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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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.)
9600 Jeronimo Road
Irvine, California 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 580-0700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The registrant's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of $.01 par value Common Stock. As more fully described in
this report, shares of Common Stock are currently being distributed by the
registrant to its former creditors pursuant to its Chapter 11 Plan of
Reorganization. At March 22, 1996, the number of issued and outstanding shares
of the Company's Common Stock was 6,728,401 shares. The aggregate market value
of all of the shares of Common Stock held by non-affiliates of the registrant as
of March 22, 1996 was approximately $29,489,000. Directors and officers and ten
percent or greater stockholders are considered affiliates for the purposes of
this calculation but should not necessarily be deemed affiliates for any other
purpose.
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 / /
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's 1994 Annual Report on Form 10-K are incorporated
herein by reference in Part I; portions of registrant's 1995 Annual Report are
incorporated herein by reference in Part II; and portions of registrant's
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held May 21, 1996 are incorporated
herein by reference into Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MAI Systems Corporation designs, sells, installs and supports total
information system solutions featuring complex wide and local area networks
("WANs" and "LANs"), primarily in the hospitality and gaming industries and for
mid-size manufacturers and distributors. It provides a wide array of products
and services to its customers who continue to use the Company's 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 these legacy systems
with currently available computer technologies. The Company also provides
on-site warranty service, maintenance service, remanufacturing and depot
service to third-party computer distributors and manufacturers.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four, Inc. to
MAI Systems Corporation on November 6, 1990. As used herein, the terms
"Company" and "MAI" include MAI Systems Corporation and its subsidiaries
(including its 70%-owned subsidiary, Gaming Systems International) unless the
context indicates otherwise. The Company commenced operations on January 29,
1985.
DESCRIPTION OF THE BUSINESS
MAI's mission is to put in place long-term information technology
partnerships with its customers by designing, installing and supporting
customer-specific total information management solutions. Focusing primarily in
the hospitality and gaming industries and with mid-size manufacturers and
distributors, it designs, sells, installs and supports information management
solutions featuring complex WANs and LANs. It provides a wide array of
products and services to its installed base of approximately 2,000 hospitality
and gaming customers and 5,000 customers who continue to use the Company's
proprietary host-based systems, including field engineering services, new and
replacement equipment, operating systems and software applications products.
These products and services upgrade, enhance and integrate legacy systems with
currently available computer technologies. The Company also provides on-site
warranty service, maintenance service, remanufacturing and depot service for
third-party computer distributors and manufacturers.
MAI markets its products and services primarily through a team selling
approach, which utilizes the Company's nationwide network of sales and service
offices, field service engineers and its telephonic account sales
representatives. The Company also markets certain products and services
through a limited number of independent value-added resellers ("VARs"),
authorized services representatives and independent software vendors ("ISVs").
The Company's activities are conducted principally in the United States
and Canada, but it also operates subsidiaries in Puerto Rico, Venezuela and the
Netherlands. Additionally, the Company sells its products through indirect
channels in the United States and abroad. These independent channels include
VARs, distributors, ISVs and local sales agents.
The Company provides on-site and help desk services to its customers in
the United States, Canada, the Netherlands, Puerto Rico and Venezuela. The
Company's foreign distributors provide support services to their customers in
countries where the Company does not have its own support organization.
PRODUCTS AND SERVICES
In 1995, the Company's revenue was derived from the following sources:
Percentage of Total
Revenue
-------------------
Network products and services.... 29%
Non-network products and services 69
Third-party support services..... 2
---
Total........................... 100%
===
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Networking Products and Services
MAI designs, implements, maintains and supports total information system
solutions utilizing complex WANs and LANs primarily for customers in the
hospitality, gaming, manufacturing and distribution businesses. In conjunction
with these solutions, the Company's approach is to analyze a customer's
information system requirements, propose a solution and then design, integrate,
install and maintain the system. One of the principal objectives of the
Company is to help its customers utilize their data across their entire
enterprise so that information that was once limited to one area of a business
can now be available to other areas where it can be utilized for new purposes.
Once a system is on-line, the Company typically continues its relationship with
the customer by providing around-the-clock field service and telephonic
support. The systems designed by the Company utilize industry-standard
hardware and software products from leading technology vendors including Cisco
Systems, Compaq Computer, Hewlett Packard, IBM, Larscom, Microsoft, Novell and
Sun Microsystems. Additionally, the Company resells telecommunication services
and equipment, including wide bandwidth T1 lines, which enable its customers to
achieve maximum utilization of their networks.
CLS Software, the Company's hospitality product line and the products
marketed by Gaming Systems International ("GSI"), the Company's gaming
solutions subsidiary, have been designed to take advantage of network
connectivity. CLS Software's Hotel CompuSystem II provides one of the leading
information systems in the hotel and resort industry. Running under UNIX,
Hotel CompuSystem II is full-featured and provides customers with front-desk,
night audit, housekeeping and numerous other functions. Additionally, the CLS
Software products interface to more than 250 other hospitality-related
information system products, such as point-of-sale systems, telephone call
monitoring systems and minibar maintenance systems. The ease of connectivity
with third-party products is one of CLS Software's competitive advantages. CLS
Software is installed in over 2,000 sites worldwide.
GSI's on-line slot accounting and player tracking product is comprised of
a proprietary circuit board which is installed inside electronic slot machines,
and database software which gathers and maintains data collected by the circuit
boards. The Company utilizes Novell-based LANs to link the slot machines. The
GSI system monitors the activity in the individual gaming machines in real
time, providing information on the activity of each machine, the amount of
money in the machine, whether or not the machine is operating properly and
alerting the casino management if the machine has been tampered with. The
software modules include stand-alone player tracking, cage/pit management,
table games accounting, slot maintenance, employee time and attendance, and
numerous other functions.
For its customers in the manufacturing and distribution businesses, the
Company designs total information systems featuring its proprietary software
applications products and those of various third parties, and designs LANs and
WANs which enable data to be accessed across entire business enterprises.
These networks often involve implementation of frame relays, links with
telecommunications providers and advanced information storage and retrieval
technologies including document imaging.
The Company offers various communication and networking products that
permit interactive local and wide area networking for the Company's products.
These products include Novell NetWare and LAN WorkPlace for DOS, which
facilitate inter-networking of personal computers ("PC's") and the Company's
and other vendors' UNIX-based systems; Sun Microsystems' NFS, which allows
transparent file sharing between UNIX Systems; and MAI MAGNET and Open BASIC
NetServer, which allow the Company's host-based proprietary systems to
communicate with UNIX-based systems.
The Company offers around-the-clock on-site and telephonic support to its
network customers. The Company also provides a range of customer education,
training and consulting services for its application software packages and
hardware and horizontal software products. These services are offered to the
Company's customers as part of the Company's strategy of supplying the total
information solution to its customers.
Non-Networked Products and Services
The Company continues to provide products and services to its installed
base of customers who continue to use the Company's host-based proprietary
information management systems. These products and services are designed to
enable customers to benefit from their investments in the Company's products.
The Company's OpenBASIC application environment permits customers using
application software written in the Business BASIC programming language to
continue to use such application software on selected hardware platforms
designed for the UNIX, MS-DOS and Novell environments thus enabling the Company
to license its application software solutions for use on industry-standard
platforms as well as to market such platforms to certain resellers, specific
industry segments and its existing customer base. Optional OpenBASIC modules
permit developers to enhance their Business BASIC applications by integrating
them with popular UNIX and MS-DOS/Microsoft Windows software.
For its customers in the manufacturing and distribution businesses, the
Company licenses application software, such as MANBASE, ASG, Medical
Management, BFMS and TriBASE.
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The Company offers around-the-clock on-site and telephonic support, and
customer education, training and consulting services to its non-network
customers as part of the Company's strategy of supplying the total information
solution to all of its customers.
The Company markets a family of upgradeable, industry-standard platforms
based upon IBM RISC and Intel Corporation microcomputer technology and featuring
the Company's OpenBASIC application environment running under various UNIX-based
operating systems. These products, manufactured by leading companies such as
Compaq Computer, Hewlett Packard and IBM, provide cost-effective, multi-user
solutions for customers whose needs range from entry-level systems to mid-size,
multiprocessor systems that support up to 500 users.
Third-Party Support Services
In addition to providing on-site service for products which it sells, the
Company has also entered into agreements with a number of third parties to
provide field warranty service, maintenance service, remanufacturing and depot
services. The Company has an agreement with Remanco Corporation, a leading
provider of point-of-sale systems for the fine-dining industry, to provide
maintenance, remanufacturing, depot and support throughout the United States.
The Company also provides these services to several manufacturers and
distributors of Intel-based microcomputers in the United States and Canada.
MARKETING AND SALES
MAI markets its products and services primarily through a team-selling
approach, which utilizes the Company's nationwide network of sales and service
offices, field service engineers and its Irvine, California-based account
representatives. The Company also markets certain products and services through
a limited number of VARs, authorized service representatives and ISVs.
In the United States, the Company's systems are marketed by a direct sales
and marketing organization which included, as of February 29, 1996, 46 sales and
marketing personnel located in seven offices and the corporate headquarters. In
addition, the Company markets its systems internationally through its
subsidiaries which operate in Canada, Puerto Rico, Venezuela and the Netherlands
and through seven distributors that are exclusive in their jurisdictions. The
Company's international subsidiaries employed, as of February 29, 1996, 76 sales
and marketing personnel who are engaged in the marketing of MAI products from
seven sales locations in Canada and nine other sales locations abroad.
Additionally, the Company also sells its products through indirect channels both
within and outside the United States. These indirect channels include VARs,
distributors, ISVs and local sales agents.
During 1995, the Company's aggregate revenue was derived from geographic
areas as follows:
Percentage of Total
Revenue
-------------------
United States.......... 85.1%
Canada................. 11.3
Other areas............ 3.6
-----
Total................. 100.0%
=====
The financial performance of the Company is affected by the fluctuation in
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including
import and export restrictions, possible expropriation or other governmental
actions, taxes and political changes. However, as only 3.6% of the Company's
1995 revenues were generated outside the United States and Canada, the risk
associated with these foreign operations in relation to the Company's overall
financial performance is low.
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MAINTENANCE AND SUPPORT SERVICE
The provision of around-the-clock customer service is a cornerstone of the
Company's business operations. As of February 29, 1996, the Company had
maintenance and support contracts with approximately 4,800 customers and
employed approximately 220 trained field service engineers. The Company also
had approximately 60 technical employees who provide telephonic support to the
Company's customers.
The Company's field service support is provided throughout the United
States, Canada and Puerto Rico from 100 service locations. Field service
engineers are trained in the latest products and technologies and have access
to on-line technical support. Telephonic support, which is primarily to assist
licensees of the Company's software applications products, is provided from the
Company's response centers located in Irvine, California and Dallas, Texas.
Recently, the Company began utilizing artificial intelligence-enhanced
technology to enable its support technicians to quickly identify and resolve
customer's software-related computing problems.
The Company's international subsidiaries and distributors offer repair,
preventative maintenance and reconditioning services for substantially all of
the systems marketed by the Company. As of February 29, 1996, the Company's
international subsidiaries had approximately 60 trained service technicians at
25 service locations in the countries in which they operated. The Company's
seven foreign distributors furnish maintenance service to their respective
customers. Such distributors obtain spare parts, training and technical
support from the Company.
The Company's maintenance services are generally provided pursuant to
individual maintenance contracts with customers, although time and material
services are provided in some areas. Such maintenance contracts are of varying
duration, provide annual cancellation rights and frequently require advance
payment of fees to the Company. Substantially all of the revenue earned by
maintenance operations was invoiced to customers in advance.
PRODUCTION AND PROCUREMENT
In response to market demand for standardized hardware and software
products, all of the Company's current systems offerings utilize open systems
architecture, which means that they will operate on a wide variety of
third-party hardware equipment. At present, the Company has relationships with
a number of suppliers including Cisco Systems, Compaq Computer, Hewlett
Packard, IBM and Sun Microsystems and distributors such as MicroAge and Ingram
Micro. Management believes that these relationships have enabled the Company
to reduce product costs, permit earlier availability of new technology and
offer customers products with superior performance at competitive prices. The
Company no longer manufactures proprietary hardware products but does refurbish
for resale previously owned MAI equipment.
Delay or failure in the delivery of products or components purchased from
third parties could adversely affect shipments by the Company and its ability
to conclude sales. The Company has purchased many products and components from
single sources of supply. Because the Company's current products are industry
standard, or are comprised of industry-standard components, management believes
that alternative sources of supply of similar products would be available to
the Company in the event of any interruption of delivery of a single source
supplier.
ORDER, SHIPMENT AND BACKLOG
The Company records and enters into backlog a purchase order for equipment
and software when it receives a customer's written order requesting delivery
within six months, and systems configuration and contract provisions are
verified. In the United States and in some areas outside the United States, a
deposit is also required from a customer before the order is recorded and
entered into backlog. Orders that are canceled by the customer and orders that
are not shipped within one year are removed from backlog. Orders that are
removed from backlog for non-shipment are restored if they are reinstated by
the customers.
Set forth below is certain information concerning orders, shipments and
backlog for 1995:
(dollars in thousands)
Orders received (net of cancellations)...... $22,848
Shipments (net of equipment returns)........ 24,898
Backlog (at period end)..................... 3,002
The Company's backlog is not necessarily indicative of future revenues.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the
development of products for hospitality and gaming information management
systems and on extending and enhancing OpenBASIC. The Company's use of the
OpenBASIC
- 5 -
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application environment and its system integration capability permits it to have
substantial independence from individual hardware manufacturers and minimizes
the need for hardware research and development.
As of February 29, 1996, the Company employed 21 engineers, programmers
and other technical personnel in research and development activities. During
1993, 1994 and 1995, the Company spent $2,901,000, $2,698,000 and $2,667,000,
respectively, on research and development activities. The Company's research
and development expenditures related primarily to support and enhancement of
existing software products.
CUSTOMERS
The Company's customers are generally small and medium-sized manufacturing
and distribution companies, with 50 to 500 employees, hotels and resorts with
50 or more rooms, and casinos with electronic gaming equipment, such as slot
machines. During 1995, no single customer accounted for ten percent or more of
the Company's revenues.
COMPETITION
Competition is vigorous in all sectors of the worldwide market for
computer-based applications systems, networked solutions and the maintenance
and support of the software and hardware which comprise those systems. The
Company has numerous competitors (and potential competitors, including the
manufacturers of products which the Company distributes) varying widely in
their size, capabilities, market segment and geographical area, many of which
are larger and have financial resources far greater than the Company.
Within its targeted application markets, the Company has positioned itself
to sell complete solutions featuring WANS and LANs to mid-size businesses.
Within this marketplace, competition comes primarily from local VARs and ISVs
who usually resell hardware or networking products of larger original equipment
manufacturers. These VARs and ISVs are typically smaller organizations that
are usually dependent on one or two specialized software application products
targeted for specific industry market segments. Although certain of these
suppliers have national (or international) capability, most are regional and
unable to provide the full range of technical support and maintenance services
offered by the Company.
The Company also competes with independent service organizations ("ISOs"),
which provide service to end users of the Company's software products, and
third-party maintenance organizations ("TPMs"), which provide service to users
of the Company's hardware products. In addition to competing with these
companies on the basis of price and quality of service and support, the Company
has also sought to enforce its copyrights when these organizations infringe
upon the Company's proprietary rights. For example, the Company's application
software licenses prohibit end users or their agents from porting its software
to different hardware platforms, an act which is sometimes performed by an ISO.
The Company has prevailed in litigation against TPMs who have utilized the
Company's proprietary diagnostic software to provide maintenance services to
customers of the Company's hardware products. Many of the Company's services
are also provided by in-house MIS departments.
TRADEMARKS, COPYRIGHTS AND LICENSES
The Company is the owner or licensee of certain trademarks, copyrights and
other property rights associated with its businesses, including rights
associated with its proprietary application software. The Company owns or has
licensing rights, generally with terms of three years, to the principal
application software products marketed by the Company. Such licensing rights
are generally renewable. Although there is some risk that independent vendors
who own such products may elect not to renew their licensing agreements with
the Company and enter into exclusive arrangements with, or elect to install
their software on systems sold by competitors of the Company, such vendors
generally tend to continue to support the Company's marketing efforts so long
as the Company's systems provide a good opportunity for them to market their
products.
The Company is party to license agreements with IBM relating to a variety
of patents, with Novell, Inc. relating to UNIX and with a number of other
suppliers of software products. These licenses are terminable at the Company's
option and certain of the licenses require the Company to make royalty
payments.
OpenBASIC and certain other intellectual property formerly owned by the
Company is currently owned by Triple P Management BV ("Triple P"), a
corporation organized under the laws of the Netherlands, which acquired the
rights from Application Systems, Inc., a Delaware corporation controlled by the
Company's former bank lenders (the "Banks"), which held the stock of certain of
the Company's former European subsidiaries, originally acquired by the Banks in
connection with the foreclosure described under "Chapter 11 Bankruptcy
Proceedings". MAI retained an exclusive license to use OpenBASIC and other
intellectual property in the western hemisphere and has a nonexclusive license
to use it in certain other parts of the world. The license is perpetual and
royalty-free, but subject to termination under certain circumstances.
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EMPLOYEES
As of February 29, 1996, the Company had approximately 630 employees, of
which approximately 470 were employed in the United States, 80 in Canada, 10 in
Puerto Rico and 70 in other foreign locations. In March 1995 a petition for
election of a collective bargaining representative was filed with regard to
field service engineers at the Company's Chicago, Illinois, office, but the
petition was withdrawn prior to the election. The Company has not experienced
any work stoppages and considers its relationship with its employees to be
good.
CHAPTER 11 BANKRUPTCY PROCEEDINGS
Prior to its Chapter 11 bankruptcy proceedings, the Company had followed
certain business strategies that eventually led to its defaulting on its and
its Canadian subsidiary's US and Canadian Credit Agreements (the "Credit
Agreements"). Thereafter, shortly before the Company filed for bankruptcy
protection, the Banks, parties to the Credit Agreements, foreclosed on all of
the outstanding capital stock of certain of the Company's former European
subsidiaries, on certain intellectual property of the Company and on amounts
due to the Company from the European subsidiaries (the "Foreclosure") in
satisfaction of all amounts due under the Credit Agreements, which, at such
date, amounted to approximately $84,500,000.
The business strategies of the Company that led to the Foreclosure
reflected the nature of the information technology industry as it existed at
that time. Historically, organizations relied upon proprietary, host-based
computing systems to implement software applications, accounting and financial
functions. The Company, like others in the industry, manufactured and serviced
its own host-based information system. However, with the declining costs of
the personal computer and developments in the design and implementation of WANs
and LANs, the information technology industry shifted away from the
centralized, host-based information system to a system of workstations or
personal computers sharing data and networked resources over WANs and LANs.
This occurred when the Company had become highly leveraged due to the leveraged
acquisition of a computer maintenance business that the Company had previously
owned. Eventually, the Company and its subsidiary were in default under its
Credit Agreements, which indebtedness matured on November 16, 1992.
EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS
On November 18, 1993, the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court") entered an order confirming the Company's
Plan of Reorganization. The Company had been operating under Chapter 11
protection since April 12, 1993. The order was not appealed and became final
and nonappealable on November 29, 1993. On January 27, 1994, the Bankruptcy
Court entered an order which fixed January 27, 1994 as the effective date (the
"Effective Date") of the Plan of Reorganization. The summary of the material
features of the Plan of Reorganization contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 under the heading, "CHAPTER
11 BANKRUPTCY PROCEEDINGS" is included herein by this reference.
The Plan of Reorganization provided for, among other things, (i) the
satisfaction of substantially all of the unsecured (non-priority) indebtedness
of MAI, Brooke Acquisition Corporation and CLS Software, Inc., the Company's
wholly-owned subsidiaries which were parties to the bankruptcy proceeding (all
of which are collectively referred to as the "Debtors"), through the issuance of
the Company's Common Stock and (ii) the cancellation of existing equity
interests in the Debtors. The Plan of Reorganization also provided for the
substantive consolidation and merger of the Debtors and the corresponding
extinguishment of intercompany liabilities and contracts among the Debtors. At
December 31, 1995, the aggregate amount of tax claims had been reduced to
$1,019,000 and the Company continues to dispute certain tax claims.
The Company commenced distribution of Common Stock to holders of unsecured
claims on April 14, 1994. The Common Stock is issued pursuant to section 1145
of the Bankruptcy Code, which contains an exemption from registration under the
Securities Act of 1933, as amended. Through December 31, 1995, the Company had
distributed 6,688,749 shares of Common Stock to its former creditors, and the
Company has estimated that an additional 667,500 shares will be issued in
settlement of other creditor claims. The Plan of Reorganization provided
holders of unsecured claims the right to elect a limited cash recovery, and
through December 31, 1995, $790,000 in cash had been distributed pursuant to
such provision.
Under the Plan of Reorganization there is no recovery for holders of the
Company's $0.01 par value old Common Stock, and all classes of Preferred Stock
outstanding prior to the Effective Date. The interests evidenced by these
securities were extinguished by operation of the Plan of Reorganization on the
Effective Date.
Pursuant to the terms of the Plan of Reorganization, the Company filed an
Amended Certificate of Incorporation pursuant to which 10,000,000 shares of new
Common Stock were authorized for issuance. Such shares are being issued to
holders of allowed unsecured claims as described above and will also be issued
to optionees under the Company's stock option plans. The number of shares of
Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option
Plan will equal ten percent of the number of shares of Common Stock issued to
holders of allowed unsecured claims pursuant to the Plan of Reorganization and
the number of shares reserved for issuance upon the exercise of the options. Due
to the fact that the Company is still resolving certain disputed trade claims,
it is unable to calculate with certainty the number of shares that will be
reserved for the 1993 Stock Option
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Plan. On a pro forma basis, assuming $34,900,000 in allowed trade claims,
approximately 7,356,250 shares of Common Stock (adjusted for the August 1995 25%
stock split) would be issued to unsecured creditors and approximately 817,500
shares would be reserved for issuance upon the exercise of options granted
pursuant to the 1993 Stock Option Plan.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion should be read in conjunction with the audited
consolidated financial statements incorporated herein by reference to the
Company's 1995 Annual Report. In addition to the factors set forth herein,
there may be other factors, or factors which arise in the future, which may
affect the future results of the Company.
COMPETITION
Competition is vigorous in all sectors of the market for computer-based
solutions and support and maintenance services which the Company offers. The
Company has numerous competitors in each of its business lines, which vary
widely in their size, capabilities, market segments and geographical areas,
many of which are larger and have financial resources far greater than the
Company. Within its markets, competition comes primarily from local VARs and
ISVs, who usually resell hardware or networking products of larger original
equipment manufacturers, ISOs, which provide service to end users of the
Company's software products, and TPMs, which provide service to users of the
Company's hardware products. Many of the Company's services are also provided
by in-house MIS departments. There can be no assurance that the Company can
effectively compete with any or all of its competitors in any of its business
lines.
PRODUCTION AND PROCUREMENT
The networking products and services implemented, maintained and
supported by the Company utilize hardware and software products from
technology vendors. Accordingly, the Company is and will remain dependent on
the demand for products from such vendors. In addition, delay or failure in
the delivery of products or components purchased from third parties could
adversely affect shipments by the Company and its ability to conclude sales.
The Company has purchased many products and components from single sources of
supply. Because the Company's current products are industry standard,
management believes that alternative sources of supply of similar products
would be available to the Company in the event of any interruption of delivery
of a single source supplier. However, there can be no assurances that any
such products will be available or be accepted by the Company's customers.
EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS
On November 18, 1993, the Bankruptcy Court entered an order confirming
the Plan of Reorganization of the Company, BAC and CLS. The Company had been
operating under the protection of Chapter 11 since April 12, 1993. On January
27, 1994, the Bankruptcy Court entered an order which among other things fixed
January 27, 1994 as the Effective Date. The following summary of some of the
features of the Plan of Reorganization is qualified in its entirety by
reference to the Plan of Reorganization, which is an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993, and by the
more detailed description of the Plan of Reorganization that is contained in
the 1994 Form 10-K.
The Plan of Reorganization provides for, among other things, (i) the
satisfaction of substantially all of the Debtors' unsecured (non-priority)
indebtedness through the issuance of Common Stock, and (ii) the cancellation
of existing equity interests in the Debtors. The Plan of Reorganization also
provides for the substantive consolidation and merger of the Debtors and the
corresponding extinguishment of intercompany liabilities and intercompany
contracts among the Debtors.
Under the Plan of Reorganization, (i) holders of approximately $1,300,000
aggregate amount of administrative claims and approximately $100,000 aggregate
amount of priority claims receive cash distributions and (ii) holders of
approximately $3,019,000 aggregate amount of tax claims receive deferred cash
payments over periods up to six years. At December 31, 1995, the aggregate
amount of tax claims had been reduced to $1,019,000 and the Company continues
to dispute certain tax claims.
The Company commenced distribution of Common Stock to holders of unsecured
claims on April 14, 1994. The settlement of certain claims is subject to
approval by the Bankruptcy Court. The Common Stock is being issued pursuant to
Section 1145 of the Bankruptcy Code, which contains an exemption from
registration under the Securities Act. Through February 29, 1996, the Company
has distributed 6,690,986 shares of Common Stock to its former creditors. The
Company continues to contest certain claims in the Bankruptcy Court. The
Company believes that approximately 7,356,250 shares in total may be issued to
creditors, although the number could vary based on its success in pursuing
certain claim objections. The Plan of Reorganization provides holders of
unsecured claims the right to elect a limited cash recovery, and through
February 29, 1996, approximately $790,000 in cash has been distributed pursuant
to such provision.
Under the Plan of Reorganization there is no recovery for holders of the
Company's $0.01 par value old Common Stock,
- 8 -
9
and all classes of Preferred Stock outstanding prior to the Effective Date.
LIMITED HISTORY OF PROFITABILITY
The Company has only had five consecutive quarters of positive operating
income since it emerged from bankruptcy in 1994. Prior to the bankruptcy the
Company incurred significant operating losses. There can be no assurance that
the Company will be able to achieve or maintain profitability or avoid losses on
a quarterly or annual basis in the future.
FLUCTUATIONS IN OPERATING RESULTS
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the timing of significant orders, the
timing of product enhancements and new product introductions by the Company, its
technology vendors and its competitors, the pricing of the Company's products
and services, competitive conditions and general economic conditions. Many of
the Company's systems sales involve lengthy sales cycles and installations.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or revenue will be recognized. As a result, the
operating results of the Company may be materially skewed if a single
transaction is completed earlier or later than expected. The Company has
experienced fluctuations in its operating results and expects to continue to
experience such fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Quarterly Results of Operations"
incorporated herein by reference to the Company's 1995 Annual Report.
Fluctuations in operating results may also result in volatility in the market
price of the Common Stock.
LIQUIDITY; VOLATILITY OF STOCK PRICE
Historically, trading volume of the Company's Common Stock has been small,
and the market for the Common Stock has been less liquid than that of many other
publicly traded companies. In August 1995, however, the Company's Common Stock
became listed on the AMEX under the symbol "NOW." Nevertheless, there can be no
assurance that a stockholder who desires to sell shares of Common Stock can sell
all of the shares that the stockholder desires to sell, either at all or at the
desired times or prices. Like the stock of other technology companies, the
market price of the Common Stock has been and may continue to be volatile.
Factors such as quarterly fluctuations in the Company's results of operations,
trading volume, the announcement of technological innovations or new products by
the Company or its competitors, general conditions in the computer hardware and
software industries, economic conditions generally, the Company's ability
to successfully increase its market share with its existing products while
expanding its product base into other markets, the strength of the Company's
distribution channels, variances between actual results of operations and the
results expected by securities analysts, and the factors mentioned under
"Fluctuations in Operating Results," among other factors, may have a significant
impact on the market price of the Common Stock.
RISKS OF CONTRACT SERVICES BUSINESS
The Company is subject to the risks associated with a contract services
business, including dependence on reputation with existing customers, volatility
of workload and dependence on ability to retain qualified technical personnel.
Also, a substantial portion of the Company's contract services revenue may be
derived from the performance of services under fixed-price contracts. There can
be no assurance that the Company can consistently perform in a profitable manner
under these contracts, especially in the field of software development, where
cost overruns are common-place.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND MARKETS
The Company expects that the market for hospitality and gaming information
management systems and network hardware and software products will continue to
be subject to frequent and rapid changes in technology and customer preferences.
Customers may delay purchases in anticipation of technological changes. In
addition, the Company's ability to develop and market information management and
network systems and other new products is dependent upon its ability to attract
and retain qualified employees. Any failure by the Company to anticipate or
respond adequately to the changes in technology and customer preferences, or to
develop and introduce new products in a timely fashion, could materially
adversely affect the Company's business and operating results.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is dependent upon its proprietary application
software and its licensing rights to the principal application software products
marketed by it. The Company relies on a combination of contractual rights,
trademarks, copyrights and other property rights to establish or protect its
proprietary rights in its products. There can be no assurance that the steps
taken by the Company in this regard will be adequate to deter misappropriation
of its proprietary rights or independent third party development of functionally
equivalent technology. Although the Company does not believe that it is
infringing on the intellectual
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10
property rights of others, there can be no assurance that such a claim will not
be asserted against the Company in the future or that any attempt to protect its
technology will not be challenged.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified personnel in the software industry is intense
and there can be no assurance that the Company will be able to attract and
retain a sufficient number of qualified employees. As the business of the
Company grows, it may become increasingly difficult for it to hire, train and
assimilate the new employees needed. The Company's success depends to a
significant degree upon the continued contributions of its key management,
marketing, product development and operational personnel, including Richard S.
Ressler or George G. Bayz. The Company does not maintain key man insurance for
any of such officers.
The services of Richard S. Ressler, Chairman of the Board, Chief Executive
Officer and Director of the Company, are provided on a non-exclusive basis
pursuant to an agreement which expires in August 1996. There can be no
assurances that Mr. Ressler will continue with the Company after such date or
that the Company will be able to find a replacement in the event that either
the Company or Mr. Ressler determines not to continue their relationship.
RISK OF FOREIGN OPERATIONS
The financial performance of the Company is affected by the fluctuation in
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including
import and export restrictions, possible expropriation or other governmental
actions, taxes and political changes. Most of the Company's foreign operations
are located in Canada.
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ITEM 2. PROPERTIES
As of February 29, 1996, the principal properties utilized by the Company
were as follows:
Approximate Total
Type Square Footage Location
- ----- ----------------- --------------------
Headquarters, warehousing, administration, marketing and sales 44,538 Irvine, California
Headquarters, software development and support, training and
engineering 32,518 Irvine, California
Administration, sales, education, warehousing, test and Markham, Ontario,
repair and maintenance services 24,110 Canada
Gaming Systems International headquarters, marketing, sales,
development, support and warehousing 12,150 Las Vegas, Nevada
Administration, sales and maintenance services 4,500 Caracas, Venezuela
All of the properties noted above were occupied by the Company pursuant to
leases with various expiration dates. The Company's lease for its headquarters
facility expires in December 1996. The Company believes that it can obtain
suitable space at prevailing market rates in the general vicinity of its
current location to house its headquarters' operations. In December 1995, the
Company sold a portion of its Caracas, Venezuela facility that was excess but
continues to own and occupy the remaining portion of the premises. The Company
also leases sales and service offices in 10 locations in the United States, 8
sales and service offices in Canada and 6 sales and service offices in Latin
America and the Netherlands. Generally, such leases are for terms of five
years or less, although several of the leases in the United States are for
terms of one year or less. In 1995, the Company instituted a parts management
program which reduced the number of offices maintained by the Company in the
United States from 49 to 10.
ITEM 3. LEGAL PROCEEDINGS
The Company has filed and will continue to file objections to claims
asserted in its Chapter 11 bankruptcy proceedings. The majority of these
claims would, if upheld, give rise to allowed unsecured claims entitling the
respective claimants to distributions of new Common Stock. A number of filed
objections in respect of secured claims, administrative claims, priority
claims, tax claims, convenience claims and cure claims were still outstanding
at December 31, 1995. To the extent the Company's objections to such claims
are not sustained, the Company will be obligated to pay such claims in a lump
sum in the case of convenience claims and administrative claims, and in the
case of secured claims, priority claims, tax claims and cure claims, on a
deferred basis over six to seven years, depending on the type of claim, at an
interest rate of 6% in accordance with the Plan of Reorganization. The Company
does not believe the outcome of these objections to be material.
The Company is also involved in various other legal proceedings which 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 or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 29, 1995 the Company received approval from the American Stock
Exchange to list its common stock ("Common Stock") on AMEX under the AMEX
symbol "NOW." Between April 10, 1994 (the date the Company's Common Stock was
first issued pursuant to the Plan of Reorganization) and August 29, 1995, the
Company's Common Stock was not listed or quoted on any national securities
exchange or in any automated interdealers quotation system. However, the
Common Stock was traded over-the-counter by various market makers under the
ticker symbol "MAIS."
The Company's Common Stock was issued pursuant to an order of the
Bankruptcy Court dated January 27, 1994. In addition, all previously
outstanding equity interests were canceled. Until April 10, 1993, the
principal market for the Company's previously outstanding common stock (the
"Old Common Stock") was the New York Stock Exchange, where the common stock was
traded under the ticker symbol "MCO." Thereafter, until November 18, 1993, the
Company's Old Common Stock was traded over-the-counter by various market
makers.
No cash dividends have been paid to date on the Common Stock. At February
29, 1996, there were approximately 618 stockholders of record.
Reference is made to the table entitled "Quarterly Data" which is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL INFORMATION
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Selected Financial Information".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Company's Annual Report under the headings, "Consolidated Balance Sheets",
"Consolidated Statements of Operations", "Consolidated Statements of
Stockholders' Equity (Deficiency)", "Consolidated Statements of Cash Flows",
"Notes to Consolidated Financial Statements" and "Independent
Auditors' Report".
Schedule II Valuation and Qualifying Accounts is set forth in this Annual
Report on Form 10-K.
All other schedules and financial statements are omitted because they are
not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be found
in the section captioned "Election of Directors" appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held May 21, 1996. Information required by this
Item with respect to executive officers may be in found in the section
captioned "Proposal I Election of Directors, Executive Officers" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held May 21, 1996. Such
information is incorporated herein by reference.
- 12 -
13
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held May 21, 1996. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Management" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held May 21, 1996. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Executive CompensationEmployment Contracts and Change of Control
Arrangements; Certain Transactions with Management" appearing in the definitive
Proxy Statement to be delivered to Stockholders in connection with the Annual
Meeting of Stockholders to be held May 21, 1996. Such information is
incorporated herein by reference.
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14
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements
The consolidated financial statements of the Company, the notes thereto
and the Independent Auditors' Report are incorporated herein by reference to
the Company's 1995 Annual Report.
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
(3) Exhibits:
Number Exhibit
- ------ -------
2.1 First Amended Joint Chapter 11 Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as
confirmed by the United States Bankruptcy Court for the District of
Delaware on November 13, 1993, filed as Exhibit 2.1 to the
registrant's Current Report on Form 8-K dated January 15, 1994.
2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for
the District of Delaware on January 27, 1994, filed as Exhibit 2.2
to the registrant's Current Report on Form 8-K dated February 9,
1994.
3.1 Amended and Restated Certificate of Incorporation of MAI Systems
Corporation filed as Exhibit 2(a) to the registrant's Registration
Statement on Form 8-A/A filed with the Securities and Exchange
Commission on February 24, 1994.
3.2 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
registrant's Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.
10.1 Services Agreement between Remanco International, Inc. and MAI
Systems Corporation dated as of October 1, 1995.
MANAGEMENT CONTRACTS, COMPENSATORY PLANS AND ARRANGEMENTS REQUIRED TO
BE FILED AS AN EXHIBIT HERETO PURSUANT TO ITEM 14 OF FORM 10-K
10.2 MAI Systems Corporation 1993 Stock Option Plan, filed as Exhibit (f)
to the registrant's Registration Statement on Form 8-A, filed with
the Securities and Exchange Commission on January 27,1994.
10.3 Employment Agreement, dated as of August 15, 1994 as amended as of
October 17, 1994, by and between the registrant and Orchard Capital
Corporation, relating to the services of Richard S. Ressler,
Chairman and Chief Executive Officer of the Company, filed as
Exhibit 10.2 to the registrant's 1994 Annual Report on Form 10-K
11.1 Computation of Income Per Share
13.1 The Company's Annual Report to Stockholders for the year ended
December 31, 1995, but only to the extent such report is expressly
incorporated by reference into Item 5, 6, 7, 8 and 14(a)(1) of this
report and such report is not otherwise deemed to be filed as part
of this Annual Report on Form 10-K.
21.1 Subsidiaries of MAI Systems Corporation
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
By: /s/ Richard S. Ressler
-----------------------
Richard S. Ressler
Chairman and Chief Executive Officer
Dated: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 1996.
Signatures Title
- ---------- -----
/s/Richard S. Ressler Chairman of the Board of Directors
- --------------------------
Richard S. Ressler
/s/George G. Bayz Director, President and Chief Operating Officer
- --------------------------
George G. Bayz
/s/Alan A. Gleicher Director
- --------------------------
Alan A. Gleicher
/s/ Morton O. Schapiro Director
- --------------------------
Morton O. Schapiro
/s/ William Brian Kretzmer Vice President, Chief Financial Officer and
- -------------------------- Treasurer
William Brian Kretzmer (Chief Accounting Officer)
- 15 -
16
MAI SYSTEMS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(dollars in thousands)
Additions
----------------------
Balances Charged to Charged to Balances
Beginning Costs of Other End of
Descriptions of Year Expenses Accounts Write-offs Year
- --------------------------------------- --------- ---------- ---------- ---------- -------
Year ended December 31, 1993:
Allowance for doubtful accounts $8,314 $1,101 $- $(6,148)* $3,267
========= ========== ========== ========== =======
Provision for inventory obsolescence $17,304 $2,845 $- $(4,389)* $15,760
========= ========== ========== ========== =======
Year ended December 31, 1994:
Allowance for doubtful accounts $3,267 $137 $- $(816) $2,588
========= ========== ========== ========== =======
Provision for inventory obsolescence $15,760 $1,400 $- $(1,180) $15,980
========= ========== ========== ========== =======
Year ended December 31, 1995:
Allowance for doubtful accounts $2,588 $613 $- $(2,109) $1,092
========= ========== ========== ========== =======
Provision for inventory obsolescence $15,980 $734 $- $(1,578) $15,136
========= ========== ========== ========== =======
*Includes effect of the foreclosure of certain European subsidiaries on March
22, 1993.