<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
COMMISSION FILE NO. 1-9158
------------------------
MAI SYSTEMS CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2554549
(State of Incorporation) (I.R.S. Employer Identification Number)
9600 Jeronimo Road
Irvine, California 92718
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (714) 580-0700
-------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
/X/ / /
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
/X/ / /
As of August 12, 1996, 8,167,069 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
<PAGE>
ITEM 5. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
Attached are the financial statements for the business acquired by
the Registrant from Hotel Information Systems, Inc. for the periods
specified in rule 3-05(b) of Regulation S-X.
(b) Pro Forma Financial Information (Unaudited).
Attached is the pro forma financial information relative to the
Registrant's acquisition of the business previously conducted by
Hotel Information Systems, Inc.
[Signature Page to Form 10-Q/A Follows]
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 23, 1996
MAI SYSTEMS CORPORATION
(Registrant)
By: /s/ William Brian Kretzmer
William Brian Kretzmer
Vice President, Chief
Financial Officer
and Treasurer
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOTEL INFORMATION SYSTEMS, INC.
Years ended December 31, 1995 and 1994
with Report of Independent Auditors
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
Consolidated Financial Statements
Years ended December 31, 1995 and 1994
CONTENTS
Report of Independent Auditors...............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................................2
Consolidated Statements of Operations........................................3
Consolidated Statements of Shareholders' Equity (Capital Deficiency).........4
Consolidated Statements of Cash Flows........................................5
Notes to Consolidated Financial Statements...................................6
<PAGE>
Report of Independent Auditors
The Board of Directors
Hotel Information Systems, Inc.
We have audited the consolidated balance sheets of Hotel Information Systems,
Inc. as of December 31, 1995 and 1994, and the related consolidated statements
of operations, shareholders' equity (capital deficiency), and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred recurring
operating losses and has working capital and stockholders' deficits. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. In June, the Company entered into an agreement to
sell substantially all of the Company's assets and the Board of Directors
approved a plan for liquidation.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hotel Information
Systems, Inc. at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
July 31, 1996
1
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
Consolidated Balance Sheets
DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,294,900 $1,509,900
Accounts receivable, less allowance for
doubtful accounts of $276,000 in 1995 and
$641,200 in 1994 5,121,100 5,689,400
Inventories 71,500 140,900
Receivables from related parties 233,300 194,200
Prepaid expenses and other current
assets 669,400 538,300
---------- ----------
Total current assets 7,390,200 8,072,700
Furniture and equipment, net 1,030,300 942,400
Capitalized software, net of accumulated
amortization of $6,617,400 in 1995 and
$5,270,100 in 1994 54,300 1,401,600
Other assets 183,400 215,700
--------- ----------
Total assets $8,658,200$10,632,400
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable $ 2,710,300 $3,531,900
Accrued compensation and related
expenses 1,020,500 786,200
Dividends payable 736,800 399,800
Other accrued liabilities 857,700 1,074,000
Current portion of notes payable and capital
lease obligations 1,103,500 92,900
Income taxes payable 564,500 578,800
Deferred revenues 6,842,400 5,723,000
---------- ----------
Total current liabilities 13,835,700 12,186,600
Notes payable and capital lease
obligations 238,400 136,000
Deferred rent - 136,400
Convertible subordinated debentures 1,037,000 1,037,000
Commitments and contingencies
Shareholders' equity (capital deficiency):
Convertible preferred stock, no par value;
10,000,000 shares authorized:
Series A redeemable convertible preferred
stock; 790,500 shares authorized issued and
outstanding in 1995 and 1994 (liquidation
preference - $1,000,000) 1,121,000 1,008,300
Series B convertible preferred stock; 5,000,000
shares authorized; 2,700,000 shares issued
and outstanding in 1995 and 1994 (liquidation
preference - $3,213,000) 3,143,000 3,143,000
Common stock, no par value; authorized
100,000,000 shares; 11,168,700 shares issued
and outstanding in 1995 and 10,987,200 shares
in 1994 193,600 172,100
Accumulated deficit (10,844,300)(7,117,700)
Notes receivable from shareholders (56,400) (76,500)
Accumulated foreign currency
translation adjustments (9,800) 7,200
--------- ----------
Total shareholders' equity (capital
deficiency) (6,452,900)(2,863,600)
---------- ----------
Total liabilities and shareholders' equity
(capital deficiency) $ 8,658,200 $10,632,400
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
Revenues $ 25,854,400 $ 27,302,700
Cost of revenues 15,145,500 17,105,900
---------- ----------
Gross profit 10,708,900 10,196,800
Selling, general and
administrative expenses 9,715,700 9,819,400
Product development expenses 2,465,700 2,672,200
---------- ----------
Total operating expenses 12,181,400 12,491,600
---------- ----------
Loss from operations (1,472,500) (2,294,800)
Loss on investments, principally
unconsolidated subsidiaries (968,900) (3,895,000)
Loss on sale of subsidiary (466,300) -
Interest expense (income), net (68,200) (78,700)
---------- ----------
Loss before income taxes (2,975,900) (6,268,500)
Provision for income taxes 301,000 290,900
---------- ----------
Net loss $(3,276,900) $(6,559,400)
---------- ----------
---------- ----------
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
Consolidated Statements of Shareholders' Equity (Capital Deficiency)
Years ended December 31, 1995 and 1994
ACCUMULATED TOTAL
RETAINED NOTES FOREIGN SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK EARNINGS RECEIVABLES CURRENCY EQUITY
----------------- ------------------- (ACCUMULATED FROM TRANSLATION (CAPITAL
SHARES AMOUNT SHARES AMOUNT DEFICIT) SHAREHOLDERS ADJUSTMENTS EFICIENCY)
-------- -------- ------- -------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 3,490,500 $4,047,000 10,324,300 $118,200 $(116,900) $(65,500) $11,400 $3,994,200
Issuance of common stock
related to Hogadata
purchase - - 643,600 128,700 - - - 128,700
Exercise of stock options - - 212,800 21,900 - (11,000) - 10,900
Redemption of stock - - (193,500) (96,700) - - - (96,700)
Accretion of preferred
stock dividends - 104,300 - - (441,400) - - (337,100)
Net loss - - - - (6,559,400) - - (6,559,400)
Equity adjustment from
foreign currency
translation - - - - - - (4,200) (4,200)
-------- --------- --------- --------- ----------- -------- -------- ----------
Balance at December 31,
1994 3,490,500 4,151,300 10,987,200 172,100 (7,117,700) (76,500) 7,200 (2,863,600)
Exercise of stock options - - 181,500 21,500 - (11,000) - 10,500
Accretion of preferred
stock dividends - 112,700 - - (449,700) - - (337,000)
Payments received on
shareholder notes
receivable - - - - - 31,100 - 31,100
Net loss - - - - (3,276,900) - - (3,276,900)
Equity adjustment from
foreign currency
translation - - - - - - (17,000) (17,000)
-------- --------- --------- -------- ----------- -------- -------- ----------
Balance at December 31,
1995 3,490,500 $4,264,000 $11,168,700 $193,600 $(10,844,300) $(56,400) $(9,800)$(6,452,900)
-------- --------- --------- ---------- ------------ ---------- --------- ----------
-------- --------- --------- ---------- ------------ ---------- --------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1994
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,276,900) $ (6,559,400)
Adjustment to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 1,562,800 2,707,200
Deferred income taxes - (357,000)
Losses from Hogadata 1,051,500 3,927,500
Equity earnings in joint venture (82,500) (32,500)
Loss on disposition of subsidiary 466,300 -
Net book value of retirement of furniture
and equipment 45,600 -
Change in operating assets and
liabilities net of disposition of
subsidiary:
Accounts receivable 252,000 (19,000)
Inventories 69,400 44,400
Receivables from related parties (39,100) (41,900)
Prepaid expenses and other current assets (131,100) (26,700)
Accounts payable (821,600) 1,201,300
Accrued compensation and related expenses 234,300 185,200
Other accrued liabilities (366,300) 349,400
Income taxes payable (14,300) 369,600
Deferred revenues 1,119,400 (768,200)
---------- ----------
Net cash provided by operating activities 69,500 979,900
INVESTING ACTIVITIES
Capitalized software development costs - (805,600)
Purchase of furniture and equipment - (317,500)
Payments for investment in Hogadata (1,051,500) (3,798,800)
Other assets 114,800 515,600
---------- ----------
Net cash used in investing activities (936,700) (4,406,300)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable 879,500 -
Repayment of borrowings and payments under
capital lease obligations (115,500) (169,000)
Decrease in deferred rent (136,400) (111,200)
Proceeds from payments on notes
receivable from shareholders 31,100 -
Redemption of common stock - (96,700)
Proceeds from issuance of common stock 10,500 10,900
---------- ----------
Net cash provided by (used in) financing activities 669,200 (366,000)
Effect of foreign exchange rate changes on cash (17,000) (4,200)
---------- ----------
Net decrease in cash and cash equivalents (215,000) (3,796,600)
Cash and cash equivalents at beginning of year 1,509,900 5,306,500
---------- ----------
Cash and cash equivalents at end of year $1,294,900 $1,509,900
---------- ----------
---------- ----------
Supplemental disclosures:
Cash paid for interest $44,637 $104,000
---------- ----------
---------- ----------
Cash paid for income taxes $315,300 -
---------- ----------
---------- ----------
Assets acquired under capital lease obligations $349,000 $135,400
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION, OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Hotel Information
Systems, Inc. and its wholly owned subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company develops, markets and supports computer software systems and related
services for the hospitality industry. The systems are principally front office
(reservations, registration, cashiering and guest services), back office
(accounting, purchasing, receiving, inventory and sales management),
reservations and guest history, yield management and interfaces. Services are
principally installation, training, professional consulting and software
maintenance. The Company has agreements with International Business Machine
Corporation, Hewlett Packard and AT&T (NCR) to sell their hardware to its
customers and is an authorized reseller on both an exclusive and non-exclusive
basis for several independent software developers.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred recurring operating
losses, has working capital and stockholders' deficits. Management's plans are
discussed below.
SALE OF ASSETS TO MAI SYSTEMS CORPORATION
In June 1996, the Company entered into an agreement to sell substantially all of
its assets to MAI Systems Corporation ("MAI"). MAI agreed to assume certain
liabilities of the Company and to issue to shareholders of the Company 1,178,380
shares of its common stock. Portions of the consideration are subject to
adjustment based on the closing balance sheet and the price realized on the sale
of MAI common stock by former HIS shareholders. The Board of Directors has
approved a plan of liquidation of the Company.
In connection with the contemplated sale of assets to MAI, the holders of Series
A and B preferred stock (Note 5) of the Company agreed to accept as the full
redemption price for their shares and accrued dividends 118,569 and 394,400
shares of MAI common stock. In addition, the holders of Series A preferred stock
agreed to cancel warrants to purchase 228,005 shares of the Company's common
stock, and the subordinated convertible debenture holder (Note 4) agreed to
accept 122,919 shares of MAI common stock as the full redemption price including
accrued interest.
6
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALE OF HOGADATA AND HOTEL INFORMATION SYSTEMS LIMITED
In May 1994, the Company entered into an agreement to acquire all of the stock
of Hogadata GmbH and related entities ("Hogadata"), a software and services
vendor with principal locations in Austria and Germany. Under the agreement,
which was accounted for as a purchase, the Company issued 643,600 shares of its
common stock, paid $1,095,800 in cash, assumed liabilities and placed 1,050,000
shares of its common stock in escrow to be released to the sellers of Hogadata
on achievement of certain operating results and incurred other acquisition costs
totaling $1,350,700. The Company also received notes in the amount of $500,000.
Control of this entity was temporary and therefore it was accounted for under
the equity method.
In connection with the agreement to acquire Hogadata, the Company also agreed to
acquire Hogadata Benelux NV and issued approximately 400,000 shares of its
common stock, paid $500,000 in cash and placed 700,000 shares of common stock in
escrow to be released to the sellers of Hogadata Benelux NV upon achievement of
certain operating results. In November 1994, Hogadata Benelux NV was sold back
to its former owners, in return for the common stock issued and cancellation of
the escrow share agreement. Cash paid on purchase and subsequent advances were
converted to a note payable to the Company. The Company has fully provided for
all cash advances at the time made.
At December 1994, the net investment and the notes were fully reserved by the
Company due to continuing operating losses of Hogadata. On December 29, 1995,
the Company sold its entire interest in Hogadata for a nominal consideration to
Nikolaus Wishaber, the owner prior to the purchase by the Company who is a
director of the Company, and also sold to the same purchaser Hotel Information
Systems, Limited ("Limited"), a UK subsidiary of the Company. In addition, the
parties cancelled the shares held in escrow and entered into a cross-licensing
arrangement which permitted each party to distribute certain products.
7
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALE OF HOGADATA AND HOTEL INFORMATION SYSTEMS LIMITED (CONTINUED)
The following is a summary of activity related to losses incurred on investments
which includes Hogadata and Hogadata Benelux NV:
1994:
Purchase price:
Cash investment $ 1,095,800
Fair market value of common stock at $.20 per share 128,700
Acquisition related costs and expenses 1,350,700
----------
2,575,200
Additional cash advances during the year 1,352,300
----------
Total investment (charged to operations) 3,927,500
Equity earnings in MSC 32,500
----------
Loss on investments $ 3,895,000
----------
----------
1995:
Additional investment during the year $ 1,017,700
Selling expenses, net of proceeds 33,800
----------
1,051,500
Equity earnings in MSC 82,600
----------
Loss on investments $ 968,900
----------
----------
As part of the sale of Limited, all inter-company receivables, payables and
notes were forgiven. Also royalty on certain maintenance revenue was forgiven by
the Company for a period of three years, and distribution rights to certain
Company products were retained by Limited. The following is a summary of the
loss incurred on the sale of Limited:
Intercompany receivables, net of liabilities $ 265,200
Investment in subsidiary 46,900
Cost of software support and maintenance
to be provided without charge 150,000
Net assets sold 4,200
----------
Net loss on sale $ 466,300
----------
----------
8
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALE OF HOGADATA AND HOTEL INFORMATION SYSTEMS LIMITED (CONTINUED)
Limited was included in the results of operations for 1994 and for the period
January 1, 1995 through December 29, 1995, and was included in the consolidated
balance sheet at December 31, 1994.
METRO SYSTEMS CORPORATION LIMITED
The Company is a joint venture partner with Metro Systems Corporation Limited
("MSC") for the purpose of marketing and selling the Company's software in
Thailand. The Company has a 49.9% interest in the joint venture and accounts for
this investment using the equity method of accounting. Condensed unaudited
financial information of MSC as of and for the year ended December 31, 1995 is
as follows:
Total assets $ 1,965,800
Total liabilities 1,593,500
Revenues 3,109,500
Net income 162,400
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates made in
preparing these financial statements include the allowance for doubtful accounts
and valuation of deferred tax assets.
CASH EQUIVALENTS
The Company invests its excess cash in money market and other demand accounts.
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
9
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, which consist primarily of purchased computer equipment, are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
("FIFO") method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation on furniture and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, generally three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets.
SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized and carried at the lower of
unamortized cost or net realizable value. Capitalized costs are amortized on the
straight-line method over the shorter of the period significant revenues will be
generated or five years. Amortization expense for software development costs in
1995 and 1994 amounted to $1,160,800 and $2,340,600, respectively, which amounts
are included in cost of revenues.
REVENUE RECOGNITION
The Company licenses software under noncancellable license agreements and
provides services such as system installation, training, professional consulting
services and software maintenance. Software license fee revenue is generally
recognized upon shipment of the product to the end user. Revenue from
installation and other consulting services is generally recognized as services
are performed. Software license and consulting revenues for contracts requiring
significant implementation services are recognized on the percentage of
completion basis. Revenue from the sale of hardware is recognized at the time of
shipment.
The Company provides maintenance for its computer software systems under
maintenance agreements, generally with a term of one year. Maintenance revenues
are recognized using the straight-line method over the term of the agreements.
The Company's revenue recognition policy is in compliance with the provision of
the American Institute of Certified Public Accountants Statement of Position
91-1, "Software Revenue Recognition."
10
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Deferred revenue includes deferred maintenance revenue and the deferred portion
of software license revenue.
The Company does not require collateral for its receivables. Reserves are
maintained for potential credit losses, and such losses to date have been within
management's expectations. Actual credit losses may differ from management's
estimates and such differences could be material to the financial statements.
The Company's customers include hotels located throughout the world.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated into U.S. dollars
using current exchange rates, and revenues and expenses are translated into U.S.
dollars using average exchange rates. The cumulative effects of foreign currency
translation adjustments are included as a separate component of stockholders'
equity (capital deficiency).
Exchange gains and losses arising from transactions denominated in currencies
other than the functional currency are included in operations and have not been
material.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") was issued and is
effective for the Company's 1996 fiscal year. The Company has elected to
continue to follow current practice but FAS 123 requires pro forma disclosures
of net income and earnings per share computed as if the fair value-based method
had been applied.
11
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31
1995 1994
<S> <C> <C>
------------------------
Furniture and equipment:
Computer equipment $ 2,896,500 $ 2,550,200
Office furniture and equipment 972,100 860,300
Leasehold improvements 144,100 239,600
Automobiles 14,400 73,600
---------- ----------
4,027,100 3,723,700
Less accumulated depreciation and amortization (2,996,800) (2,781,300)
---------- ----------
Net furniture and equipment $ 1,030,300 $ 942,400
---------- ----------
---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable consist of the following:
DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
Term note payable, unsecured, due in
monthly installments of $4,110 including
interest at 6.0% per annum through June 1997 $ 70,600 $ 114,200
Term note payable to bank, secured
by equipment, due in monthly
principal installments of $2,400 plus
interest at prime plus 1.75% per annum
through October 1995 (10.25% at December 31,1994) - 21,600
Term note payable to bank, secured
by equipment, due in monthly principal
installments of $833 plus interest at
prime plus 1.75% per annum through September
1997, paid in full in 1995 (10.25% at
December 31, 1994) - 27,500
Term note payable to shareholder,
unsecured, due in monthly installments
of $943 including interest at 11% per
annum through October 1997 18,700 -
Borrowings under $500,000 line of
credit with bank, secured by assets of parties
related to shareholders of the Company, accruing
interest at prime plus 1.0%, maturing June 30,
1997. The Company has pledged all of its
maintenance contracts and proceeds therefrom
to the shareholders that have provided
security in support of this loan 341,900 -
Borrowings under $500,000 line of
credit with shareholder, secured by the
Company's accounts receivable, with interest
at 10% per annum. Under this line the
shareholder will advance the Company the lesser
of 75% of designated accounts receivable or
$500,000. This advance is due in July 1996 500,000 -
Note payable to shareholder, unsecured,
with interest at 10% per annum, maturing
December 18, 1995 and was paid in full in
March 1996 18,900 -
-------- --------
Total notes payable 950,100 163,300
Less current portion 916,800 75,200
-------- --------
$ 33,300 $ 88,100
-------- --------
-------- --------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Capital lease obligations represent the present value of future rental payments
under various lease agreements for computer equipment and vehicles. Depreciation
on the relevant assets is charged to depreciation expense. Net book value of
computer equipment, furniture and equipment, and vehicles under capital leases
was $384,600 and $85,600 at December 31, 1995 and 1994, respectively.
Maturities of notes payable and future minimum lease payments under capital
leases are as follows:
NOTES CAPITAL
YEAR ENDING DECEMBER 31 PAYABLE LEASES
---------- ----------
<S> <C> <C>
1996 $916,800 $238,800
1997 33,300 132,300
1998 - 97,600
1999 - 30,000
------- -------
$950,100 498,700
-------
-------
Less amount representing interest 106,900
-------
Present value of minimum lease payments 391,800
Current portion 186,700
-------
Long-term portion $205,100
-------
-------
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBENTURE
In October 1993, the Company issued 8% convertible subordinated debentures.
Interest accrues at the rate of 8% per annum and is payable upon declaration of
dividends on Series B preferred stock. The debentures plus accrued interest are
convertible at any time, at the option of the holders into Series B preferred
stock at a rate of $1.19 per share in accordance with the original terms of the
agreement (see Note 1).
14
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 10,000,000 shares of convertible preferred stock authorized for
issuance, of which 790,513 shares are designated Series A and are redeemable,
5,000,000 shares are designated Series B and are not redeemable and 4,209,487
shares are undesignated.
The holders of the Series A preferred stock may require the Company to redeem
their shares at any time after December 31, 1995 at $1.265 per share plus
accrued dividends and a redemption premium equal to 10% of the issuance price
per annum.
Dividends cumulate annually on the Series A and Series B preferred stock at the
rate of $0.101 and $0.095 per share, respectively, and are payable in cash upon
the redemption, conversion or repurchase of the preferred shares, declaration of
dividends on common shares, or the acquisition, merger, liquidation or
dissolution of the Company. Dividends of $180,000 and $556,800, respectively,
are accrued on the Series A and Series B preferred stock at December 31, 1995.
Subject to certain provisions per the agreement, each share of Series A and
Series B preferred stock is convertible into one share of common stock at any
time at the option of the stockholder. The shares automatically convert upon
completion of an initial public offering of the Company's common stock at a
price not less than $3.00 per common share and for aggregate proceeds greater
than $7,500,000. The holders of the preferred stock are entitled to the number
of votes equal to the number of shares of common stock into which their
preferred stock is convertible.
In the event of liquidation, dissolution, or winding up of the Company, the
holders of Series A and Series B preferred stock have a liquidation preference
over holders of common stock equal to $1.265 and $1.19 per share, respectively,
plus any unpaid dividends (see Note 1).
COMMON STOCK
Common stock has been issued to founders, certain employees and investors of the
Company. Such common shares are subject to certain repurchase rights by the
Company in the event of termination of employment, death or disability.
15
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS
In September 1993, warrants to purchase approximately 128,005 shares of common
stock at $0.25 per share were issued in connection with the sale of Series A
preferred stock. The warrants expire in September 1998.
In June 1995, warrants to purchase 100,000 shares of common stock at $0.20 per
share, were issued to a Series A preferred stockholder as partial compensation
for consulting services provided to the Company. Also in June 1995, warrants to
purchase 50,000 shares of common stock at $0.50 per share were issued in
connection with a Securities Loan Agreement pertaining to the bank line of
credit dated June 15, 1995. The warrants expire in 2000.
STOCK OPTIONS
The Board has granted non-qualified stock options to employees to purchase
common stock of the Company. The options vest ratably over a three to five year
period. The Company has the right to repurchase all shares issued pursuant to
exercise of options upon termination of employment, death or disability.
In January 1994, the Board of Directors approved the Incentive Stock Option Plan
(the "Plan") for eligible employees. The Plan provides for the issuance of both
qualified and non-qualified stock options, restricted stock, stock purchase
rights and performance stock options. All options have an exercise period of 10
years and generally vest over a period of 4 years. The Board authorized options
to purchase up to 400,000 shares of common stock to be issued at the fair market
value at the time of grant.
16
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following summarizes stock option activity for the two years ended December
31, 1995:
OPTION PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding December 31, 1993 2,030,100 $ 0.023 - 0.250
Granted 646,000 0.200
Expired (309,600) 0.085 - 0.131
Cancelled (366,700) 0.023 - 0.250
--------- ------------
Outstanding December 31, 1994 1,999,800 $0.023 - 0.250
Granted 25,000$ 0.200
Exercised (181,500) 0.085 - 0.200
Cancelled (128,300) 0.200 - 0.250
--------- ------------
Outstanding December 31, 1995 1,715,000 $0.023 - 0.250
--------- ------------
--------- ------------
Exercisable December 31, 1995 864,600 $0.023 - 0.250
--------- ------------
--------- ------------
</TABLE>
6. INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
17
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows:
YEARS ENDING DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
Current:
Federal - -
State - -
Foreign 301,000 648,000
---------- ----------
Total current 301,000 648,000
Deferred:
Federal (1,074,000) (2,641,000)
State (86,000) (233,000)
Foreign (14,000) (68,000)
Effect of valuation allowance adjustment 1,174,000 2,585,000
---------- ----------
Total deferred - (357,000)
---------- ----------
Total provision $ 301,000 $ 291,000
---------- ----------
---------- ----------
</TABLE>
Income tax expense for 1994 and 1995 differs from the amount of income tax
expense that would result from applying U.S. statutory tax rates to the pretax
loss from operations as a result of foreign income and withholding taxes which
cannot be offset by the Company's U.S. net operating losses for 1994 and 1995.
18
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) as of December 31 are as
follows:
1995 1994
------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards $1,009,000 $675,000
Capital loss carryforwards 2,042,000 -
Reserves and other accruals 420,000 565,000
Equity investments - 1,474,000
Other 288,000 313,000
---------- ----------
Total deferred tax assets 3,759,000 3,027,000
Valuation allowance (3,759,000) (2,585,000)
---------- ----------
- 442,000
Deferred tax liabilities:
Capitalized software - (442,000)
---------- ----------
Net deferred tax - -
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995, the Company had federal and state net operating loss
carryforwards totaling approximately $2,911,000 which expire in the years 2006
through 2011. In addition, in December 1995, the Company realized losses on the
sale of its investment in Hogadata and related entities and on the sale of its
wholly owned subsidiary in the United Kingdom, Hotel Information Systems,
Limited. These sales resulted in capital losses for income tax purposes that may
only be offset against future capital gains. At December 31, 1995, the Company
had capital loss carryforwards of approximately $5,441,000 for both federal and
state tax purposes. The capital loss carryforward for federal purposes expires
in the year 2000 while the carryforward for state purposes may be carried
forward indefinitely. Due to the "change of ownership" provisions of the Tax
Reform Act of 1986, utilization of the Company's net operating loss and capital
loss carryforwards against taxable income in future years may be subject to a
substantial annual limitation.
19
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with a major shareholder whereby the Company has
the exclusive and perpetual right to market and sell front office software
systems (the "System") developed by the shareholder. In consideration for such
rights, the Company has agreed to pay the shareholder a royalty of $75,000 per
year in perpetuity as long as the Company has the right to market the System
unless the Company exercises its option to acquire the System. The royalty
expense is included in cost of revenues.
Royalty revenue from product sales and services provided through MSC totalled
$142,900 in 1995 ($219,000 in 1994). Royalties due from MSC totalled $118,600
and $82,900 at December 31, 1995 and 1994, respectively.
The Company has two unsecured notes payable to shareholders with a combined
balance at December 31, 1995 of $37,600 (see Note 3).
The Company also has a $500,000 line of credit with a bank that is secured by
assets of parties related to shareholders. The balance of this line of credit at
December 31, 1995 is $341,900. Warrants to purchase 50,000 of common stock at
$0.50 per share were issued to these parties in connection with this line of
credit.
In June 1995, the Company entered into an agreement with a shareholder in which
the shareholder will advance to the Company the lesser of 75% of designated
accounts receivable or $500,000 secured by the Company's accounts receivable.
The agreement calls for the Company to pay the shareholder a commitment fee of
$10,000 plus 10% per annum on the outstanding balance. This advance is due in
July 1996.
20
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
8. INTERNATIONAL OPERATIONS
A summary of the Company's operations by geographic area is as follows:
YEARS ENDING DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
Revenues:
United States $14,701,100 $18,149,700
Europe 2,837,100 2,772,900
Far East 10,144,500 8,336,200
Adjustments and eliminations (1,828,300) (1,956,100)
---------- ----------
Consolidated $25,854,400 $27,302,700
---------- ----------
---------- ----------
Operating income (loss):
United States $ (1,723,700) $ (2,803,000)
Europe (37,300) (107,200)
Far East 288,500 616,500
---------- ----------
Consolidated $ (1,472,500) $ (2,293,700)
---------- ----------
---------- ----------
Identifiable assets, end of year:
United States $ 4,268,300 $ 6,517,300
Europe - 1,618,300
Far East 6,779,200 4,971,700
Adjustments and eliminations (2,389,300) (2,474,900)
---------- ----------
Consolidated $ 8,658,200 $10,632,400
---------- ----------
---------- ----------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company has noncancelable operating leases for office space, furniture and
equipment that expire over the next five years. Future minimum lease payments
under operating leases are as follows:
YEARS ENDING DECEMBER 31
<S> <C>
1996 $1,117,900
1997 998,400
1998 274,800
1999 68,800
Thereafter 34,400
---------
$2,494,300
---------
---------
</TABLE>
Rent expense was $1,045,200 and $1,026,500 in 1995 and 1994, respectively.
VENDOR CLAIM
In June 1996, the Company received a letter from a hardware vendor claiming
$950,000 relating to alleged obligations of former subsidiaries of the Company.
The Company believes that it has no responsibility to honor claims against its
former subsidiaries and intends to vigorously contest the claim. However, the
outcome of this matter is not determinable at this time, its ultimate resolution
could have a material adverse effect on the financial position and results of
operations of the Company.
PURCHASE COMMITMENT
At December 31, 1995, the Company is committed to purchase a minimum of
$1,260,000 in services related to a customer contract.
10. EMPLOYEE SALARY DEFERRAL 401(K) PLAN
The Company sponsors an Employee Salary Deferral 401(k) Plan for eligible
employees. The Company made matching contributions of $26,400 and $48,100 in
1995 and 1994, respectively.
22
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
Years ended December 31, 1993 and 1992
with Report of Independent Auditors
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
Years ended December 31, 1993 and 1992
CONTENTS
Report of Independent Auditors...............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................................2
Consolidated Statements of Operations........................................3
Consolidated Statements of Shareholders' Equity (Capital Deficiency).........4
Consolidated Statements of Cash Flows........................................5
Notes to Consolidated Financial Statements...................................6
<PAGE>
Report of Independent Auditors
The Board of Directors
Hotel Information Systems, Inc.
We have audited the consolidated balance sheet of Hotel Information Systems,
Inc. as of December 31, 1993, and the related consolidated statements of
operations, shareholders' equity (capital deficiency), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated balance sheet of Hotel
Information Systems, Inc. as of December 31, 1992 and the related consolidated
statements of operations, shareholders' equity (capital deficiency), and cash
flows for each of the two years in the period ended December 31, 1992, were
audited by other auditors whose report dated February 26, 1993, except as to
Note 12 which is as of April 26, 1993, expressed an unqualified opinion on those
statements prior to restatement.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hotel Information
Systems, Inc. at December 31, 1993, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
We also audited the adjustments described in Note 12 that were applied to
restate the 1992 and 1991 financial statements. In our opinion, such adjustments
are appropriate and have been properly applied.
/s/ Ernst & Young LLP
May 31, 1994
1
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1993 1992
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,306,500 $ 417,900
Accounts receivable, less allowance
for doubtful accounts
of $298,900 in 1993 and $86,100 in 1992 5,670,400 4,290,300
Inventories 185,300 620,400
Receivables from related parties 152,300 -
Deferred income taxes 575,000 -
Prepaid expenses and other current assets 511,600 285,600
---------- ----------
Total current assets 12,401,100 5,614,200
Furniture and equipment, net of accumulated
depreciation of $2,498,800 in 1993 and
$2,278,800 in 1992 772,000 746,700
Capitalized software, net of accumulated
amortization of $2,845,400 in 1993 and
$2,019,300 in 1992 3,020,700 2,708,700
Other assets 636,100 383,300
------- -------
Total assets $16,829,900 $9,452,900
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,330,600 $1,193,900
Accrued compensation and related expenses 601,000 334,500
Other accrued liabilities 724,600 1,512,100
Short-term borrowings - 74,700
Current portion of notes payable
and capital lease obligations 86,400 89,600
Income taxes payable 209,200 44,700
Deferred revenues 6,491,200 6,164,20
---------- ---------
Total current liabilities 10,443,000 9,413,700
Notes payable and capital lease obligations 176,100 124,000
Deferred income taxes 932,000 76,000
Deferred rent 247,600 276,400
Convertible subordinated debentures 1,037,000 -
Commitments and contingencies
Shareholders' equity (capital deficiency):
Convertible preferred stock, no
par value;10,000,000 shares authorized:
Series A redeemable convertible
preferred stock; 790,500 shares authorized;
790,500 shares issued and outstanding in 1993
(liquidation preference $1,000,000) 903,900 -
Series B convertible preferred stock;
5,000,000 shares authorized; 2,700,000
shares issued and outstanding in 1993
(liquidation preference $3,213,000) 3,143,100 -
Common stock, no par value. Authorized
100,000,000 shares, 10,324,300 shares
issued and outstanding in 1993 and
9,868,500 shares in 1992 118,200 81,500
Accumulated deficit (116,900) (521,300)
Notes receivable from shareholders (65,500) (37,700)
Accumulated foreign currency translation adjustments 11,400 40,300
--------- ---------
Total shareholders' equity (capital deficiency) 3,994,200 (437,200)
--------- ---------
Total liabilities and shareholders'
equity (capital deficiency)
$16,829,900 $9,452,900
=========== ==========
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
1993 1992 1991
-----------------------------------------
<S> <C> <C> <C>
Revenues $23,273,100 $17,815,400 $15,955,700
Cost of revenues 11,622,300 8,727,200 7,743,200
---------- ---------- ----------
Gross profit 11,650,800 9,088,200 8,212,500
Selling, general and administrative
expenses 9,092,400 8,249,400 8,199,200
Product development expenses 1,481,000 1,127,200 1,355,000
---------- ---------- ----------
Total operating expenses 10,573,400 9,376,600 9,554,200
---------- ---------- ----------
Income (loss) from operations 1,077,400 (288,400) (1,341,700)
Interest expense (income), net 7,400 8,200 (3,200)
---------- ---------- ----------
Income (loss) before income taxes 1,070,000 (296,600) (1,338,500)
Provision for income taxes (benefit) 576,800 119,400 (42,500)
---------- ---------- ----------
Net income (loss) $493,200 $(416,000) $ (1,296,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Accumulated Total
Retained Notes Foreign Shareholders
Preferred Stock Common Stock Earnings Receivable Currency Equity
---------------- ------------------ (Accumulated from Translation (Capital
Shares Amount Shares Amount Deficit) Shareholders Adjustments Deficiency)
----- --------- ------- ----------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 - - 9,675,000 $81,500 $1,190,700 $(37,700) $29,900 $1,264,400
Common stock issued
in exchange for
minority interest in
subsidiary - - 193,500 - - - - -
Net loss - - - - (1,296,000) - - (1,296,000)
Equity adjustment
from foreign
currency
translation - - - - - - 14,300 14,300
------- ------- ------- -------- ------- ------- ------- -----------
Balance at December 31,
1991 - - 9,868,500 81,500 (105,300) (37,700) 44,200 (17,300)
Net loss - - - - (416,000) - - (416,000)
Equity adjustment
from foreign
currency
translation - - - - - - (3,900) (3,900)
------- ------- ------- ------ ------- ------- -------- --------
Balance at December 31,
1992 - - 9,868,500 81,500 (521,300) (37,700) 40,300 (437,200)
Issuance of Series A
preferred stock at
$1.265 per share,
net of issuance
costs 790,500 877,800 - - - - - 877,800
Issuance of Series B
preferred stock at
$1.19 per share,
net of issuance
costs 2,700,000 3,143,100 - - - - - 3,143,100
Exercise of stock
options - - 455,800 36,700 - (27,800) - 8,900
Accretion of
preferred stock
dividends - 26,100 - - (88,800) - - (62,700)
Net income - - - - 493,200 - - 493,200
Equity adjustment
from foreign
currency
translation - - - - - - (28,900) (28,900)
--------- --------- ---------- --------- --------- --------- --------- ----------
Balance at December 31,
1993 3,490,500 $4,047,000 10,324,300 $ 118,200 $(116,900) $(65,500) $11,400 $3,994,200
========= ========== ========== ========= ========= ========= ========= ==========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1993 1992 1991
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $493,200 $(416,000) $(1,296,000)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,073,300 1,361,500 1,066,000
Loss on disposal of equipment - - (8,100)
Deferred income taxes 281,000 (70,500) (373,400)
Equity in joint venture losses (income) 13,300 (33,500) (21,000)
Change in operating assets and liabilities:
Accounts receivable (1,380,100) 173,800 877,900
Related party receivable (152,300) - -
Inventories 435,100 (525,400) 93,600
Prepaid expenses and other
current asset (226,000) (98,000) 207,400
Accounts payable and accrued expenses 1,340,500 663,400 (1,265,300)
Income taxes payable 164,500 (82,200) 302,000
Deferred revenue 327,000 127,500 1,676,800
Other liabilities (816,300) 94,700 104,500
--------- ---------- -------
Net cash provided by operating activities 1,553,200 1,195,300 1,364,400
INVESTING ACTIVITIES
Capitalized software development costs (963,100) (780,300) (1,269,300)
Purchase of furniture and equipment (241,700) (189,300) (390,600)
Proceeds from disposal of
furniture and equipment - - 12,400
Other assets (293,300) - -
---------- --------- ----------
Net cash used in investing activities (1,498,100) (969,600) (1,647,500)
FINANCING ACTIVITIES
Proceeds from issuance of
convertible debentures 1,037,000 - -
Proceeds from borrowings 2,500 124,700 310,500
Repayment of borrowings and
payments under capital leases (206,900) (628,800) (105,600)
Proceeds from issuance of preferred stock, net 4,020,900 - -
Proceeds from issuance of common stock 8,900 - -
Net cash provided by (used in) --------- --------- ---------
financing activities 4,862,400 (504,100) 204,900
Effect of foreign exchange
rate changes on cash (28,900) (3,900) 14,300
Net increase (decrease) in cash ---------- --------- ---------
and cash equivalents 4,888,600 (282,300) (63,900)
Cash and cash equivalents
at beginning of year 417,900 700,200 764,100
---------- --------- ----------
Cash and cash equivalents at end of year $5,306,500 $417,900 $700,200
========== ========= ==========
Supplemental disclosures:
Interest paid $48,300 $44,800 $38,000
========== ========= ==========
Income taxes paid $131,300 $272,100 $142,000
========== ========= ==========
Assets acquired under capital leases $3,600 $14,600 $96,900
========== ========= ==========
Supplemental disclosures of noncash
investing and financing activities:
Note issued for purchased software $175,000 $ - $ -
========== ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND OPERATIONS
The consolidated financial statements include the accounts of Hotel Information
Systems, Inc. and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company develops, markets and supports computer software systems and related
services for the hospitality industry. The systems are principally front office
(reservations, registration, cashiering and guest services), back office
(accounting, purchasing, receiving, inventory and sales management), yield
management and interfaces. Services are principally installation, education,
professional consulting services and software maintenance. The Company has
agreements with International Business Machine Corporation, Hewlett Packard and
AT&T (NCR) to sell their hardware to its customers.
In September 1991, the Company entered into a joint venture with Metro Systems
Corporation Limited to form HIS MSC Company Limited for the purpose of marketing
and selling the Company's software in Thailand. The Company has a 49.9% interest
in the joint venture and accounts for this investment using the equity method.
Condensed unaudited financial information of HIS MSC Company Limited as of and
for the year ended December 31, 1993 is as follows:
Total assets $ 796,800
Total liabilities 745,100
Revenues 1,949,800
Net loss (50,200)
CASH EQUIVALENTS
The Company invests its excess cash in money market and other demand accounts.
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORIES
Inventories which consist primarily of purchased computer equipment, are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
6
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation on furniture and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, generally three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets.
SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized and carried at the lower of
unamortized cost or net realizable value. Capitalized costs are amortized on the
straight-line method over five years. The total amortization expense for
software development costs in 1993, 1992 and 1991 was $821,900, $858,600 and
$568,800, respectively, and is included in cost of revenues.
REVENUE RECOGNITION
The Company licenses software under noncancellable license agreements and
provides services such as system installation, training, professional consulting
services and software maintenance. Software license fee revenue is generally
recognized upon shipment of the product to the end user. Revenue from
installation and other consulting services is generally recognized as services
are performed. Software license and consulting revenues for contracts requiring
significant implementation services are recognized on the percentage of
completion basis. Revenue from the sale of hardware is recognized at the time of
shipment.
The Company provides maintenance for its computer software systems under
maintenance agreements, generally with a term of one year. Maintenance revenues
are recognized using the straight-line method over the term of the agreements.
Deferred revenue includes deferred maintenance revenue and the deferred portion
of software license revenue.
The Company does not require collateral for its receivables. Reserves are
maintained for potential credit losses, and such losses to date have been within
management's expectations. The Company's customers include hotels located
throughout the world. The Company is directly affected by the financial cycles
of the hotel industry, however, management does not believe significant credit
risk exists at December 31, 1993.
7
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated into U.S. dollars
using current exchange rates, and revenues and expenses are translated into U.S.
dollars using average exchange rates. The cumulative effects of foreign currency
translation adjustments are included as a separate component of stockholders'
equity (capital deficiency).
Exchange gains and losses arising from transactions denominated in currencies
other than the functional currency are included in operations have not been
material.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
<TABLE>
<CAPTION>
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
DECEMBER 31
1993 1992
--------------------------
<S> <C> <C>
Computer equipment $ 2,190,300 $ 1,991,700
Office furniture and equipment 713,500 618,300
Leasehold improvements 191,600 165,100
Automobiles 175,400 250,400
---------- ----------
3,270,800 3,025,500
Less accumulated depreciation and amortization (2,498,800) (2,278,800)
---------- ----------
Net furniture and equipment $ 772,000 $ 746,700
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable consists of the following:
DECEMBER 31
1993 1992
------------------------
<S> <C> <C>
in monthly installments of $4,110
including interest accrued at 6.0%
per annum through June 1997 $ 155,400 $ -
Term note payable to bank, secured
by equipment, due in monthly principal
installments of $2,400 plus interest
accrued at prime plus 1.75% per annum
through October 1995 (7.75% at December 31, 1993) 46,000 79,000
Term note payable to bank, secured
by equipment, due in monthly principal
installments of $833 plus interest accrued
at prime plus 1.75% per annum through September
1997 (7.75% at December 31, 1993) 29,200 47,500
Borrowings under credit agreement
with bank, $255,000 maximum, secured by
equipment, due in monthly principal
installments of $7,300 plus interest
accrued at prime plus 1.75% per annum
through March 1993 - 14,700
-------- --------
Total notes payable 230,600 141,200
Less current portion 71,400 53,400
-------- --------
$ 159,200 $ 87,800
-------- --------
-------- --------
</TABLE>
Capital lease obligations represent the present value of future rental payments
under various lease agreements for computer equipment and vehicles. Depreciation
on the relevant assets is charged to depreciation expense. Cost of computer
equipment and vehicles under capital leases are $115,100 and $111,500 at
December 31, 1993 and 1992, respectively.
9
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Maturities of notes payable and future minimum lease payments under capital
leases are as follows:
NOTES CAPITAL
YEAR ENDING DECEMBER 31 PAYABLE LEASES
-------- --------
<C> <C> <C>
1994 $71,400 $21,300
1995 72,700 9,500
1996 54,500 4,000
1997 32,000 -
-------- ------
$230,600 34,800
-------- ------
Less amount representing interest 2,900
------
Present value of minimum lease payments 31,900
Current portion 15,000
------
Long-term portion $16,900
------
------
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBENTURE
In October 1993, the Company issued 8% convertible subordinated debentures due
January 1, 2010. Interest accrues at the rate of 8% per annum and is payable
upon declaration of dividends on Series B preferred stock. The debentures are
convertible at any time at the option of the holders into Series B preferred
stock at a rate of $1.19 per share in accordance with the original terms of the
agreement.
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 10,000,000 shares of convertible preferred stock authorized for
issuance, of which approximately 790,500 shares are designated Series A and are
redeemable, 5,000,000 shares are designated Series B and are not redeemable and
4,209,487 shares are undesignated.
10
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
In September 1993, the Company issued approximately 790,500 shares of Series A
redeemable, convertible preferred stock to various investors in exchange for
cash at $1.265 per share. Proceeds totalled $877,800, net of issuance costs of
$122,200. The holders of the Series A preferred stock may require the Company to
redeem their shares at any time after December 31, 1995 at $1.265 per share plus
accrued dividends and a redemption premium equal to 10% of the issuance price
per annum.
In October 1993, the Company issued 2,700,000 shares of Series B convertible
preferred stock to various investors in exchange for cash at $1.19 per share.
Proceeds totalled $3,143,100, net of issuance costs of $45,900.
Dividends cumulate annually on the Series A and Series B preferred stock at the
rate of $0.101 and $0.095 per share, respectively, and are payable in cash upon
the redemption, conversion or repurchase of the preferred shares, declaration of
dividends on common shares, or the acquisition, merger, liquidation or
dissolution of the Company. Dividends of $20,000 and $42,700, respectively, are
accrued on the Series A and Series B preferred stock at December 31, 1993.
Subject to certain provisions per the agreement, each share of Series A and
Series B preferred stock is convertible into one share of common stock at any
time at the option of the stockholder. The shares automatically convert upon
completion of an initial public offering of the Company's common stock at a
price not less than $3.00 per common share and for aggregate proceeds greater
than $7,500,000. The holders of the preferred stock are entitled to the number
of votes equal to the number of shares of common stock into which their
preferred stock is convertible.
In the event of liquidation, dissolution, or winding up of the Company, the
holders of Series A and Series B preferred stock have a liquidation preference
over holders of common stock equal to $1.265 and $1.19 per share, respectively,
plus any unpaid dividends.
11
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Common stock has been issued to founders, certain employees and investors of the
Company. Such common shares are subject to certain repurchase rights by the
Company in the event of termination of employment, death or disability.
WARRANTS
In September 1993, warrants to purchase approximately 128,000 shares of common
stock at $0.25 per share were issued in connection with the sale of Series A
preferred stock. The warrants expire in September 1998.
<TABLE>
<CAPTION>
STOCK OPTIONS
The Board has granted nonqualified stock options to employees to purchase common
stock of the Company. The options vest ratably over a three to five year period.
The Company has the right to repurchase all shares issued pursuant to exercise
of options upon termination of employment, death or disability.
The following summarizes option activity for the three years ended December 31,
1993:
OPTION PRICE
SHARES PER SHARE
-------- ------------
<S> <C> <C>
Outstanding December 31, 1990 375,400 $ 0.129 - 0.137
Granted 851,300 0.083 - 0.131
Expired (185,700) 0.137
--------- -------------
Outstanding December 31, 1991 1,041,000 0.083 - 0.131
Cancelled (305,700) 0.129 - 0.131
--------- -------------
Outstanding December 31, 1992 735,300 0.083 - 0.131
Granted 1,591,500 0.023 - 0.250
Exercised (296,700) 0.023 - 0.131
--------- -------------
Outstanding December 31, 1993 2,030,100 $ 0.023 - 0.250
--------- ------------
--------- ------------
Exercisable, December 31, 1993 64,500 $ 0.131
--------- ------------
--------- ------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Effective January 1, 1993. the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Prior to the adoption of FAS 109, income tax expense
was determined using the deferred method. Deferred tax expense was based on
items of income and expense that were reported in different years in the
financial statements and tax returns and were measured at the tax rate in effect
in the years the difference originated.
As permitted by FAS 109, the Company has elected not to restate the financial
statements of any prior years. The effect of the change on the provision for
income taxes for 1993 and the cumulative effect of the change were not material.
The provisions (benefits) for income taxes consist of the following:
LIABILITY
METHOD DEFERRED METHOD
-------- ----------------------
1993 1992 1991
-------- --------- --------
<S> <C> <C> <C>
Federal:
Current $17,000 $ - $ -
Deferred 258,000 (70,500) (252,300)
-------- -------- ---------
275,000 (70,500) (252,300)
State:
Current 11,000 2,400 2,400
Deferred 23,000 - (28,000)
------- ------- --------
34,000 2,400 (25,600)
Foreign:
Current 267,800 187,500 235,400
-------- -------- --------
Total $576,800 $119,400 $(42,500)
-------- -------- --------
-------- -------- --------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The reconciliation of income tax provision (benefit) attributable to continuing
operations computed at the U.S. federal statutory rates to income tax expense is
as follows:
LIABILITY
METHOD DEFERRED METHOD
-------- ----------------------
1993 1992 1991
-------- --------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 363,800 $(100,900) $(455,100)
State taxes net of federal benefit 22,400 1,600 (15,000)
Unrecognized loss of foreign subsidiary - 63,900 -
Net operating losses not utilized - 28,700 284,700
Foreign income and withholding taxes 207,000 131,000 132,900
Other (16,400) (4,900) 10,000
-------- -------- ---------
Total $ 576,800 $119,400 $(42,500)
-------- -------- ---------
-------- -------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income taxes result from timing differences between years in the
recognition of certain revenue and expense items for financial and tax reporting
purposes. The source of timing differences and resulting tax effects are as
follows (deferred method):
1992 1991
--------- --------
<S> <C> <C>
Depreciation and amortization $8,000 $(14,500)
Capitalized software 26,600 270,700
Deferred revenue - (28,600)
Accrued expenses 26,600 (63,200)
Allowance for doubtful accounts 6,700 -
Foreign tax credits - -
Net operating losses not utilized (138,400) (443,000)
Utilization of net operating loss - -
Other - (1,700)
-------- --------
$(70,500) $(280,300)
-------- --------
-------- --------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities were
as follows at December 31, 1993 (liability method):
<S> <C>
Deferred tax assets:
Foreign tax deductions $189,000
Deferred revenue 318,000
Accrued expenses 219,000
Allowance for doubtful accounts 116,000
Other 102,000
---------
Total deferred tax assets 944,000
Deferred tax liabilities:
Capitalized software 1,079,000
Other 222,000
---------
Total deferred tax liabilities 1,301,000
---------
Net deferred tax liabilities $357,000
---------
---------
Recorded in the accompanying financial statements as:
Net current deferred tax assets $575,000
Net noncurrent deferred tax liabilities 932,000
---------
Net deferred tax liabilities $357,000
---------
---------
</TABLE>
No provision has been made for federal income taxes on unrequited earnings of
certain of the Company's foreign subsidiaries (approximately $300,000 at
December 31, 1993) since the Company plans to permanently reinvest all such
earnings. However, if such earnings were remitted, foreign tax credits would be
available to substantially offset the resulting U.S. income tax.
16
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At December 31, 1993, the Company had research and development credit
carryforwards of approximately $60,000 for federal income tax reporting
purposes. The research and development credits expire from 2001 to 2004. During
1993, the Company utilized approximately $1,300,000 in net operating loss
carryforwards for federal income tax reporting purposes. A change in ownership,
as defined by the "change in ownership" provisions of the Tax Reform Act of
1986, of more than 50% of the value of the Company's stock may have occurred
during the year ended December 31, 1993. The Company has not completed the
analysis required to determine if a "deemed" change in ownership has occurred.
However, the amount of the net operating loss carryforward utilized subsequent
to the potential change in ownership is not material to the consolidated
financial statements.
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with a major shareholder whereby the Company has
the exclusive and perpetual right to market and sell front office software
systems developed by the shareholder. In consideration for such rights, the
Company has agreed to pay the shareholder a royalty of $75,000 per year. The
royalty expense is included in cost of revenues.
Royalty revenue from product sales and services provided through HIS MSC Company
Limited (49.9% owned company) totalled $333,800 in 1993 ($210,000 and $16,800 in
1992 and 1991, respectively). Royalties due from HIS MSC Company Limited total
$152,300 at December 31, 1993 (none at December 31, 1992).
17
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTERNATIONAL OPERATIONS
No single customer accounted for more than 10% of revenues in 1993, 1992 or
1991.
A summary of the Company's operations by geographic area for the three years
ended December 31, 1993 follows:
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States $16,041,200 $12,132,000 $10,201,900
Europe 3,062,000 4,076,700 4,043,000
Far East 5,541,200 3,217,800 3,168,000
Adjustments and eliminations (1,371,300) (1,611,100) (1,457,200)
---------- ---------- ----------
Consolidated $23,273,100 $17,815,400 $15,955,700
---------- ---------- ----------
---------- ---------- ----------
Operating income (loss):
United States 932,400 35,300 (1,451,200)
Europe 181,200 (156,400) 19,700
Far East (35,200) (180,500) 92,700
---------- ---------- ----------
Consolidated 1,078,400 (301,600) (1,338,800)
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
United States $13,012,500 $ 5,933,400 $ 6,277,400
Europe 1,593,800 1,829,200 2,349,400
Far East 3,341,400 2,899,700 1,725,700
Adjustments and eliminations (1,117,800) (1,209,400) (723,100)
---------- ---------- ----------
Consolidated $16,829,900 $ 9,452,900 $ 9,629,400
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company has noncancelable operating leases for office space, furniture and
equipment that expire over the next five years.
Future minimum lease payments under operating leases are as follows:
YEAR ENDING DECEMBER 31
<S> <C>
1994 $1,068,900
1995 960,700
1996 804,900
1997 and thereafter 517,500
---------
$3,352,000
---------
---------
</TABLE>
EMPLOYEE MEDICAL COVERAGE
The Company is partially self-insured for medical expenses incurred with a stop
loss of $25,000 per individual or family per year for employees participating in
the standard medical plan. Medical expenses incurred beyond the $25,000 level
are insured under a stop-loss coverage insurance plan. Amounts accrued under the
standard medical plan were approximately $86,700 and $77,900 at December 31,
1993 and 1992, respectively.
10. EMPLOYEE SALARY DEFERRAL 401(K) PLAN
The Company sponsors an Employee Salary Deferral 401(k) Plan for eligible
employees. The Company has not historically matched employee contributions;
however, the Plan allows for such matching upon approval by the Board of
Directors.
There were no contributions made in 1993, 1992 and 1991.
19
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT
In May 1994, the Company entered into an agreement to acquire all of the stock
of a software and services vendor with locations in Austria, Germany and
Belgium. Under the agreement, the Company will issue 2,750,000 shares of its
common stock and pay $500,000 in cash. 1,750,000 of the shares are held in
escrow to be released upon resolution of contingencies as specified in the
agreement and upon attainment by the acquiree company of certain performance
criteria as defined. Additionally, the Company has agreed to loan to the
acquiree up to $1,000,000 at 4% per annum to fund the completion of certain
development projects. The transaction will be accounted for as a purchase. The
results of operations of the acquiree will be included in the consolidated
results of operations for periods subsequent to the acquisition date.
In January 1994, the Board of Directors approved the Incentive Stock Option Plan
for eligible employees. The Plan provides for the issuance of both qualified and
non-qualified stock options, restricted stock, stock purchase rights and
performance stock options. All options will have an exercise period of 10 years.
The Board authorized options to purchase up to 400,000 shares of common stock to
be issued at the fair market value at the time of grant.
12. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
During 1992, and 1991, the Company recognized revenue from nonrefundable
deposits received upon the signing of its license agreements with its customers
prior to delivery of the related software and services. The Company's policy
requires that software be delivered and services be performed in order to
recognize revenue for amounts received upon signing of the contract with the
customer. Also during 1992, the Company did not recognize certain license fees
that were billed and collected under normal payment terms for software that was
delivered prior to year end with no significant vendor obligations or other
contingencies. The financial statements for 1992 and 1991 have been restated to
properly record revenues for these periods. The effect of the restatement was to
decrease previously reported net loss by $170,400 for the year ended December
31, 1992, and to increase previously reported net loss for the year ended
December 31, 1991 by $837,200. The restatement reduced previously reported
retained earnings by $666,800 and $837,200 at December 31, 1992 and 1991,
respectively.
20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HOTEL INFORMATION SYSTEMS, INC.
(unaudited)
For the Six Month Periods ended
June 30, 1996 and 1995
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1996
(dollars in thousands)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,241
Receivables, net 3,509
Inventories 62
Deferred income tax 719
Prepaids 1,203
---------
Total current assets 7,734
Furniture, fixtures and equipment, net 824
Other assets 213
--------
Total assets $8,771
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings 1,047
Accounts payable 1,413
Accrued liabilities 1,763
Income taxes payable 171
Dividends payable 905
Unearned revenue 7,702
---------
Total current liabilities 13,001
Deferred income taxes 726
Long-term debt 1,162
---------
Total liabilities 14,889
=========
Shareholders' equity:
Common stock 199
Preferred Stock 4,264
Notes receivable from shareholders (56)
Cumulative translation adjustment (19)
Accumulated deficit (10,506)
----------
Total shareholders' equity (6,118)
----------
Total liabilities and stockholders' equity $8,771
==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
1
<PAGE>
<TABLE>
<CAPTION>
HOTEL INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six-Months Ended
June 30,
1996 1995
(dollars in thousands)
<S> <C> <C>
Revenues $8,580 $13,329
Direct costs 4,195 7,781
------ ---------
Gross profit 4,385 5,548
Selling, general and administrative expenses 2,813 4,781
Research and development costs 1,110 1,247
Other operating expense (income) 96 (91)
------ --------
Operating income (loss) 366 (389)
Loss on investments, principally unconsolidated 400
subsidiary
Interest expense, net 198 17
------ --------
Income before income taxes 168 (806)
Provision for income taxes - 91
------ --------
Net income $ 168 $(897)
======= ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statement
2
<PAGE>
<TABLE>
<CAPTION>
Hotel Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six-Months
Ended
June 30,
1996 1995
(dollars in
thousands)
<S> <C> <C>
Net cash provided by operating activities $ 992 $ 328
Cash flows from investing activities:
Payments for investment in Hogadata - (260)
Capital expenditures (42) (31)
---------- ---------
Net cash used in investing activities (42) (291)
Cash flows from financing activities:
Proceeds from the issuance of common stock 5 -
--------- --------
Net cash generated from financing activities 5 -
--------- --------
Effect of exchange rate changes on cash and cash (9) 55
equivalents
Net change in cash and cash equivalents 946 92
Cash and cash equivalents at beginning of period 1,295 1,510
--------- --------
Cash and cash equivalents at end of period $ 2,241 $ 1,602
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
HOTEL INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1996
(1) Basis of Presentation
Companies for which this report is filed are Hotel Information Systems,
Inc. and its wholly owned subsidiaries (the "Company"). The information
contained herein is unaudited, but gives effect to all adjustments (which are
normal recurring accruals) necessary to present fairly the condensed
consolidated financials statements. All significant intercompany balances and
transactions have been eliminated in consolidation. These condensed consolidated
financial statements do not include the effect of certain proposed purchase
price adjustments of approximately $2.6 million which have been proposed by MAI
and which are being reviewed by the Company. See, note (2) below.
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern.
(2) Subsequent Event
On August 9, 1996, the Company sold substantially all of its assets to MAI
Systems Corporation ("MAI"). As consideration, MAI assumed certain liabilities
of the Company and issued to shareholders of the Company 1,178,380 shares of its
common stock. The final consideration is subject to adjustments (if any) based
on the Company's closing balance sheet as of August 9, 1996.
4
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial data presents the Pro Forma
Combined Balance Sheet on June 30, 1996, giving effect to the acquisition of
Hotel Information Systems, Inc. ("HIS") as if they were consummated on that
date. Also presented are the Pro Forma Combined Statements of Operations for the
six months ended June 30, 1996, and the fiscal year ended December 31, 1995,
after giving effect to the acquisitions as if they were consummated on January
1, 1995. The pro forma data is based on the historical consolidated financial
statements of MAI Systems Corporation, and the historical financial statements
of HIS giving effect to the transaction under the assumptions and adjustments
outlined in the accompanying Notes to Unaudited Pro Forma Combined Financial
Data.
The unaudited pro forma data is provided for comparative purposes only. It does
not purport to be indicative of the results that actually would have occurred if
the acquisition had been consummated on the date indicated or which may be
obtained in the future. The pro forma combined financial data should be read in
conjunction with the notes thereto contained elsewhere herein and the audited
financial statement of HIS and the related notes thereto contained elsewhere
herein and the audited consolidated financial statements of the Company and the
related notes thereto incorporated herein by reference.
<PAGE>
<TABLE>
<CAPTION>
MAI Systems Corporation
Pro Forma Combined Balance Sheet
(Unaudited)
June 30, 1996
(dollars in thousands)
Pro Forma
Historical Adjustments
============= ==============================
Increase Adjust Combined
MAI HIS (Decrease) Refer. Total
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
10,664 2,241 (1,466) a(i) 9,738
(1,701) a(ii)
Receivables, net 7,353 3,509 (756) a(v) 10,106
Inventories 4,297 62 - 4,359
Deferred income taxes - 719 (719) a(i) -
Prepaids 1,148 1,203 - 2,351
------ ------ ------ ------
Total current assets 23,462 7,734 (4,642) 26,554
Furniture, fixtures and
equipment, net 3,783 824 (191) 4,416
Goodwill and other
intangibles 3,336 - 20,832 a(iv) 24,168
Other assets 599 213 - 812
------ ----- -------- ---------
Total assets $ 31,180 8,771 $15,999 $55,950
======= ===== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current portion of
long-term debt $ 1,276 - - 1,276
Short-term borrowings - 1,047 (919) a(ii) 128
Customer deposits 1,151 - - 1,151
Accounts payable 5,062 1,413 - 6,475
Accrued liabilities 3,688 1,763 (100) a(iii) 7,681
3,009 a(v)
(679) a(i)
Income taxes payable 157 171 (171) a(i) 157
Dividends payable - 905 (905) a(i) -
Unearned revenue 3,354 7,702 123 a(v) 11,179
------ ----- ------- -------
Total current 14,688 13,001 358 28,047
liabilities
Deferred income taxes 15 726 (726) a(i) 15
Long-term debt 1,072 1,162 (1,037) a(iii ) 1,197
Other liabilities 767 - - 767
------- ------- -------- -------
Total liabilities
16,542 14,889 (1,405) 30,026
------- ------- -------- --------
Stockholders' equity:
Common stock 75 199 (199) a(i) 88
13 a(iii)
Preferred Stock - 4,264 (4,264) a(i) -
Additional paid-in capital 200,367 - 11,273 a(iii) 211,640
Note receivable from
stockholders - (56) 56 a(i) -
Cumulative translation (82) (19) 19 a(i) (82)
adjustment
Accumulated deficit (185,722) (10,506) 10,506 a(i) (185,722)
--------- -------- ------- ---------
Total stockholders'equity 14,638 (6,118) 17,404 25,924
--------- -------- ------- ---------
Total liabilities and
stockholders' equity $ 31,180 8,771 15,999 55,950
======== ======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Combined Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
MAI Systems Corporation
Pro Forma Combined Statement of Operations
(Unaudited)
For the six months ended June 30, 1996
(dollars in thousands, except share data)
Pro Forma
Historical
============ =========================
Adjustments
Increase Adjust.Combined
MAI HIS (Decrease) Refer. Total
<S> <C> <C> <C> <C> <C>
Revenue:
Software, networks and
professional services:
Software Sales 5 $2,155 $1,955 $(1,355) b(vii) $2,755
Network and computer
equipment 6,467 1,189 - 7,656
Professional services 4,952 5,436 - 10,388
--------------------------------- ---------
Total 13,574 8,580 (1,355) 20,799
Legacy revenue 16,191 - - 16,191
------- ------- ------- -------
Total revenue 29,765 8,580 (1,355) 36,990
Direct costs 18,390 4,195 (518) b(iv) 22,067
------- ------- ------- -------
Gross profit 11,375 4,385 (837) 14,923
Selling, general and 6,478 2,813 (1,320) b(iv) 7,971
administrative expenses
Research and development costs 989 1,110 (171) b(iv) 1,928
Other operating (income) expense (7,294) 96 - (7,198)
Goodwill amortization - - 1,474 b(v) 1,474
------- ------- ------- -------
Operating Income 11,202 366 (820) 10,748
Interest expense-net (95) (198) 85 b(vi) (208)
Minority interest in consolidated
subsidiary 165 - - 165
------- ------- ------ -------
Income before income taxes 11,272 168 (735) 10,705
Provision (benefit) for income taxes - - - -
-------- -------- -------- ---------
Net Income $11,272 $168 $(735) $10,705
======== ======== ======== ========
Pro forma primary income per share
1.34 1.10
----- -----
Pro forma fully diluted income
per share 1.33 1.10
----- -----
</TABLE>
See accompanying notes to Pro Forma Combined Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
MAI Systems Corporation
Pro Forma Combined Consolidated Statement of Operations
(Unaudited)
For the year ended December 31, 1995
(dollars in thousands, except share data)
HISTORICAL PRO FORMA
============ ======================================
MAI HIS Disposed Adjustment
Operations Increase/Adj. Combined
Adj. Ref.b(i) (Decrease) Ref. Total
<S> <C> <C> <C> <C> <C>
Revenue:
Software, networks and
professional services:
Software Sales ....... 4,250 5,591 (544) - 9,297
Network and computer
equipment 16,602 7,734 (146) - 24,190
Professional services 9,528 12,529 (2,147) - 19,910
-------- -------- ------- -------
Total ................30,380 25,854 (2,837) - 53,397
Legacy revenue .......35,914 - - - 35,914
------- ------- ------- ------- -------
Total revenue ........66,294 25,854 (2,837) - 89,311
Direct costs ..............41,249 15,145 (1,962) (1,035)b(iv) 53,397
------- ------- ------- -------- -------
Gross profit ........ 25,045 10,709 (875) 1,035 35,914
Selling, general and
administrative expenses ...12,979 9,716 (912) (2,639) b(iv) 19,144
Research and development....2,667 2,465 - (1,161) b(iii) 3,628
(343) b(iv) -
Goodwill amortization ..... - - - 2,948 b(v) 2,948
------- ------- ------- ------- -------
Operating Income (loss) 9,399 (1,472) 37 2,230 10,194
Loss on investments,
principally unconsolidated
subsidiaries and disposal of
subsidiary - (1,435) - 1,435 b(ii) -
Interest expense-net ...... (228) (68) 11 170 (115)
Minority interest in
consolidated subsidiary ... (165) - - - (165)
------- ------ ------- ------- -------
Income before income taxes 9,006 (2,975) 48 3,835 9,914
Provision for income taxes 383 301 - - 684
------ ------- ------- ------- --------
Income before extraordinary 8,623 (3,276) 48 3,835 9,230
item
Extraordinary item ........ 1,566 - - - 1,566
------- ------- ------- ------- -------
Net Income ........... $10,189 $(3,276) $48 $3,835 $10,796
======= ======== ======== ======= =========
</TABLE>
Pro forma primary and fully
diluted income per share:
Income before
Extraordinary item 1.04 0.96
Extraordinary item
0.19 0.16
Net Income ---- -----
1.23 1.12
==== =====
3
<PAGE>
MAI SYSTEMS CORPORATION
Notes to Unaudited Pro Forma Combined Financial Data
(Unaudited)
(a) The pro forma combined balance sheet has been prepared to reflect the
acquisition by the Company of HIS. The acquisition is reflected under the
purchase method of accounting. As consideration for the assets acquired
from HIS, MAI issued 1,307,305 shares of common stock and paid
approximately $1,750,000 in cash.
The pro forma combined balance sheet has been adjusted to reflect the
above acquisition transactions as follows:
(i) To adjust the pro forma combined balance sheet to eliminate
the assets and liabilities of HIS not acquired by the Company
and to eliminate the equity of HIS.
(ii) To record the payment of estimated costs and liabilities
assumed related to the acquisition of HIS.
(iii) To record the issuance of common stock related to the acquisition.
(iv) To record goodwill generated from the acquisition of HIS.
(v) To adjust acquired assets of HIS to fair market value at
the acquisition date, including certain proposed purchase price
adjustments of approximately $2.6 million.
(b) The pro forma combined statement of operations give effect
to the following pro forma adjustments to reflect:
(i) On December 29, 1995, HIS disposed of Hotel Information
Systems Limited, a UK subsidiary of the Company.
(ii) In 1995, HIS incurred non-recurring losses of $1,435,200 in
connection with investments in Hogadata Gmbh and related entities,
Hogadata Benelux N.V., and the disposal of Hotel Information Systems
Limited.
(iii) In 1995, HIS recorded amortization expense for software development
costs of $1,160,800. Amortization expense subsequent to the
acquisition of HIS will be nil as the software was fully amortized
by August 9, 1996.
(iv) Estimated costs savings that will arise from the integration of
the respective businesses.
(v) The amortization of goodwill for the six months ended June 1996, and
the twelve months ended December 31, 1995 of $1,474,000 and
$2,948,000, respectively. The amortization period is seven years.
(vi) The reduction of interest expense reflects the repayment of notes
payable and the issuance of MAI Systems Corporation Common Stock in
satisfaction of the outstanding debenture on August 9, 1996.
(vii) To adjust for the difference in revenue recognition policy between
MAI and HIS.
(c) The pro forma combined financial data may not include all potential fair
value adjustments and opening balance sheet accruals which will be
identified within the twelve months succeeding the acquisitions.
4
<PAGE>
