<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NO. 1-9158
------------------------
MAI SYSTEMS CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2554549
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9601 Jeronimo Road
Irvine, California 92618
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (949) 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 July 25, 2000, 10,842,071 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAI Systems Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,645 $ 1,097
Receivables, less allowance for doubtful accounts
of $3,622 in 1999 and $3,315 in 2000 7,189 5,419
Inventories 625 465
Notes receivable, less deferred gain of $1,227 2,700 2,700
Prepaids and other assets 782 1,194
--------- ---------
Total current assets 13,941 10,875
Furniture, fixtures and equipment, net 2,609 2,306
Intangibles, net 7,974 6,676
Other assets 106 118
--------- ---------
Total assets $ 24,630 $ 19,975
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Bridge Loan $ 1,450 $ 700
Current portion of long-term debt 447 298
Accounts payable 10,705 9,611
Customer deposits 2,236 1,492
Accrued liabilities 5,136 3,932
Income taxes payable 575 422
Unearned revenue 7,773 7,654
--------- ---------
Total current liabilities 28,322 24,109
Line of credit 2,892 2,939
Long-term debt 5,270 5,263
Other liabilities 715 730
--------- ---------
Total liabilities 37,199 33,041
--------- ---------
Stockholders' deficiency:
Preferred Stock, par value $0.01 per share; 1,000,000
shares authorized, none issued and outstanding -- --
Common Stock, par value $0.01 per share; authorized
24,000,000 shares; 10,906,658 shares issued and
issuable at December 31, 1999 and June 30, 2000 112 112
Additional paid-in capital 220,567 220,567
Accumulated other comprehensive income 494 884
Accumulated deficit (233,742) (234,629)
--------- ---------
Total stockholders' deficiency (12,569) (13,066)
--------- ---------
Total liabilities and stockholders' deficiency $ 24,630 $ 19,975
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-2-
<PAGE> 3
MAI Systems Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- --------
(in thousands, except (in thousands, except per
per share data) share data)
<S> <C> <C> <C> <C>
Revenue
Software, networks and professional services:
Software sales $ 3,448 $ 1,791 $ 8,293 $ 3,364
Network and computer equipment 2,210 273 3,085 918
Professional services 8,010 6,253 15,197 11,349
-------- -------- -------- --------
13,668 8,317 26,575 15,631
Legacy revenue 2,617 1,600 5,794 3,258
-------- -------- -------- --------
Total revenue 16,285 9,917 32,369 18,889
Direct costs 7,212 4,578 14,228 9,373
-------- -------- -------- --------
Gross profit 9,073 5,339 18,141 9,516
Selling, general and administrative expenses 6,225 2,963 12,061 6,257
Research and development costs 1,205 1,155 2,407 2,198
Amortization and impairment of intangibles 599 642 1,209 1,297
Other operating (income) expense, net (69) 21 (110) 58
-------- -------- -------- --------
Operating income (loss) 1,113 558 2,574 (294)
Equity in net income of unconsolidated subsidiaries 13 -- 28 --
Interest income 33 97 63 155
Interest expense (353) (387) (650) (748)
-------- -------- -------- --------
Income (loss) before income taxes 806 268 2,015 (887)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) $ 806 $ 268 $ 2,015 $ (887)
======== ======== ======== ========
Income (loss) per share:
Basic income (loss) per share $ 0.07 $ 0.02 $ 0.18 $ (0.08)
======== ======== ======== ========
Diluted income (loss) per share $ 0.07 $ 0.02 $ 0.18 $ (0.08)
======== ======== ======== ========
Weighted average common shares used in
determining income (loss) per share:
Basic 10,907 10,907 10,871 10,907
======== ======== ======== ========
Diluted 11,019 10,986 10,983 10,907
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
<PAGE> 4
MAI Systems Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(in thousands, except
per share data)
1999 2000
------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 726 $ (553)
------- -------
Cash flows from investing activities:
Capital expenditures (751) (172)
Capitalized software costs (468) --
------- -------
Net cash used in investing activities (1,219) (172)
------- -------
Cash flows from financing activities:
Short-term borrowings, net 31 47
Proceeds from issuance of common stock, net 500 --
Repayments of long-term debt -- (156)
Repayments of Bridge Loan -- (750)
Proceeds from the exercise of stock
options and warrants 9 --
------- -------
Net cash provided by (used in) financing activities 540 (859)
------- -------
Effect of exchange rate changes on cash and cash equivalents (23) 36
------- -------
Net change in cash and cash equivalents 24 (1,548)
------- -------
Cash and cash equivalents at beginning of period 2,029 2,645
------- -------
Cash and cash equivalents at end of period $ 2,053 $ 1,097
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
<PAGE> 5
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Six Months ended June 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
Companies for which this report is filed are MAI Systems Corporation and
its wholly-owned subsidiaries (the "Company"). The information contained
herein is unaudited, but gives effect to all adjustments (which are
normal recurring accruals) necessary, in the opinion of Company
management, to present fairly the condensed consolidated financial
statements for the interim period. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission
(the "SEC"), and these financial statements should be read in
conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, which
is on file with the SEC.
2. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -------
(dollars in thousands)
<S> <C> <C>
Finished goods $251 $176
Replacement parts 374 289
---- ----
$625 $465
==== ====
</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 may be distributed by the Company to its former
creditors. As of July 25, 2000, 6,758,251 shares of Common Stock had
been issued pursuant to the Plan and were outstanding. The Company
estimates that approximately 6,820,338 shares will have been issued to
creditors at completion of the Plan.
4. BUSINESS ACQUISITIONS
HOTEL INFORMATION SYSTEMS, INC. ("HIS"):
During 1996, the Company entered into arbitration proceedings regarding
the purchase price of HIS. The Company placed approximately 1,100,000
shares of Common Stock issued in connection with the acquisition of HIS
in an escrow account to be released in whole, or in part, upon final
resolution of post closing adjustments.
-5-
<PAGE> 6
In November 1997, the purchase price for the acquisition of HIS was
reduced by $931,000 pursuant to arbitration proceedings. As a result,
goodwill was reduced $931,000 and approximately 100,650 price protected
shares will be released from the escrow account and returned to the
Company. In addition, further claims relating to legal costs and certain
disbursements currently estimated at approximately $650,000 are
presently pending. Resolution of such claims may result in release of
additional escrow shares to the Company. The amount and number of shares
will be determined based on the final resolution of such claims.
Accordingly, as of June 30, 2000, the final purchase price has not been
determined.
The Company will, as needed, pursuant to the asset purchase agreement
and related documents, issue additional shares of Common Stock in order
that the recipients ultimately receive shares worth a fair value of
$9.25 per share (subject to increase in such amount to approximately
$12.56 per share). This adjustment applies to a maximum of 590,785
shares of Common Stock (see Note 10).
5. BUSINESS DIVESTITURE
On June 19, 1999, the Company sold its wholly owned subsidiary Gaming
Systems International ("GSI") for an amount in excess of its book value.
The Company received three promissory notes totaling $4,925,000 with
face values of $1,100,000, $1,500,000 and $2,325,000, respectively.
Interest is paid monthly at the rate of 10% per annum on both the
$1,100,000 and $1,500,000 notes, with the principal due and payable on
June 19, 2001 and June 19, 2003, respectively. The $1,100,000 promissory
note is guaranteed by a third party. Principal payments and interest, at
prime plus 1%, commence for the $2,325,000 promissory note on October 1,
2002 in 48 monthly installments of approximately $48,000 of principal,
plus accrued interest.
Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 resulting in a
combined carrying value of $4,282,000 for all three promissory notes.
The Company is amortizing the imputed interest over the contractual life
of the promissory notes using the interest method. The gain on sale of
$1,227,000 has been deferred until collection of the proceeds
representing the gain can be assured. The promissory notes are currently
held for sale and the Company has executed a letter of intent with a
third party to sell the notes at an amount approximately $355,000 less
than the carrying value of such notes. Accordingly, the promissory notes
have been written down to their estimated net realizable value of
$2,700,000 and are classified as current in the accompanying
consolidated balance sheets.
Summarized below is historical financial information about GSI (in
thousands):
<TABLE>
<CAPTION>
January 1, 1999 -
June 19, 1999
<S> <C>
Revenue $1,696
Operating income 80
Total assets at period end 3,800
</TABLE>
6. LINE OF CREDIT, BRIDGE LOAN AND LONG-TERM DEBT
On July 28, 1999, the Company obtained a Bridge Loan from Coast Business
Credit ("Coast") in the amount of $2,000,000. The Bridge Loan originally
boar interest at prime plus 5% (prime plus 8% when default interest
rates apply) and was payable interest only on a monthly basis with all
accrued and unpaid principal and interest due on the earlier of June 30,
2000 or the date the Company receives a debt or equity infusion of at
least $10,000,000. Loan origination fees of $75,000 paid to Coast in
connection with the Bridge Loan are included in prepaids and other
assets and are being amortized to interest expense over the term of the
loan. Due to a temporary event of default on the Bridge Loan and the
secured revolving credit facility and pursuant to a forbearance
agreement with Coast, the Company began making weekly principal payments
of $25,000 on the Bridge Loan commencing in September 1999. During the
default period, the Company also paid $40,000 in default fees to Coast
in 1999 and $30,000 in 2000.
In April 1998, the Company negotiated a $5,000,000 secured revolving
credit facility with Coast. The availability of this facility is based
on a calculation using a rolling average of certain cash collections.
The facility was amended on July 28, 1999 to allow for aggregate
borrowings on an interest only basis under the credit facility and
Bridge Loan not to exceed $6,000,000. The facility is secured by all
assets, including intellectual property of the Company, and bears
-6-
<PAGE> 7
interest at prime plus 2.25% (prime plus 5.25% when default interest
rates apply) and expires on April 30, 2002. The facility was again
amended on April 13, 2000. In accordance with the amendment, the Bridge
Loan and the credit facility bear interest at prime plus 4.5% and
require $35,000 weekly principal payments on the Bridge Loan until it is
paid in full. As of June 30, 2000, the unpaid balance of the Bridge Loan
was $700,000. Additionally, the credit facility was amended to allow for
aggregate borrowings on an interest only basis under the credit facility
not to exceed $3,360,000. In connection with the amendment, Coast waived
all existing defaults. Additionally, the Company will pay Coast a fee of
$300,000. This fee will be paid by the Company in weekly installments of
$35,000 commencing after the Bridge Loan is paid in full. The facility
contains various restrictions and covenants, including a minimum
consolidated net worth, debt coverage ratio and minimum quarterly
profitability. The Company was in compliance with these covenants as of
June 30, 2000.
At December 31, 1999 and June 30, 2000, approximately $2,892,000 and
$2,939,000, respectively, was available and drawn down under the credit
facility.
Loan restructuring fees of $300,000 were incurred in connection with the
line of credit and Bridge Loan, are classified in prepaids and other
current assets and are being amortized to interest expense over the term
of the facility.
In March 1997 the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). In September 1997 this indebtness was reduced
to $5,250,000 through application of a portion of the proceeds realized
from the exercise of warrants by Canyon. The notes call for semi-annual
interest payments. On September 3, 1999, the Company failed to make the
semi-annual interest payment due on that date in the amount of $288,750.
Accrued interest on the subordinated notes payable is $446,000 as of
June 30, 2000.
The Company and Canyon subsequently entered into a forbearance agreement
which provided that the Company pay Canyon weekly interest payments of
$12,500 effective January 1, 2000. In addition, the Company executed a
security agreement, which provided Canyon with a lien on all of the
Company's tangible and intangible property, which lien is junior to the
lien granted to Coast.
On April 13, 2000, the Company entered into an agreement with Canyon
which waived all existing events of default, accelerated the maturity
date to March 3, 2003 and provided for continued weekly interest
payments of $12,500 until the Coast Bridge Loan is paid in full. Upon
repayment of the Bridge Loan, the Company will be required to pay Canyon
weekly interest payments of $25,000 until all interest on the
subordinated notes is paid in full. Thereafter, the Company will pay
weekly interest payments of approximately $11,000.
7. COMMON STOCK
On February 3, 1999, the Company's Chairman purchased 201,106 shares of
the Company's Common Stock valued at $500,000.
8. INCOME (LOSS) PER SHARE OF COMMON STOCK
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". This statement replaces the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share.
Basic and diluted loss per share is computed using shares of common
stock issued to date and expected to be issued in accordance with the
Plan of Reorganization ("Common Stock") as discussed in Note 3. As of
June 30, 2000, 6,758,251 shares had been issued pursuant to the Plan of
Reorganization. All outstanding options and warrants have been excluded
from diluted loss per share for loss periods presented as their effect
would be anti-dilutive.
-7-
<PAGE> 8
The following table illustrates the computation of basic and diluted
earnings (loss) per share under the provisions of SFAS 128:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- --------
(in thousands, except per (in thousands, except per
share data) share data)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
(loss) per share - net (loss) income $ 806 $ 269 $ 2,015 $ (887)
======== ======== ======== ========
Denominator:
Denominator for basic earnings (loss) per
share-weighted average number of
common shares outstanding during
the period 10,907 10,907 10,871 10,907
Incremental common shares attributable
to exercise of outstanding options 112 79 112 --
-------- -------- -------- --------
Denominator for diluted earnings (loss)
per share 11,019 10,986 10,983 10,907
======== ======== ======== ========
Basic earnings (loss) per share $ 0.07 $ 0.02 $ 0.18 $ (0.08)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.07 $ 0.02 $ 0.18 $ (0.08)
======== ======== ======== ========
</TABLE>
9. ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is
effective for transactions entered into after January 1, 2001. This
statement requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a
hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges will be recognized in earnings. The Company is in
the process of determining the impact that the adoption of SFAS No. 133
will have on its results of operations and financial position.
In December 1999, the SEC staff issued Staff Accounting Bulletin No.,
101, "Revenue Recognition in Financial Statements" and in March 2000,
the SEC staff issued Staff Accounting Bulletin No. 101A "Implementation
Issues Related to SAB 101." These bulletins summarize certain of the
staff's views about applying generally accepted accounting principles to
revenue recognition in financial statements. The staff is providing this
guidance due, in part, to the large number of revenue recognition issues
that registrants encounter. The provisions of these pronouncements are
effective for the Company commencing with the fourth quarter of 2000.
Management is in the process of analyzing the implications of these
bulletins and is anticipating that further implementation guidance will
be forthcoming from the SEC. Accordingly, there is uncertainty as to the
ultimate impact to the Company in applying these bulletins.
10. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At June 30, 2000, there was only one material claim to be settled before
the Company's Chapter 11 proceeding could be formally closed, a tax
claim with the United States Internal Revenue Service (the "Service").
The amount of this claim is in dispute. The Company has reserved
$712,000 for settlement of this claim, which it is anticipated would be
payable to the Service in equal monthly installments over a period of
six (6) years from the settlement date at an interest rate of 6%.
-8-
<PAGE> 9
CSA Private Limited ("CSA")
CSA is a Company shareholder. On August 9, 1996, the Company acquired
from Hotel Information Systems, Inc. ("HIS") substantially all their
assets and certain of their liabilities (the "HIS Acquisition"). At the
time of the Company's acquisition of HIS in 1996, CSA was a shareholder
of HIS and, in connection with the purchase, the Company agreed to issue
to CSA shares of our common stock worth approximately $4.8 million in
August 1996, which amount has increased to approximately $6,496,000 as
of June 30, 2000, pursuant to the agreement. The Company also granted
CSA demand registration rights with respect to such stock. CSA requested
registration of their shares, but the Company delayed registration based
upon its good faith exercise of its rights under its agreement with CSA.
On October 5, 1998, CSA filed a lawsuit against the Company in the U.S.
District Court for the Central District of California. Pursuant to a
settlement agreement entered into as of May 13, 1999 the Company agreed
by November 1, 1999 to file, or at a minimum to commence the process to
file, a registration statement with the Securities and Exchange
Commission ("SEC") for the purpose of registering CSA's shares. The
number of shares which may be sold by CSA includes: (i) CSA's current
ownership of 590,785 shares, and (ii) 8,851,000 additional shares,
assuming a stock price of $0.688 per share, which the Company would
issue to CSA in order for them to receive net proceeds of approximately
$6,496,000 after deducting any discounts or commissions. The Company
has not yet filed the registration statement called for by the
settlement agreement. CSA initiated another lawsuit in December 1999 in
the above-referenced court (a) seeking damages in excess of $5 million;
(b) enforcement of the settlement agreement; and (c) and injunctive
relief through court order to cause the Company to file the S-1
registration statement. On March 6, 2000, the Company answered the
complaint. A trial date has been set for December 18, 2000. The Company
is currently in discussions with CSA attempting to settle this matter.
Enterprise Hospitality Solutions, Inc.
On November, 30, 1999, Enterprise Hospitality Solutions, Inc. ("EHS")
and Christian Rivadella commenced an action against the Company in the
United States District Court for the Central District of California,
alleging that the Company had failed to pay certain royalties to EHS
under the parties' exclusive license agreement. The complaint asserted
claims for breach of contract, unjust enrichment, accounting and unfair
competition. The complaint sought damages, preliminary and permanent
injunctive relief, imposition of a constructive trust, an order
canceling the Company's exclusive right to license the software at issue
under the parties' agreement, and the appointment of a receiver to
conduct an audit. On February 1, 2000, the Company answered the
complaint by denying its material allegations and asserted a
Counterclaim against the plaintiffs. The Counterclaim asserted claims
for breach of the parties exclusive license agreement, breach of the
covenant of good faith and fair dealing, unfair business practices,
interference with contractual relations and declaratory relief, and a
declaration that the Company was not in breach of the parties' license
agreement.
Effective June 30, 2000, the parties entered into an agreement pursuant
to which the Company acquired from EHS the exclusive worldwide marketing
rights to certain Lodging Touch products and the royalty free use of the
Lodging Touch name and trademark. As part of that agreement, all prior
agreements between the Company and EHS were terminated. The parties
executed mutual general releases, and the litigation was dismissed with
prejudice.
Wang Global Corporation
On December 2, 1996 the Company executed outsource agreements with
Olivetti North America, Inc. ("ONA") in the United States and with
Olivetti Canada Ltd. in Canada, for on-site repair and warranty service
and telephonic support for the Company's Legacy customers. On July 26,
1999, Wang Global Corporation ("Wang"), asserting that it was the parent
of ONA, filed for arbitration in this matter, alleging breach of
contract for payments due for maintenance services provided by Wang.
Wang claims that the amounts due from the Company exceed $3.7 million.
The Company filed a counterclaim for breach of contract and unfair
business practices. The Company believes that to the extent any amounts
are outstanding under the parties' agreement, the amount outstanding is
significantly less than $3.7 million. Getronics Corporation answered the
Counterclaim in the arbitration, asserting that it was the
successor-in-interest to ONA and Wang.
-9-
<PAGE> 10
On June 9, 2000, the Company filed a compliant in California Superior
Court against Getronics Corporation seeking to enjoin it from proceeding
with the arbitration on the grounds that the Company had not agreed to
arbitrate with Getronics Corporation (the "Court Action"). On June 22,
2000, the arbitration was stayed pending the resolution of the Court
Action.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business.
Management believes the ultimate outcome of these matters will not have
a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
11. COMPREHENSIVE (LOSS) INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and disclosure of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has presented the
information required by SFAS No. 130 as follows (in thousands):
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net (loss) income $ 806 $ 268 $ 2,015 $ (887)
Change in cumulative
translation adjustments (117) 156 (108) 390
------- ------- ------- -------
Comprehensive (loss) income $ 689 $ 424 $ 1,907 $ (497)
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive (loss) income in the accompanying
consolidated balance sheets consists of cumulative translation
adjustments.
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, working capital improved from a working capital deficiency of
$14,381,000 at December 31, 1999 to a working capital deficiency of $13,234,000.
Excluding unearned revenue of $7,654,000, the Company's working capital
deficiency at June 30, 2000 would be $5,580,000 or a ratio of current assets to
current liabilities of 0.66 to 1.0. Excluding unearned revenue, working capital
deficiency at December 31, 1999 was $6,608,000, with a current ratio of 0.68 to
1.0. Excluding unearned revenue, the decrease in the working capital deficiency
of $1,028,000 was primarily attributable to decreases in the Coast Bridge Loan
of $750,000, accounts payable of $1,094,000, deposits of $744,000 and accrued
liabilities of $1,204,000 offset by decreases in cash of $1,548,000 and
receivables of $1,770,000.
Cash was $1,097,000 at June 30, 2000, as compared to $2,645,000 at December 31,
1999. Availability under the Company's secured revolving credit facility is
based on a calculation using a rolling average of certain cash collections. At
June 30, 2000, approximately $2,939,000 was available and drawn down under this
facility. The facility expires on April 30, 2002.
Net cash used for investing activities for the six months ended June 30, 2000,
totaled $172,000, which represented capital expenditures.
Net cash used by financing activities for the six months ended June 30, 2000
totaled $859,000, which is comprised of $156,000 and $750,000 in repayments of
long-term debt and Bridge Loan, respectively, offset by a $47,000 increase in
the secured revolving credit facility. The Company was temporarily in default on
its revolving credit facility, Bridge Loan and subordinated debt. On April 13,
2000, the Company amended the respective loan agreements to waive all previous
defaults and to require weekly principal payments of $35,000 on the Bridge Loan
and weekly interest payments of $12,500 on the subordinated debt until the
Bridge Loan is paid in full, then interest payments of $25,000 per week on the
subordinated debt until all accrued and unpaid interest on the subordinated debt
is paid in full, then $11,000 per week in interest on the subordinated debt
thereafter. Additionally, the Company will be required to pay Coast a fee of
$300,000.
Stockholders' deficiency increased from $12,569,000 at December 31, 1999 to
$13,066,000 at June 30, 2000, as a result of a net loss for the period of
$887,000 offset by an increase in accumulated comprehensive income of $390,000.
The Company has commitments in connection with lease commitments, which require
payments of $1,405,000 in 2000.
Net cash used in operating activities for the six months ended June 30, 2000
totaled $553,000 and mainly related to the Company's net loss of $887,000,
decreases in accounts payable and customer deposits of $1,838,000, income taxes
payable of $153,000 and accrued liabilities of $1,504,000 offset by non-cash
charges for depreciation and amortization of tangible and intangible assets of
$1,773,000, a provision for doubtful accounts receivable of $713,000, a decrease
in receivables of $1,057,000, and a net loss from foreign currency of $354,000.
The Company expects that it will generate cash from its operating activities
cumulatively for fiscal 2000.
Although the Company has a net stockholders' deficiency of $13,066,000 at June
30, 2000, the Company believes it will generate sufficient funds from operations
and obtain additional financing, as needed, in 2000 to meet its operating and
capital requirements. The Company's belief is based on the Company significantly
reducing its cost structure through a restructuring effected in 1999 which
included reductions in employee headcount and the use of outside consultants,
the closure and reduction of certain facilities, and the renegotiation,
termination or replacement of certain contracts with service providers.
Additionally, the Company has a $14.1 million backlog as of June 30, 2000. The
Company expects to generate positive cashflow during 2000 from shipping out
products and services from this backlog as well as new orders. Also, the Company
is currently holding its notes receivable for sale and has a letter of intent
for the sale of the notes. If consummated, the amount expected to be realized
upon the sale of these notes is approximately $2,700,000. The Company expects to
sell these notes during 2000 and use the funds to reduce certain current
obligations and other operational purposes.
Lastly, the Company has historically been successful in securing additional
capital, when needed, to meet operating and capital requirements.
-11-
<PAGE> 12
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 2000
<TABLE>
<CAPTION>
Three Months Ended Percentage Three Months Ended Percentage
June 30, 1999 of Revenue June 30, 2000 of Revenue
------------------- ---------- ------------------ -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 10,016 61.5% $ 7,032 70.9%
Process Manufacturing 2,176 13.4% 1,073 10.8%
Legacy 2,617 16.1% 1,812 18.3%
Gaming 1,337 8.2% -- --
Other 139 0.8% -- --
Total revenue 16,285 100.0% 9,917 100.0%
Gross profit 9,073 55.7% 5,339 53.8%
Selling, general &
administrative expenses 6,225 38.2% 2,963 29.9%
Research and development
costs 1,205 7.4% 1,155 11.6%
Amortization of intangibles 599 3.7% 642 6.5%
Other operating (income) (69) (0.4%) 21 0.2%
</TABLE>
The quarter-to-quarter decrease in overall revenue of 39.1% was due primarily to
decreases in sales of hospitality enterprise solutions. Hospitality revenue
decreased 29.8% from $10,016,000 in 1999 to $7,032,000 in 2000, largely due to
decreased sales of software and professional services. Process manufacturing
revenue decreased 50.7% from $2,176,000 in 1999 to $1,073,000 in 2000 due to
product transition. Gaming revenue decreased $1,337,000 due to the sale of its
gaming subsidiary in June 1999.
Consistent with the Company's strategy to focus on providing software and
services to its vertical markets, the Company's legacy revenue (traditional
hardware contract service revenues and proprietary add-on sales) declined 30.8%
quarter over quarter, largely due to the expected decrease in volume and
customers replacing their legacy systems due to Year 2000 compliance.
Gross profit decreased to 53.8% in 2000 from 55.7% in 1999 due to decreased
software sales which generate higher gross margins. Revenue on lower margin
functions such as hardware, professional services and legacy also declined.
Selling, general and administrative expenses ("SG&A") decreased 52.4% from
$6,225,000 in 1999 to $2,963,000 in 2000. The decrease is related to the
implementation of several cost reduction measures, including the Company's
restructuring effected in 1999.
Research and development costs decreased 4.1% over the comparable period in
1999. This is primarily as a result of a reduction in the use of contracted
research and development in 2000.
The 7.2% increase in amortization of intangibles versus the comparable period of
1999 is due to the increased amortization expense associated with capitalized
software development costs at the Company's Process Manufacturing division.
-12-
<PAGE> 13
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Six Months Ended Percentage Six Months Ended Percentage
June 30, 1999 of Revenue June 30, 2000 of Revenue
---------------- ---------- ---------------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 20,296 62.7% $ 12,654 67.0%
Process Manufacturing 4,444 13.7% 2,533 13.4%
Legacy 5,794 17.9% 3,702 19.6%
Gaming 1,696 5.2% -- --
Other 139 0.5% -- --
Total revenue 32,369 100.0% 18,889 100.0%
Gross profit 18,141 56.0% 9,516 50.4%
Selling, general &
administrative expenses 12,061 37.3% 6,257 33.1%
Research and development
costs 2,407 7.4% 2,198 11.6%
Amortization of intangibles 1,209 3.7% 1,297 6.9%
Other operating (income) expense (110) (0.3%) 58 0.3%
</TABLE>
The year-to-year decrease in revenue of 41.6% for the six months ended June 30,
1999 over the comparable period was due primarily to decreases in sales of
hospitality enterprise solutions. Hospitality revenue decreased 37.7% from
$20,296,000 in 1999 to $12,654,000 in 2000, largely due to decreased software
sales and professional services. Process Manufacturing revenue decreased 43.0%
from $4,444,000 in 1999 to $2,533,000 in 2000 due to product transition. Gaming
revenue decreased $1,696,000 due to the sale of its gaming subsidiary in June
2000.
Consistent with the Company's strategy to focus on providing software and
services to its vertical markets, the Company's legacy revenue (traditional
hardware contract service revenues and proprietary add-on sales) declined 36.1%
year over year, largely due to the expected decrease in volume and customers
replacing their legacy systems due to Year 2000 compliance.
Gross profit decreased to 50.4% from 56.0% due to decreased software sales which
generate higher gross margins. Revenue on lower margin functions such as
hardware, professional services and legacy also declined.
Selling, general and administrative expenses ("SG&A") decreased 48.1% to
$6,257,000. The decrease is related to the implementation of several cost
reduction measures, including the Company's restructuring effected in 1999.
Research and development costs decreased 8.7% over the comparable period of
1999. This is primarily as a result of a reduction in the use of contracted
research and development in 2000.
The 7.3% increase in amortization of intangibles versus the comparable period of
1999 is due to the increased amortization expense associated with capitalized
software development costs of the Company's Process Manufacturing division.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for
transactions entered into after January 1, 2001. This statement requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings. The Company is
in the process of determining the impact that the adoption of SFAS No. 133 will
have on its results of operations and financial position.
-13-
<PAGE> 14
In December 1999, the SEC staff issued Staff Accounting Bulletin No., 101,
"Revenue Recognition in Financial Statements" and in March 2000, the SEC staff
issued Staff Accounting Bulletin No. 101A "Implementation Issues Related to SAB
101." These bulletins summarize certain of the staff's views about applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff is providing this guidance due, in part, to the large
number of revenue recognition issues that registrants encounter. The provisions
of these pronouncements are effective for the Company commencing with the fourth
quarter of 2000. Management is in the process of analyzing the implications of
these bulletins and is anticipating that further implementation guidance will be
forthcoming from the SEC. Accordingly, there is uncertainty as to the ultimate
impact to the Company in applying these bulletins.
YEAR 2000 COMPLIANCE RISKS
This section is a Year 2000 Readiness Disclosure Statement pursuant to the Year
2000 Information and Readiness Disclosure Act of 1998.
During 1999, the Company successfully completed its program to achieve Year 2000
Readiness. Before June 30, 1999 the Company completed an evaluation of both its
information technology systems and its non-technology systems, such as equipment
containing microprocessors. At that time the Company determined that all
information technology and non-technology systems in its corporate home office
in Irvine, California and in its branch or subsidiary offices in the United
States and internationally had been modified to address Year 2000 issues. "Year
2000 Ready" meant that the performance or functionality of the Company's
internal systems would not be significantly affected by the dates prior to,
during, and after the Year 2000, to include leap year calculations and specific
day-of-the-week calculations.
The Company established a Year 2000 "task force" which prepared and released its
Year 2000 products readiness report on the Company's "Web Pages"
(www.maisystems.com and www.hotelinfosys.com) and made available to clients a
copy of this report on a per request basis. The Company launched a direct
mail/fax campaign in February 1999 to all of its current maintenance agreement
clients as well as to all identifiable clients that may be utilizing the
Company's products, informing clients that the "Year 2000 Readiness Program" was
available to be viewed at the indicated websites. The mailing also provided
clients the opportunity to request information regarding the "Year 2000
Readiness Program" if they so desired. This mailing was executed using the most
current client database available. This notification went to approximately
18,000 domestic customers as well as being faxed to approximately 4,000
international customers from the Company's international offices.
The Company currently knows of no significant year 2000-related failures
occurring in either its products or its internal systems as a result of the date
change from December 31, 1999 to January 1, 2000. As expected, the Company has
not experienced a material adverse impact on its business, products, results of
operations, or financial condition as a result of the Year 2000 issue. Costs
associated with implementing its Year 2000 compliance plan for its corporate
offices were approximately $300,000. These costs were expensed as incurred and
were comprised primarily of the personnel costs required to review all software
for Year 2000 compliance, the informational mailing and website costs and
outside consulting fees.
The Company will continue to monitor its critical processes, and those of
significant third parties that are critical to the company's operations, for
potential Year 2000-related problems. The Company's present "reasonably likely
worst case scenario" for Year 2000 problems involves potential product liability
claims by substantial customers involving collateral (business interruption)
damages. Although the Company has not experienced any product liability claims
to date regarding Year 2000 compliance, there can be no assurance that errors or
defects, whether associated with Year 2000 functions or otherwise, will not
result in product liability claims against the Company in the future. The
Company's license agreements with customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims;
however, it is possible that such limitation of liability provisions may not be
effective under the laws of certain jurisdictions. Defective products or
releases could result in loss of revenues, increased service and warranty costs
and product liability claims, and could adversely affect the Company's market
penetration and reputation, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
-14-
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are
subject to risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements. The
Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates. The Company does not have
derivative financial instruments for hedging, speculative, or trading
purposes.
INTEREST RATE SENSITIVITY
Of the Company's $9.7 million principal amount of indebtedness at June
30, 2000, $3.6 million bears interest at a rate that fluctuates based on
changes in prime rate. A 1% change in the underlying prime rate would
result in a $36,000 change in the annual amount of interest payable on
such debt. Of the remaining amount of $6.1 million, $5.25 million bears
interest at a fixed rate of 11% and $850,000 million bears fixed
interest rates ranging from 6% to 17.5%.
The face amount of the Company's notes receivable totals $4,925,000. Of
that amount, $2.6 million bears interest at a fixed rate of 10%. The
remaining balance consisting of a $2,325,000 note (which has been
discounted at the rate of 10% for financial reporting) is non-interest
bearing until October 2002, at which time interest is payable at the
rate of prime plus 1%. A one-percentage point change in the interest
rate of this note would result in a $23,250 annual change in interest
income beginning in October 2002. The impact reduces as the principal is
paid down over the following four years.
FOREIGN CURRENCY RISK
The Company believes that its exposure to currency exchange fluctuation
risk is insignificant because the Company's transactions with
international vendors are generally denominated in US dollars. The
currency exchange impact on intercompany transactions was immaterial for
the quarter ended June 30, 2000.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At June 30, 1999, there was only one material claim to be settled before
the Company's Chapter 11 proceeding could be formally closed, a tax
claim with the United States Internal Revenue Service (the "Service").
The amount of this claim is in dispute. The Company has reserved
$712,000 for settlement of this claim, which it is anticipated would be
payable to the Service in equal monthly installments over a period of
six (6) years from the settlement date at an interest rate of 6%.
CSA Private Limited ("CSA")
CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. ("HIS") substantially all their assets and
certain of their liabilities (the "HIS Acquisition"). At the time of
MAI's acquisition of HIS in 1996, CSA was a shareholder of HIS and, in
connection with the purchase, MAI agreed to issue to CSA shares of its
common stock worth approximately $4.8 million in August 1996, which
amount has increased to approximately $6,496,000 as of June 30, 2000,
pursuant to the agreement. MAI also granted CSA demand registration
rights with respect to such stock. CSA requested registration of their
shares, but MAI delayed registration based upon its good faith exercise
of its rights under its agreement with CSA. On October 5, 1998, CSA
filed a lawsuit against MAI in the U.S. District Court for the Central
District of California. Pursuant to a settlement agreement entered into
as of May 13, 1999 MAI agreed by November 1, 1999 to file, or at a
minimum to commence the process to file, a registration statement with
the Securities and Exchange Commission ("SEC") for the purpose of
registering CSA's shares. The number of shares which may be sold by CSA
includes: (i) CSA's current ownership of 590,785 shares, and (ii)
8,851,000 additional shares, assuming a stock price of $0.688 per share,
which MAI would issue to CSA in order for them to receive net proceeds
of approximately $6,496,000 after deducting any discounts or
commissions. MAI has not yet filed the registration statement called
for by the settlement agreement. CSA initiated another lawsuit in
December 1999 in the above-referenced court (a) seeking damages in
excess of $5 million; (b) enforcement of the settlement agreement; and
(c) and injunctive relief through court order to cause MAI to file the
S-1 registration statement. On March 6, 2000, the Company answered the
complaint. A trial date has been set for December 18, 2000. MAI is
currently in discussions with CSA attempting to settle this matter.
Enterprise Hospitality Solutions, Inc.
On November, 30, 1999, Enterprise Hospitality Solutions, Inc. ("EHS")
and Christian Rivadella commenced an action against MAI in the United
States District Court for the Central District of California, alleging
that MAI had failed to pay certain royalties to EHS under the parties'
exclusive license agreement. The complaint asserted claims for breach of
contract, unjust enrichment, accounting and unfair competition. The
complaint sought damages, preliminary and permanent injunctive relief,
imposition of a constructive trust, an order canceling MAI's exclusive
right to license the software at issue under the parties' agreement, and
the appointment of a receiver to conduct an audit. On February 1, 2000,
MAI answered the complaint by denying its material allegations and
asserted a Counterclaim against the plaintiffs. The Counterclaim
asserted claims for breach of the parties exclusive license agreement,
breach of the covenant of good faith and fair dealing, unfair business
practices, interference with contractual relations and declaratory
relief, and a declaration that MAI was not in breach of the parties'
license agreement.
Effective June 30, 2000, the parties entered into an agreement pursuant
to which MAI acquired from EHS the exclusive worldwide marketing rights
to certain Lodging Touch products and the royalty free use of the
Lodging Touch name and trademark. As part of that agreement, all prior
agreements between MAI and EHS were terminated. The parties executed
mutual general releases, and the litigation was dismissed with
prejudice.
-16-
<PAGE> 17
Wang Global Corporation
On December 2, 1996 MAI executed outsource agreements with Olivetti
North America, Inc. ("ONA") in the United States and with Olivetti
Canada Ltd. in Canada, for on-site repair and warranty service and
telephonic support for it's Legacy customers. On July 26, 1999, Wang
Global Corporation ("Wang"), asserting that it was the parent of ONA,
filed for arbitration in this matter, alleging breach of contract for
payments due for maintenance services provided by Wang. Wang claims that
the amounts due from MAI exceed $3.7 million.
MAI filed a counterclaim for breach of contract and unfair business
practices. MAI believes that to the extent any amounts are outstanding
under the parties' agreement, the amount outstanding is significantly
less than $3.7 million. Getronics Corporation answered the Counterclaim
in the arbitration, asserting that it was the successor-in-interest to
ONA and Wang.
On June 9, 2000, MAI filed a compliant in California Superior Court
against Getronics Corporation seeking to enjoin it from proceeding with
the arbitration on the grounds that the Company had not agreed to
arbitrate with Getronics Corporation (the "Court Action"). On June 22,
2000, the arbitration was stayed pending the resolution of the Court
Action.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business.
Management believes the ultimate outcome of these matters will not have
a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In March 1997, the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). In September 1997 this indebtedness was
reduced by $5,250,000 through application of a portion of the proceeds
realized from the exercise of warrants by Canyon. The notes call for
semi-annual interest payments. On September 3, 1999 the Company failed
to make the semi-annual interest payment due on that date in the amount
of $ 288,750.
The Company and Canyon subsequently entered into a forbearance agreement
which provided that the Company pay Canyon weekly interest payments of
$12,500 effective January 1, 2000. In addition, the Company executed a
security agreement which provided Canyon with a lien on all of the
Company's tangible and intangible property, which lien is junior to the
lien granted to Coast.
On April 13, 2000, the Company entered into an agreement with Canyon
which waived all existing events of default, accelerated the maturity
date to March 3, 2003 and provided for continued weekly interest
payments of $12,500 until the Coast Bridge Loan is paid in full. Upon
repayment of the Bridge Loan, the Company will be required to pay Canyon
weekly interest payments of $25,000 until all interest on the
subordinated notes is paid in full. Thereafter, the Company will pay
weekly interest payments of approximately $11,000.
-17-
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders.
The Company held its Annual Meeting of Stockholders on May 19,
2000 at the Hollywood Roosevelt Hotel, 7000 Hollywood Boulevard,
Los Angeles, California.
(b) Elected Directors of Registrant.
The following persons were elected to serve as directors of the
Company.
Richard S. Ressler
Morton O. Schapiro
Zohar Loshitzer
(c) Items Voted Upon by Stockholders of the Registrant.
The following matters were voted upon by the stockholders of the
Company. The number of votes cast for and against are set forth
below (as well as the applicable number of abstentions and
broker non-votes):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
VOTES
AGAINST
SUBJECT VOTES FOR OR WITHHELD ABSTENTIONS BROKER NON-VOTES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Election of
Directors:
8,611,424 116,790 0 0
Zohar Loshitzer 8,611,397 116,817 0 0
Richard S. Ressler 8,611,056 117,158 0 0
Morton O. Schapiro
-------------------------------------------------------------------------------------------
Ratification of the 8,584,558 91,195 52,461 0
Company's selection
of KPMG LLP to act
as the independent
auditors for the
Company.
-------------------------------------------------------------------------------------------
</TABLE>
(d) None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
10.1 Warrant Agreement.
(b) Reports on Form 8-K.
None.
-18-
<PAGE> 19
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: July 31, 2000 /s/ James W. Dolan
-----------------------------------------
James W. Dolan
Chief Financial Officer
(Chief Financial and Accounting Officer)
-19-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
27 Financial Data Schedule.
10.1 Warrant Agreement.
</TABLE>
