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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the period ended March 31, 2003 or
/__/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___to___.
Commission file number: 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 (IRS Employer Identification No.)
incorporation or organization)
26110 Enterprise Way, Lake Forest, CA 92630
Address of principal executive offices
Registrant's telephone number including area code (949) 598-6000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
The aggregate market value of the common stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on April 28, 2003 was $2,677,635.
The number of shares of common stock issued, outstanding and subscribed as of
April 28, 2003 was 14,875,752.
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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 As of March
31, 2002 31, 2003
-------- --------
ASSETS
Current assets:
Cash $ 545 $ 300
Receivables, less allowance for doubtful accounts of
$336 in 2002 and $308 in 2003 1,834 2,524
Inventories 60 73
Notes receivable 250 --
Prepaids and other assets 628 644
--------- ---------
Total current assets 3,317 3,541
Furniture, fixtures and equipment, net 843 866
Intangibles, net 1,823 2,053
Other assets 194 240
--------- ---------
Total assets $ 6,177 $ 6,700
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 3,289 $ 3,465
Accounts payable 1,077 958
Customer deposits 1,811 1,225
Accrued liabilities 2,007 2,065
Income taxes payable 89 89
Unearned revenue 3,693 4,724
--------- ---------
Total current liabilities 11,966 12,526
Long-term debt 7,234 7,132
Other liabilities 1,759 1,690
--------- ---------
Total liabilities 20,959 21,348
--------- ---------
Commitments and contingencies
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; 14,875,752 shares issued, outstanding
and subscribed at December 31, 2002 and
March 31, 2003 150 152
Additional paid-in capital 218,251 218,112
Accumulated other comprehensive loss
Minimum pension liability (918) (918)
Foreign currency translation (31) (32)
Unearned Compensation (91) (81)
Accumulated deficit (232,143) (231,881)
--------- ---------
Total stockholders' deficiency (14,782) (14,648)
--------- ---------
Total liabilities and stockholders' deficiency $ 6,177 $ 6,700
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31,
(in thousands, except per share data)
2002 2003
---- ----
Revenue:
Software $ 1,267 $ 1,130
Network and computer equipment 269 149
Services 4,196 3,907
-------- --------
Total revenue 5,732 5,186
Direct costs:
Software 157 207
Network and computer equipment 203 91
Services 1,620 1,174
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Total direct costs 1,980 1,472
Gross profit 3,752 3,714
Selling, general and administrative expenses 2,074 2,531
Research and development costs 1,008 682
Amortization of intangibles 64 --
Other operating income (1) (51)
-------- --------
Operating income 607 552
Interest income 2 1
Interest expense (386) (350)
-------- --------
Income from continuing operations before income taxes 223 203
Income tax expense (benefit) (3) 59
-------- --------
Income from continuing operations 220 262
Income from discontinued operations 106 --
-------- --------
Net income $ 326 $ 262
======== ========
Income per share:
Continuing Operations:
Basic income per share $ 0.02 $ 0.02
======== ========
Diluted income per share $ 0.02 $ 0.02
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Discontinued Operations:
Basic income per share $ 0.01 $ 0.00
======== ========
Diluted income per share $ 0.01 $ 0.00
======== ========
Net income per share:
Basic income per share $ 0.02 $ 0.02
======== ========
Diluted income per share $ 0.02 $ 0.02
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Weighted average common shares used in determining income per share:
Basic 13,656 14,426
======== ========
Diluted 13,663 14,876
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
(in thousands)
2002 2003
---- ----
Net cash provided by (used in) operating activities: $ 376 $ (35)
Cash flows used in investing activities:
Proceeds from note receivable -- 250
Capital Expenditures (66) (128)
Capitalized software development costs -- (229)
------- -------
Net cash used in investing activities (66) (107)
Cash flows from financing activities:
Net decrease in line of credit (130) --
Repayments on long-term debt (64) (103)
------- -------
Net cash used in financing activities (194) (103)
------- -------
Net cash provided by (used in) continuing operations 116 (245)
Net cash provided by discontinued operations 45 --
Effect of exchange rate changes on cash 2 --
------- -------
Net change in cash 163 (245)
------- -------
Cash at beginning of period 1,224 545
------- -------
Cash at end of period $ 1,387 $ 300
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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MAI SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
Companies for which this report is filed are MAI Systems Corporation and its
wholly-owned subsidiaries (the "Company"). The information contained herein is
unaudited, but gives effect to all adjustments (which are normal recurring
accruals) necessary, in the opinion of Company management, to present fairly the
condensed consolidated financial statements for the interim period. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Although the Company believes that the disclosures in these financial statements
are adequate to make the information presented not misleading, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"), and these
financial statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002, which is on file with the SEC.
2. LIQUIDITY
Although the Company has a net stockholders' deficiency of $14,648,000 and a
working capital deficit of $8,985,000 (which includes subordinated debt due to
CSA of $2,800,000) at March 31, 2003, the Company believes it will continue to
generate sufficient funds from operations and obtain additional financing or
restructure its subordinated note with CSA to meet its operating and capital
requirements. The Company is currently in negotiations with CSA to restructure
the terms of the existing debt, including extending the maturity date. The
Company expects to generate positive cash flow from its continuing operations
during 2003 from shipping out products and services from its current backlog as
of March 31, 2003 as well as new orders. In the event that the Company cannot
generate positive cash flow from its continuing operations during 2003, the
Company can substantially reduce its research and development efforts to
mitigate cash outflow to help sustain its operations. There can be no assurance
that the Company will be able to sustain profitability, generate positive cash
flow from operations or restructure its debt as necessary. 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, including protection under the bankruptcy laws. We believe that it is
likely that we will delist from AMEX and apply for a listing on the electronic
bulletin board sponsored by Nasdaq in 2003.
3. INVENTORIES
Inventories are summarized as follows:
(dollars in thousands)
December 31, March 31,
2002 2003
---- ----
Finished goods $45 $65
Replacement parts 15 8
--- ---
$60 $73
=== ===
4. PLAN OF REORGANIZATION
In connection with the Company's Chapter 11 bankruptcy proceedings in 1993,
shares of Common Stock are currently being distributed by the Company to its
former creditors pursuant to the Plan of Reorganization (the "Plan") as approved
by United States Bankruptcy Court. The Company does not anticipate that
additional shares will be issued under the plan. As of March 31, 2003, 6,758,251
shares had been issued pursuant to the Plan.
Notwithstanding the confirmation and effectiveness of its Plan of Reorganization
pursuant to which the Company emerged from a voluntary proceeding under the
bankruptcy laws, the United States Bankruptcy Court continues to have
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jurisdiction, among other things, 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. BUSINESS ACQUISITIONS
HOTEL INFORMATION SYSTEMS, INC.
Effective August 9, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Hotel Information Systems, Inc. ("HIS")
pursuant to an asset purchase agreement dated June 30, 1996 (as amended July 10,
1996) for 1,179,000 unregistered shares of the Company's common stock valued at
$10,900,000. The net assets acquired from HIS are used in the business of
software design, engineering and service relating to hotel information systems.
The net assets also included subsidiaries of HIS in Singapore, Hong Kong,
Australia and Mexico. The acquisition of HIS has been accounted for by the
purchase method of accounting. The total purchase price for HIS was $21,373,000,
which included net liabilities assumed of HIS of $7,873,000 and acquisition
costs of approximately $2,600,000.
During 1996, the Company entered into arbitration proceedings regarding the
purchase price of HIS. The Company placed approximately 1,100,000 shares of
Common Stock issued in connection with the acquisition of HIS in an escrow
account to be released in whole, or in part, upon final resolution of post
closing adjustments.
In November 1997, the purchase price for the acquisition of HIS was reduced by
$931,000 pursuant to arbitration proceedings. As a result, goodwill was reduced
by $931,000 and approximately 100,650 shares were required to be released from
the escrow account and returned to the Company (this has not accrued as of March
31, 2003). In addition, the Company had further claims against HIS relating to
legal costs and certain disbursements inappropriately made by HIS prior to the
closing estimated at $650,000. The Company was required, as needed, pursuant to
the asset purchase agreement and related documents, to 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 applied to a maximum of 73,466
shares of Common Stock. As of March 31, 2003, the fair market value of the
Company's common stock was $0.29 per share, which would result in approximately
2,931,859 additional shares being issued. Also, included in the escrow account
at December 31, 2002 are 200,000 shares of the Company's common stock, which do
not have a guarantee of value.
On March 25, 2003, the Company entered into a settlement agreement with HIS and
one of its former corporate officers whereby (i) the parties dismissed all
claims, known and unknown, against each other; (ii) the Company forgave and
wrote off a note receivable from the former corporate officer of HIS in the
amount of $66,000 (which was expensed to other expense in the 2002 consolidated
statement of operations); (iii) the Company paid $50,000 in cash and issued a
non-interest bearing unsecured promissory note which requires 35 consecutive
monthly payments of $5,000 each commencing April 1, 2003; and (iv) the remaining
374,116 shares in the escrow account will be released to the Company. If the
Company is delinquent four times in any twelve month period during the term of
the unsecured promissory note in making its $5,000 monthly payments to HIS, and
HIS issues respective valid default notices, the Company will be subject to a
$225,000 penalty. The 374,116 shares have been received by MAI together with the
HIS authorization to legally transfer such shares to MAI.
Imputing interest at 11%, the present value of the $175,000 promissory note a
the date of the settlement was $149,000. The Company recorded the present value
of this debt issuance and the $50,000 cash payment as a reduction to additional
paid-in capital.
HOSPITALITY SERVICES & SOLUTIONS
On June 23, 2002, the Company acquired substantially all of the assets and
assumed certain liabilities of Hospitality Services & Solutions ("HSS") pursuant
to a stock purchase agreement for 100,000 shares of common stock valued at
$32,000 (the quoted market price of the common stock at the time the terms were
agreed), and $75,000 in cash. Additionally, the shareholders of HSS received a
20% minority interest in the Company's combined operations in Asia. HSS was
acquired for the Company to expand its operations in the Asian marketplace,
strengthen its management team n the territory and create new opportunities for
its new enterprise capable suite of products. 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. The Company recorded $297,000 of goodwill
(deductible for tax purposes) in connection with the acquisition of HSS. Pro
forma results of operations as if this acquisition had occurred at the beginning
of 2001 and 2002 are not shown because its impact would have been immaterial.
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6. BUSINESS DIVESTITURES
GAMING SYSTEMS INTERNATIONAL
On June 19, 1999, the Company sold Gaming Systems International ("GSI") for an
amount in excess of the book value of net assets sold. Assets sold of
approximately $3,749,000 consisted of accounts receivable of $1,514,000,
inventories of $364,000, furniture, fixtures and equipment of $218,000,
intangible assets of $1,573,000 and prepaid expenses of $80,000. Liabilities
assumed by the buyer consisted of accounts payable and accrued liabilities of
$197,000, deposits of $100,000, unearned revenue of $351,000 and long-term debt
of 446,000. The Company received three promissory notes totaling $4,925,000 with
face values of $1,100,000, $1,500,000 and $2,325,000, respectively. Interest was
paid monthly at the rate of 10% per annum on both the $1,100,000 and $1,500,000
notes, with the principal due and payable on June 19, 2001 and June 19, 2003,
respectively. The $1,100,000 promissory note was guaranteed by a third party.
Principal payments and interest, at prime plus 1%, was to commence for the
$2,325,000 promissory note on October 1, 2002 in 48 monthly installments of
approximately $48,000 of principal, plus accrued interest.
Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 which resulted in a combined
carrying value of $4,282,000 for all three promissory notes. The gain on sale of
$1,227,000 had been deferred until collection of the proceeds representing the
gain can be assured. As of December 31, 2000, the Notes were held for sale and
were written down to an amount which approximated their estimated net realizable
value of $2,700,000.
On April 6, 2001 the Company entered into an agreement with the maker of the
Notes whereby the maker reconveyed 100% of the Common Stock of GSI to the
Company for the purpose of selling GSI to a third party. In connection with the
agreement, the Company canceled the Notes and entered into a new $1.1 million
secured promissory note with the same party. The maker will be paid a commission
of 30% of cash receipts from the third party, which will be first applied to the
$1.1 million note and paid in 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, of which $500,000 was received in December 2002 and
$250,000 in January 2003. The third party was also required to pay an additional
$250,000 subject to a maximum $250,000 reduction pursuant to the resolution of
certain uncertainties as of the date of the Agreement, which, as part of the
settlement, in January 2003 the Company received $46,000. Due to the uncertainty
of collecting the unsecured amount of $250,000, gain recognition on that part of
the proceeds was deferred until collection was assured. The Company recorded a
gain on the sale of GSI of $245,000 in the fourth quarter of 2001.
LEGACY
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 currently providing 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 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.
MAI CANADA
On December 6, 2002, the Company sold all the assets and certain liabilities of
its Canadian operations, including all legacy divisions, to the management of
this subsidiary pursuant to a stock purchase agreement. In connection with the
sale, the Company also entered into a software distribution agreement whereby
the buyer has a non-exclusive right and license to market and install the
Company's hospitality products in Canada. The sale resulted in a loss of
approximately $630,000, which is included in the loss on disposal of
discontinued operations. Prior to the sale, the Canadian operations incurred a
net income of $159,000 for the three-month period ended March 31, 2002.
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PROCESS MANUFACTURING
On December 6, 2002, the Company entered into an Asset Purchase Agreement
whereby all the assets and certain liabilities of its process manufacturing
software division were sold to a third party for cash of $250,000. The sale
resulted in a loss of approximately $391,000, which is included in the loss on
disposal of discontinued operations. Prior to the sale, Process Manufacturing
operations incurred a net loss of $15,000 for the three-month period ended March
31, 2002.
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 was 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 was due to expire 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 was paid in
full. The Loan Fee was fully paid by April 23, 2001. The Loan Fee of $300,000 is
classified in prepaids and other current assets and was being amortized to
interest expense over the original term of the facility. As of March 31, 2003
the loan fee was fully amortized.
On January 13, 2003, the Company re-negotiated the terms of the credit facility
whereby the outstanding balance of $1,828,000 as of that date was converted to a
term loan which accrues interest at 9.25% per annum and requires monthly
payments of $58,000 over a 36 month period commencing March 1, 2003. The new
term loan matures on February 28, 2005, at which time all remaining principal
and accrued interest is due and payable. The Company will also be required to
pay Coast additional principal payments on a quarterly basis based upon an
EBITDA-based formula commencing March 31, 2003. For the three-months ended March
31, 2003, there are no additional principal payment required under the
EBITDA-based formula. The consolidated balance sheet as of December 31, 2002 and
March 31, 2003 reflects the reclass of the secured revolving credit facility to
a term loan. The restructured debt pursuant to an intercreditor agreement
between Canyon Capital and Coast Business Credit, contains various restrictions
and covenants, including a minimum quick ratio of 0.30 to l.00 and minimum debt
service coverage ratio of 0.90 to l.00 which commence as of and for the
three-month period ended March 31, 2003. The minimum quick ratio increases to
0.31 to 1.00 as of June 30, 2003 and September 30, 2003 and to 0.34 to 1.00 as
of December 31, 2003 and for each and every fiscal quarter ending thereafter.
The minimum debt coverage ratio increases to 1.10 to 1.00 for the three-month
period ending June 30, 2003 and to 1.25 to 1.00 for the three-month period
ending September 30, 2003 and for each and every fiscal quarter thereafter. In
the event that the Company were not in compliance with the various restrictions
and covenants and were unable to receive waivers for non-compliance, the term
and subordinated debt would be immediately due and payable. The Company is in
compliance with the covenants as of March 31, 2003.
On February 7, 2003, the Federal Deposit Insurance Corporation ("FDIC") put
Coast and its parent company, Southern Pacific Bank, into receivership and is
currently holding all of Coast's assets for sale to third parties, which include
the Company's term loan with Coast. This receivership and ultimate sale of the
loan by the FDIC does not change any of the terms of the Company's current loan
agreement.
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
providing 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.
-7-
On April 13, 2000, the Company entered into an agreement with Canyon, waiving
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 $5,662,000 at December 31, 2002 and March 31, 2003.
On January 13, 2003, the Company modified the terms of its agreement with
Canyon, whereby the Company is required to make monthly payments of $52,000,
until the Coast term loan is paid off in full, at which time the note payable
will be converted into a three-year amortizing loan which will accrue interest
at 11% per annum and requires equal monthly payments of principal and interest
such that the subordinated debt will be paid in full at the end of the amended
term. Upon the repayment of the Coast debt in full, the Company will also be
required to pay Canyon additional principal payments on a quarterly basis based
upon an EBITDA-based formula. Additionally, the Company will issue to Canyon
200,000 shares of its common stock valued at $20,000 (the quoted market price of
the common stock at the time the terms were agreed) and one million warrants at
an exercise price of $0.40 per share valued at $ 42,000 (using the Black-Scholes
option-pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.5%, volatility of 80% and an expected life of 5 years). The
$62,000 will be amortized to interest expense over the term of the modified
note.
In connection with a settlement agreement with CSA, 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, 2002 and March 31, 2003.
The agreement with CSA was amended whereby the Company shall be required to pay
the required payments under the subordinated note unless and until it paid $1
million by December 31, 2002. Upon payment of the $1 million, contractual
payments under the subordinated note would have ceased until a final payment in
the amount of $400,000 is paid by February 28, 2003. If the Company did not make
all of the modified payments to CSA, the subordinated note will revert back to
its original terms. The Company did not make the modified payment and have not
made any payments since September 2002. Under the terms of the subordination
agreement between Coast, Canyon and CSA, the Company is not allowed to make any
principal or interest payments to CSA until the Coast and Canyon debt, including
any accrued interest, is repaid in full, or the CSA debt is restructured and
approved by Coast and Canyon. 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 Coast and Canyon will ultimately approve the terms of
the restructuring. In the event that the Company is unable to meet the required
payments to its primary lenders or meet its payment obligations to its other
secured creditors, they are entitled to exercise certain rights under the
respective agreements the Company has with them, including but not limited to,
foreclosing on all of the Company's tangible and intangible assets. Such action
would have a substantial adverse effect on our ability to continue as a going
concern. The CSA debt is shown as current.
CSA has not formally notified the Company of its default. As of December 31,
2002 and March 31, 2003, accrued interest relating to the CSA subordinated debt
was $408,000 and $489,000 respectively, and is included in accrued liabilities
in the accompanying consolidated balance sheets.
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 must also 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
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shares of $153,125 was treated as unearned compensation and is being amortized
to expense in proportion to the vesting schedule through March 2005. The
unamortized balance as of March 31, 2003 is $81,000.
9. PREFERRED STOCK
On May 20, 1997, the Company authorized the issuance of up to 1,000,000 shares
of $0.01 par value preferred stock. The Board of Directors has the authority to
issue the preferred stock, in one or more series, and to fix the rights,
preferences, privileges and restrictions thereof without any further vote by the
holders of Common Stock.
10. INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and capitalized software.
Intangible assets other than goodwill are amortized on a straight-line basis
over their estimated useful lives. Prior to 2002, goodwill, representing the
excess of the purchase price over the estimated fair value of the net assets of
the acquired business, was amortized over the period of expected benefit of five
to seven years. However, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets, ("SFAS No. 142") which requires that the Company cease
amortization of all goodwill and intangible assets having indefinite useful
economic lives. The Company determined that there was no impairment upon
adoption. Such assets are not to be amortized until their lives are determined
to be finite, however, a recognized intangible asset with an indefinite useful
life should be tested for impairment annually or on an interim basis if events
or circumstances indicate that the fair value of the asset has decreased below
its carrying value. At March 31, 2003, the Company evaluated its goodwill and
determined that fair value had not decreased below carrying value and no
adjustment to impair goodwill was necessary in accordance with SFAS No. 142.
Goodwill and capitalized software as of December 31, 2002 and March 31, 2003 are
as follows:
(dollars in thousands)
December 31, March 31,
2002 2003
Goodwill $ 962 $ 962
Accumulated amortization -- --
------- -------
Goodwill, net 962 962
------- -------
Capitalized software 2,180 2,410
Accumulated amortization (1,319) (1,319)
------- -------
Capitalized software, net 861 1,091
------- -------
Total $ 1,823 $ 2,053
======= =======
The Company's weighted average amortization period for capitalized software is
expected to be three years. The following table shows the estimated amortization
expense for these assets for each of the five succeeding years:
Year Ending December 31,
(in thousands)
2003 $ 72
2004 287
2005 287
2006 215
2007 230
------
$1,091
======
11. INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic and diluted income or loss 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
-9-
128:
For The Three Months Ended
March 31,
2002 2003
---- ----
(in thousands, except per
share data)
Numerator:
Numerator for basic and diluted earnings
per share - net income $ 326 $ 262
======= =======
Denominator:
Denominator for basic earnings per
Share-weighted average number of
Common shares outstanding during
the period 13,656 14,426
Incremental common shares attributable
To exercise of outstanding options 7 450
------- -------
Denominator for diluted earnings
Per share 13,663 14,876
======= =======
Basic earnings per share $ 0.02 $ 0.02
======= =======
Diluted earnings per share $ 0.02 $ 0.02
======= =======
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 1,648,272 and 3,676,355 in 2002 and
2003, respectively.
12. STOCK OPTION PLANS
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board, APB, No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure-only provisions of FAS
No. 123 "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense relating to employee stock options is determined
based on the excess of the market price of the Company's stock over the
exercise price on the date of grant, the intrinsic value method, versus
the fair value method as provided under FAS No. 123.
At March 31, 2003, the Company had two stock-based employee compensation
plans. The Company accounts for that plan under the recognition and
measurement principles of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no stock-based
employee compensation cost is reflected in net income (loss), as all
options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had
compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards for the three-month
periods ended March 31, 2002 and 2003, consistent with the provisions of
FAS No. 123, the Company's net income and net income per share would have
decreased. The following table represents the effect on net income and net
income per share if the Company had applied the fair value based method
and recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amended FAS No. 123,
"Accounting for Stock-Based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair
market value based method for accounting for stock-based employee
compensation. Additionally, the statement amends the disclosure
requirements of FAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for financial statements for
the year ended December 31, 2002. In compliance with FAS No. 148, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation plan as defined by
APB No. 25 and has made the applicable disclosures in Note 10.
-10-
For the three-months ended March 31,
------------------------------------
(in thousands, except per share data)
2002 2003
------- -------
Net income: As reported $ 326 $ 262
Add: Stock-based employee compensation
expense recorded -- --
Less: Stock based employee compensation
expense determined under fair value
calculations (33) (17)
------- -------
Pro forma 293 245
======= =======
Basic income per share: As reported $ 0.02 $ 0.02
Add: Stock-based employee compensation
expense recorded -- --
Less: Stock based employee compensation
expense determined under fair value
calculations -- --
------- -------
Pro forma 0.02 0.02
======= =======
Diluted income per share:
As reported $ 0.02 $ 0.02
Add: Stock-based employee compensation
expense recorded -- --
Less: Stock based employee compensation
expense determined under fair value
calculations -- --
------- -------
Pro forma $ 0.02 $ 0.02
======= =======
13. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At December 31, 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.
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 was 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"),
- 11 -
who acquired the assets and certain liabilities of the gaming subsidiary
on July 27, 2001. Based upon this suit, MIS 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. On October 24, 2002, the Company
entered into a global settlement agreement between the parties whereby all
claims, known and unknown, between the parties were dismissed and the
Company received $796,000.
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 and claims
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.
14. COMPREHENSIVE INCOME
The following table summarizes components of comprehensive income:
For The Three Months Ended
March 31,
2002 2003
----- -----
Net income $ 326 $ 262
Change in cumulative translation adjustments 2 (1)
----- -----
Comprehensive income $ 328 $ 261
===== =====
Accumulated other comprehensive income in the accompanying consolidated
balance sheets consists of cumulative translation adjustments.
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
The Company earns 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 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
- 12 -
evenly over the related contract period.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on
specifically identified amounts that it believes is uncollectible. The
Company also records additional allowances based upon certain percentages
of our aged receivables, which are determined based on historical
experience and or assessment of the general financial conditions affecting
our customer base. If the Company's actual collection experience changes,
revisions to its allowance may be required. Any unanticipated change in
the Company's customer's credit worthiness or other matters affecting the
collectibility of amounts due from such customers, could have a material
affect on its results of operations in the period in which such changes or
events occur. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" provides a single
accounting model for long-lived assets to be disposed of. SFAS No. 144
also changes the criteria for classifying an asset as held for sale, and
broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of recognizing
losses on such operations.
The Company adopted SFAS No. 144 on January 1, 2001. The adoption of SFAS
No.144 did not affect the Company's financial statements. In accordance
with SFAS No. 144, long-lived assets, such as furniture, fixtures and
equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, and impairment
charge is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as
held for sale would be presented separately in the appropriate asset and
liability sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets to be disposed of in accordance with SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of".
Goodwill
Prior to 2002, goodwill, representing the excess of the purchase price
over the estimated fair value of the net assets of the acquired business,
was amortized over the period of expected benefit of five to seven years.
Long-lived assets and certain identifiable intangibles to be held and used
by the Company were reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used was assessed by
a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets were
considered to be impaired, the impairment recognized was measured by the
amount by which the carrying amount of the assets exceeded the fair value
of the assets. Assets that were to be disposed of were reported at the
lower of the carrying amount or fair value less cost to sell.
However, effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," ("SFAS No. 142") which requires that the Company cease
amortization of goodwill and all intangible assets having indefinite
useful economic lives. Such assets are not to be amortized until their
lives are determined to be finite, however, a recognized intangible asset
with an indefinite useful life should be tested for impairment annually or
on an interim basis if events or circumstances indicate that the fair
value of the asset has decreased below its carrying value. At December 31,
2002, the Company evaluated its goodwill and determined that fair value
had not decreased below carrying value and no adjustment to impair
goodwill was necessary in accordance with SFAS No. 142.
Software Development Costs
The Company capitalizes costs related to the development of certain
software products. Capitalization of costs begins when technological
feasibility is established and ends when the product is available for
general release to customers. Technological feasibility is reached upon
the earlier of completion of a detailed program design or working model.
- 13 -
Amortization is computed on an individual product basis and is recognized
over the greater of the remaining economic lives of each product or the
ratio that current gross revenues for a product bear to the total of
current and anticipated revenues for that product, commencing when the
products become available for general release to customers. Software
development costs are generally being amortized over a three-year period.
The Company continually assesses the recoverability of software
development costs by comparing the carrying value of individual products
to their net realizable value.
The Company capitalized $0 and $229,000 for the three-month period ended
March 31, 2002 and 2003, respectively for software development costs
relating to its new N-Tier, Internet-native corporate application suite of
products written in java. Although the Company has not yet sold any of the
modules to this suite of applications, the Company believes that its new
product will produce new sales adequate to recover amounts capitalized.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, working capital decreased from a working capital
deficiency of $8,649,000 at December 31, 2002 to a working capital
deficiency of $8,985,000. Excluding unearned revenue of $4,724,000, the
Company's working capital deficiency at March 31, 2003 would be
$4,261,000. Excluding unearned revenue of $3,693,000, the Company's
working capital deficiency at December 31, 2002 would be $4,956,000.
Excluding unearned revenue, the decrease in the working capital deficiency
of $695,000 was primarily attributable to increase in accounts receivable
of $690,000 and decreases in accounts payable of $119,000, customer
deposits of $586,000 offset by decreases in cash of $245,000, note
receivable of $250,000 and increases in current portion of long term debt
of $176,000 and accrued liabilities of $58,000.
Net cash used in investing activities for the period ended March 31, 2003
totaled $107,000, which is comprised of capital expenditures of $128,000
and capitalized software of $229,000 offset by proceeds from note
receivable of $250,000.
Net cash used in financing activities for the period ended March 31, 2003
totaled $103,000, which is comprised of repayments on long-term debt of
$103,000. On January 13, 2003, the Company converted its credit facility
to a term loan which requires monthly principal and interest payments of
$58,000 and matures on February 28, 2005. In addition, the Company amended
its subordinated note to require monthly interest only payments of $52,000
through February 28, 2005, at which time it will convert to a term loan to
be amortized over a three year period. The restructured debt pursuant to
an intercreditor agreement between Canyon Capital and Coast Business
Credit, contains various restrictions and covenants, including a minimum
quick ratio of 0.30 to l.00 and minimum debt service coverage ratio of
0.90 to l.00 which commence as of and for the three-month period ended
March 31, 2003. The minimum quick ratio increases to 0.31 to 1.00 as of
June 30, 2003 and September 30, 2003 and to 0.34 to 1.00 as of December
31, 2003 and for each and every fiscal quarter ending thereafter. The
minimum debt coverage ratio increases to 1.10 to 1.00 for the three-month
period ending June 30, 2003 and to 1.25 to 1.00 for the three-month period
ending September 30, 2003 and for each and every fiscal quarter
thereafter. In the event that we were not in compliance with the various
restrictions and covenants and were unable to receive waivers for
non-compliance, the term and subordinated debt would be immediately due
and payable. We are in compliance with the covenants as of March 31, 2003
and believe that we will be in compliance for every fiscal quarter
thereafter.
Stockholders' deficiency decreased from $14,782,000 at December 31, 2002
to $14,648,000 at March 31, 2003, mainly as a result of net income of
$262,000, the issuance of common stock and warrants to Canyon Capital of
valued at $62,000, and amortization of unearned compensation of $10,000
offset by a reduction in additional paid-in capital $199,000 relating to
the issuance of $149,000 of debt and $50,000 of cash to satisfy a legal
settlement (see note 5).
Although the Company has a net stockholders' deficiency of $14,648,000 and
a working capital deficit of $8,985,000 (which includes subordinated debt
due to CSA of $2,800,000) at March 31, 2003, the Company believes it will
generate sufficient funds from operations and obtain additional financing
or restructure its subordinated note with CSA to meet its operating and
capital requirements. The Company is currently in negotiations with CSA to
restructure the terms of the existing debt, including extending the
maturity date. The Company expects to generate positive cash flow from its
continuing operations during 2003 from shipping out products and services
from its current backlog as of March 31, 2003 as well as new orders. In
the event that the Company cannot generate positive cash flow from its
continuing operations during 2003, the Company can substantially reduce
its research and development efforts to mitigate cash outflow to help
sustain its operations. There can be no assurance that the Company will be
able to sustain profitability, generate positive cash flow from operations
or restructure its debt as necessary. 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,
including protection under the bankruptcy laws.
- 14 -
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company's obligations and commitments
as of March 31, 2003:
Payments Due by Period (in thousands)
----------------------------------------------------------------------
Contractual Cash Obligations Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
---------------------------- ----- ---------------- --------- --------- -------------
Long-Term Debt $10,597 $ 3,465 $ 3,137 $ 3,742 $ 253
Operating Leases 2,319 679 1,110 423 107
Consulting Agreements 336 336 -- -- --
------- ------- ------- ------- -------
$13,252 $ 4,480 $ 4,247 $ 4,165 $ 360
======= ======= ======= ======= =======
- 15 -
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2003
Percentage of Percentage of
March 31, 2002 Revenue March 31, 2003 Revenue
-------------- ------- -------------- -------
Revenue: $ 5,732 100.0% $ 5,186 100.0%
Gross profit 3,752 65.5% 3,714 71.6%
Selling, general and administrative expenses 2,074 36.2% 2,531 48.8%
Research and development costs 1,008 17.6% 682 13.2%
Amortization of intangibles 64 1.1% -- 0.0%
Other operating income (1) (0.0%) (51) (1.0%)
Interest expense, net 384 6.7% 349 6.7%
Income tax expense (benefit) 3 0.1% (59) 0.1%
Income from discontinued operations 106 1.8% -- 0.0%
Net income $ 326 5.7% $ 262 5.1%
Revenue for 2003 was $5,186,000 compared to $5,732,000 in 2002 or a 9.5%
decrease. Revenue decreased $546,000 in 2003, as a result of decreased
professional services and maintenance services mainly due to decreased
capital spending on information technology in 2003 due to the effects of
the September 11, 2001 terrorist attacks on the hospitality industry.
The decrease in revenue in 2003 was mainly attributable to a decrease in
service volume and rates 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
postponed increasing its support prices until the first quarter of 2003
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 is expected to generate
sufficient cash from operations to adequately fund its ongoing operating
activities.
Revenue in our Asian operations increased from $490,000 in 2002 to
$814,000 in 2003 as a result of its acquisition of HSS in June 2002 (see
note 5) which allowed the Company to expand its operations in the Asian
marketplace, strengthen its management team in the territory and create
new opportunities for its new enterprise capable suite of products.
Gross profit for 2003 decreased to $3,714,000 (71.6%) from $3,752,000
(65.5%) in 2002. The decrease in gross profit is mainly due to the
decrease in software and maintenance services revenues during the period
in excess of the Company's cost reductions.
Selling, general and administrative expenses ("SG&A") increased from
$2,074,000 in 2002 to $2,531,000 in 2003. The increase is mainly due to an
increase in selling and marketing expenses for trade shows, advertisement
and travel as the Company continues to actively and aggressively market
its newly developed enterprise suite of applications and services.
Research and development costs decreased from $1,008,000 in 2002 to
$682,000 in 2003. The decrease is due to the capitalization of $229,000 of
software development costs in 2003 associated with the Company's product
development of its new internet native suite of applications. There were
no such costs capitalized in 2002.
Other operating income was $1,000 in 2002 and $51,000 in 2003. The
increase is mainly due to receipt of approximately $46,000 of cash
resulting from a legal settlement.
The decrease in amortization of intangibles in 2003 versus the comparable
period of 2002 is due to the fact that the Company amortized $64,000 of
software development costs in 2002 relating to costs capitalized in 1999.
These costs were fully amortized during 2002.
Net interest expense was $384,000 in 2002 compared to $349,000 in 2003.
The decrease is due to lower balances of interest bearing debt during 2003
as compared to 2002.
The income tax provision (benefit) 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. The income
tax benefit in 2003 is due to the Company recording a domestic income tax
receivable during the period to recover taxes previously paid.
Results from discontinued operations was $106,000 in 2002. Results from
discontinued operations in 2003 was $0 as
- 16 -
all entities held for sale were sold in the fourth quarter of 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about our 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. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates.
We do not have derivative financial instruments for hedging, speculative,
or trading purposes.
INTEREST RATE SENSITIVITY
Of our $10.6 million principal amount of indebtedness at March 31, 2003,
none bears interest at a variable rate. However, $5.7 million bears
interest at a fixed rate of 11%, $2.8 million bears interest at a fixed
rate of 10%, $1.8 million bears interest at 9.25% and $0.3 million bears
fixed interest rates ranging from 6% to 17.5%. Since these debt
instruments bear interest at fixed rates, we have no exposure to decreases
in interest rates because we still are required to pay the fixed rate even
if current interest rates are lower.
FOREIGN CURRENCY RISK
We believe that our exposure to currency exchange fluctuation risk is
reduced because our transactions with international vendors and customers
are generally transacted in US dollars. The currency exchange impact on
intercompany transactions was immaterial for the quarter ended March 31,
2003.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At March 31, 2003, 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
- 17 -
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 6).
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 was 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 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. On October 24, 2002, the Company entered into a global
settlement agreement between the parties whereby all claims, known and
unknown, between the parties were dismissed and the Company received
$796,000 (see note 5).
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 and claims
that are incident to its business. Management believes the ultimate
outcome of these matters will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None
(b) None
(c) None
(d) None
ITEM 5. OTHER INFORMATION
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(a) 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 Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer, James W. Dolan, as
required by Sections 3.02 and 9.06 of Sarbanes-Oxley Act of 2002
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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: April 28, 2003 /s/James W. Dolan
-----------------------------------------
James W. Dolan
Chief Financial and Operating Officer
(Chief Financial and Accounting Officer)
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EXHIBIT INDEX
99.1 Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Sections 3.02 and 9.06 of Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer, James W. Dolan, as
required by Sections 3.02 and 9.06 of Sarbanes-Oxley Act of 2002
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