SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-9158
MAI SYSTEMS CORPORATION
| Delaware (State or other jurisdiction of incorporation or organization) |
22-2554549 (I.R.S. Employer Identification No.) |
9601 Jeronimo Road
Irvine, California
92618
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (949) 598-6000
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes 
No 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
As of August 14, 2002, 14,568,585 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (in thousands, except share data) | ||||||||||
| As of December | As of June | |||||||||
| 31, 2001 | 30, 2002 | |||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash |
$ | 1,224 | $ | 1,238 | ||||||
Receivables, less allowance for doubtful accounts of
$1,023 in 2001 and $553 in 2002 |
2,396 | 2,410 | ||||||||
Inventories |
90 | 99 | ||||||||
Note receivable |
500 | 750 | ||||||||
Prepaids and other assets |
918 | 978 | ||||||||
Current assets held for sale |
204 | 435 | ||||||||
Total current assets |
5,332 | 5,910 | ||||||||
Furniture, fixtures and equipment, net |
1,221 | 1,043 | ||||||||
Notes receivable |
250 | — | ||||||||
Intangibles, net |
799 | 1,300 | ||||||||
Assets held for sale |
613 | 581 | ||||||||
Other assets |
73 | 207 | ||||||||
Total assets |
$ | 8,288 | $ | 9,041 | ||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
||||||||||
Current liabilities: |
||||||||||
Current portion of long-term debt |
$ | 112 | $ | 5,774 | ||||||
Line of credit |
— | 2,039 | ||||||||
Accounts payable |
1,903 | 1,507 | ||||||||
Customer deposits |
1,164 | 964 | ||||||||
Accrued liabilities |
2,402 | 2,340 | ||||||||
Income taxes payable |
235 | 140 | ||||||||
Unearned revenue |
1,743 | 3,027 | ||||||||
Current liabilities held for sale |
1,560 | 1,421 | ||||||||
Total current liabilities |
9,119 | 17,212 | ||||||||
Line of credit |
2,424 | — | ||||||||
Long-term debt |
8,542 | 2,904 | ||||||||
Other liabilities |
1,195 | 1,258 | ||||||||
Total liabilities |
21,280 | 21,374 | ||||||||
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; 13,656,085 and 14,368,585 shares
issued and outstanding at December 31, 2001 and
June 30, 2002, respectively |
140 | 147 | ||||||||
Additional paid-in capital |
218,022 | 218,200 | ||||||||
Accumulated other comprehensive loss |
(361 | ) | (451 | ) | ||||||
Unearned compensation |
— | (109 | ) | |||||||
Accumulated deficit |
(230,793 | ) | (230,120 | ) | ||||||
Total stockholders’ deficiency |
(12,992 | ) | (12,333 | ) | ||||||
Commitments and contingencies
|
||||||||||
Total liabilities and stockholders’ deficiency |
$ | 8,288 | $ | 9,041 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| (Unaudited) | (Unaudited) | |||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||
| 2001 | 2002 | 2001 | 2002 | |||||||||||||||||
Revenue: |
||||||||||||||||||||
Software |
$ | 1,519 | $ | 1,124 | $ | 3,211 | $ | 2,391 | ||||||||||||
Network and computer equipment |
221 | 134 | 444 | 404 | ||||||||||||||||
Services |
4,532 | 4,230 | 9,115 | 8,425 | ||||||||||||||||
Total revenue |
6,272 | 5,488 | 12,770 | 11,220 | ||||||||||||||||
Direct costs: |
||||||||||||||||||||
Software |
142 | 192 | 205 | 349 | ||||||||||||||||
Network and computer equipment |
84 | 90 | 288 | 292 | ||||||||||||||||
Services |
1,690 | 1,499 | 3,591 | 3,119 | ||||||||||||||||
Total direct costs |
1,916 | 1,781 | 4,084 | 3,760 | ||||||||||||||||
Gross profit |
4,356 | 3,707 | 8,686 | 7,460 | ||||||||||||||||
Selling, general and administrative expenses |
1,834 | 2,336 | 3,916 | 4,409 | ||||||||||||||||
Research and development costs |
1,100 | 656 | 2,175 | 1,664 | ||||||||||||||||
Amortization of intangibles |
183 | 45 | 367 | 109 | ||||||||||||||||
Other operating (income) loss |
8 | 6 | (1,349 | ) | 5 | |||||||||||||||
Operating income |
1,231 | 664 | 3,577 | 1,273 | ||||||||||||||||
Interest income |
2 | 1 | 49 | 3 | ||||||||||||||||
Interest expense |
(408 | ) | (388 | ) | (863 | ) | (775 | ) | ||||||||||||
Income from continuing operations before
income taxes |
825 | 277 | 2,763 | 501 | ||||||||||||||||
Income taxes |
(2 | ) | (5 | ) | (79 | ) | (8 | ) | ||||||||||||
Income from continuing operations |
823 | 272 | 2,684 | 493 | ||||||||||||||||
Income (loss) from discontinued operations |
(530 | ) | 74 | (996 | ) | 180 | ||||||||||||||
Net income |
$ | 293 | $ | 346 | $ | 1,688 | $ | 673 | ||||||||||||
Income (loss) per share: |
||||||||||||||||||||
Continuing Operations: |
||||||||||||||||||||
Basic income per share |
$ | 0.06 | $ | 0.02 | $ | 0.21 | $ | 0.04 | ||||||||||||
Diluted income per share |
$ | 0.06 | $ | 0.02 | $ | 0.21 | $ | 0.04 | ||||||||||||
Discontinued Operations: |
||||||||||||||||||||
Basic income (loss) per share |
$ | (0.04 | ) | $ | 0.00 | $ | (0.08 | ) | $ | 0.01 | ||||||||||
Diluted income (loss) per share |
$ | (0.04 | ) | $ | 0.00 | $ | (0.08 | ) | $ | 0.01 | ||||||||||
Net income per share: |
||||||||||||||||||||
Basic income per share |
$ | 0.02 | $ | 0.02 | $ | 0.13 | $ | 0.05 | ||||||||||||
Diluted income per share |
$ | 0.02 | $ | 0.02 | $ | 0.13 | $ | 0.05 | ||||||||||||
Weighted average common shares used in
determining income (loss) per share: |
||||||||||||||||||||
Basic |
13,679 | 14,302 | 12,537 | 13,979 | ||||||||||||||||
Diluted |
13,847 | 14,361 | 12,705 | 13,999 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MAI Systems Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | |||||||||
| June 30, | |||||||||
| (in thousands) | |||||||||
| 2001 | 2002 | ||||||||
Net cash provided by operating activities |
$ | 487 | $ | 1,229 | |||||
Cash flows used in investing activities - |
|||||||||
Capital expenditures |
(40 | ) | (117 | ) | |||||
Software development costs |
— | (359 | ) | ||||||
Net cash used in investing activities |
(40 | ) | (476 | ) | |||||
Cash flows from financing activities: |
|||||||||
Net increase (decrease) in line of credit |
19 | (385 | ) | ||||||
Repayments of long-term debt |
(159 | ) | (75 | ) | |||||
Repayments of bridge loan |
(220 | ) | — | ||||||
Net cash used in financing activities |
(360 | ) | (460 | ) | |||||
Net cash provided by continuing operations |
87 | 293 | |||||||
Net cash used in discontinued operations |
(432 | ) | (264 | ) | |||||
Effect of exchange rate changes on cash |
12 | (15 | ) | ||||||
Net change in cash |
(333 | ) | 14 | ||||||
Cash at beginning of period |
1,019 | 1,224 | |||||||
Cash at end of period |
$ | 686 | $ | 1,238 | |||||
Supplemental disclosure of non-cash investing and financing activities (see notes 4 and 8)
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Six Months ended June, 2002
(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 accounting principles generally accepted in the United States of America 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, 2001, which is on file with the SEC. | ||
| 2. | Inventories | |
| Inventories are summarized as follows: |
| (dollars in thousands) | ||||||||
| December 31, | June 30, | |||||||
| 2001 | 2002 | |||||||
Finished goods |
$ | 75 | $ | 83 | ||||
Replacement parts |
15 | 16 | ||||||
| $ | 90 | $ | 99 | |||||
| 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 June 30, 2002, 6,758,251 shares of Common Stock had been issued pursuant to the Plan and were outstanding. | ||
| 4. | Business Acquisitions | |
| HOTEL INFORMATION SYSTEMS,
INC. (“HIS”): During 1996, the Company entered into arbitration proceedings regarding the purchase price of HIS. The Company placed approximately 1,100,000 shares of Common Stock issued in connection with the acquisition of HIS in an escrow account to be released in whole, or in part, upon final resolution of post closing adjustments. |
||
| In November 1997, the purchase price for the acquisition of HIS was reduced by $931,000 pursuant to arbitration proceedings. As a result, goodwill was reduced by $931,000 and approximately 100,650 shares will be released from the escrow account and returned to the Company. In addition, further claims by the Company against HIS relating to legal costs and certain disbursements currently estimated at $650,000 are presently pending. Resolution of such claims may result in release of additional escrow shares to the Company. Upon settlement, the Company may, as needed, pursuant to the asset purchase agreement and related documents, issue additional shares of Common Stock in order that the recipients |
-5-
| ultimately receive shares worth a fair value of $9.25 per share. This adjustment applies to a maximum of 73,466 shares of Common Stock. As of June 30, 2002, the fair market value of the Company’s common stock was $0.33 per share, which would result in approximately 2,495,451 additional shares being issued. Also, included in the escrow account at June 30, 2002 is 200,000 shares of Common Stock which do not have a guarantee of value. The amount and number of shares will be determined based on the final resolution of such claims. Accordingly, as of June 30, 2002, the final purchase price has not been determined. | ||
| HOSPITALITY SERVICES &
SOLUTIONS (“HSS”): On June 23, 2002, the Company acquired substantially all of the assets and assumed certain liabilities of Hospitality Services & Solutions pursuant to a stock purchase agreement for 100,000 shares of common stock valued at $32,000, and $75,000 in cash. Additionally, the shareholders of HSS received a 20% minority interest in the Company’s combined operations in Asia. The net assets acquired from HSS are used in the business of software design, engineering and service relating to hotel information systems. The net assets also include subsidiaries of HSS in Malaysia, Singapore and Thailand. |
||
| 5. | Business Divestitures | |
| On June 19, 1999, the Company sold GSI for an amount in excess of the book value of net assets sold. Assets sold of approximately $3,749,000 consisted of accounts receivable of $1,514,000, inventories of $364,000, furniture, fixtures and equipment of $218,000, intangible assets of $1,573,000 and prepaid expenses of $80,000. Liabilities assumed by the buyer consisted of accounts payable and accrued liabilities of $197,000, deposits of $100,000, unearned revenue of $351,000 and long-term debt of $446,000. The Company received three promissory notes totaling $4,925,000 with face values of $1,100,000, $1,500,000 and $2,325,000, respectively. Interest was paid monthly at the rate of 10% per annum on both the $1,100,000 and $1,500,000 notes, with the principal due and payable on June 19, 2001 and June 19, 2003, respectively. The $1,100,000 promissory note was guaranteed by a third party. Principal payments and interest, at prime plus 1%, was to commence for the $2,325,000 promissory note on October 1, 2002 in 48 monthly installments of approximately $48,000 of principal, plus accrued interest. | ||
| Imputing interest at a rate of 10%, the present value of the $2,325,000 promissory note at the date of sale was $1,682,000 which resulted in a combined carrying value of $4,282,000 for all three promissory notes. The gain on sale of $1,227,000 had been deferred until collection of the proceeds representing the gain can be assured. As of December 31, 2000, the Notes were held for sale and were written down to an amount which approximated their estimated net realizable value of $2,700,000. | ||
| On April 6, 2001 the Company entered into an agreement with the maker of the Notes whereby the maker reconveyed 100% of the Common Stock of GSI to the Company for the purpose of selling GSI to a third party. In connection with the agreement, the Company canceled the Notes and entered into a new $1.1 million secured promissory note with the same party. The maker will be paid a commission of 30% of cash receipts from the third party, which will be first applied to the $1.1 million note and paid in |