SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH, 31, 1997
COMMISSION FILE NO. 1-9158
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MAI SYSTEMS CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2554549
(State of Incorporation) (I.R.S. Employer
Identification Number)
9601 Jeronimo Road
Irvine, California 92618
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (714) 598-6000
-------------------------------
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 May 12, 1997, 8,689,686 shares of the registrant's Common Stock, $0.01 par
value, were outstanding.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAI Systems Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, March 31,
1996 1997
(dollars in thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,857 $ 4,086
Receivables, less allowance for doubtful
accounts of $2,578 in 1996 and $4,311 in 1997 11,407 21,581
Inventories 3,321 3,856
Prepaids and other current assets 1,938 2,304
-------- --------
Total current assets 20,523 31,827
Furniture, fixtures and equipment,net 4,065 4,304
Intangibles 6,804 13,738
Other assets 1,461 1,468
-------- --------
Total assets $32,853 $51,337
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $1,394 $1,143
Accounts payable 6,852 6,995
Customer deposits 1,763 1,895
Accrued liabilities 7,312 8,148
Income taxes payable 462 462
Unearned revenue 11,010 19,802
-------- --------
Total current liabilities 28,793 38,445
Long-term debt 485 6,691
Other liabilities 1,517 1,490
-------- --------
Total liabilities 30,795 46,626
Stockholders' equity:
Common stock, par value $0.01 per share, authorized
25,000,000 shares, 8,292,935 and 8,747,861 shares
issuable 88 91
Additional paid-in capital 212,351 215,931
Cumulative translation adjustment 100 375
Accumulated deficit (210,481) (211,686)
-------- --------
Total stockholders' equity 2,058 4,711
-------- --------
Commitments and contingencies
Total liabilities and $32,853 $51,337
Stockholders' equity ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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<TABLE>
<CAPTION>
MAI Systems Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
(dollars in thousands,
except per share data)
1996 1997
Revenue:
<S> <C> <C>
Software, networks and professional services:
Software sales 740 1,580
Network and computer equipment 3,357 2,940
Professional services 2,370 7,124
-------- --------
6,467 11,644
Legacy revenue 8,264 5,180
-------- --------
Total revenue 14,731 16,824
Direct costs 9,644 10,781
-------- --------
Gross profit 5,087 6,043
Selling, general and administrative expenses 2,763 5,546
Research and development costs 687 1,206
Amortization and impairment of intangibles - 316
Other operating expense (income) - 65
-------- --------
Operating income (loss) 1,637 (1,090)
Minority interest in consolidated subsidiary 165 -
Interest income - 21
Interest expense (42) (136)
-------- --------
Income(loss)before income taxes 1,760 (1,205)
-------- --------
Provision for income taxes - -
-------- --------
Net income (loss) $1,760 $(1,205)
======== ========
Primary and fully diluted income
(loss) per share of common stock $ 0.26 $ (0.14)
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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<PAGE>
<TABLE>
<CAPTION>
MAI Systems Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Eded
March 31,
1996 1997
(dollars in thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities $406 $(2,543)
-------- --------
Cash flows from investing activities:
Capital expenditures (215) (521)
Purchase of businesses - (6,102)
-------- --------
Net cash used in investing activities
(215) (6,623)
-------- --------
Cash flows from financing activities:
Short-term borrowings, net - 1,079
Payments received on notes receivable - 79
Proceeds from issuance of common stock, net - 2,300
Proceeds from issuance of subordinated notes payable - 6,000
Increase in notes receivables - (25)
Repayments of term and other long-term debt (308) (85)
Proceeds from the exercise of stock options 47 71
-------- --------
Net cash (used in) provided by financing activities (261) 9,419
-------- --------
Effect of exchange rate changes on cash and cash equivalents 39 (24)
-------- --------
Net change in cash and cash equivalents (31) 229
-------- --------
Cash and cash equivalents at beginning of period 4,086 3,857
-------- --------
Cash and cash equivalents at end of period $4,055 $4,086
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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<PAGE>
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 1997
(Unaudited)
(1) BASIS OF PRESENTATION
Companies for which this report is filed are MAI Systems Corporation and
its wholly-owned subsidiaries (the "Company"). The information contained herein
is unaudited, but gives effect to all adjustments (which are normal recurring
accruals) necessary, in the opinion of Company management, to present fairly the
condensed consolidated financial statements for the interim period. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
(2) INVENTORIES
<TABLE>
<CAPTION>
Inventories are summarized as follows: December 31, March 31,
1996 1997
(dollars in thousands)
<S> <C> <C>
Finished goods $2,277 $2,868
Replacement parts 1,044 988
--------- ---------
$3,321 $3,856
</TABLE>
(3) PLAN OF REORGANIZATION
In 1993, the Company emerged from a voluntary proceeding under the
bankruptcy protection laws. Notwithstanding the confirmation and effectiveness
of its Plan of Reorganization (the "Plan"), the Bankruptcy Court continues to
have jurisdiction to resolve disputed pre-petition claims against the Company to
resolve matters related to the assumptions, assignment or rejection of executory
contracts pursuant to the Plan and to resolve other matters that may arise in
connection with the implementation of the Plan.
Shares of Common Stock are currently being distributed by the Company to
its former creditors. As of May 13, 1997, 6,728,256 shares of Common Stock had
been issued pursuant to the Plan and were outstanding. The Company estimates
that approximately 6,820,338 shares will be issued to creditors.
(4) BUSINESS ACQUISITIONS
CIMPRO:
On March 6, 1997, the Company acquired substantially all the assets and
assumed certain liabilities of CIMPRO, which develops and markets process
manufacturing software, for $5,900,000 in cash. To finance the acquisition of
CIMPRO, the Company sold 400,000 shares of its Common Stock in a private
placement for $6.50 per share and issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital Management
LP ("Canyon"). Interest on the subordinated notes is payable semi-annually
commencing September 3, 1997.
Associated with the stock issuance, the Company incurred $300,000 of
issuance costs which are included in additional paid-in capital in the
accompanying condensed consolidated balance sheet as of March 31, 1997.
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<TABLE>
<CAPTION>
The acquisition of CIMPRO has been accounted for using the purchase method
of accounting. A preliminary allocation of the purchase price is as follows:
Allocation of
Purchase Price
(in thousands)
<S> <C>
Current assets $2,011
Property, plant and equipment 400
Intangibles 6,338
Current liabilities (2,263)
Long-term liabilities (586)
---------
$ 5,900
</TABLE>
Intangible assets are being amortized on a straight-line basis over the
expected periods to be benefited of five to seven years.
GAMING SYSTEMS INTERNATIONAL:
In March 1997, the Company acquired options to purchase 3.5% of Gaming
Systems International ("GSI") Common Stock from two individuals in exchange for
14,930 shares of the Company's Common Stock valued at $104,500 and notes payable
of $104,500. The transaction resulted in an increase in goodwill of $209,000.
(5) STOCK WARRANTS
Warrants to purchase 750,000 shares of the Company's Common Stock at $8
per share were issued in connection with the issuance of the 11% subordinated
debt. These warrants are exercisable and callable (by the Company) under certain
circumstances at any time within seven years and the 11% subordinated notes may
be used to exercise the warrants. The Company recorded an original issue
discount of $1,027,000 which represents the fair value of the warrants at the
time of issuance. The fair value of the warrants was recorded in connection with
the issuance of the warrants and is reflected as a reduction in the face value
of the subordinated notes.
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<PAGE>
(6) INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share". SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the principal
difference being that the common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock method and the
three percent materiality provision and (c) revising the contingent share
provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Accordingly, the financial statements for the
Company's fourth quarter ending December 31, 1997, will include a restatement of
historical income (loss) per share to conform to the requirements of SFAS No.
128. The Company has not yet determined the impact of the implementation of SFAS
No. 128.
Primary and fully diluted income (loss) per share for 1996 and 1997 are
computed using 6,834,921 and 8,595,408 shares of common stock, respectively.
These share amounts represent the shares of common stock (adjusted for stock
split in August 1995) expected to be issued in accordance with the Plan of
Reorganization and the weighted average number of shares and equivalent shares
of common stock outstanding during the period. Common stock equivalents consist
of dilutive outstanding stock options and warrants and are calculated using the
treasury stock method. Common Stock equivalents are not included in the 1997
calculation as they would be anti-dilutive.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, working capital increased from a deficit of $8,270,000
at December 31, 1996 to a deficit of $6,618,000. Excluding unearned revenue
(which will not give rise to cash disbursements) of $19,802,000, the Company's
working capital is $13,184,000 or a ratio of current assets to current
liabilities of 1.71 to 1.0. The comparable ratio at December 31, 1996 was 1.15
to 1.0. The improvement in the Company's working capital position is attributed
to greater sales of software, networking, and computer equipment.
Cash and cash equivalents were $4,086,000 at March 31, 1997, as compared
to $3,857,000 as of December 31, 1996. The Company continues to have available a
$4,000,000 secured revolving credit facility. The availability of this line of
credit is based on a calculation reflecting the age and nature of certain
accounts receivable. At March 31, 1997, the available balance was $4,000,000, of
which approximately $1,079,000 was drawn down under this facility.
Net cash used for investing activities in the three months ended March 31,
1997, totaled $6,623,000. Capital expenditures comprised $521,000 while the
acquisition of CIMPRO and the acquisition of options to purchase 3.5% of GSI
accounted for $6,102,000.
Net cash provided by financing activities included $6,000,000 from the
issuance of the 11% subordinated notes payable due in 2004 in connection with
the CIMPRO acquisition. The Company's working capital was increased by the
issuance of 400,000 shares of $0.01 par value common stock ("Common Stock")
totaling $2,300,000, net of issuance costs of $300,000, and the increased
utilization of the revolving credit facility of $1,079,000.
Stockholders' equity increased $2,653,000 at March 31, 1997, due
principally to the issuance of the Common Stock totaling $2,300,000, net of
issuance costs.
The Company believes it will continue to have sufficient cash available to
fund its operating and capital requirements through 1997.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
Three-Months Ended March 31, 1996 Compared to Three-Months Ended March 31, 1997
Three months ended Percentage Three months ended Percentage
March 31, 1996 of Revenue March 31, 1997 of Revenue
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue $14,731 100.0% $16,824 100.0%
Gross profit 5,087 34.5% 6,043 35.9%
Selling, general &
administrative expenses 2,763 18.8% 5,546 33.0%
Research and development
costs 687 4.7% 1,206 7.2%
Amortization of intangibles - - 316 1.9%
Minority Interest 165 1.1% - -
</TABLE>
Revenue for the first quarter of 1997 benefited from December 31, 1996
backlog of approximately $15,700,000, a significant portion of which was
converted into revenue during the quarter. The year-to-year increase in revenue
of 14% was composed of an 80% increase in sales of software, networks and
professional services offset by a 37% decline in legacy revenue. This is
consistent with the Company's strategy to focus on providing software and
services to its vertical markets.
-8-
<PAGE>
Gross profit increased to 35.9% from 34.5% due to a higher gross margin in
professional services (39% in 1997 as compared to 22% for the same period in
1996). Gross margin on software increased as well due to a shift in the mix of
software product sales to higher-margin company-owned products from lower-margin
third-party products. The overall gross margin was affected by a reduction in
the margin from legacy revenues. For strategic reasons, legacy services were
outsourced to Olivetti North America and Olivetti Canada, Ltd., in December,
1996.
Selling, general and administrative expenses ("SG&A") increased 100.7% to
$5,546,000 compared to the first quarter of 1996. The major items affecting this
increase are additional expenses for salaries, professional fees, travel costs,
advertising, and sales commissions, totaling $1,700,000. These expenses are
related to a more aggressive sales strategy aimed at winning integration
services contracts with large multi-site customers, and residual integration
costs associated with the August 1996, acquisition of Hotel Information Systems.
In addition, for the first quarter of 1997, the Company did not experience the
benefit of the reversal of certain excess costs as was the case in the first
quarter of 1996. Higher facilities costs in connection with the combination of
Irvine, California, operations into a single building (which will lower future
costs) and higher telecommunications costs, due to increased traffic from HIS,
also contributed to increased SG&A expenses.
Research and development costs increased 75.5% or $519,000 over the
comparable period in 1996 due to a significantly larger set of product
development and sustaining engineering activities. The acquisition of HIS and
the March 1997, acquisition of the CIMPRO product line have resulted in
increased expense in the development and sustaining of these products.
Amortization of intangibles of $316,000 is related to the acquisitions of
HIS, CIMPRO, and the minority ownership of Gaming Systems International. There
was no comparable amortization expense during the first quarter of 1996. There
was income recognized of $165,000 during the first quarter of 1996 reflecting
the 30% minority interest in the earnings of Gaming Systems International.
-9-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence of the commencement of the Company's bankruptcy
proceedings, the Company has filed objections to a large number of proofs of
claim. Sums determined to be due to claimants, as a result of settlement or
judicial determinations, will be treated under the Plan of Reorganization as
claims and claimants will receive either cash or shares of common stock in
exchange for their claims. The Company does not believe the outcome of these
objections to be material.
Further, the Company instituted several adversary proceedings prior to the
effective date of the Plan of Reorganization. None of those proceedings involve
allegations of material claims against the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
On March 6, 1997, the registrant filed a report on Form 8-K , without
financial statements, reporting that the Company had completed the acquisition
of the CIMPRO division of Oracle Corporation's wholly-owned subsidiary Datalogix
International, Inc..
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAI SYSTEMS CORPORATION
(Registrant)
Date: May 15, 1997 /s/ Lewis H. Stanton
----------------------
Lewis H. Stanton
Executive Vice President and
Chief Operating and Financial Officer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000760436
<NAME> MAI SYSTEMS CORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,086
<SECURITIES> 0
<RECEIVABLES> 21,581
<ALLOWANCES> (4,311)
<INVENTORY> 3,856
<CURRENT-ASSETS> 31,827
<PP&E> 14,063
<DEPRECIATION> (9,759)
<TOTAL-ASSETS> 51,337
<CURRENT-LIABILITIES> 38,445
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 4,620
<TOTAL-LIABILITY-AND-EQUITY> 51,337
<SALES> 16,824
<TOTAL-REVENUES> 16,824
<CGS> 10,781
<TOTAL-COSTS> 10,781
<OTHER-EXPENSES> 6,046
<LOSS-PROVISION> 1,087
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> (1,205)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,205)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
