ITEM 1. BUSINESS
THE COMPANY
MAI Systems Corporation provides total information technology solutions primarily to the hospitality, resort and destination industry and to mid-sized process manufacturers. The solutions provided by the Company typically include applications software, computer hardware, peripherals and wide and local area network design, implementation, installation and support. The software applications are generally the Company's proprietary software, or software which is licensed to the Company on an exclusive or non-exclusive basis. The hardware, peripherals and networking systems are generally third-party products, which the Company distributes. Directly and through its arrangement with third parties, the Company provides on-site and off-site service and support to users of its network and systems hardware.
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 the "Company" and "MAI" include MAI Systems Corporation and its subsidiaries 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 systems for its customers by designing, installing and supporting customer-specific total information management solutions. Focusing primarily on the hotel, motel and resort destinations industry and solutions for mid-sized process manufacturers, it designs, sells, installs and supports information management solutions featuring complex wide area networks ("WANs") and local area networks ("LANs"). It provides a wide array of products and services to its installed base of approximately 6,000 customers and continues to make direct sales of certain products and services which enhance, upgrade and extend the useful life of the Company's legacy systems.
MAI markets its products and services primarily through a team selling approach, which utilizes the company's nationwide network of sales offices. The Company also markets certain products and services through a limited number of distributors, independent value-added resellers ("VARs"), authorized service representatives and independent software vendors ("ISVs").
The Company's activities are conducted principally in the United States, Canada, the United Kingdom, Hong Kong, Singapore and Mexico. The Company also operates subsidiaries in Puerto Rico and Venezuela and operates offices in the People's Republic of China and Malaysia. 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 software support services (both procedural and technical support) to its hospitality and process manufacturing customers from its offices in the United States, the United Kingdom and Singapore. In some countries the Company relies on certain foreign distributors of its products to provide software support services to customers located within the distributors' regions.
The Company provides on-site service and help support desk services to its legacy system customers in the United States, Canada, Puerto Rico and Venezuela. In the United States and Canada, the Company and its third-party subcontractors provide on-site services to the Company's new and legacy system customers.
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PRODUCTS AND SERVICES
In 1999, the Company's revenue was derived from the following product lines:
Percentage of Total Revenue -------------
Hospitality 63.3% Process Manufacturing 14.6% Gaming 3.0% Legacy 19.1% ------ Total 100.0% ======
Products and Services
MAI designs, implements, maintains and supports total information system solutions utilizing WANs and LANs. 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 telephonic support and, through its contracts with Olivetti, on-site field support. The systems designed by the Company utilize the Company's property management system for hotels, resorts and destinations and enterprise resource planning ("ERP") applications software for midsize process manufacturers, which the Company markets with industry-standard hardware and software products from leading technology vendors including Cisco Systems, Compaq Computer, Hewlett Packard, IBM, Data General, Larscom, Microsoft and Novell.
Hospitality - 63.3%
The Company markets three property management systems. Hotel CompuSystem II has been marketed by the Company since 1990, when the Company acquired Computerized Lodging Systems ("CLS"). In August 1996 the Company acquired Hotel Information Systems, Inc. ("HIS") and began marketing its Paragon product line. In October 1996, the Company became the exclusive distributor of the Lodging Touch International products from Enterprise Hospitality Solutions. Each of the product lines has features, which make it particularly well suited to a different segment of the hospitality marketplace.
Hotel CompuSystem II, which targets hotels and resorts in the 300 to 1,000 room range, runs under UNIX. Hotel CompuSystem II is full-featured and provides customers with front desk, night audit, housekeeping and numerous other functions. Additionally, the CLS 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 the system's competitive advantages. Hotel CompuSystem II is installed in over 1,500 sites worldwide.
The Paragon and Paragon Plus property management system, from HIS, is designed to serve the needs of larger hotels and resorts. Running on IBM AS/400 or System 36 minicomputers, the Paragon product line provides the full range of features and functionality required by premier properties, such as Disneyland Paris or Renaissance Hotels International. Paragon is installed in more than 1,000 hotels and resorts around the world, and is a major presence in the Pacific Rim.
The Lodging Touch ("LTS") products comprise a state-of-the-art suite of products designed to take full advantage of the versatility of Microsoft's Windows 2000 and Windows NT operating systems. They are the industry's first fully graphical products to fully utilize the features of the Windows NT operating system and Microsoft Sequel Server. With the LTS products, MAI has been named a Microsoft Solutions Partner.
Process Manufacturing - 14.6%
MAI develops and markets CIMPRO and MANBASE, both of which are ERP applications, used by midsize process manufacturers. The Company's typical customer generally has annual revenues between $20 million and $500 million. These manufacturers convert raw materials into finished goods or into products used to manufacture other goods. Typical users of the Company's ERP product would be manufacturers who convert raw milk into cheese and other dairy
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products, or pharmaceutical manufacturers who convert raw chemicals into medicinal products. These process manufacturers have unique requirements in quality control, regulatory compliance, inventory control and production planning that require an integrated application and system solution.
CIMPRO, which the Company acquired from Datalogix International, Inc., a subsidiary of Oracle Corporation, in March 1997, offers a fully integrated modular system for complete support of process manufacturing planning and tracking, including inventory, production, supply chain management, costing, accounting, electronic data interchange ("EDI") and regulatory compliance. CIMPRO's customer base is a primarily food, chemical and pharmaceutical manufacturer.
MANBASE, the rights to which the Company reacquired in May 1996, also offers a fully integrated ERP application for process manufacturers. MANBASE has been sold primarily to food manufacturers and has many features, which are tailored for the unique requirements of this industry.
The Company intends to provide continuing support for its MANBASE customers but will concentrate its sales and development efforts on the CIMPRO product.
Gaming - 3.0%
The Company marketed software products for the gaming industry through its Gaming Systems International ("GSI") subsidiary. GSI's products provided management systems for on-line slot accounting, player tracking, cage/pit administration, table games accounting, employee time and attendance and numerous other functions. GSI was sold on June 19, 1999.
Legacy - 19.1%
The Company continues to provide principally maintenance services to its installed base of customers. These products and services are designed to enable customers to benefit from their investment in the Company's host-based information systems. 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. Optional OpenBASIC modules permit developers to enhance their Business BASIC applications by integrating them with popular UNIX and MS-DOS/Microsoft Windows software.
With its own personnel and through an outsource agreement with Wang Global Corporation in the United States and with Olivetti Canada Ltd. in Canada, and directly in Venezuela and Puerto Rico, the Company offers on-site repair and warranty service and around-the-clock telephonic support to its 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.
MARKETING AND SALES
MAI markets its products and services primarily through a team-selling approach, which utilizes the Company's nationwide network of sales offices and its Irvine, California-based account representatives. The Company also markets certain products and services through limited numbers 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, 2000, 18 sales and marketing personnel located in the corporate headquarters and five satellite offices. In addition, the Company markets its systems internationally through its subsidiaries which operate in Canada, the United Kingdom, Mexico, Hong Kong, Singapore, Puerto Rico and Venezuela and through various distributors that are exclusive in their jurisdictions. The Company's international subsidiaries employed, as of February 29, 2000, 23 sales and marketing personnel who are engaged in the marketing of MAI products from sales offices in Canada, Mexico, the United Kingdom, Hong Kong, Singapore, Malaysia, the People's Republic of China, Venezuela and Puerto Rico. 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.
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During 1999, the Company's aggregate revenue was derived from geographic areas as follows:
Percentage of Total Revenue -------------
United States 77.6% Asia 9.5% Canada 6.6% United Kingdom 4.6% Other Areas 1.7% ----- 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 possible expropriation or other governmental actions, taxes and political changes. However, as only 22.4% of the Company's 1999 revenue was generated outside the United States, even though most of this activity is in Asia which has recently incurred significant economic and currency disruptions, the risk associated with these foreign operations in relation to the Company's overall financial performance is limited.
SUPPORT AND MAINTENANCE
The provision of around-the-clock customer service is a cornerstone of the Company's business. As of February 29, 2000, the Company had software support agreements with approximately 1,500 customers. Additionally, it had hardware maintenance agreements with approximately 1,300 other customers. The Company employs approximately 38 technicians to provide support for the Company's applications software products.
Telephonic support, which is primarily to assist licensees of the Company's applications products, is provided from the Company's response centers located in Irvine, California, Concord, California, Tarrytown, New York, Singapore and the United Kingdom. The Company utilizes the latest developments in telephony and artificial intelligence-enhanced technology to enable its support technicians to quickly identify and resolve customers' software related computing problems.
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 support and maintenance are of varying duration, provide prospective cancellation rights and require advance payment of fees to the Company. Substantially all of the revenue earned by maintenance operations is 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 Microsoft, Cisco Systems, Compaq Computer, Data General, Hewlett Packard, Seagull Software and IBM 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.
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
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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. 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 customer.
Set forth below is certain information concerning orders, shipments and backlog for 1998 and 1999:
(dollars in millions) 1998 1999 ---- ----
Orders received (net of cancellations) $38.3 $15.5 Shipments (net of equipment returns) 24.6 23.3 Backlog (at period end) 21.8 14.0
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 the hospitality, resort and destination industry and for products for midsize process manufacturers. The Company also maintains and expands OpenBASIC, an operating system that enables users of the Company's proprietary environment, BusinessBASIC, to run their applications under UNIX. The Company's use of the OpenBASIC 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.
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As of February 29, 2000, the Company employed 26 engineers, programmers and other technical personnel in research and development activities. During 1997, 1998 and 1999, the Company incurred $5,583,000, $4,058,000, and $5,114,000, respectively, for 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 in hospitality are generally hotels and resorts with fifty or more rooms, in gaming were casinos with electronic gaming equipment such as slot machines, and in process manufacturing are generally midsize process manufacturers. Legacy comprises a highly diversified group of customers in various industries who use hardware sold by MAI over the years. During 1998 and 1999, 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 geographic 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 its customers. Within this marketplace, competition comes primarily from vendors of competing information technology in the markets in which the Company competes. There are several providers of information technology to the hotel, resort and destination industry against which the Company regularly competes. The primary competitors are of similar size to the Company, and provide technology that is also similar to the Company. They also cover essentially the same territory, which is anywhere in the developed world.
The competition in the enterprise resource planning ("ERP") market is diffuse and new or different competitors often appear with each sales opportunity. In the lower end of the market, the Company competes with local VARs and ISVs who usually resell hardware or networking products of larger equipment manufacturers. These VARs and ISVs usually sell one or two specialized software application products targeted for specific industry market segments. Within the mid-range market, the Company competes with several companies of similar size and technology. On the high end of the market, the Company competes with companies that are much larger and have financial resources far greater than the Company.
Within the gaming industry, the Company competed with manufacturers of gaming equipment. Some of those competitors were substantially larger than the Company.
In the legacy arena, there is some third-party maintenance organizations ("TPMS") that provide service to users of the Company's hardware products. The competition is minimal, as outside companies cannot provide complete solutions to the Company's existing proprietary customer base.
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 (although the term of the license to the LTI software is perpetual), 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.
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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. MAI holds 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 conditions.
EMPLOYEES
As of February 29, 2000, the Company had 310 employees, of whom 192 were employed in the United States, 13 in Canada, 8 in Mexico, 5 in Puerto Rico, 9 in the United Kingdom, 58 in Asia (Hong Kong, Singapore and the People's Republic of China) and 25 in Venezuela. The Company has not experienced any work stoppages and considers its relationship with its employees to be good.
CHAPTER 11 BANKRUPTCY PROCEEDINGS
The Company filed for Chapter 11 bankruptcy protection on April 12, 1993, shortly after the Company's banks foreclosed on all of the outstanding capital stock of certain of the Company's former European subsidiaries in satisfaction of all amounts due under certain loan agreements. On January 27, 1994, the Company's Plan of Reorganization became effective. 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, 1993 under the heading "CHAPTER 11 BANKRUPTCY PROCEEDINGS", is included herein by this reference.
Under the Plan of Reorganization, there was 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. The Company commenced distribution of Common Stock to holders of unsecured claims on April 14, 1994. Through December 31, 1999, the Company had distributed 6,758,251 shares of Common Stock to its former creditors in settlement of all outstanding claims, except for tax claims, and the Company does not anticipate that any further shares will be issued in this matter. The Plan of Reorganization provided holders of unsecured claims the right to elect a limited cash recovery, and through December 31, 1999, $74,570 in cash had been distributed pursuant to such provision.
At December 31, 1999, there is only one material claim to be settled before the Chapter 11 proceedings can be formally closed, a tax claim with the United States Internal Revenue Service (the "Service"). The amount of this claim is in dispute. The Company has reserved $712,000 for settlement of this claim, which it is anticipated would be payable to the Service in equal monthly installments over a period of six (6) years from the settlement date.
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RISK FACTORS
The following discussion should be read in conjunction with the audited consolidated financial statements contained herein. In addition to the factors set forth herein, there may be other factors, or factors that arise in the future which may affect the future performance of the Company.
LIMITED HISTORY OF PROFITABILITY
Prior to its bankruptcy filing in 1993, the Company incurred significant operating losses. The Company was profitable in 1994 and 1995, but then incurred losses in 1996, 1997, 1998 and 1999. 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." Fluctuations in operating results may also result in volatility in the market price of the Common Stock.
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 geographic areas, many of which are larger and have financial resources far greater than the Company. Within its markets, competition comes primarily from vendors of competing information technology in the markets in which it competes. There are several providers of information technology to the hotel, resort and destination industry against which the Company regularly competes. The competition in the ERP market is diffuse and new or different competitors often appear with each sales opportunity. The Company also competes against local value added resellers ("VARs") and independent software vendors ("ISVs"), who usually resell hardware or networking products of larger original equipment manufacturers, 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 from 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.
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. 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
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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, variances between actual results of operations and the results expected by securities analysts, and the factors mentioned under "Fluctuations in Operation Results", among other factors, may have 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. The Company is party to an agreement with Olivetti pursuant to which Olivetti performs certain field engineering services for the Company. If the quality of services provided by Olivetti is not perceived as comparable to that previously provided by the Company, there is a probability that some of the Company's field service customers will terminate their service agreements.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND MARKETS
The Company expects that the market for hospitality, resort and destination information management systems and information systems for midsize process manufacturers 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, copyrights, trademarks 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 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.
The services of Richard S. Ressler, Chairman of the Board and Director of the Company, are provided on a non-exclusive basis pursuant to an agreement, which expires in August 2000. 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 the 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.
YEAR 2000 COMPLIANCE RISKS
This section is a Year 2000 Readiness Disclosure Statement pursuant to the Year 2000 Information and Readiness Disclosure Act of 1998.
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During 1999, the Company successfully completed its program to achieve Year 2000 Readiness. Before June 30, 1999 the Company completed an evaluation of both its information technology systems and its non-technology systems, such as equipment containing microprocessors. At that time the Company determined that all information technology and non-technology systems in its corporate home office in Irvine, California and in its branch or subsidiary offices in the United
States and internationally had been modified to address Year 2000 issues. "Year 2000 Ready" meant that the performance or functionality of the Company's internal systems would not be significantly affected by the dates prior to, during, and after the Year 2000, to include leap year calculations and specific day-of-the-week calculations.
The Company established a Year 2000 "task force" which prepared and released its Year 2000 products readiness report on the Company's "Web Pages" (www.maisystems.com and www.hotelinfosys.com) and made available to clients a copy of this report on a per request basis. The Company launched a direct mail/fax campaign in February 1999 to all of its current maintenance agreement clients as well as to all identifiable clients that may be utilizing the Company's products, informing clients that the "Year 2000 Readiness Program" was available to be viewed at the indicated websites. The mailing also provided clients the opportunity to request information regarding the "Year 2000 Readiness Program" if they so desired. This mailing was executed using the most current client database available. This notification went to approximately 18,000 domestic customers as well as being faxed to approximately 4,000 international customers from the Company's international offices.
The Company currently knows of no significant year 2000-related failures occurring in either its products or its internal systems as a result of the date change from December 31, 1999 to January 1, 2000. As expected, the Company has not experienced a material adverse impact on its business, products, results of operations, or financial condition as a result of the Year 2000 issue. Costs associated with implementing its Year 2000 compliance plan for its corporate offices were approximately $300,000. These costs were expensed as incurred and were comprised primarily of the personnel costs required to review all software for Year 2000 compliance, the informational mailing and website costs and outside consulting fees.
The Company will continue to monitor its critical processes, and those of significant third parties that are critical to the company's operations, for potential Year 2000-related problems. The Company's present "reasonably likely worst case scenario" for Year 2000 problems involves potential product liability claims by substantial customers involving collateral (business interruption) damages. Although the Company has not experienced any product liability claims to date regarding Year 2000 compliance, there can be no assurance that errors or defects, whether associated with Year 2000 functions or otherwise, will not result in product liability claims against the Company in the future. The Company's license agreements with customers typically contain provisions designed to limit the Company's exposure to potential product liability claims; however, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Defective products or releases could result in loss of revenues, increased service and warranty costs and product liability claims, and could adversely affect the Company's market penetration and reputation, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
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ITEM 2.
ITEM 2. PROPERTIES
As of February 29, 2000, the principal properties utilized by the Company were as follows:
All of the properties noted above were occupied by the Company pursuant to leases with various expiration dates. In addition to the premises identified above, the Company leases offices in three additional locations in the United States, one additional location in Canada and seven other locations around the world. 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At December 31, 1999, there was only one material claim to be settled before the Company's Chapter 11 proceeding could be formally closed, a tax claim with the United States Internal Revenue Service (the "Service"). The amount of this claim is in dispute. The Company has reserved $712,000 for settlement of this claim, which it is anticipated would be payable to the Service in equal monthly installments over a period of six (6) years from the settlement date at an interest rate of 6%.
CSA Private Limited v. MAI Systems Corporation
CSA is an 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 our common stock worth approximately $4.8 million in August 1996, which amount has increased to approximately $6,342,000 as of March 31, 2000, pursuant to the agreement. MAI also granted CSA demand registration rights with respect to such stock. CSA requested registration of their shares, but MAI delayed registration based upon its good faith exercise of its rights under its agreement with CSA. On October 5, 1998, CSA Private Limited ("CSA") filed a lawsuit against MAI in the U.S. District Court for the Central District of California. Pursuant to a settlement agreement entered into as of May 13, 1999 MAI agreed by November 1, 1999 to file, or at a minimum to commence the process to file, a registration statement with the Securities and Exchange Commission ("SEC") for the purpose of registering CSA's shares. The number of shares which may be sold by CSA includes: (i) CSA's current ownership of 590,785 shares, and (ii) 6,658,000 additional shares, assuming a stock price of $0.875 per share, which MAI will issue to CSA in order for them to receive net proceeds of approximately $6,342,000 after deducting any discounts or commissions. MAI may be required under the settlement agreement to issue and register additional shares for sale by CSA, in order that they receive net proceeds in the amount called for by the settlement agreement. MAI has not yet filed the registration statement called for by the settlement agreement. CSA initiated another lawsuit in December 1999 in the above-referenced court (a) seeking damages in excess of $5 million; (b) enforcement of the settlement agreement; and (c) and injunctive relief through court order to cause MAI to file the S-1 registration statement. MAI answered the complaint in March 2000 and intends to proceed as expeditiously as possible to file the required S-1 registration statement utilizing year-end information contained in this Annual Report on Form 10-K.
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Enterprise Hospitality Solutions, Inc. v. MAI Systems Corporation
On November, 30, 1999, Enterprise Hospitality Solutions, Inc. ("EHS") and Christian Rivadella commenced an action against MAI in the United States District Court for the Central District of California, alleging that MAI had failed to pay certain royalties to EHS under the parties' exclusive license agreement. The Complaint asserts claims for breach of contract, unjust enrichment, accounting and unfair competition. The Complaint seeks damages, preliminary and permanent injunctive relief, imposition of a constructive trust, an order canceling MAI's exclusive right to license the software at issue under the parties' agreement, and the appointment of a receiver to conduct an audit. On February 1, 2000, MAI answered the Complaint by denying its material allegations and asserted a Counterclaim against the plaintiffs. The Counterclaim asserts claims for breach of the parties exclusive license agreement, breach of the covenant of good faith and fair dealing, unfair business practices, interference with contractual relations and declaratory relief, and a declaration that MAI is not in breach of the parties' license agreement. No trial date has been set.
Wang Global Corporation v. MAI
On November 25, 1996 MAI executed an outsource agreement with Wang Global Corporation in the United States and with Olivetti Canada Ltd. in Canada, for on-site repair and warranty service and telephonic support for the Company's Legacy customers. On July 26, 1999 Wang filed for arbitration in this matter involving alleged breach of contract for payments due for maintenance services provided by Wang. The amounts claimed as due by Wang exceed $3.7 million. MAI's position is that no additional amounts are due Wang. Settlement of the dispute is currently being discussed. Absent a settlement, the arbitration will commence on June 7, 2000.
Other Litigation
The Company is also involved in various other legal proceedings that are incident to its business.
Management believes the ultimate outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares are traded on the American Stock Exchange, Inc. under the AMEX symbol "NOW". Prior to listing on the AMEX, which occurred August 29, 1995, the Company's shares were traded over-the-counter by various market makers under the ticker symbol "MAIS". The following table sets forth the high and low sales prices for the Company's common stock for the indicated periods during 1998 and 1999, as reported by the AMEX. On March 31, 2000, the closing price of our common stock as reported by the AMEX was $0.875. At March 31, 2000, there were 557 stockholders of record.
We have never paid any dividends and do not anticipate declaring or paying cash dividends in the foreseeable future. We intend to retain future earnings, if any, to reinvest in our business. The covenants in our current or future financing agreements may prohibit or limit our ability to declare or pay cash dividends.
On February 3, 1999 the Company issued 201,106 shares of the Company's Common Stock to its Chairman for cash consideration of $500,000. Such shares were issued at 90% of the average of the last sales price for Common Stock for the ten trading days immediately prior to the date of the transaction. The shares issued are entitled to certain registration rights as provided in a Registration Rights Agreement between the Company and its Chairman dated September 8, 1997.
ITEM 6.
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.
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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURS ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not have derivative financial instruments for hedging, speculative, or trading purposes.
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INTEREST RATE SENSITIVITY
Of the Company's $10.59 million principal amount of indebtedness at December 31, 1999, $4.34 million bears interest at a rate that fluctuates based on changes in prime rate. A 1% change in the underlying prime rate would result in a $43,000 change in the annual amount of interest payable on such debt. Of the remaining amount of $6.25 million, $5.25 million bears interest at a fixed rate of 11% and $1.0 million bears fixed interest rates ranging from 6% to 17.5%
The face amount of the Company's notes receivable totals $4,925,000. Of that amount, $2.6 million bears interest at a fixed rate of 10%. The remaining balance consisting of a $2,325,000 note (which has been discounted at the rate of 10% for financial reporting) is non-interest bearing until October 2002, at which time interest is payable at the rate of prime plus 1%. A one-percentage point change in the interest rate of this note would result in a $23,250 annual change in interest income beginning in October 2002. The impact reduces as the principal is paid down over the following four years.
FOREIGN CURRENCY RISK
The Company believes that its exposure to currency exchange fluctuation risk is insignificant because the Company's transactions with international vendors are generally denominated in US dollars, which is considered to be the functional currency of the Company and its subsidiary. The currency exchange impact on intercompany transactions was immaterial in 1999.
ITEM 8.
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 Statement of Stockholders' Equity (Deficiency) and Comprehensive Income (Loss)", "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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10.
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 in 2000. Information required by this Item with respect to executive officers may be found in the section captioned "Proposal 1 - - 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 in 2000. Such information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by 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 in 2000. Such information is incorporated herein by reference.
ITEM 12.
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 in 2000. Such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned "Executive Compensation - Employment 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 in 2000. Such information is incorporated herein by reference.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficiency) and Comprehensive Income (Loss) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The consolidated financial statements of the Company, the notes thereto and the Independent Auditors' Report are incorporated herein by reference to the Company's 1999 Annual Report.
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
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(b) Reports on Form 8-K during the fourth quarter of 1999
None.
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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
Dated: April 14, 2000
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 April 14, 2000.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999 (dollars in thousands)
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EXHIBIT INDEX
EXHIBIT INDEX (Continued)