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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 September 30, 2002
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9601 JERONIMO ROAD
IRVINE, CALIFORNIA
92618
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 598-6000
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Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No
As of November 19, 2002, 14,568,585 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
Due to the recent dismissal of KPMG LLP as its independent public accountants,
the Company has been unable to engage a new independent public accounting firm
to complete the SAS 71 review. The Company anticipates engaging its new
independent public accounting firm and completing its SAS 71 review shortly.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
As of December 31, As of September 30,
2001 2002
------------------ -------------------
ASSETS
Current assets:
Cash $ 1,224 $ 545
Receivables, less allowance for doubtful accounts of
$1,023 in 2001 and $546 in 2002 2,396 2,244
Inventories 90 86
Note receivable 500 750
Prepaids and other assets 918 807
Current assets held for sale 204 579
--------- ---------
Total current assets 5,332 5,011
Furniture, fixtures and equipment, net 1,221 924
Notes receivable 250 --
Intangibles, net 799 1,532
Assets held for sale 613 563
Other assets 73 261
--------- ---------
Total assets $ 8,288 $ 8,291
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 112 $ 5,856
Line of credit -- 2,144
Accounts payable 1,903 1,479
Customer deposits 1,164 1,275
Accrued liabilities 2,402 2,397
Income taxes payable 235 101
Unearned revenue 1,743 3,033
Current liabilities held for sale 1,560 385
--------- ---------
Total current liabilities 9,119 16,670
Line of credit 2,424 --
Long-term debt 8,542 2,837
Other liabilities 1,195 1,263
--------- ---------
Total liabilities 21,280 20,770
--------- ---------
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 14,568,585
shares issued and outstanding at December 31, 2001 and
September 30, 2002, respectively 140 149
Additional paid-in capital 218,022 218,244
Accumulated other comprehensive loss (361) (488)
Unearned compensation -- (100)
Accumulated deficit (230,793) (230,284)
--------- ---------
Total stockholders' deficiency (12,992) (12,479)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficiency $ 8,288 $ 8,291
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-2-
MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(in thousands, except per (in thousands, except per
share data) share data)
2001 2002 2001 2002
-------- -------- -------- --------
Revenue:
Software $ 1,254 $ 1,396 $ 4,465 $ 3,787
Network and computer equipment 375 328 820 731
Services 4,474 3,987 13,588 12,413
-------- -------- -------- --------
Total revenue 6,103 5,711 18,873 16,931
-------- -------- -------- --------
Direct costs:
Software 81 158 427 507
Network and computer equipment 274 276 421 569
Services 1,409 1,366 5,000 4,485
-------- -------- -------- --------
Total direct costs 1,764 1,800 5,848 5,561
-------- -------- -------- --------
Gross profit 4,339 3,911 13,025 11,370
Selling, general and administrative
expenses 1,985 2,418 5,901 6,828
Research and development costs 1,114 797 3,289 2,461
Amortization of intangibles 183 25 550 134
Other operating (income) expense 8 232 (1,340) 237
-------- -------- -------- --------
Operating income 1,049 439 4,625 1,710
Interest income 4 1 53 4
Interest expense (410) (372) (1,273) (1,146)
-------- -------- -------- --------
Income from continuing operations
before income taxes 643 68 3,405 568
Income taxes (1) (8) (79) (16)
-------- -------- -------- --------
Income from continuing operations 642 60 3,326 552
Loss from discontinued operations (231) (223) (1,227) (43)
-------- -------- -------- --------
Net income (loss) $ 411 $ (163) $ 2,099 $ 509
======== ======== ======== ========
Income (loss) per share:
Continuing Operations:
Basic income per share $ 0.05 $ 0.00 $ 0.26 $ 0.04
======== ======== ======== ========
Diluted income per share $ 0.05 $ 0.00 $ 0.26 $ 0.04
======== ======== ======== ========
Discontinued Operations:
Basic income (loss) per share $ (0.02) $ (0.01) $ (0.10) $ 0.00
======== ======== ======== ========
Diluted income (loss) per share $ (0.02) $ (0.01) $ (0.10) $ 0.00
======== ======== ======== ========
Net income (loss) per share:
Basic income (loss) per share $ 0.03 $ (0.01) $ 0.16 $ 0.04
======== ======== ======== ========
Diluted income (loss) per share $ 0.03 $ (0.01) $ 0.16 $ 0.04
======== ======== ======== ========
Weighted average common shares
used in determining income (loss)
per share:
Basic 13,691 14,569 12,922 14,175
======== ======== ======== ========
Diluted 13,928 14,569 13,113 14,182
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-3-
MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
(in thousands)
2001 2002
------- -------
Net cash provided by (used in) operating
activities $ (655) $ 1,933
Cash flows used in investing activities -
Capital expenditures (124) (128)
Software development costs
-- (615)
------- -------
Net cash used in investing activities (124) (743)
------- -------
Cash flows from financing activities:
Net increase (decrease) in line of
credit 18 (280)
Proceeds received from sale of
subsidiary 1,000 --
Repayments of long-term debt (262) (89)
Repayments of bridge loan (220) --
------- -------
Net cash provided by (used in) financing
activities 536 (369)
------- -------
Net cash provided by (used in) continuing
operations (243) 821
Net cash used in discontinued operations (423) (1,487)
Effect of exchange rate changes on cash 4 (13)
------- -------
Net change in cash (662) (679)
------- -------
Cash at beginning of period 1,019 1,224
------- -------
Cash at end of period $ 357 $ 545
======= =======
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
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION AND LIQUIDITY
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.
The Company currently operates in one reportable business segment, which
is the hospitality market, focusing primarily on the hotel, motel and
resort destinations industry for which we design, sell, install and
support enterprise information systems.
Although the Company has a net stockholders' deficiency of $12,479,000
at September 30, 2002, the Company believes it will continue to generate
sufficient funds from operations and obtain additional financing or
restructure its subordinated notes with Canyon and CSA as well as its
facility with Coast, as needed, to meet its operating and capital
requirements. The Company is currently not able to pay its existing debt
obligations with Canyon and Coast, which mature in March 2003 and April
2003, respectively and CSA, which matures in October 2003, without
significantly modifying the existing terms of such debt. The Company is
currently in negotiations with all of its secured creditors to
restructure the terms of the existing debt, including extending the
maturity dates. The Company expects to generate positive cash flow from
its continuing operations during 2002 and 2003 from shipping out
products and services from its $3.2 million backlog as of September 30,
2002 as well as new orders. Also, in July 2001, the Company entered into
an agreement for the sale of its investment in GSI and has received $2.5
million in 2001. The Company expects to receive an additional $500,000
in 2002 and an additional $250,000 to $300,000 in January 2003. There
can be no assurance that the Company will be able to sustain
profitability, generate positive cash flow from operations or obtain the
necessary renewal and/or restructure of its debt. These financial
statements have been prepared assuming the Company will continue to
operate as a going concern. If the Company is unsuccessful in the
aforementioned efforts, the Company could be forced to liquidate certain
of its assets, reorganize its capital structure and, if necessary, seek
other remedies available to the Company.
2. INVENTORIES
Inventories are summarized as follows:
(dollars in thousands)
December 31, September 30,
2001 2002
------------ -------------
Finished goods $75 $70
Replacement parts 15 16
--- ---
$90 $86
=== ===
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.
-5-
Shares of common stock may be distributed by the Company to its former
creditors. As of September 30, 2002, 6,738,251 shares of Common Stock
had been issued pursuant to the Plan and were outstanding.
4. BUSINESS ACQUISITIONS
HOTEL INFORMATION SYSTEMS, INC. ("HIS"):
Effective August 9, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of HIS pursuant to an asset
purchase agreement. 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. During the fourth quarter of
1996, arbitration proceedings were initiated regarding the final
purchase price of HIS.
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 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 September 30, 2002, the fair market value of the Company's
common stock was $0.17 per share, which would result in approximately
5,138,110 additional shares being issued. Also, included in the escrow
account at September 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 September 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 its gaming subsidiary ("GSI"). 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 ("Notes").
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 cash to the maker thereafter. On July 27, 2001, the Company
entered into an Asset Purchase Agreement ("Agreement") with the third
party for approximately $3.2 million whereby all of the assets of GSI
were acquired and all of the liabilities assumed, except for
approximately $300,000 of obligations, which will remain with GSI. The
payment terms under the Agreement required a $1 million non-refundable
cash payment to the Company, which was received on July 27, 2001 and a
$1.5 million payment, which was received in December 2001. The Company
also received a secured promissory note in the amount of $750,000. Under
the terms of the secured promissory note, the third party was required
to pay $500,000 in April 2002 (See Note 12) and the remaining $250,000
in January 2003. The third party is also required to pay an additional
$250,000 in January 2003 subject to a maximum $250,000 reduction
pursuant to the resolution of certain uncertainties as of the date of
the Agreement.
Due to the uncertainty of collecting the unsecured amount of $250,000,
gain recognition on that part of the proceeds has been deferred until
collection can be assured. The Company recorded a gain on the sale of
GSI of $245,000 in the fourth quarter of 2001.
On October 9, 2001, the Company sold certain rights under customer
contracts together with the related assets and liabilities of its
domestic Legacy hardware maintenance division to the third party which
currently provides the on-site repair and warranty service to the
Company's Legacy hardware maintenance customers. Pursuant to the
agreement, the Company retained the software maintenance component of
the customer contracts and will continue to provide the software support
services directly to the domestic Legacy customer base. Additionally,
the third party will be required to pay the
-6-
Company approximately 15% of the third party's hardware maintenance
revenue stream relating to the hardware maintenance customer contracts
subsequent to October 31, 2003. In connection with the sale, the Company
received $328,000 in cash and sold approximately $157,000 of assets
consisting of inventory, spare parts, fixed assets and certain accounts
receivable. The third party also assumed approximately $1,091,000 of
liabilities consisting of accrued liabilities of approximately $366,000
and deferred revenue of approximately $725,000. The sale resulted in a
gain of approximately $1,262,000 in October 2001, which is included in
other operating income.
6. BUSINESSES HELD FOR SALE
In the fourth quarter of 2001, the Company's Board of Directors adopted
a plan to sell its Process manufacturing and Legacy divisions. The
Process manufacturing business division designs, sells, installs and
supports total enterprise solutions to the process manufacturing
industry. The Legacy business provides a wide array of products and
services to its customers who continue to use its proprietary host-based
computer systems, including field engineering services, new and
replacement equipment, operating systems and software application
products. These products and services upgrade, enhance and integrate the
legacy systems with currently available computer technologies.
The Company is actively seeking buyers for its Process Manufacturing and
Legacy divisions and expects to consummate the sale of these divisions
during 2002. These divisions are available for immediate sale subject
only to customary terms for such sales.
In accordance with SFAS No. 144, the Company has reflected all of the
assets and liabilities of Process Manufacturing and Legacy in the
consolidated balance sheets as held for sale and the operating results
of these businesses have been reflected as discontinued operations in
the consolidated statements of operations for all periods presented.
Summarized below is historical financial information about Process
Manufacturing and Legacy (in thousands):
For The Three Months For The Nine Months
Ended Ended
September 30, September 30,
2001 2002 2001 2002
------- ----- ------- -------
Revenue $ 1,342 $ 585 $ 4,450 $ 2,072
Income (loss) before income
tax (231) (223) (1,227) (43)
7. LINE OF CREDIT AND BRIDGE LOAN AND LONG TERM DEBT
LINE OF CREDIT & BRIDGE LOAN
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
bore interest at prime plus 5% (prime plus 8% when default interest
rates apply). Loan origination fees of $75,000 paid to Coast in
connection with the Bridge Loan were amortized to interest expense over
the term of the loan. During the first quarter of 2001, the remaining
balance of the Bridge Loan was repaid in full. 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 is secured
by all assets, including intellectual property of the Company, and bore
interest at prime plus 4.5% and expires on April 30, 2003. 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, the Company agreed to pay Coast a fee of
$300,000 ("Loan Fee") in weekly installments of $35,000 commencing after
the Bridge Loan is paid in full. The Loan Fee was fully paid by April
23, 2001. 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 all
covenants as of September 30, 2002 except for its minimum quarterly
profitability covenant of $250,000. Coast has informed the Company that
it is in default and that Coast reserves all rights and remedies as
provided in the loan agreement. Additionally, the Company capitalized
$256,000 of software development costs during the quarter ended
September 30, 2002.
At December 31, 2001, approximately $2,579,000 $2,424,400, respectively,
was available and drawn down under the credit facility. At September 30,
2002, approximately $2,162,000 and $2,144,000 was available and drawn
down under the credit facility.
The Loan Fee of $300,000 is classified in prepaids and other current
assets and is being amortized to interest expense over
-7-
the term of the facility.
The Company is currently in negotiations with Coast to restructure the
terms of the facility including extending its maturity date. There can
be no assurance that Coast and MAI will come to terms on a restructuring
or that management will be successful in finding a replacement lender
with acceptable terms.
LONG-TERM DEBT
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 to $5,250,000 through application of a portion of the proceeds
realized from the exercise of warrants by Canyon. The notes called for
semi-annual interest payments.
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. On January 31, 2001, the Company entered into an
agreement with Canyon whereby the specified accrued interest of $431,000
was added to the principal balance of the subordinated notes payable. As
part of this agreement, the Company also agreed to pay Canyon an
additional $79,000 loan fee, of which $29,000 was added to principal.
The principal balance outstanding on the subordinate notes payable to
Canyon was approximately $5,690,000 and $5,670,000 at December 31, 2001
and September 30, 2002, respectively.
The Company is currently in negotiations with Canyon to restructure the
terms of the subordinated notes including extending its maturity date.
There can be no assurance that Canyon and MAI will come to terms on a
restructuring or that management will be successful in finding a
replacement lender with acceptable terms.
In connection with a settlement agreement with CSA (see Note 12), the
Company issued $2.8 million of subordinated debt to CSA. The $2.8
million of debt is secured by all of the Company's assets which is
subordinate to Coast and Canyon, accrues interest at 10% per annum and
requires payments of $37,500 from March 1, 2002 through September 1,
2002 and monthly payments of $107,500 commencing on October 1, 2002
until October 2003 when all remaining unpaid principal and accrued
interest is to be paid in full. The balance outstanding on the
subordinate debt to CSA was $2,800,000 at December 31, 2001 and
September 30, 2002.
The agreement with CSA was revised whereby the Company shall be required
to pay the required payments under the subordinated note unless and
until it pays $1 million by December 31, 2002. Upon payment of the $1
million, contractual payments under the subordinated note will cease
until a final payment in the amount of $400,000 is paid by February 28,
2003. If the Company does not make all of the modified payments to CSA,
the subordinated note will revert back to its original terms. As of
November 14, 2002, the Company had not made the modified payment nor its
October 1, 2002 and November 1, 2002 required payment under the
subordinated notes to CSA. CSA has not formally notified the Company of
its default. The Company is currently in negotiations with CSA to
restructure the terms of the subordinated notes including extending its
maturity date. There can be no assurance that CSA and MAI will come to
terms on a restructuring or that management will be successful in
finding a replacement lender with acceptable terms.
8. COMMON STOCK
In January and February of 2001, the Company entered into agreements
with several creditors to retire approximately $2.1 million of Company
obligations in exchange for 798,000 shares of Common Stock and $470,000
of cash. This resulted in a gain of $1,377,000. To fulfill its
performance under the agreement, the Company issued the 798,000 shares
of its Common Stock and registered the shares with the SEC. The Company
was also required to pay the $470,000 to the creditors as prescribed in
the respective agreements. All payments required under the agreements
were made in 2001 and the first quarter of 2002.
In May 2002, the Company issued 612,500 shares of restricted common
stock to its members of the board of directors and certain of its
corporate officers. Recipients are not required to provide consideration
to the Company other than rendering the service and have the right to
vote the shares.
Under SFAS No. 123, compensation cost is recognized for the fair value
of the restricted stock awarded, which is its fair market value without
restrictions at the date of grant, which was $0.25 per share. The total
market value of the shares of $153,125 was treated as unearned
compensation and is being amortized to expense in proportion to the
vesting schedule
-8-
through March 2005. The unamortized balance as of September 30, 2002 is
$100,000.
9. ACCOUNTING CHANGES
Effective January 1, 2002, the Company adopted SFAS 141 and SFAS 142.
SFAS 141 requires business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required to
be recognized and reported separate from goodwill. SFAS 142 requires
that goodwill and certain intangibles no longer be amortized, but
instead tested for impairment at least annually. There was no impairment
of goodwill upon adoption of SFAS 142.
Net income and earnings per share for the third quarter of fiscal 2001
adjusted to exclude amortization expense (net of taxes) is as follows:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
2001 2001
------------- -------------
Net income:
Reported net income $ 411 $ 2,099
Goodwill amortization 105 315
------- ---------
Adjusted net income $ 516 $ 2,414
======= =========
Basic earnings per share:
Reported basic earnings per share $ 0.03 $ 0.16
Goodwill amortization 0.01 0.02
------- ---------
Adjusted basic earnings per share $ 0.04 $ 0.18
======= =========
Diluted earnings per share:
Reported diluted earnings per share $ 0.03 $ 0.16
Goodwill amortization 0.01 0.02
------- ---------
Adjusted diluted earnings per share $ 0.04 $ 0.18
======= =========
As of September 30, 2002, net intangible assets consisted of $917,000 of
goodwill and $615,000 of capitalized software. Capitalized software
amortization was $64,000 $45,000 and $25,000 during the first, second,
and third quarters of 2002, respectively.
10. INCOME PER SHARE OF COMMON STOCK
Basic and diluted income per share is computed using the weighted
average shares of common stock outstanding during the period.
Consideration is also given in the diluted income per share calculation
for the dilutive effect of stock options and warrants.
The following table illustrates the computation of basic and diluted
earnings per share under the provisions of SFAS 128:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
------- ------- ------- -------
(in thousands except (in thousands except
per share data) per share data)
Numerator:
Numerator for basic and diluted
earnings per share - net income $ 411 $ (163) $ 2,099 $ 509
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share-weighted average number of Common
shares outstanding during the period 13,691 14,569 12,922 14,175
Incremental common shares
attributable to exercise of
outstanding shares 237 -- 191 7
------- ------- ------- -------
Denominator for diluted earnings per
share 13,928 14,569 13,113 14,182
======= ======= ======= =======
Basic earnings per share $ 0.03 $ (0.01) $ 0.16 $ 0.04
======= ======= ======= =======
Diluted earnings per share $ 0.03 $ (0.01) $ 0.16 $ 0.04
======= ======= ======= =======
-9-
The computation does not consider the additional shares of common stock
which may be issued in connection with past acquisitions. The number of
antidilutive options and warrants that were excluded from the
computation of incremental common shares were 2,126,894 and 2,667,272
for the nine-month periods ended September 30, 2001 and 2002,
respectively.
11. ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long -Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While
Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long -Lived Assets and for Long-Lived Assets for Be
Disposed Of, it retains many of the fundamental provisions of that
Statement.
Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. However, it
retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that
either has been disposed of (by sale, abandonment, or in a distribution
to owners) or is classified as held for sale.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company
elected to adopt Statement No. 144 as of December 31, 2001. There was no
impact on the statement of operations as a result of the adoption of
Statement No. 144.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4 and
64, Amendment of FASB Statement No. 13, and Technical Corrections, "to
update, clarify and simplify existing accounting pronouncements. FASB
Statement No. 4, which required all gains and losses from debt
extinguishments to be aggregated and, if material, classified as an
extraordinary item, net of related tax effect, was rescinded.
Consequently, FASB Statement No. 64, which amended FASB Statement No. 4,
was rescinded because it was no longer necessary. The adoption of SFAS
145 did not have a material impact on the Company's financial position
or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS 146 addresses accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit An Activity
(Including Certain Costs Incurred in a Restructuring). "SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the
liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. We do not expect the adoption of this statement
to have a material effect on our financial statements.
12. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At September 30, 2002, there was only one material claim to be settled
regarding the Company's Chapter 11 proceedings, 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 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 had increased to approximately $6.8 million as of December 31,
2000, pursuant to the agreement. The Company entered into a settlement
agreement with CSA in February, 2001 whereby it (i) issued CSA 1,916,014
additional shares of our Common Stock to bring CSA's total share
ownership to 2,433,333 shares; (ii) filed a registration statement for
all of CSA's shares of our Common Stock which has been declared
-10-
effective by the SEC so that such shares are now freely tradable; and
(iii) executed a secured debt instrument in favor of CSA in the
principal sum of $2,800,000 which is subordinate only to the Company's
present group of two (2) senior secured leaders and required cash
installment payments to commence in March 2002 (see note 7).
In connection with the settlement agreement with CSA, the Company
recorded the $2.8 million debt issuance as a reduction in paid in
capital and the 1,916,014 additional shares at par as an addition to
Common Stock and a reduction to additional paid in capital.
Cher-Ae Heights Indian Community
A lawsuit has been filed by Cher-Ae Heights Indian Community ("Cher-Ae
Heights") against Logix Development Corporation (Logix), now known as
MAI Development Corporation, as a co-defendant for a breach of contract
by the Company's formerly owned gaming subsidiary along with the new
owners, Monaco Informatiques Systemes ("MIS"), who acquired the assets
and certain liabilities of the gaming subsidiary on July 27, 2001. Based
upon this suit, MIS has informed the Company that it did not intend to
pay the next $500,000 due to the Company under a promissory note and
security agreement (see note 5). The Company is currently in settlement
negotiations with Cher-Ae Heights and MIS to resolve any and all
outstanding legal issues associated with Cher-Ae Heights and the July
27, 2001 Agreement and believes that the promissory note will be
recoverable through payments from MIS.
Logix Development Corporation
The Company entered into a settlement agreement with Logix in July of
2002 whereby it (i) issued Logix 200,000 shares of our Common Stock (ii)
required the Company to make various cash installment payments totaling
$175,000 to be paid within 1 year and (iii) executed a contract with
Logix for a consulting project in the amount of $50,000.
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.
13. COMPREHENSIVE INCOME
The following table summarizes components of comprehensive income:
For The Three Months For The Nine Months
Ended Ended
September 30, September 30,
2001 2002 2001 2002
---- ----- ------ -----
Net income $411 $(163) $2,099 $ 509
Change in cumulative
translation Adjustments 46 (37) 56 (128)
---- ----- ------ -----
Comprehensive income $457 $(200) $2,155 $ 381
==== ===== ====== =====
Accumulated other comprehensive income in the accompanying consolidated
balance sheets consists of cumulative translation adjustments.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments
that affect our reported assets, liabilities, revenues and expenses. On
an on-going basis, we evaluate our estimates, including those related to
revenue recognition, accounts receivable and intangible assets. We base
our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. This forms
the basis of judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies and the related
judgments and estimates affect the preparation of our consolidated
financial statements:
Revenue Recognition
We record revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. We license our products
through our direct sales force and indirectly through resellers. We
recognize revenue from sales of hardware, software and professional
services and from arrangements involving multiple elements of each of
the above. Revenue for multiple element arrangements are recorded by
allocating revenue to the various elements based on their respective
fair values as evidenced by vendor specific objective evidence. The fair
value in multi-element arrangements is determined based upon the price
charged when sold separately. Revenue is not recognized until persuasive
evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable. Sales of network
and computer equipment are recorded when title and risk of loss
transfers. Software revenues are recorded when application software
programs are shipped to end users, resellers and distributors, provided
the Company is not required to provide services essential to the
functionality of the software and/or significantly modify, customize or
produce the software. Professional services fees for software
development, training and installation are recognized as the services
are provided. Maintenance revenues are recorded evenly over the related
contract period.
Accounts Receivable
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
The amount of our reserves is based on historical experience and our
analysis of the accounts receivable balances outstanding. If the
financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
may be required which would result in an additional general and
administrative expense in the period such determination was made. While
such credit losses have historically been within our expectations and
the provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past.
Intangible Assets
We record goodwill arising from acquisitions as the excess of the
purchase price over the fair value of assets acquired and such goodwill
was being amortized over a useful life of five to seven years. In July
2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and provides new criteria for
recording intangible assets separately from goodwill. Existing goodwill
and intangible assets will be evaluated against these new criteria,
which may result in certain intangible assets being subsumed into
goodwill. SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible
assets that have indefinite useful lives will not be amortized into
results of operations, but instead will be evaluated at least annually
for impairment and written down when the recorded value exceeds the
estimated fair value. The Company adopted the provisions of SFAS No. 142
on January 1, 2002. As a result, the Company has ceased amortization of
goodwill, reducing annual amortization expense. In addition, impairment
reviews may result in charges against earnings to write down the value
of goodwill.
The Company capitalized $256,000 and $615,000 of software development
costs during the three and nine month periods ended September 30, 2002,
respectively, relating to its new N-Tier, Internet-native corporate
application suite of products written. Although the Company has not yet
sold any of the modules to this suite of applications, the Company
believes that
-12-
its new product will produce new sales adequate to recover amounts
capitalized.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, working capital decreased from a working capital
deficiency of $3,787,000 at December 31, 2001 to a working capital
deficiency of $11,659,000 as an additional $7.9 million of Company debt
was classified as current as of September 30, 2002. Excluding unearned
revenue of $3,033,000, the Company's working capital deficiency at
September 30, 2002 would be $8,626,000 or a ratio of current assets to
current liabilities of 0.37 to 1.0. Excluding unearned revenue, working
capital deficiency at December 31, 2001 was $2,044,000 with a current
ratio of 0.72 to 1.0. Excluding unearned revenue, the increase in the
working capital deficiency of $6,582,000 was primarily attributable to
an increase in current portion of long-term debt and line of credit of
$7,888,000 and customer deposits of $111,000 offset by increases in note
receivable of $250,000, current assets held for sale of $375,000 and
decreases in accounts payable of $424,000, income taxes payable of
$134,000 and current liabilities held for sale of $1,175,000.
Cash was $545,000 at September 30, 2002, as compared to $1,224,000 at
December 31, 2001. Availability under the Company's secured revolving
credit facility is based on a calculation using a rolling average of
certain cash collections. At September 30, 2002, approximately
$2,162,000 was available and $2,144,000 was drawn down under this
facility. The facility expires on April 30, 2003.
Net cash used in investing activities for the nine months ended
September 30, 2002, totaled $743,000 which represented capital
expenditures of $128,000 and capitalized software of $615,000.
Net cash used in financing activities for the nine months ended
September 30, 2002 totaled $369,000, which is comprised of a $280,000
decrease in the secured revolving credit facility and $89,000 in
repayments of long-term debt. The revolving credit facility requires
monthly interest only payments on the average outstanding balance for
the period. The Company is required to make weekly payments of $12,500
on the subordinated debt. The facility, and subordinated debt pursuant
to an intercreditor agreement between Canyon Capital and Coast Business
Credit, contains various restrictions and covenants, including an
adjusted minimum consolidated net worth of ($4,758,102) as of September
30, 2002, minimum quarterly debt coverage ratio of 1.1:1 and minimum
quarterly profitability of $250,000. In the event that we are not in
compliance with the various restrictions and covenants and were unable
to receive waivers for non-compliance, the facility and subordinated
debt would become immediately due and payable. We were in compliance
with all covenants as of September 30, 2002, except for our minimum
quarterly profitability covenant of $250,000. Coast has informed the
Company that it is in default and that Coast reserves all rights and
remedies as provided in the loan agreement. Additionally, the Company
capitalized $256,000 of software development costs during the quarter
ended September 30, 2002. The restrictions and covenants are assessed
quarterly.
Stockholders' deficiency decreased from $12,992,000 at December 31, 2001
to $12,479,000 at September 30, 2002, mainly as a result of net income
of $509,000 and the issuance of common stock of $231,000 offset by an
increase in the accumulated other comprehensive loss of $127,000 and
unearned compensation of $100,000.
Net cash provided by operating activities for the nine months ended
September 30, 2002 totaled $1,933,000 and mainly related to an increase
in unearned revenue of $1,040,000, customer deposits of $111,000, net
income for the period of $509,000, non-cash charges for depreciation and
amortization of tangible and intangible assets of $775,000 and a
decrease in accounts receivable of $260,000 and $191,000 of prepaids and
other assets, offset by a decrease in accounts payable of $570,000,
accrued liabilities of $132,000, and income taxes payable of $139,000.
Net cash used for discontinued operations was $1,487,000. The Company
expects that it will generate cash from its operating activities during
the next twelve months.
Although the Company has a net stockholders' deficiency of $12,479,000
at September 30, 2002, the Company believes it will continue to generate
sufficient funds from operations and obtain additional financing or
restructure its subordinated notes with Canyon and CSA as well as its
facility with Coast, as needed, to meet its operating and capital
requirements. The Company is currently not able to pay its existing debt
obligations with Canyon and Coast, which mature in March 2003 and April
2003, respectively and CSA, which matures in October 2003, without
significantly modifying the existing terms of such debt. The Company is
currently in negotiations with all of its secured creditors to
restructure the terms of the existing debt, including extending the
maturity dates. The Company expects to generate positive cashflow from
its continuing operations during 2002 and 2003 from shipping out
products and services from its $3.2 million backlog as of September 30,
2002 as well as new orders. Also, in July 2001, the Company entered into
an agreement for the sale of its investment in GSI and has received $2.5
million in 2001. The Company expects to receive an additional $500,000
in 2002 and an additional $250,000 to $300,000 in January 2003. There
can be no assurance that the Company will be able to sustain
profitability, generate positive cash flow from operations or obtain the
necessary renewal and/or restructure of its debt. These financial
statements have been prepared assuming the Company will continue to
operate as a going concern. If the
-13-
Company is unsuccessful in the aforementioned efforts, the Company could
be forced to liquidate certain of its assets, reorganize its capital
structure and, if necessary, seek other remedies available to the
Company.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company's obligations and commitments
as of September 30, 2002:
Payments Due by Period (in thousands)
-------------------------------------
Less Than 1 After 5
Contractual Cash Obligations Total Year 1-3 Years 4-5 Years Years
- ---------------------------- ----- ----------- --------- --------- -------
Long-Term Debt $ 8,787 $5,928 $2,607 $ -- $252
Line of Credit 2,144 2,144 -- -- --
Operating Leases 1,372 765 540 67 --
------- ------ ------ ---- ----
$12,303 $8,837 $3,147 $ 67 $252
======= ====== ====== ==== ====
-14-
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared
to Three Months Ended September 30, 2002
September 30, Percentage September 30, Percentage
2001 of Revenue 2002 of Revenue
------------- ---------- ------------- ----------
(in thousands) (in thousands)
Revenue $ 6,103 100.0% $ 5,711 100.0%
Gross profit 4,339 71.1% 3,911 68.5%
Selling, general and administrative
expenses 1,985 32.5% 2,418 42.3%
Research and development costs 1,114 18.3% 797 14.0%
Amortization of intangibles 183 3.0% 25 0.4%
Other operating income 8 0.1% 232 4.1%
Interest expense, net 406 6.7% 371 6.5%
Income taxes 1 0.0% 8 0.1%
Loss from discontinued operations (231) (3.8)% (223) (3.9)%
Net income $ 411 6.7% $ (163) (2.9)%
Revenue for 2002 was $5,711,000 compared to $6,103,000 in 2001 or a 6.4%
decrease. Revenue decreased $392,000 in 2002, as a result of decreased
professional services and maintenance services mainly due to decreased
capital spending on information technology in 2002 due to the effects of
the September 11, 2001 terrorist attacks on the hospitality industry.
The decrease in revenue in 2002 was mainly attributable to a decrease in
services as many hotels have reduced their operating costs by canceling
or reducing contracted services, including support, in a post September
11, 2001 economy. Many hotels have requested that their suppliers reduce
the cost of service or delay any price while they are experiencing
reduced guest occupancy and lower average daily rates on their inventory
of rooms. Certain hotels have also established their own help desks to
further reduce costs. As a result, the Company did not raise support
prices in 2002 and agreed, with certain of its clients, to provide a
second line of support versus a first line of support that was
previously provided to such clients. Our continuing hospitality business
unit continues to generate sufficient cash from operations to adequately
fund its ongoing operating activities.
Gross profit for 2002 decreased to $3,911,000 (68.5%) from $4,339,000
(71.1%) in 2001. The decrease in gross profit is mainly due to the
decrease in professional services and maintenance services revenues
during the period in excess of the Company's cost reductions. Selling,
general and administrative expenses ("SG&A") increased from $1,985,000
in 2001 to $2,418,000 in 2002. The increase is mainly due to an increase
in selling & marketing, expenses for trade shows, advertisements and
additional head count and other employee related expenses as the Company
actively markets components of its newly developed enterprise suite of
applications. Additionally, approximately $225,000 was expensed to S,G&A
during the period in connection with the Company's legal settlement with
Logix.
The decrease in research and development costs in 2002 was due to the
capitalization of approximately $257,000 of software development costs
associated with the Company's new product development for hospitality.
There were no such costs capitalized in 2001.
The decrease in amortization of intangibles in 2002 versus the
comparable period of 2001 is due to the fact that goodwill is no longer
amortized to expense commencing January 1, 2002. Goodwill amortization
was $105,000 for the three months ended September 30, 2001.
Net interest expense was $406,000 in 2001 compared to $371,000 in 2002.
The decrease is mainly due to the Company not incurring interest expense
for the Bridge Loan in 2002. The Bridge loan was paid in full in 2001.
The income tax provision reflects a tax provision for our foreign
operations only and alternative minimum taxes for domestic operations
due to the utilization for net operating loss carry forward in 2001 and
2002.
Results from discontinued operations improved from a loss of $231,000 in
2001 to loss of $223,000 in 2002 as a result of decreased Process
Manufacturing operating expenses from $866,000 in 2001 to $401,000 in
2002. Revenue from discontinued operations decreased from $1,342,000 in
2001 to $585,000 in 2002. Revenue from Process Manufacturing decreased
from $482,000 in 2001 to $339,000 in 2002 as the process business unit
continued its transition from a direct selling model to a reseller model
and completed development of new products. During 2000, we focused on
developing enhancements to our CIMPRO V and CIMPRO classic process
manufacturing products which were released in late 2001 and early 2002.
Additionally, consistent with our strategy to focus on providing
software and services to our vertical markets, our legacy revenue
(traditional hardware contract service revenues and proprietary add-on
sales) declined $614,000 (71.3%) from $860,000 in 2001 to $246,000 in
2002, largely due to the sale of its domestic legacy hardware
-15-
business in October 2001 and expected decreased volume and customers
replacing their legacy systems. The Company is actively engaged in
selling its businesss units classified as discontinued operations.
Nine Months Ended September 30, 2001
Compared to Nine Months Ended September 30, 2002
September 30, Percentage September 30, Percentage
2001 of Revenue 2002 of Revenue
------------- ---------- ------------- ----------
(in thousands) (in thousands)
Revenue $ 18,873 100.0% $ 16,931 100.0%
Gross profit 13,025 69.0% 11,370 67.2%
Selling, general and administrative
expenses 5,901 31.3% 6,828 40.4%
Research and development costs 3,289 17.4% 2,461 14.6%
Amortization of intangibles 550 2.9% 134 0.8%
Other operating (income) expense (1,340) (7.1)% 237 1.4%
Interest expense, net 1,220 6.5% 1,142 6.8%
Income taxes 79 0.4% 16 0.1%
Loss from discontinued operations (1,227) (6.5)% (43) (0.3)%
Net income $ 2,099 11.1% $ 509 3.0%
Revenue for 2002 was $16,931,000 compared to $18,873,000 in 2001 or a
10.5% decrease. Revenue decreased $688,000 in 2002, as a result of
decreased professional services and maintenance services mainly due to
decreased capital spending on information technology in 2002 due to the
effects of the September 11, 2001 terrorist attacks on the hospitality
industry.
The decrease in revenue in 2002 was mainly attributable to a decrease in
services as many hotels have reduced their operating costs by canceling
or reducing contracted services, including support, in a post September
11, 2001 economy. Many hotels have requested that their suppliers reduce
the cost of service or delay any price increases while they are
experiencing reduced guest occupancy and lower average daily rates on
their inventory of rooms. Certain hotels have also established their own
help desks to further reduce costs. As a result, the Company did not
raise support prices in 2002 and agreed, with certain of its clients, to
provide a second line of support versus a first line of support that was
previously provided to such clients. Our continuing hospitality business
unit continues to generate sufficient cash from operations to adequately
fund its ongoing operating activities.
Gross profit for 2002 decreased to 11,370,000 (67.2%) from $13,025,000
(69.0%) in 2001. The decrease in gross profit is mainly due to the
decrease in professional services and maintenance services revenues
during the period in excess of the Company's cost reductions. Selling,
general and administrative expenses ("SG&A") increased from $5,901,000
in 2001 to $6,828,000 in 2002. The increase is mainly due to an increase
in selling & marketing, expenses for trade shows, advertisements and
additional head count and other employee related expenses as the Company
actively markets components of its newly developed enterprise suite of
applications. Additionally, approximately $225,000 was expensed to S,G&A
during the period in connection with the Company's legal settlement with
Logix.
The decrease in research and development costs in 2002 was due to the
capitalization of approximately $615,000 of software development costs
associated with the Company's new product development for hospitality.
There were no such costs capitalized in 2001.
The decrease in amortization of intangibles in 2002 versus the
comparable period of 2001 is due to the fact that goodwill is no longer
amortized to expense commencing January 1, 2002. Goodwill amortization
was $315,000 for the nine months ended September 30, 2001.
Other operating (income) expense was ($1,340,000) in 2001 and $237,000
in 2002. The decrease in other operating income in 2002 is mainly due to
the Company issuing Common Stock to certain creditors to satisfy its
obligations, which resulted in a gain of $1,377,000 in the first quarter
of 2001. There were no such transactions in 2002.
Net interest expense was $1,220,000 in 2001 compared to $1,142,000 in
2002. The decrease is mainly due to the Company not incurring interest
expense for the Bridge Loan in 2002. The Bridge loan was paid in full in
2001.
The income tax provision only reflects a tax provision for our foreign
operations and alternative minimum taxes for domestic operations due to
the utilization for net operating loss carry forward in 2001 and 2002.
Results from discontinued operations improved from a loss of $1,227,000
in 2001 to loss of $43,000 in 2002 as a result of decreased Process
Manufacturing operating expenses from $2,819,000 in 2001 to $1,039,000
in 2002. Revenue from discontinued operations decreased from $4,450,000
in 2001 to $2,073,000 in 2002. Revenue from Process Manufacturing
decreased from $1,565,000 in 2001 to $1,172,000 in 2002 as the process
business unit continued its transition from a direct selling model to a
reseller model and completed development of new products. During 2000,
we focused on developing
-16-
enhancements to our CIMPRO V and CIMPRO classic process manufacturing
products which were released in late 2001 and early 2002. Additionally,
consistent with our strategy to focus on providing software and services
to our vertical markets, our legacy revenue (traditional hardware
contract service revenues and proprietary add-on sales) declined
$1,984,000 (68.8%) from $2,885,000 to $901,000, largely due to the sale
of its domestic legacy hardware business in October 2001 and expected
decreased volume and customers replacing their legacy systems.
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 approximate $10.8 million principal amount of
indebtedness at September 30, 2002, approximately $2.1 million bears
interest at a rate that fluctuates based on changes in prime rate. A one
percentage point change in the underlying prime rate would result in an
approximately $21,000 change in the annual amount of interest payable on
such debt. Of the remaining amount of approximately $8.7 million, $5.6
million bears interest at a fixed rate of 11%, $2.8 million bears
interest at a fixed rate of 10% and $300,000 bears fixed interest rates
ranging from 6% to 17.5%.
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 September 30, 2002.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules
13a-14(c) and 15-d-14(c)) as of a date ("Evaluation Date") within 90
days before the filing date of this quarterly report, have concluded
that as of the Evaluation Date, our disclosure controls and procedures
were adequate and designed to ensure that material information relating
to us and our consolidated subsidiaries would be made known to them by
others within those entities.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect our
disclosure controls and procedures subsequent to the Evaluation Date.
-17-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At September 30, 2002, there was only one material claim to be settled
regarding the Company's Chapter 11 proceedings, 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 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 had increased to approximately $6.8 million as of December 31,
2000, pursuant to the agreement. The Company entered into a settlement
agreement with CSA in February, 2001 whereby it (i) issued CSA 1,916,014
additional shares of our Common Stock to bring CSA's total share
ownership to 2,433,333 shares; (ii) filed a registration statement for
all of CSA's shares of our Common Stock which has been declared
effective by the SEC so that such shares are now freely tradable; and
(iii) executed a secured debt instrument in favor of CSA in the
principal sum of $2,800,000 which is subordinate only to the Company's
present group of two (2) senior secured leaders and required cash
installment payments to commence in March 2002 (see note 7 to the
financial statements).
In connection with the settlement agreement with CSA, the Company
recorded the $2.8 million debt issuance as a reduction in paid in
capital and the 1,916,014 additional shares at par as an addition to
Common Stock and a reduction to additional paid in capital.
Cher-Ae Heights Indian Community
A lawsuit has been filed by Cher-Ae Heights Indian Community ("Cher-Ae
Heights") against Logix Development Corporation (Logix), now known as
MAI Development Corporation, as a co-defendant for a breach of contract
by the Company's formerly owned gaming subsidiary along with the new
owners, Monaco Informatiques Systemes ("MIS"), who acquired the assets
and certain liabilities of the gaming subsidiary on July 27, 2001. Based
upon this suit, MIS has informed the Company that it did not intend to
pay the next $500,000 due to the Company under a promissory note and
security agreement (see note 5 to the financial statements). The Company
is currently in settlement negotiations with Cher-Ae Heights and MIS to
resolve any and all outstanding legal issues associated with Cher-Ae
Heights and the July 27, 2001 Agreement and believes that the promissory
note will be recoverable through payments from MIS.
Logix Development Corporation
The Company entered into a settlement agreement with Logix in July of
2002 whereby it (i) issued Logix 200,000 shares of our Common Stock (ii)
required the Company to make various cash installment payments totaling
$175,000 to be paid within 1 year and (iii) executed a contract with
Logix for a consulting project in the amount of $50,000.
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.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002
99.2 Certification of Chief Financial Officer, James W. Dolan, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002
(b) Reports on Form 8-K: None.
-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: November 19, 2002 /s/ James W. Dolan
-------------------------------------
James W. Dolan
Chief Financial and Operating Officer
(Chief Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
99.1 Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002
99.2 Certification of Chief Financial Officer, James W. Dolan, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002