------------
</TABLE>
The Company recorded certain deferred tax assets as of December 31, 1995
that were previously omitted due to contingencies that were resolved during
1995. However, the Company has recorded a valuation allowance in the amount
set forth above for certain deductible temporary differences where it is not
certain whether the Company will receive future tax benefits. The net change
in the valuation allowance for the year ended 1995 was $2,371,000.
The deferred tax assets at December 31, 1995 have been stated on the
assumption that federal net operating loss benefits derived from the BGLS
group of approximately $23,000,000, which expire in the years 2005 through
2010, will be available for use in future periods. The utilization of these
net operating losses is limited to approximately $2,500,000 on an annual
basis. Net operating losses attributable to foreign operations total
approximately $1,200,000 and will expire in the years 1997 through 2002.
The income tax provision, computed by applying the U.S. statutory rate to
consolidated income before income taxes and extraordinary items, is
reconciled to the actual provision as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1994 1995
----------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Change in valuation
allowance due to
net operating loss
and credit carry-
forwards (34.6) (15.0) -
Deferred tax assets realized
but previously reserved - - (29.4)
Effect of foreign
operations 4.5 (17.0) (4.0)
Effect of foreign
taxes (3.8) - -
Other 0.3 (0.3) 3.7
----------------------------------------------------------
Effective tax rate 0.4% 1.7% 4.3%
----------------------------------------------------------
</TABLE>
<PAGE> 19
NOTE 8 GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the design, sale, installation
and support of total information system solutions. Information with respect
to the Company's operations by significant geographic area is set forth
below. "United States" includes operations in Puerto Rico. "Other foreign"
includes operations in Mexico, Costa Rica, Venezuela, Singapore, Malaysia
and Hong Kong. During 1994, the Company closed its operation in Mexico and
a decision was taken to discontinue its operations in Costa Rica, Singapore,
Malaysia and Hong Kong. Europe consists primarily of the European
Subsidiaries surrendered in connection with the Foreclosure (see Note 12).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(dollars in thousands) 1993 1994 1995
------------------------------------------------------
<S> <C> <C> <C>
Revenue from unaffiliated
customers:
United States $ 61,751 $53,792 $56,410
Canada 10,631 8,544 7,482
Other foreign 6,812 3,556 1,962
Europe 36,097 203 440
------------------------------------------------------
$115,291 $66,095 $66,294
------------------------------------------------------
United States revenue from
foreign affiliates $ 6,924 $ 983 $ 898
United States export sales $ 404 $ 61 $ 163
------------------------------------------------------
Operating income (loss):
United States (including
export sales) $ 25,868 $ (38) $ 8,377
Canada 4,447 3,963 1,712
Other foreign (792) (1,956) (694)
Europe 5,470 (228) 4
------------------------------------------------------
$ 34,993 $ 1,741 $ 9,399
------------------------------------------------------
<CAPTION>
December 31,
--------------------------
(dollars in thousands) 1993 1994 1995
------------------------------------------------------
<S> <C> <C> <C>
Identifiable assets:
United States $ 15,215 $12,629 $17,436
Canada 2,707 2,176 2,167
Other foreign 3,862 1,211 1,278
Europe - - 152
------------------------------------------------------
$ 21,784 $16,016 $21,033
------------------------------------------------------
</TABLE>
United States revenue from foreign affiliates consists of net intercompany
sales and services from the United States to the Company's foreign
subsidiaries and is eliminated from consolidated net revenue. Intercompany
sales are based on current selling prices or list prices less discounts.
Discounts typically are influenced by competitive pricing, market conditions
and relative foreign exchange rates.
NOTE 9 STOCK OPTION AND COMPENSATION PLANS
In connection with the Plan of Reorganization (see Note 12), the Company
adopted the MAI Systems Corporation 1993 Stock Option Plan (the "1993 Plan")
which became effective on January 27, 1994. Under the 1993 Plan, 10% of the
authorized shares of Common Stock are reserved for issuance of options.
Pursuant to the Plan of Reorganization, the number of shares subject to the
1993 Plan will be reduced to 10% of the total issued shares. Options under
the 1993 Plan may be granted at exercise prices determined by the
Compensation Committee of the Board of Directors, provided that the exercise
prices shall not be less than the fair market value of the Common Stock on
the date of grant. Cash or the Company's Common Stock, computed at fair
market value, may be used to exercise options under the 1993 Plan. At
December 31, 1995, 29,166 options under the 1993 Plan were exercisable.
In July 1995, the Board of Directors adopted the Non-Employee Director's
Stock Option Plan (the "Director's Plan"). Under the Director's Plan,
certain directors who are not employees of the Company or any affiliate of
the Company are
<PAGE> 20
eligible to receive stock options. The Director's Plan provides each
non-employee director who is elected or appointed and duly qualified, be
granted automatically a one-time option to purchase 31,250 shares of
Common Stock. The option vests in five equal installments, the first of
which occurs on the six-month anniversary of the non-employee director's
election or appointment to the Board, and thereafter on the date of each
successive re-election to another term. The number of shares of Common
Stock reserved for issuance pursuant to the Director's Plan is 125,000
shares. The exercise price shall not be lower than the fair market value
of the Common Stock on the date of grant. As of December 31, 1995, no
options under the Director's Plan were exercisable.
Information regarding the Company's stock option plans is summarized
below:
<TABLE>
<CAPTION>
Shares Price Range
------- --------------
<S> <C> <C>
Shares under option:
Outstanding at December 31, 1994 - -
- -------------------------------- ------- --------------
Granted 709,375 $1.65 - $10.12
Canceled (58,334) $1.65
Outstanding at December 31, 1995 651,041 $1.65 - $10.12
- -------------------------------- ------- --------------
</TABLE>
The Company previously adopted the 1985 Stock Option Plan and the 1989
Stock Option Plan (together, the "Old Plans"). The Old Plans were
terminated in connection with the Plan of Reorganization and all stock
options were canceled.
NOTE 10 EMPLOYEE BENEFITS
SAVINGS PLANS
On October 1, 1995, the Company established a Savings and Investment Plan
covering substantially all the Company's domestic employees (the "Domestic
Plan"). The Domestic Plan qualifies under Sections 401(k) and 401(a) of
the Internal Revenue Code. Participating employees are allowed to
contribute from 1% to 15% of their annual compensation. In 1995, the
Company contributed a discretionary matching contribution of 10% of
employee contributions up to a maximum of 6% of their annual compensation.
For 1995, contributions to the Domestic Plan by the Company were
approximately $18,000.
The Company's Canadian subsidiary offers to its employees a money purchase
plan for benefits accruing in respect of service from August 1, 1985 for
substantially all full-time employees (the "Canadian Plan").
Participating employees are allowed to contribute between 2% and 6% of
their annual compensation. The Company contributes an amount equal to 50%
of the employee contributions up to a maximum of 2% of annual
compensation. Contributions to the Canadian Plan by the Company were
approximately $43,000, $39,000 and $32,000 for 1993, 1994 and 1995,
respectively.
On September 30, 1994, the Company froze a defined contribution and
savings plan existing at that date. The Company is in the process of
merging this plan into the Domestic Plan.
DEFINED BENEFIT PLANS
In April 1992, the Company elected to cease benefit accruals under the
defined benefit plan to current participants. The curtailment had no
effect on the accrued pension cost of the defined benefit plan.
Company contributions under this plan are funded annually. Plan assets are
comprised primarily of guaranteed investment/annuity contracts. Employee
benefits are based on years of service and the employees' compensation
during their employment.
<PAGE> 21
accompanying consolidated statement of operations in 1994 comprising
termination benefits to involuntarily terminated employees, costs
associated with vacating certain business premises and severance
obligations to past officers of the Company. At December 31, 1994, the
remaining balance was approximately $2,044,000. During 1995, approximately
$380,000 of costs were paid, a settlement was reached with a past officer
of the Company, whereby severance benefits for $576,000 were offset
against a note receivable from such officer and lease obligations for
excess facilities no longer required of approximately $1,088,000 were
reversed and credited to selling, general and administrative expenses in
the accompanying consolidated statement of operations in 1995. There were
no remaining balances relating to this restructuring program at December
31, 1995.
NOTE 12 PLAN OF REORGANIZATION AND FORECLOSURE
In connection with the Company's Chapter 11 bankruptcy proceedings in 1993,
shares of Common Stock are currently being distributed by the Company to
its former creditors pursuant to the Plan of Reorganization (the "Plan") as
approved by United States Bankruptcy Court. The Company anticipates that
approximately 7,356,250 shares of Common Stock will be issued. As of
December 31, 1995, 6,688,749 shares had been issued pursuant to the Plan of
Reorganization.
On March 22, 1993, a syndicate of banks (the "Banks") foreclosed (the
"Foreclosure") on all of the outstanding capital stock of certain of the
Company's European subsidiaries (the "European Subsidiaries"), on certain
intellectual property of the Company and on amounts due to the Company from
certain European Subsidiaries in satisfaction of all amounts due under the
Company's term loan facilities and revolving facilities with the Banks.
The Plan and the Foreclosure gave rise to an extraordinary gain in 1993 of
$117,312,000. The reorganization resulted in an extraordinary gain of
approximately $60,360,000 based on the $50,000,000 estimated enterprise
value of the Company as established by management in connection with the
implementation of the Company's Plan, and the Foreclosure resulted in an
extraordinary gain of $56,952,000, net of income taxes of $1,332,000,
representing the difference between the carrying amount of debt satisfied
and management's estimated fair market value of the assets surrendered.
The Foreclosure was accounted for as a troubled debt restructuring. As a
result, the Company recorded a gain on the transfer of assets of
$22,187,000 in the accompanying consolidated statement of operations in
1993, representing the difference between the carrying amount and
management's estimated fair value of the assets surrendered.
At December 31, 1993, $7,500,000 of the gain on Foreclosure was deferred
due to a potential obligation of the Company's parent at the time to the
Banks. During 1994, the Company determined that it had no continuing
obligation and accordingly, the $7,500,000 was classified as additional
paid-in capital in the accompanying consolidated statement of stockholders'
deficiency for 1994.
The Company recorded interest expense during the bankruptcy period (April
12, 1993 to January 27, 1994) only to the extent interest was paid or
accrued to secured creditors. The amount of contractual interest which was
not accrued as a result of the Chapter 11 proceedings was approximately
$4,512,000.
The other non-operating expense of $2,744,000 in 1993 in the accompanying
consolidated statement of operations represents the net reorganization
expense resulting from the Chapter 11 proceedings and was comprised mainly
of professional fees of $2,407,000, the write-off of original issue
discount and debt issue costs of $1,221,000 and a gain on the settlement of
leases and other executory contracts of $1,173,000.
Notwithstanding the confirmation and effectiveness of its Plan of
Reorganization pursuant to which the Company emerged from a voluntary
proceeding under the bankruptcy laws, the United States Bankruptcy Court
continues to have jurisdiction, among other things, 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.
NOTE 13 COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment, some of which are in
excess of the Company's current and anticipated needs (and have been
included in accrued liabilities and other long-term liabilities in the
balance sheet at December 31, 1995), under both month-to-month and
fixed-term agreements.
<PAGE> 22
The aggregate minimum rentals under operating leases with noncancelable
terms of one year or more are as follows:
Year ending December 31:
(dollars in thousands)
-----------------------------------------
<TABLE>
<S> <C>
1996 $1,025
1997 218
1998 87
1999 48
-----------------------------------------
$1,378
-----------------------------------------
</TABLE>
Rental expense was approximately:
<TABLE>
<CAPTION>
(dollars in thousands)
---------------------------------------
<S> <C>
Year ended December 31, 1993 $5,409
Year ended December 31, 1994 2,283
Year ended December 31, 1995 1,467
---------------------------------------
</TABLE>
LEGAL PROCEEDINGS
The Company has filed and will continue to file objections to claims
asserted in its Chapter 11 bankruptcy proceedings. The majority of these
claims would, if upheld, give rise to allowed unsecured claims entitling
the respective claimants to distributions of Common Stock. A number of
filed objections in respect of secured claims, administrative claims,
priority claims, tax claims, convenience claims and cure claims were still
outstanding at December 31, 1995. To the extent the Company's objection to
such claims are not sustained, the Company will be obligated to pay such
claims in a lump sum in the case of convenience claims and administrative
claims and in the case of secured claims, priority claims, tax claims and
cure claims, on a deferred basis over six to seven years, depending on the
type of claim, at an interest rate of 6% in accordance with the Plan of
Reorganization. The Company does not believe the outcome of these
objections to be material.
During 1993, the Company commenced legal actions involving competitors
offering maintenance services to the Company's end users. During 1994 and
1995 favorable legal settlements were received. The settlements and costs
incurred have been included in selling, general and administrative expenses
in the consolidated statement of operations. In 1994, the settlement (net
of expenses) was approximately $582,000. For 1993 and 1995, net expenses
were incurred of approximately $623,000 and $3,000, respectively. The
Company is recovering ongoing royalty income from defendants with whom
settlements have been achieved. Similar actions are pending against other
alleged copyright infringers.
The Company is also involved in various other legal proceedings which 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 or results of operations of the Company.
RELATED PARTY TRANSACTIONS
Under the terms of a consulting agreement dated August 15, 1994, between
Orchard Capital Corp. ("Orchard") and the Company, Orchard provides the
services of Richard S. Ressler as Chairman and Chief Executive Officer of
the Company. Orchard is paid a consulting fee of $20,000 per month. In
addition, Orchard earned a bonus of $1,188,000 payable in cash or freely
transferable Common Stock (at the option of the Company) when the closing
trading price of the shares of the Company's Common Stock for 20
consecutive trading days ending on or after January 1, 1996 exceeded $4.00
per share (adjusted for the 25% stock split see Note 1). The $1,188,000
(of which $594,000 was accrued in both the third and the fourth quarters of
1995) is included in selling, general and administrative expenses in the
accompanying consolidated statements of operations and as part of accrued
liabilities in the accompanying balance sheet at December 31, 1995. In
addition to such compensation, Orchard was granted a warrant (adjusted for
the August 1995 25% stock split) to purchase up to 625,000 shares of Common
Stock at a price of $1.90 per share, the fair market value of Common Stock
on the date of grant. The consulting agreement expires August 15, 1996.
Mr. Ressler is the principal stockholder of Orchard.
On February 13, 1995, BGLS distributed, by way of a special dividend, its
approximate 3,200,000 shares of the Company's Common Stock to holders of
Brooke Group, Ltd. common stock. Accordingly, the Company is no longer a
subsidiary of BGLS. As a result of the distribution, a former Chairman of
the Company holds approximately 1,652,433 shares of Common Stock.
<PAGE> 23
During 1994, the Company loaned $550,000 to a former officer of the
Company. The loan was originally repayable by December 30, 1994. In
1995, the loan was offset against remaining severance reserves of
approximately $576,000 subsequently established for this officer (See Note
11).
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAI SYSTEMS CORPORATION
The following is a list showing MAI Systems Corporation and each of
its subsidiaries, as of December 31, 1995, indicating as to each the
jurisdiction under the laws of which it was organized. The names of the
subsidiaries are indented below the names of their respective parent
corporation. In the case of each subsidiary, its immediate parent owns
beneficially all of its voting securities except for Gaming Systems
International whose voting securities are owned 70% by MAI Systems
Corporation and 30% by VSOP Computer, Inc.
<TABLE>
JURISDICTION OF
NAME INCORPORATION
<S> <C>
MAI Systems Corporation Delaware
MAI Canada, LTD Canada
MAI del Caribe, Inc. Delaware
Computerized Lodging Systems, B.V Netherlands
MAI de Venezuela S.A Venezuela
Gaming Systems International Nevada
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MAI Systems Corporation:
The audits referred to in our report dated February 9, 1996, included the
related financial statement schedule as of December 31, 1995, and for each of
the years in the three-year period ended December 31, 1995, included in the
annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein and incorporated herein by
reference.
/s/ KPMG Peat Marwick LLP
Orange County, California
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) MAI
SYSTEMS CORPORATION'S CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED
BALANCE SHEETS FOR 1995 INCORPORATED BY REFERENCE INTO ITS 1995 ANNUAL REPORT ON
FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) DOCUMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1,000
<CASH> 4,086
<SECURITIES> 0
<RECEIVABLES> 7,662
<ALLOWANCES> 1,092
<INVENTORY> 3,769
<CURRENT-ASSETS> 16,430
<PP&E> 13,189
<DEPRECIATION> (9,423)
<TOTAL-ASSETS> 21,033
<CURRENT-LIABILITIES> 16,093
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,033
<SALES> 66,294
<TOTAL-REVENUES> 66,294
<CGS> 0
<TOTAL-COSTS> 41,249
<OTHER-EXPENSES> 15,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 9,006
<INCOME-TAX> 383
<INCOME-CONTINUING> 8,623
<DISCONTINUED> 0
<EXTRAORDINARY> 1,566
<CHANGES> 0
<NET-INCOME> 10,189
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
