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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 1-9158
MAI SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2554549
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9600 Jeronimo Road
Irvine, California 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 580-0700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's Certificate of Incorporation authorizes the issuance of
25,000,000 shares of $.01 par value Common Stock. As more fully described in
this report, shares of Common Stock are currently being distributed by the
registrant to its former creditors pursuant to its Chapter 11 Plan of
Reorganization. At March 25, 1997, the number of issued and outstanding shares
of the Company's Common Stock was 8,643,776 shares. The aggregate market value
of all of the shares of Common Stock held by non-affiliates of the registrant as
of March 25, 1997 was approximately $ 39,360,266. Directors and officers and ten
percent or greater stockholders are considered affiliates for the purposes of
this calculation but should not necessarily be deemed affiliates for any other
purpose.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's 1994 Annual Report on Form 10-K are incorporated
herein by reference in Part I; portions of registrant's 1996 Annual Report are
incorporated herein by reference in Part II; and portions of registrant's
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held May 20, 1997 are incorporated
herein by reference into Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MAI Systems Corporation provides total information technology solutions
primarily to the hospitality, resort and destination industry and to midsized
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 Olivetti North
America and Olivetti Canada Ltd., the Company provides on-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
partnerships with 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 midsized
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 7,000 customers and continues to make direct
sales of 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, the Netherlands, 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 on-site service and help support desk services to
its customers in the United States, Canada, the United Kingdom, the Netherlands,
Puerto Rico and Venezuela. In the United States and Canada, the Company and its
subcontractors, Olivetti North America, Inc. and Olivetti Canada, Ltd.
(sometimes collectively referred to as "Olivetti"), provide on-site services to
the Company's new and legacy system customers. The company's foreign
distributors provide support services to their customers in countries where the
Company does not have its own support organization.
PRODUCTS AND SERVICES
In 1996, the Company's revenue was derived from the following sources:
<TABLE>
<CAPTION>
Percentage of Total
Revenue
<S> <C>
Software, networks and professional services %
Software sales ................................................. 12.0%
Network and computer equipment ................................. 24.7%
Professional services .......................................... 19.9%
Total ........................................................ 56.6%
Legacy systems ................................................... 43.4%
-----
</TABLE>
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<TABLE>
<S> <C>
Total .................................................. 100.0%
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</TABLE>
Products and Services
MAI designs, implements, maintains and supports total information
system solutions utilizing complete 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 partnership with
Olivetti, on-site field support. The systems designed by the Company utilize the
Company's industry-leading 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, Larscom, Microsoft and Novell.
Additionally, the Company resells telecommunication services and equipment,
including wide bandwidth T1 lines, which enable its customers to achieve maximum
utilization of their networks.
Products for Hotels, Resorts and Destinations
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 Enhanced Hospitality Solutions.
Each of the product lines has features which make it particularly well-suited to
a different segment of the hospitality marketplace. In addition, the Company
markets the Gaming Systems International ("GSI") products for the gaming
industry.
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 2,000 sites worldwide.
The Paragon 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 1,200 hotels
and resorts around the world, and is a major presence in the Pacific Rim.
The Lodging Touch International ("LTI") products comprise a
state-of-the-art suite of products designed to take full advantage of the
versatility of Microsoft's Windows 95 and Windows NT operating systems. They are
the industry's first fully graphical products and the only ones to fully utilize
the features of the Windows operating system. With the LTI products, MAI has
been named a Microsoft Solutions Partner.
GSI's on-line slot accounting and player tracking product is comprised
of a proprietary circuit board which is installed inside electronic slot
machines, and database software which gathers and maintains data collected by
the circuit boards. The Company utilizes Novell-based LANs to link the slot
machines. The GSI system monitors the activity in the individual gaming machines
in real time, providing information on the activity of each machine, the amount
of money in the machine, whether or not the machine is operating properly and
alerting the casino management if the machine has been tampered with. The
software modules include stand-alone player tracking, cage/pit management, table
games accounting, slot maintenance, employee time and attendance, and numerous
other functions.
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Products for Process Manufacturing
MAI develops and markets MANBASE and CIMPRO, both of which are ERP
applications, used by midsize process manufacturers. The Company's typical
customer generally has annual revenues between $50 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
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 primarily food, chemical and pharmaceutical
manufacturers.
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 efforts on the CIMPRO product.
Other Solutions
In certain instances, the Company will provide customers outside its
core markets with integration and implementation services. These customers
utilize the Company's professional services, consulting, network and system
products and/or partner products, to rehost their legacy application to modern
client/server technology. These customers do not use the Company's hospitality
or process manufacturing applications, but have an in-house or third party
application. Since this is a highly competitive business, the Company provides
this service only to customers with a long-standing relationship to the Company
whose needs are uniquely matched to its services. MAI's products and services
give these customers a single-source network and system solution with rapid
implementation and integration.
Legacy/ Maintenance
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 Olivetti
North America, Inc. 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.
The Company markets a family of upgradeable, industry-standard
platforms based upon IBM RISC and Intel Corporation microcomputer technology and
featuring the Company's OpenBASIC application environment running under various
UNIX-based operating systems. These products provide cost-effective, multi-user
solutions for customers whose needs range from entry-level systems to midsize,
multiprocessor systems that support up to 500 users.
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MARKETING AND SALES
MAI markets its products and services primarily through a team-selling
approach, which utilizes the Company's nationwide network of sales office and
its Irvine, California-based account representatives. The Company also markets
certain products and services through a limited number of VARs, authorized
service representatives and ISVs.
In the United States, the Company's systems are marketed by a direct
sales and marketing organization which included, as of February 28, 1997, 113
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 Netherlands (and in the
United Kingdom through a branch office), 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
28, 1997, 86 sales and marketing personnel who are engaged in the marketing of
MAI products from sales offices in Canada, Mexico, the United Kingdom, the
Netherlands, Hong Kong, Singapore, Malaysia, the People's Republic of China and
Venezuela. Additionally, the Company also sells its products through indirect
channels both within and outside the United States. These indirect channels
include VARs, distributors, ISVs and local sales agents.
During 1996, the Company's aggregate revenue was derived from
geographic areas as follows:
<TABLE>
<CAPTION>
Percentage of Total
Revenues
<S> <C>
United States ............................................ 85.6%
Canada ................................................... 9.2%
Pacific Rim .............................................. 2.7%
Other Areas .............................................. 2.5%
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Total ........................................... 100.0%
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</TABLE>
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 5.2% of the Company's 1996 revenues were
generated outside the United States and Canada, the risk associated with these
foreign operations in relation to the Company's overall financial performance is
low.
SUPPORT AND MAINTENANCE
The provision of around-the-clock customer service is a cornerstone of
the Company's business. As of February 28, 1997, the Company had software
support agreements with approximately 3,000 customers. Additionally, it had
hardware maintenance agreements with approximately 4,000 other customers. The
Company employs approximately 40 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, Dallas, Texas, 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 annual 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
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In response to market demand for standardized hardware and software
products, all of the Company's current systems offerings utilize open systems
architecture, which means that they will operate on a wide variety of
third-party hardware equipment. At present, the Company has relationships with a
number of suppliers including Cisco Systems, Compaq Computer, Hewlett Packard
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 the Company in the event of any interruption of delivery of a
single source supplier.
ORDER, SHIPMENT AND BACKLOG
The Company records and enters into backlog a purchase order for
equipment and software when it receives a customer's written order requesting
delivery within six months, and systems configuration and contract provisions
are verified. In the United States, a deposit is also required from a customer
before the order is recorded and entered into backlog. Orders that are canceled
by the customer and orders that are not shipped within one year are removed from
backlog. Orders that are removed from backlog for non-shipment are restored if
they are reinstated by the customer.
Set forth below is certain information concerning orders, shipments and
backlog for 1996 and 1995:
<TABLE>
<CAPTION>
(dollars in millions)
1996 1995
---- ----
<S> <C> <C>
Orders received (net of cancellations) ....................... $32.8 $22.8
Shipments (net of equipment returns) ......................... 23.8 24.9
Backlog (at period end) ...................................... 15.7 3.0
</TABLE>
The Company's backlog is not necessarily indicative of future revenues.
The 1996 Backlog reflects unfulfilled orders acquired from HIS recorded
as a backlog adjustment by the Company.
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 which 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.
As of February 28, 1997, the Company employed 36 engineers, programmers
and other technical personnel in research and development activities. During
1994, 1995 and 1996, the Company incurred $2,698,000, $2,667,000 and $3,117,000,
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 are generally hotels and resorts with fifty or
more rooms, casinos with electronic gaming equipment such as slot machines, and
midsize process manufacturers. During 1996, 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
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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 competition in the
ERP market is diffuse and new or different competitors often appear with each
sales opportunity. The Company also competes with local VARs and ISVs who
usually resell hardware or networking products of larger original equipment
manufacturers. These VARs and ISVs are typically smaller organizations that are
usually dependent on one or two specialized software application products
targeted for specific industry market segments. Although certain of these
suppliers have national (or international) capability, most are regional and
unable to provide the full range of technical support and maintenance services
offered by the Company.
The Company also competes with independent service organizations
("ISOs"), which provide service to end users of the Company's software products,
and third-party maintenance organizations ("TPMs"), which provide service to
users of the Company's hardware products.
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.
OpenBASIC and certain other intellectual property formerly owned by the
Company is currently owned by Tripple P management BV ("Triple P"), a
corporation organized under the laws of the Netherlands, which acquired the
rights from Application Systems, Inc., a Delaware corporation controlled by the
Company's former bank lenders (the "Banks"), which held the stock of certain of
the Company's former European subsidiaries, originally acquired by the Banks in
connection with the foreclosure described under "Chapter 11 Bankruptcy
Proceedings". MAI retained an exclusive license to use OpenBASIC and other
intellectual property in the western hemisphere and has a nonexclusive license
to use it in certain other parts of the world. The license is perpetual and
royalty-free, but subject to termination under certain conditions.
EMPLOYEES
As of February 28, 1997, the Company had 551 employees, of which 364
were employed in the United States, 33 in Canada, 14 in Mexico, 11 in Puerto
Rico, 13 in the Netherlands, 60 in Asia (Hong Kong, Indonesia, Malaysia,
Singapore and the People's Republic of China) and 56 in Venezuela. Many of the
Company's former field service engineers are now employed by Olivetti in the
United States and Canada. The Company has not experienced any work stoppages and
considers its relationship with its employees to be good.
CHAPTER 11 BANRUPTCY PROCEEDINGS
Prior to its Chapter 11 bankruptcy proceedings, the Company had
followed certain business strategies that eventually led to its defaulting on
its and its Canadian subsidiary's US and Canadian Credit Agreements (the "Credit
Agreements"). Thereafter, shortly before the Company filed for bankruptcy
protection, the Company's banks, parties to the Credit Agreements, foreclosed on
all of the outstanding capital stock of certain
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of the Company's former European subsidiaries (the "Foreclosure") in
satisfaction of all amounts due under the Credit Agreements, which, at such date
amounted to approximately $84,500,000.
The business strategies of the Company that led to the Foreclosure
reflected the nature of the information technology industry as it existed at
that time. Historically, organizations relied upon proprietary, host-based
computing systems to implement software applications, accounting and financial
functions. The Company, like others in the industry, manufactured and serviced
its own host-based information system. However, with the declining costs of the
personal computer and developments in the design and implementation of WANs and
LANs, the information technology industry shifted away from centralized,
host-based information system to a system of workstations or personal computers
sharing data and networked resources over WANs and LANs. This occurred when the
Company had become highly leveraged due to the leveraged acquisition of a
computer maintenance business that the Company had previously owned. Eventually,
the Company and its subsidiary were in default under its Credit Agreements,
which indebtedness matured on November 16, 1992.
EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS
On November 18, 1993, the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court") entered an order confirming the
Company's Plan of Reorganization. The Company had been operating under Chapter
11 protection since April 12, 1993. The order was not appealed and became final
and nonappealable on November 29, 1993. On January 27, 1994, the Bankruptcy
Court entered an order which fixed January 27, 1994 as the effective date (the
"Effective Date") of the Plan of Reorganization. The summary of the material
features of the Plan of Reorganization contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 under the heading, "CHAPTER 11
BANKRUPTCY PROCEEDINGS" is included herein by this reference.
The Plan of Reorganization provided for, among other things, (i) the
satisfaction of substantially all of the unsecured (non-priority) indebtedness
of MAI, Brooke Acquisition Corporation and CLS Software, Inc., the Company's
wholly-owned subsidiaries which were parties to the bankruptcy proceeding (all
of which are collectively referred to as the "Debtors"), through the issuance of
the company's Common Stock and (ii) the cancellation of existing equity
interests in the Debtors. The Plan of Reorganization also provided for the
substantive consolidation and merger of the Debtors and the corresponding
extinguishment of intercompany liabilities and contracts among the Debtors. At
December 31, 1996, the aggregate amount of tax claims had been reduced to
approximately $1,010,000 and the Company continues to dispute certain tax
claims.
The Company commenced distribution of Common Stock to holders of
unsecured claims on April 14, 1994. The Common Stock is issued pursuant to
section 1145 of the Bankruptcy Code, which contains an exemption from
registration under the Securities Act of 1933, as amended. Through December 31,
1996, the Company had distributed 6,728,256 shares of Common Stock to its former
creditors and the Company estimated that an additional 75,000 shares will be
issued in settlement of other creditor claims. The Plan of Reorganization
provided holders of unsecured claims the right to elect a limited cash recovery,
and through December 31, 1996, $74,570 in cash had been distributed pursuant to
such provision.
Under the Plan of Reorganization, there is no recovery for holders of
the Company's $0.01 par value old Common Stock, and all classes of Preferred
Stock outstanding prior to the Effective Date. The interests evidenced by these
securities were extinguished by operation of the Plan of Reorganization on the
Effective Date.
Pursuant to the terms of the Plan of Reorganization, the Company filed
an Amended Certificate of Incorporation pursuant to which new Common Stock were
authorized for issuance. Such shares are being issued to holders of allowed
unsecured claims as described above and will also be issued to optionees under
the Company's stock option plans.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion should be read in conjunction with the audited
consolidated financial statements incorporated herein by reference to the
Company's 1996 Annual Report. In addition to the factors set forth herein, there
may be other factors, or factors which arise in the future which may affect the
future performance of the Company.
COMPETITION
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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 VARs and ISVs, who
usually resell hardware or networking products of larger original equipment
manufacturers, ISOs, which provide service to end users of the Company's
software products, and TPMs, which provide service to users of the Company's
hardware products. Many of the Company's services are also provided by in-house
MIS departments. There can be no assurance that the Company can effectively
compete with any or all of its competitors in any of its business lines.
PRODUCTION AND PROCUREMENT
The networking products and services implemented, maintained and
supported by the Company utilize hardware and software products from technology
vendors. Accordingly, the Company is and will remain dependent on the demand for
products from such vendors. In addition, delay or failure in the delivery of
products or components purchased from third parties could adversely affect
shipments by the Company and its ability to conclude sales. The Company has
purchased many products and components from single sources of supply. Because
the Company's current products are industry standard, management believes that
alternative sources of supply of similar products would be available to the
Company in the event of any interruption of delivery 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.
LIMITED HISTORY OF PROFITABILITY
Prior to the bankruptcy the Company incurred significant operating
losses. While the Company has generally experienced positive operating income
since emerging from bankruptcy, there can be no assurance that the Company will
be able to achieve or maintain profitability or avoid losses on a quarterly or
annual basis in the future.
FLUCTUATIONS IN OPERATING RESULTS
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the timing of significant orders, the
timing of product enhancements and new product introductions by the Company, its
technology vendors and its competitors, the pricing of the Company's products
and services, competitive conditions and general economic conditions. Many of
the Company's systems sales involve lengthy sales cycles and installations.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or revenue will be recognized. As a result, the
operating results of the Company may be materially skewed if a single
transaction is completed earlier or later than expected. The Company has
experienced fluctuations in its operating results and expects to continue to
experience such fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quarterly Results of
Operations" incorporated herein by reference to the Company's 1996 Annual
Report. Fluctuations in operating results may also result in volatility in the
market price of the Common Stock.
LIQUIDITY; VOLATILITY OF STOCK PRICE
Historically, trading volume of the Company's Common Stock has been
small, and the market for the Common Stock has been less liquid than that of
many other publicly traded companies. In August 1995 the Company's Common Stock
became listed on the AMEX under the symbol "NOW". Nevertheless, there can be no
assurance that a stockholder who desires to sell shares of Common Stock can sell
all of the shares that the stockholder desires to sell, either at all or at the
desired times or prices. Like the stock of other technology companies, the
market price of the Common Stock has been and may continue to be volatile.
Factors such as quarterly fluctuations in the Company's results of operations,
trading volume, the announcement of technological innovations or new products by
the Company or its competitors, general conditions in the computer hardware and
software industries, economic conditions generally, the Company's ability to
successfully increase its market share with its existing products while
expanding its product base into other markets, the strength of the Company's
distribution channels, variances between actual results of operations
-9-
<PAGE> 10
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. Additionally, the
Company has recently inaugurated a program to bill its service customers with a
single annual invoice. This program may adversely impact the Company's contract
services business.
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 1997. 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.
ITEM 2. PROPERTIES
As of February 28, 1997, the principal properties utilized by the
Company were as follows:
-10-
<PAGE> 11
<TABLE>
<CAPTION>
Approximate Total
Type of Facility Square Footage Location
---------------- ---------------- --------
<S> <C> <C>
Headquarters, warehousing, administration, marketing and sales 44,538 Irvine, California
Headquarters, software development and support, training and
engineering 32,518 Irvine, California
Product development, sales and support 36,632 Concord, California
Product development, sales and support 6,028 Irving, Texas
Product development, sales and support 8,500 Valhalla, New York(*)
Gaming Systems International headquarters, marketing, sales,
development, support and warehousing 12,150 Las Vegas, Nevada
MAI Canada Ltd Administration, sales, education, warehousing,
test and repair 24,150 Marham, Ontario, Canada
Hotel Information Systems (Ltd) Hong Kong headquarters,
marketing, sales, support 3,638 Hong Kong
Hotel Information Systems (Ltd) Singapore sales and support 4,527 Singapore
</TABLE>
(*)Valhalla, New York commenced March 6, 1997 with the acquisition of CIMPRO
All of the properties noted above were occupied by the Company pursuant
to leases with various expiration dates. The lease for the Company's
headquarters expired December 31, 1996 and the Company is currently holding over
until the completion of its new 50,210 square foot consolidated facility, which
it expects to occupy on or about April 1997. In addition to the premises
identified above, the Company leases offices in three additional locations in
the United States, one additional location in Canada, 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. LEGAL PROCEEDINGS
The Company has filed and will continue to file objections to claims
asserted in its Chapter 11 bankruptcy proceedings. The majority of these claims
would, if upheld, give rise to allowed unsecured claims entitling respective
claimants to distributions of new Common Stock. A number of filed objections in
respect of secured claims, priority claims, tax claims, convenience claims and
cure claims are still outstanding at December 31, 1996. To the extent the
Company's objections to such claims are not sustained, the Company will be
obligated to pay such claims in a lump sum in the case of convenience claims and
administrative claims, and in the case of secured claims, priority claims, tax
claims and cure claims, on a deferred basis over six to seven years, depending
on the type of claim, at an interest rate of 6% in accordance with the Plan of
Reorganization. The Company does not believe the outcome of these objections
will be material.
The Company is also involved in various other legal proceedings which
are incident to its business. Management believes the ultimate outcome of these
matters will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-11-
<PAGE> 12
PART II
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 Company's Common Stock was issued pursuant to an order of the
Bankruptcy Court dated January 27, 1994. In addition, all previously outstanding
equity interests were canceled. Until April 10, 1993, the principal market for
the Company's previously outstanding common stock (the "Old Common Stock") was
the New York Stock Exchange, where the common stock was traded under the ticker
symbol "MCO". Thereafter, until November 18, 1993, the Company's Old Common
Stock was traded over-the-counter by various market makers.
No cash dividends have been paid to date on the Common Stock. At
February 28, 1997, there were 594 stockholders of record.
Reference is made to the table entitled "Quarterly Data" in the 1996
Annual Report which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL INFORMATION
The information required by this item is incorporated by reference to
the Company's 1996 Annual Report under the heading, "Selected Financial
Information".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
the Company's 1996 Annual Report under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the Company's 1996 Annual Report under the headings, "Consolidated Balance
Sheets", Consolidated Statements of Operations", "Consolidated Statements of
Stockholders' Equity (Deficiency)", "Consolidated Statements of Cash Flows",
"Notes to Consolidated Financial Statements" and "Independent Auditors' Report".
Schedule II Valuation and Qualifying Accounts is set forth in Schedule
II in this Annual Report on Form 10-K.
All other schedules and financial statements are omitted because they
are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be
found in the section captioned "Election of Directors" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held May 20, 1997. Information required
by this Item with respect to executive officers may be found in the section
captioned "Proposal 1--Election of Directors,
-12-
<PAGE> 13
- --Executive Officers" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held May 20, 1997. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held May 20, 1997. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Management" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held May 20, 1997. Such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Executive 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 May 20, 1997. Such information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements of the Company, the
notes thereto and the Independent Auditors' Report are incorporated herein by
reference to the Company's 1996 Annual Report.
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
(3) Exhibits:
Number Exhibit
- ------ -------
2.1 First Amended Joint Chapter II Plan of Reorganization of MAI systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as
confirmed by the United States Bankruptcy Court for the District of
Delaware, on November 13, 1993, filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated January 15, 1994.
2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for
the district of Delaware on January 27, 1994, as filed as Exhibit 2.2
to the Registrant's Current Report on form 9-K dated February 9, 1994.
3.1 Amended and Restated Certificate of Incorporation of MAI Systems
Corporation filed as Exhibit 2(a) to the Registrant's Registration
Statement on Form 8-A/A filed with the Securities and Exchange
Commission on February 24, 1994.
3.2 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation filed as Appendix "A" to the
Registrants Notice of Annual Meeting and Proxy Statement filed with the
Securities and Exchange Commission on April 26, 1996.
3.3 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
Registrant's Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.
-13-
<PAGE> 14
10.1** Equipment Service Subcontract dated December 2, 1996 between MAI
Systems Corporation and Olivetti North America, Inc. [**Confidential
treatment has been requested for certain portions of this document and
the confidential portions of Exhibit 10.1 have been filed separately
with the Securities and Exchange Commission.]
10.2** Equipment Service Subcontract dated February 21, 1997 between MAI
Canada Ltd. and Olivetti Canada Ltd. [ ** Confidential treatment has
been requested for certain portions of this document and the
confidential portions of Exhibit 10.2 have been filed separately with
the Securities and Exchange Commission].
10.3** Software License Agreement dated October 1, 1996 between MAI Systems
Corporation and Enhanced Hospitality Solutions filed as Exhibit 10.1 to
the Registrant's 10-Q/A filed with the Securities and Exchange
Commission on January 10, 1996. [ ** Confidential treatment has been
requested for certain portions of this document and the confidential
portions of Exhibit 10.3 have been filed separately with the Securities
and Exchange Commission].
10.4 Lease Agreement dated January 2, 1997 between MAI Systems Corporation
and the Irvine Company, a Michigan corporation.
10.5 MAI Systems Corporation Amended 1993 Stock Option Plan
10.6 Consulting Agreement dated as of August 15, 1994, as amended as of
October 17, 1994 and October 16, 1996 by and between the Registrant and
Orchard Capital Corporation, relating to the services of Richard S.
Ressler, Chairman and Chief Executive Officer of the Company. The
original agreement and the October 17, 1994 amendment are incorporated
herein by reference to the Company's 1994 Annual Report on Form 10-K.
11.1 Computation of Income (Loss) Per Share
13.1 The Company's Annual Report to Stockholders for the year ended December
31, 1996, but only to the extent such report is expressly incorporated
by reference into Items 5, 6, 7, 8 and 14(a)(1) of this report and such
report is not otherwise deemed to be filed as part of this Annual
Report on Form 10- K.
21.1 Subsidiaries of MAI Systems Corporation
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAI SYSTEMS CORPORATION
By:/s/ Richard S. Ressler
------------------------
Richard S. Ressler
Chairman
Dated:
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 [date].
Signatures Title
/s/Richard S. Ressler Chairman, Director
- -----------------------------------
Richard S. Ressler
/s/George G. Bayz President and Chief Executive
- ----------------------------------- Officer, Director
George G. Bayz
/s/Alan A. Gleicher Director
- -----------------------------------
Alan A. Gleicher
/s/Morton O. Schapiro Director
- -----------------------------------
Morton O. Schapiro
/s/Lewis H. Stanton
- ----------------------------------- Executive Vice President and Chief
Financial Lewis H. Stanton Operating and Officer (Chief Accounting
Officer)
-15-
<PAGE> 1
EXHIBIT 3.1
AMENDMENT #1
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
PURSUANT TO SECTIONS 245 AND 303 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
BY AND ON BEHALF OF
MAI SYSTEMS CORPORATION
MAI Systems Corporation, a Delaware corporation organized and existing
under and by virtue of the laws of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify that:
1. The name of the Corporation is "MAI Systems Corporation" and the
date of filing of its original Certificate of Incorporation with the
Secretary of the State of Delaware was September 6, 1984.
2. The name under which the Corporation was originally
incorporated was "BSIC Subsidiary, Inc."
3. This Amended and Restated Certificate of Incorporation amends and
restates the Corporation's Certificate of Incorporation, as amended to
date, in its entirety and is intended to supersede the Corporation's prior
Certificate of Incorporation, as amended, in all respects.
4. This Amended and Restated Certificate of Incorporation was
adopted as part of a plan or reorganization for the Corporation in the
manner prescribed by Section 303 of the General Corporation Law of the
State of Delaware.
5. This Amended and Restated Certificate of Incorporations hall
become effective upon the filing hereof with the office of the Secretary
of State of the State of Delaware.
6. The text of the Corporation's Certificate of Incorporation
is hereby amended to read as herein set forth in full:
FIRST: The name of the Corporation is "MAI Systems Corporation".
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
<PAGE> 2
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: In accordance with the provisions of Section 303 of the General
Corporation Law of the State of Delaware, the authorized capital stock of the
Corporation, consisting (prior to the date hereof) of 100,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock,
par value $1.00 per share, shall be cancelled, and the rights of the holders
thereunder shall be extinguished as of the date thereof.
FIFTH: The total number of shares which the Corporation shall have
authority to issue is 10,000,000 shares of Common Stock, par value $.01 per
share. In accordance with Section 1123(a)(6) of Title 11 of the United States
Code, as amended and as in effect on the date of this Amended and Restated
Certificate of Incorporation, the Corporation shall not issue any nonvoting
equity securities.
A. Dividends: The holders of shares of Common Stock shall be
entitled to receive, when and if declared by the Board of Directors, out of
the assets of the Corporation which are by law available therefor, dividends
payable either in cash, property or shares of Common Stock.
B. Voting Rights: At every annual or special meeting of
stockholders of the Corporation, every holder of Common Stock shall be
entitled to one vote, in person or by proxy, for each share of Common Stock
standing in his or her name on the books of the Corporation.
C. Liquidation, Dissolution, or Winding Up: In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the affairs
of the Corporation, after payment or provision for payment of the debts and
other liabilities of the Corporation, the holders of all outstanding shares of
Common Stock shall be entitled to share ratably in the remaining net assets of
the Corporation.
SIXTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to
adopt, amend or repeal the by-laws of the Corporation.
SEVENTH: Elections of directors need not be by written ballot unless
the by-laws of the Corporation shall otherwise provide.
EIGHTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receivers appointed for the Corporation under the provisions
of Section 291 of Title 8 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver or
receivers appointed for the Corporation under the provisions of Section 279 of
Title 8 of the General Corporation Law of the State of Delaware, order a meeting
of creditors or class of creditors, and/or the
<PAGE> 3
stockholders, or class of stockholders of the Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which said application has been made, be binding on all the
creditors or class of creditors, and/or on all of the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
TENTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
any improper personal benefit. This Article Tenth shall not apply to any act or
omission occurring prior to the date when this provision shall become effective.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of directors of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ELEVENTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, s the same
may be hereafter amended and supplemented, indemnify and all persons whom it
shall have power to indemnify under said Section from and against any and all of
the expenses, liabilities or other matters referred to in or covered by said
Section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the
<PAGE> 4
heirs, executors and administrators of such person.
IN WITNESS WHEREOF, MAI Systems Corporation has caused this Certificate to
be executed in its corporation name by its Vice President and its seal to be
hereunto affixed and attested by its Assistant Secretary this 30th day of
December, 1996.
MAI SYSTEMS CORPORATION
By /s/ Elliot J. Stein
----------------------
Elliot J. Stein
Vice President
ATTEST:
By: /s/ Eric Christensen
- ------------------------
Eric Christensen
<PAGE> 1
EXHIBIT 3.2
AMENDMENT NO. 1
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
PURSUANT TO SECTIONS 245 AND 303 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
BY AND ON BEHALF OF
MAI SYSTEMS CORPORATION
MAI Systems Corporation, a Delaware corporation organized and existing
under and by virtue of the laws of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify that:
1. This Amendment No. 1 to the Amended and Restated
Certificate of Incorporation amends and restates Articles FOURTH and FIFTH of
the Corporation's Certificate of Incorporation, in their entirety, as amended
to date, as follows:
FOURTH: In accordance with the provisions of Section 303 of the
General Corporation Law of the State of Delaware, the authorized capital stock
of the Corporation shall consist of 25,000,000 shares par value $0.01 per
share.
FIFTH: The total number of shares which the Corporation shall
have authority to issue is 25,000,000 shares of Common Stock, par value $.01
per share. In accordance with Section 1123(a)(6) of Title 11 of the United
States Code, as amended and as in effect on the date of this Amended and
Restated Certificate of Incorporation, the Corporation shall not issue any
nonvoting equity securities.
A. Dividends: The holders of shares of Common Stock shall be
entitled to receive, when and if declared by the Board of Directors, out of the
assets of the Corporation which are by law available therefor, dividends payable
either in cash, property or shares of Common Stock.
B. Voting rights: At every annual or special meeting of
stockholders of the Corporation, every holder of Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his or her name on the books of the Corporation.
C. Liquidation, Dissolution, or Winding Up: In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the affairs
of the Corporation, after payment or provision for payment of the debts and
other liabilities of the Corporation, the holders of all outstanding shares of
Common Stock shall be entitled to share ratably in the remaining net assets of
the Corporation.
IN WITNESS WHEREOF, MAI Systems Corporation has caused this Certificate
to be executed in its corporation name by its Vice President and its seal to be
hereunto affixed and attested by its Assistant Secretary this 21st day of May
1996.
MAI SYSTEMS CORPORATION
By: /s/ STANLEY P. WITKOW ATTEST BY: /s/ ERIC CHRISTIANSEN
------------------------------ ------------------------------
Stanley P. Witkow Eric Christiansen
<PAGE> 1
EXHIBIT 10.1
EQUIPMENT SUPPORT SUBCONTRACT
This Agreement, consisting of this Equipment Support Subcontract along with
Schedules A through G, is between OLIVETTI NORTH AMERICA, INC. ("ONA"), a
Washington corporation, with corporate headquarters at 22425 East Appleway,
Liberty Lake, Washington and MAI SYSTEMS CORPORATION, ("MAI"), a Delaware
corporation, with corporate headquarters at 9600 Jeronimo Road, Irvine, CA
92718, and is effective on December 2, 1996 ("Effective Date").
1. PURPOSE
MAI sells computers and computer systems and provides service for the
equipment it sells to its customers. As part of that business, MAI
provides warranty service for many of the products it sells and has
also entered into contracts with many of its customers to provide
maintenance, repair, and related services for these products. In
order to provide these services, MAI employs a number of computer
service technicians working out of a number of field offices
throughout the United States. MAI is planning to discontinue its
current field service operations and needs a company with a qualified
field service organization to perform the field service portion of
MAI's contracts with its customers. ONA is also in the business of
selling computers and computer systems and also maintains a computer
service field organization throughout the United States. ONA has
agreed to provide MAI with computer field service throughout the
United States under the terms and conditions set forth in this
agreement.
2. APPLICATION OF AGREEMENT
This Agreement is intended to cover not only the provision of computer
field service operations under those contracts MAI has with its
customers as of the Effective Date of this Agreement ("Existing
Customer Agreements"), but contracts MAI enters into with its
customers after the Effective Date as well ("New Customer
Agreements"). However, the terms under which ONA will provide
services related to Existing Customer Agreements differ in some
respects from those under which it will provide services related to
New Customer Agreements.
Schedules A through E define the services ONA will perform and the
manner in which MAI will support ONA and pay ONA for those services
with respect to New Customer Agreements. Schedule F identifies the
ways in which the treatment of these same issues will differ with
respect to Existing Customer Agreements.
Equipment Support Subcontract - 1 11/25/96
MAI Systems Corp.
<PAGE> 2
3. EXCLUSIVITY/RIGHT TO BID
This Agreement is intended to establish an exclusive relationship
whereby ONA will provide all of MAI's Maintenance Service needs (for
both Warranty Service and Contract Service) under Existing Customer
Agreements. MAI agrees to have ONA provide all its field service
requirements of this type under the Existing Customer Agreements and
that it will not perform those obligations itself or contract with any
other person or entity to provide such requirements so long as this
Agreement is in force.
MAI further agrees that with respect to all of its other Equipment
Support needs it may have during the term of this Agreement, it shall,
at a minimum, provide ONA with the opportunity to bid on the provision
of such services. MAI further agrees to provide the use of office
space and access to MAI's existing office equipment (telephones,
copiers, fax machine, etc.) at MAI's corporate headquarters for an ONA
employee to work on-site to serve as an account contact and to respond
to requests for bids from MAI. ONA agrees to reimburse MAI for long
distance telephone charges incurred by this employee.
4. MAI EMPLOYEES
a. MAI shall terminate the employment of those MAI employees
identified by name and title on Schedule G (the "Target
Employees") effective December 1, 1996.
b. Prior to the Effective Date, ONA will offer employment to the
Target Employees on the following terms:
(1) a salary or hourly wage no less than that being paid
to the Target Employee by MAI,
(2) ONA's normal terms and conditions of employment for
similar employees,
(3) treatment of the Target Employees' credited years of
service with MAI (as shown on Schedule G ) as service
with ONA for all purposes except as follows:
a) Notice/Severance Pay. Target Employees
identified on Schedule G as Customer Support
Engineers, Senior Customer Support Engineers,
Customer Support Specialists, District
Product Specialists, Senior Field Materials
Coordinators, National Product Support
Specialists or Logistics Planners (1) will
not be entitled to payment of more than 12
weeks of severance pay under ONA's
Notice/Severance Pay Policy regardless of
their actual years of service (MAI, ONA, or
combined), and (2) shall not be entitled to
receive notice pay under ONA's
Notice/Severance Pay Policy.
b) Pension Plan. A Target Employee's years of
service with MAI will not be considered for
purposes of computing the pension benefit to
which that employee is entitled under ONA's
Defined Benefit Pension Plan. However, those
years of service with MAI will be considered
for
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MAI Systems Corp.
<PAGE> 3
purposes of satisfying the vesting
requirements of that plan. Regardless of a
Target Employee's ONA hire date, such
employee shall not become a participant in
ONA's Defined Benefit Pension Plan until at
least January 1, 1997.
c) ONA agrees not to layoff any Target Employees
identified on Schedule G as managers during
the twelve (12) month period beginning on the
Effective Date. This shall not prohibit ONA
from terminating such employees for cause.
(4) ONA's offer of employment to a Target Employee shall
be contingent on that Target Employee agreeing to
transfer his or her accrued vacation balance to ONA
instead of having the value of that balance paid in
cash by MAI upon termination of employment. MAI
agrees to reimburse ONA for the value of all vacation
balances transferred to ONA by Target Employees (the
"Transferred Total"). This reimbursement shall be
made beginning January 1, 1997 in monthly payments
equal to the greater of (i)one-twelfth (1/12) of the
Transferred Total or (ii)the actual value of
transferred vacation balances taken by Target
Employees in the prior month. MAI agrees to
indemnify ONA against any claims arising from this
provision on transferring vacation balances in
accordance with the provisions of Section 13(a) of
this Agreement.
c. ONA's current field engineers in metropolitan New York and in
New Jersey are unionized and MAI has indicated that it is not
willing to have its ex-employees incorporated into the union
unless it is sure that they would not be the first to be laid
off should layoffs occur. MAI is concerned about having a
trained work force in place to do the work being subcontracted
to ONA pursuant to this Agreement. ONA is currently working
with its union to try to modify the existing collective
bargaining agreement to address this problem. However, if
that effort is ultimately unsuccessful, ONA will then be
forced to take some other action to resolve this situation,
including possibly subcontracting the work from MAI in this
area to another company with qualified personnel. MAI hereby
consents to such subcontracting.
d. The provisions of this section are intended solely for the
benefit of MAI and ONA and are not intended to create or
expand any rights, as third party beneficiaries or otherwise,
of any other person, including without limitation any of MAI's
employees. Nothing in this section shall be construed as
requiring ONA to pay severance to any employee.
5. SOFTWARE LICENSE
MAI either owns or has the right to license certain software
(including diagnostic programs) which is either necessary or desirable
to use in providing Equipment Support (the "Software"). Subject to
the terms and conditions of this Agreement, MAI hereby grants to ONA a
non-exclusive license to access and use the Software as ONA determines
appropriate
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<PAGE> 4
in performing its responsibilities under this Agreement and only under
this Agreement. ONA shall be permitted to make copies of the Software
as it deems appropriate for use in performing its obligations under
this Agreement.
ONA acknowledges that the Software is licensed, not sold, to it solely
for the purpose of performing its obligations under this Agreement.
ONA further acknowledges that the Software is "Confidential" and
subject to the provisions of Section 16, Non-Disclosure, of this
Agreement. ONA acknowledges that it is not permitted, nor shall it
permit anyone else, under any circumstances, to decode, reverse
engineer, decompile, or disassemble the Software.
6. ONA RESPONSIBILITIES
During the term of this Agreement, ONA will:
a. provide Equipment Support in the United States in the manner
identified in Schedules A & F;
b. maintain sufficient fully trained, competent and qualified
maintenance personnel to perform the Equipment Support
required by this Agreement;
c. perform the obligations imposed on it with respect to Parts in
Schedules C & F; and
d. except as permitted by this Agreement, not enter into direct
Contract Service or Equipment Support agreements with any MAI
End Users pertaining to equipment which is the subject of a
service agreement with MAI.
7. CUSTOMER RESPONSIBILITIES
During the term of this Agreement, MAI will:
a. order Equipment Support from ONA in the manner identified in
Schedules A & F;
b. pay for Equipment Support rendered by ONA in the manner
identified in Schedules B & F;
c. perform the obligations imposed on it with respect to Parts in
Schedule F; and
d. provide ONA with the Technical Support necessary to permit it
it provide Equipment Support as identified in Schedule D.
8. DEFINITIONS
For the purposes of this Agreement the following terms shall have the
following meanings:
a. "Contract Service" means performing Maintenance Service
pursuant to a contract with the End User in which the End User
pays MAI for its agreement to provide such service.
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<PAGE> 5
b. "Equipment Support" means performing any one or more of the
following types of service on the Equipment:
(1) Maintenance Service, (which includes both Contract
Service and Warranty Service)
(2) Installation Service, or
(3) Time and Materials Service
as those terms are defined in the Schedules to this Agreement.
c. "Existing Customer Agreement" means a contract between MAI and
its customer which is in effect on the Effective Date of this
Agreement and also means any subsequent renewal of such an
Agreement on substantially the same terms and conditions as
are in effect on the Effective Date of this Agreement.
d. "Location" means a site where Equipment is installed.
e. "New Customer Agreement" means
(1) a contract between MAI and its customer which was not
in effect on the Effective Date of this Agreement, or
(2) an Existing Customer Agreement which is renewed after
the Effective Date of this Agreement on terms and
conditions substantially different than those in
effect on the Effective Date of this Agreement.
MAI and ONA may agree in writing to continue to treat an
Existing Customer Agreement which is renewed after the
Effective Date of this Agreement on terms and conditions
different than those in effect on the Effective Date of this
Agreement as an Existing Customer Agreement despite the
changes in terms and conditions.
f. "Parts" means any modules, subassemblies, boards, components
and related materials of an item or unit of the Equipment.
g. "Service City" means those cities in which ONA maintains a
service office. Schedule E lists ONA's present Service Cities.
h. "Warranty Service" means performing Maintenance Service in
fulfillment of a warranty given to the End User in connection
with the purchase of the Equipment.
In addition, capitalized terms not defined in this section shall have
the meanings stated in the text of this Agreement.
9. TERM
This Agreement shall take effect on the Effective Date, regardless of
when it is signed. Unless sooner terminated in accordance with the
terms of this Agreement, this Agreement shall have an initial term of
five (5) years ("Initial Term") and shall automatically be extended
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<PAGE> 6
for successive one (1) year periods thereafter. Either party may
terminate this Agreement at the end of the Initial Term or at the end
of any subsequent annual renewal upon not less than one hundred eighty
(180) days prior written notice.
10. INTERNATIONAL SERVICE
MAI has indicated that in the future it may need Equipment Support in
countries other than the United States. ONA agrees that, upon request
by MAI, it will attempt to provide such service through Ing. C.
Olivetti & C., S.p.A. and its affiliates on terms and conditions to be
agreed upon with MAI.
11. WARRANTY
ONA warrants that all Equipment Support provided by it pursuant to
this Agreement will be performed in a competent and workmanlike
manner. This warranty is in lieu of all warranties, express or
implied, which may be deemed applicable to the subject matter of this
agreement, including, but not limited to, any implied warranties of
merchantability and fitness for a particular purpose.
12. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE ENTITLED TO RECOVER ANY OF THE FOLLOWING TYPES
OF DAMAGES FROM THE OTHER IN CONNECTION WITH ANY CLAIM RELATED TO THIS
AGREEMENT, REGARDLESS OF WHETHER THAT CLAIM IS BASED IN TORT, CONTRACT
OR OTHERWISE:
(1) THE LOSS OF OR THE COST OF RECONSTRUCTING DATA STORED ON DISK
FILES, TAPES, OR MEMORIES, EXCEPT AS PART OF A CLAIM FOR
INDEMNIFICATION PURSUANT TO SECTION 13, BELOW(1),
(2) LOSS OF GOODWILL,
(3) INCIDENTAL DAMAGES
(4) CONSEQUENTIAL DAMAGES,
(5) PUNITIVE DAMAGES,
(6) ANY FORM OF INDIRECT DAMAGES OF ANY NATURE, OR
(7) DAMAGES FOR PERSONAL INJURY OR PROPERTY DAMAGE EXCEPT TO THE
EXTENT CAUSED BY THE NEGLIGENCE OF THAT PARTY OR ITS EMPLOYEE.
__________________________________
(1) MAI agrees to continue to include a limitation of liability
provision substantially similar to Section 13 of its current Services
Agreement form contract (see Appendix F-2) in future services
agreements with Customers.
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<PAGE> 7
13. INDEMNIFICATION
a. MAI agrees to defend, indemnify and save ONA harmless from and against
any and all claims, suits, or proceedings brought against it and in any
way relating to either the allegedly negligent or wrongful acts or
omissions of MAI, or the products sold by MAI covered by this
Agreement, and from the costs, expenses and damages incurred by ONA in
connection with such claims, suits and proceedings. ONA agrees to
promptly notify MAI of any claim as to which indemnification is sought,
cooperate fully in the defense of such claim, and permit MAI or its
insurance carrier to control the defense and settlement of such claim.
b. ONA agrees to defend, indemnify and save MAI harmless from and against
any and all claims, suits, or proceedings brought against it and in any
way relating to allegedly negligent or wrongful acts or omissions of
ONA, and from the costs, expenses and damages incurred by MAI in
connection with such claims, suits and proceedings. MAI agrees to
promptly notify ONA of any claim as to which indemnification is sought,
cooperate fully in the defense of such claim, and permit ONA or its
insurance carrier to control the defense and settlement of such claim.
14. INSURANCE
Each party represents and warrants to the other that it has and will
maintain liability insurance coverage throughout the Term of this
Agreement, in an amount appropriate in light of the potential liability
created by this Agreement.
15. NON-SOLICITATION OF EMPLOYEES
From the Effective Date until six (6) months after the termination of this
Agreement, MAI shall not, directly or indirectly, hire or solicit for hire
any ONA employee connected with performance under this Agreement, without
ONA's prior written approval. This section shall not prevent MAI from
soliciting or hiring any ONA employee after such employee's employment with
ONA has been ended through no involvement by MAI. It is further agreed
that the damages as a result of a breach of this provision would be
difficult to measure and that the amount of One Hundred Thousand
($100,000.00) Dollars is a good approximation of the damages that would be
caused by one violation of this provision and should be payable as
liquidated damages in the event of a breach of this provision.
This paragraph shall not apply to prevent MAI from hiring or attempting to
hire the Target Employees following a full or partial termination of this
Agreement by MAI pursuant to the terms of this Agreement.
16. NON-DISCLOSURE
a. Both parties agree that any information disclosed to it by the other
party in connection with this Agreement which has been designated in
writing as "Confidential" (including information disclosed orally and
identified in writing as "Confidential"
Equipment Support Subcontract - 7 11/25/96
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<PAGE> 8
within ten (10) days after the initial oral disclosure) shall be
treated as such. Additionally, all information provided by MAI to ONA
in connection with requests for bids or proposals for Equipment
Support, including the identity of MAI's customers and their service
requirements, shall be deemed "Confidential" whether or not it is so
identified. Each agrees that with respect to such information it will:
(1) not disclose such information to third parties without the written
consent of the other,
(2) use such information solely for the purposes of this Agreement,
(3) treat such information of the other with a degree of care which is
reasonably calculated to protect such information from disclosure
(but in any event with at least the same degree of care as it
treats its own confidential information),
(4) inform its employees, agents or authorized representatives of the
confidential or proprietary nature of such information, and
(5) direct such persons to comply with the terms of this Agreement.
Either party may bring an action in equity to foreclose violations of
this section through injunctive relief.
b. The following types of information shall not be considered
"Confidential" information subject to the restrictions of this
provision:
(1) Information in the possession of or known to the receiving party
on the date of receipt,
(2) Information in the public domain at the time of its disclosure or
which enters the public domain after such disclosure through no
fault of the receiving party,
(3) Information independently developed by the receiving party, its
employees, agents or representatives without reference to the
other party's confidential information,
(4) Information made available to the receiving party, its employees,
agents or representatives by a third party having a right to do
so, or
(5) Information ordered disclosed pursuant to judicial or other lawful
governmental action, provided, that the party receiving such
request gives prompt written notice of the request to the other
party.
c. MAI acknowledges that ONA's business includes the design, development,
and servicing of products for the computer-based industry, and nothing
in this Agreement shall preclude or in any way impair ONA's engaging or
continuing to engage in that business.
d. The non-disclosure obligations imposed by this Agreement shall continue
in force for so long as the information is maintained as confidential
by the disclosing party and for
Equipment Support Subcontract - 8 11/25/96
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<PAGE> 9
a minimum period of three (3) years from the date of first
disclosure, regardless of any termination of this Agreement.
17. RELATIONSHIP BETWEEN PARTIES
ONA shall perform its duties under this Agreement as an independent
contractor, and not as an agent or affiliate of MAI. In particular:
a. nothing contained in this Agreement shall be construed to constitute
ONA as a partner, employee or agent of MAI, nor shall either have any
authority to bind the other in any respect, it being intended that each
shall remain an independent contractor responsible for its own actions,
b. MAI shall exercise no control over the activities and operations of
ONA, each being recognized hereunder as an independent contractor,
c. The relationship between ONA and MAI's customers shall be that of a
subcontractor; ONA is not assuming any of the Customer Agreements and
shall have no direct obligation to MAI's customers.
18. ASSIGNMENT
Neither party may assign any of its rights, interests or duties under this
Agreement without the prior written consent of the other party, which
consent shall not be unreasonably withheld. In the event one party seeks
consent to an assignment and the other party withholds its consent to that
proposed assignment, the party seeking consent may terminate this Agreement
upon sixty (60) days notice to the other party.
19. AUTHORIZED REPRESENTATIVES AND NOTICES
a. Each party shall at all times designate one representative who shall be
authorized to take any and all action and/or grant any approvals
required in the course of performance of this Agreement. Such
representative shall be fully authorized to act for and bind such party
including the approval of amendments to this Agreement. Until written
notice to the contrary, the authorized representatives of the parties
are as follows:
FOR ONA: FOR MAI:
Vice President, Customer Service Vice President, Customer Service
Olivetti North America, Inc. MAI Systems Corporation
22424 E. Appleway 9600 Jeronimo Road
Liberty Lake, WA 99019 Irvine, CA 92718
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MAI Systems Corp.
<PAGE> 10
b. Any notice or other communication required or permitted under this
Agreement shall be in writing and shall be delivered in person or sent
by overnight commercial courier service with receipt, addressed as set
forth below:
IN THE CASE OF ONA: WITH A COPY TO:
Vice President General Counsel
Customer Service Legal Department
Olivetti North America, Inc. Olivetti North America, Inc.
22425 E. Appleway 22425 E. Appleway
Liberty Lake, WA 99019 Liberty Lake, WA 99019
IN THE CASE OF MAI: WITH A COPY TO:
Vice President General Counsel
Customer Service Legal Department
MAI Systems Corporation MAI Systems Corporation
9600 Jeronimo Road 9600 Jeronimo Road
Irvine, CA 92718 Irvine, CA 92718
Notice shall be deemed given when received.
c. Either party may change the name or address to which notices or other
communications are to be sent by giving written notice of such change
to the other party.
20. EXCUSED NON-PERFORMANCE
A delay in or failure of performance under this Agreement caused by
circumstances beyond the reasonable control of the party affected shall be
excused to the extent necessary, provided that the party affected shall
make reasonable efforts to remove or circumvent such circumstances. Such
excusing circumstances shall include (without limitation): shortages of
materials; acts of God; fire; flood; war; embargo; labor trouble; failure
or delay by suppliers; riots; and laws, rules, regulations and orders of
any governmental authority. If any delay or inability to perform continues
for more than sixty (60) days, the non-affected party shall have the right
to terminate the affected portion of this Agreement upon seven (7) days
Notice to the affected party, or to suspend its obligations under the
Agreement until such time as the delay or inability to perform is
corrected.
If any delay or inability to perform on the part of ONA continues for a
period greater than the period of excused non-performance permitted in
MAI's contract with one of more of its Customers, MAI shall have the right
to terminate the affected portion of this Agreement upon twenty-four (24)
hours Notice to ONA. MAI agrees to continue to include an excused
non-performance provision substantially similar to the first two sentences
of Section 15 of its
Equipment Support Subcontract - 10 11/25/96
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<PAGE> 11
current Services Agreement form contract (see Appendix F-2) in future
services agreements with Customers.
21. DEFAULT AND TERMINATION
a. If either party defaults in performance of any material obligation
under this Agreement, and such default is not cured within sixty (60)
days after receipt of Notice from the non-defaulting party, the
non-defaulting party shall have the right to immediately terminate this
Agreement by Notice to the defaulting party.
b. MAI may terminate this Agreement for default by ONA on less than sixty
days notice as follows:
(1) If ONA is in default under this Agreement, MAI shall escalate that
problem within ONA's service organization as necessary in order to
have the problem addressed. This escalation shall include, when
necessary, bringing the problem to the attention of ONA's vice
president of customer service.
(2) If, after ONA has been given a reasonable opportunity under the
circumstances to resolve the problem, MAI believes that ONA is
still in default under this Agreement, MAI will give ONA Notice of
the alleged default.
(3) If ONA has not cured the default within forty-eight (48) hours of
its receipt of Notice, MAI may terminate this Agreement as to the
MAI Customer to whom the default relates.
c. Should MAI become more than forty-five (45) days delinquent in its
obligation to pay, ONA may suspend its performance hereunder until
MAI's account is brought current. If MAI's account remains delinquent
for a total period of sixty (60) days, ONA shall have the option to
terminate this Agreement immediately by Notice to MAI.
d. Termination of this Agreement shall not affect any rights existing as
of the effective date of termination.
e. The rights and remedies provided in this Agreement are cumulative and
in addition to any other rights or remedies available at law or in
equity.
f. The provisions of Section 16 shall survive termination of this
Agreement.
22. CONFLICT RESOLUTION
MAI and ONA agree to meet and work together to find acceptable solutions to
any disputes between them related to this Agreement. If, after thirty (30)
days, they are unable to so resolve the dispute, the dispute will be referred to
MAI's President and the President or CEO of ONA, or their designated
representatives, who shall meet or talk within fifteen (15) business days after
Notice is received to resolve such dispute. Notice of the invocation of this
procedure shall be directed to such officers and shall include a reference to
this Section 16. If the dispute is not resolved by this meeting, then it shall
be resolved by arbitration in
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<PAGE> 12
accordance with Section 17. If a party fails to meet with the other party
upon request, the requesting party may either obtain an order of a court of
competent jurisdiction requiring the non-complying party to meet and confer
or proceed to arbitration in accordance with Section 17.
23. ARBITRATION
All disputes relating to this Agreement shall be submitted to arbitration
in accordance with the commercial rules of the American Arbitration
Association then in effect. Such arbitration shall take place in the
county where the national headquarters of the defending party are located
and shall be conducted by three (3) arbitrators, one selected by each party
and the third selected by the other two. The decision of the arbitrators
shall be final, binding, and without appeal and may be enforced in any
court having jurisdiction over the relevant parties or their assets.
24. GENERAL
a. This Agreement shall be governed by the laws of the State of
Washington.
b. This Agreement, together with the attached Schedules, constitutes the
complete and final agreement between the parties with respect to the
subject matter of this Agreement. This Agreement supersedes all prior
discussions, agreements and writings with respect thereto. No
agreement purporting to modify, add to, terminate, waive or change any
term or condition of this Agreement shall be binding unless it is in
writing and signed by authorized representatives of both parties.
c. The organization of this Agreement and section headings are for
convenience only and shall not be used to construe or interpret this
Agreement.
d. No delay or failure of either party in exercising any right hereunder,
and no partial or single exercise thereof, shall be deemed to
constitute a waiver of such right or any other rights hereunder.
e. If any provision or term of this Agreement shall be deemed or construed
to be invalid, illegal or unenforceable by a court of competent
jurisdiction, such determination shall in no way affect the validity,
legality, or enforceability of the remaining portions of this
Agreement.
f. Should legal action be required to enforce or interpret any of the
provisions of this agreement, the prevailing party shall be entitled to
all costs incurred in connection with that action, including a
reasonable attorney's fee.
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<PAGE> 13
"ONA" "MAI"
OLIVETTI NORTH AMERICA, INC. MAI SYSTEMS CORPORATION
By: By:
---------------------------------- -------------------------------
Its: Its:
--------------------------------- ------------------------------
Dated: Dated:
------------------------------- ----------------------------
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<PAGE> 14
SCHEDULE A
NEW CUSTOMER AGREEMENTS EQUIPMENT SUPPORT
This Schedule sets out a beginning framework to define the manner in which
service will be ordered by MAI and provided by ONA for New Customer Agreements.
The parties anticipate that ONA will be submitting bids to MAI with respect to
most New Customer Agreements and that the provisions of this schedule may be
modified by the specific provisions of a bid provided by ONA. However, in the
absence of such changes specified in the ONA bid documents, ONA will be making
its bids on the basis of the provisions of this schedule. The parties also
anticipate that as they refine their relationship and the manner in which they
do business, they may decide to modify the provisions of this schedule and each
agrees to negotiate in good faith about any requests for changes made by the
other. Any agreed changes resulting from such negotiations will be reflected
in an amendment to this Agreement signed by both parties.
1. PLACING EQUIPMENT UNDER SERVICE
a. In order to initiate Equipment Support for a particular item of
Equipment, MAI must prepare and submit a completed ONA Maintenance
Service Order ("MSO") to ONA and that MSO must be accepted by ONA. The
MSO must include such information about the Equipment as is reasonably
requested by ONA, including:
(1) the model, age and configuration of the Equipment,
(2) the Equipment Location,
(3) the name, address, and telephone number of the End User,
(4) the identity of the End User contact person, and
(5) any applicable uplifts for Extended Maintenance Service which
apply to the Equipment, such as zone uplifts, extended coverage
hours uplifts and/or response time uplifts.
b. Equipment Support will not begin for a particular item of Equipment
until ONA has received and accepted an MSO for that item of Equipment.
Following acceptance of an MSO, ONA will label the Equipment with an ID
tag. This ID number must be used to identify the Equipment in all
communications with ONA about the Equipment.
c. All changes to the information provided to ONA about Equipment under
maintenance, such as a change in Equipment location, must be documented
by submission of a revised MSO.
d. An MSO placing Equipment under service shall be valid until
discontinued in accordance with paragraph A7. Until ONA receives an
MSO discontinuing service the Equipment will be kept under service and
ONA will bill MAI for that service.
Schedule A-1 11/25/96
MAI Systems Corp.
<PAGE> 15
Requests for service received when no valid MSO is in force will be
treated as requests for Time & Materials Service.
2. REQUESTS FOR SERVICE
a. MAI, or its designated representative, will receive all End User
requests for service or repair.
b. MAI, or its designated representative, will, obtain as much information
as reasonably possible about the End User's problem during its
communications with the End User.
c. MAI, or its designated representative, will obtain from the End User
the information necessary to determine whether the Equipment is
eligible for Maintenance Service and to permit ONA to properly perform
Equipment Support. This shall include, without limitation, the model
and age of the Equipment and the configuration in which it is
installed.
d. MAI, or its designated representative, will contact ONA and request
Equipment Support for the End User's Equipment. This request shall
include all pertinent information MAI has about the End User's
Equipment and the problem being experienced, at a minimum:
(1) the ID number for the Equipment, and
(2) the nature of the problem being experienced by the End User,
3. MAINTENANCE SERVICE
a. Maintenance Service means service performed to correct improper
functioning of Equipment which occurs from normal use, including making
any necessary adjustments and/or replacing defective assemblies or
subassemblies.
b. Maintenance Service does not include:
(1) Service of equipment not specifically identified on the MSO
ordering the Maintenance Service, including devices peripheral or
connected to Equipment.
(2) Electrical work external to the Equipment.
(3) Repair of damage or loss resulting from accident, transportation,
neglect, misuse or abuse, operator error, failure of electrical
power or air conditioning or humidity control, or use for which
Equipment was not designed.
(4) Supplies or accessories, painting or refinishing Equipment,
furnishing material for Equipment, making specification or field
engineering changes, performing services connected with relocation
of Equipment, or adding or moving accessories, attachments or
other devices.
(5) Software programming and software program maintenance.
Schedule A - 2 11/25/96
MAI Systems Corp.
<PAGE> 16
(6) Service which is impractical for ONA to render or required because
of any adjustment, repair, maintenance, alteration, attachment,
addition, or connection to another machine or device.
(7) Service calls required as the result of modification, work or
service of the Equipment by non-ONA personnel.
(8) Service of Equipment which, because of a safety hazard, exposes
ONA personnel to a risk of injury.
(9) Service in connection with the installation, discontinuance or
removal of Equipment.
(10) Installation of engineering changes, feature changes, or safety
changes.
c. Equipment shall be kept in or shall be restored to good working order.
d. Maintenance Service will be performed in a prompt, courteous, efficient
and workmanlike manner.
e. Unless otherwise specified, Preventive Maintenance will be performed on
equipment only during a Maintenance Service call. Preventive
Maintenance includes general cleaning and inspection, and any
adjustments and/or lubrication as specified by the Equipment
manufacturer.
4. STANDARD MAINTENANCE SERVICE.
a. After receiving a Request for Service from MAI or its designated
representative, ONA will dispatch a properly trained Customer Service
Engineer (CSE) to the Equipment Location along with such tools, parts
and manuals as the CSE reasonably believes will be required to repair
the Equipment based on the information provided to ONA by MAI. Upon
arrival the CSE will diagnose the problem, if any, and perform the
Maintenance Service.
b. ONA will use all reasonable efforts to arrive at the Equipment Location
ready to complete the Maintenance Service within the agreed upon
response time for that Equipment.
c. Maintenance Service will be performed during the agreed upon hours of
service(2) and at the location agreed upon for that Equipment.
5. INSTALLATION SERVICE
a. Installation Service shall consist of:
__________________________________
(2) Normal Service Hours are Monday through Friday, 8 a.m. to 5 p.m.
local time, excluding ONA observed holidays. Service started during
Normal Service Hours and completed within 1 hour after Normal Service
Hours will be deemed performed within Normal Service Hours.
Schedule A - 3 11/25/96
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<PAGE> 17
(1) Any necessary unpacking of the Equipment;
(2) Connection of Equipment;
(3) Physical inspection of Equipment in place;
(4) Functional testing of Equipment according to prescribed procedures
for such Equipment;
(5) Resolution of normal installation problems; and
(6) notification to MAI and End User of unusual installation problems
(e.g., design or engineering problems, transit damage, etc.).
These problems must be corrected before ONA will perform
Maintenance Service on this Equipment.
b. Installation Service does not include uncrating or major movement of
the Equipment.
c. ONA will use all reasonable efforts to provide Installation Service in
a timely manner, subject to the availability of personnel and
equipment, necessary travel time and other factors affecting ONA's
ability to provide this service.
6. TIME AND MATERIALS SERVICE
a. ONA may, at its option and in its discretion, elect to accept requests
from MAI for service on a time and materials basis ("Time and Materials
Service"). Such Service shall be on a "best efforts" basis consistent
with the availability and location of trained personnel and Parts.
b. ONA will use all reasonable efforts to provide Time & Materials Service
in a timely manner, subject to the availability of personnel and
equipment, necessary travel time and other factors affecting ONA's
ability to provide this service.
7. DISCONTINUANCE
MAI may discontinue Maintenance Service for any Equipment by sending ONA a
fully completed and properly signed MSO acceptable to ONA identifying the
Equipment to be discontinued. Such discontinuance shall become effective
thirty (30) days after it is received by ONA. Such discontinuance shall be
ineffective if any part of its purpose is to allow the Maintenance Service
to be performed by MAI or a third party.
Schedule A - 4 11/25/96
MAI Systems Corp.
<PAGE> 18
SCHEDULE B
PRICES FOR NEW CUSTOMER AGREEMENTS
This Schedule sets out what will eventually become the standard pricing scheme
to be used by the parties when no other pricing arrangements are agreed upon
for a specific order. However, both parties recognize that the market for
Equipment Support services is very competitive and changes frequently.
Accordingly, ONA agrees that upon request by MAI it will re-evaluate the prices
and pricing methodology identified in this schedule to respond to competitive
pressures or to reflect appropriate volume discounts upon request by MAI. In
addition, ONA will provide bids for major projects in accordance with Section 3
of this Agreement. Any agreed changes resulting from this re-evaluation and/or
bidding process will be reflected in a document signed by both parties which
identifies the Equipment to which such modified prices apply.
1. STANDARD MAINTENANCE SERVICE
MAI will pay ONA an Annual Maintenance Charge ("AMC") for each unit of
Equipment placed under Maintenance Service as payment for ONA's agreement
to provide Standard Maintenance Service for each such unit of Equipment.
The AMC for each model of Equipment shall be as identified in any service
order accepted by ONA or flat rate pricing schedule subsequently provided
to MAI by ONA.
Schedule B - 1 11/25/96
MAI Systems Corp.
<PAGE> 19
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.1 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
2. TIME AND MATERIALS/INSTALLATION SERVICE
a. ONA will bill [**] for each hour of labor incurred during Normal
Service Hours and [**] for each hour of labor incurred outside Normal
Service Hours by a CSE in performing the service.
b. Labor charges commence upon dispatch of the CSE to the End-User
location and include travel to and from the site.
c. There is a minimum 1 hour charge per call and additional time will be
charged in increments of one-quarter (1/4) hour.
d. ONA will, upon request by MAI, provide flat rate installation prices
for items of Equipment identified by MAI.
3. COMMERCIAL TRAVEL
a. When Commercial Travel is required to perform Time and Materials and/or
Installation Service and has been approved in advance by MAI, MAI will
be charged the actual, reasonable cost of such travel. Commercial
travel includes, but is not limited to, such items as airfare, ferry
and rental vehicles.
4. LODGING EXPENSES
a. If ONA determines that it is in the best interests of ONA and MAI to
have a CSE remain overnight at or near the Equipment Location in
connection with Time and Materials and/or Installation Service and MAI
has approved such expenses in advance, MAI will be charged the actual,
reasonable lodging and meal expenses incurred.
5. INVOICING/PAYMENT
a. ONA will invoice MAI monthly for Equipment for which Contract or
Warranty Service has been ordered. These invoices will be issued on
approximately the fifteenth (15th) of the month for which the invoice
is being issued. For example, ONA will invoice MAI on approximately
October 15th for the October Contract Service being provided by ONA.
ONA will invoice MAI monthly, in arrears, for all other Equipment
Support.
b. Invoices are due and payable upon receipt and will begin to accrue
interest at 1.25% per month from the date of the invoice if not paid in
full within 45 days of the date of the invoice.
Schedule B - 2 11/25/96
MAI Systems Corp.
<PAGE> 20
c. MAI will pay or reimburse ONA for any and all sales, use and excise
taxes, and other fees or charges levied or imposed by any governmental
agency or authority on or in connection with or measured by the value
of the Services provided by ONA under this Agreement.
6. AMENDMENT
a. This Schedule may be amended by ONA upon Notice to MAI.
b. The Amended Schedule shall become effective on the Effective Date
stated in the Amended Schedule, but no sooner than 30 days after Notice
is given to MAI.
c. Price changes included in any Amended Schedule shall apply only to
Equipment Support requested after the Effective Date of the Amended
Schedule.
Schedule B - 3 11/25/96
MAI Systems Corp.
<PAGE> 21
SCHEDULE C
SPARE PARTS
1. ONA'S OBLIGATIONS
a. ONA shall, at its expense, establish and maintain an inventory of a
sufficient quantity of all the Parts necessary to perform the Equipment
Service called for by this Agreement in each Service City open for
Equipment Service.
b. At its option, ONA may elect to maintain an inventory of certain Parts
in a centralized depot or depots for distribution within ONA as
required.
c. ONA shall keep records of its receipt, disbursement and use of such
Parts.
d. ONA shall take all steps necessary to ensure the availability of
sufficient Parts to satisfy its commitments with respect to all
Equipment Service to be performed by it under this Agreement;
Schedule C - 1 11/25/96
MAI Systems Corp.
<PAGE> 22
SCHEDULE D
TECHNICAL SUPPORT
1. TRAINING
a. Because ONA will be hiring many of MAI's former service engineers, the
parties do not anticipate that any initial training of ONA personnel
will be required. Should training subsequently be required as a result
of adding new Equipment to the Schedules to this Agreement, the parties
will at that time determine who is required to provide such training.
If no agreement is reached on this issue, ONA shall not be required to
provide Equipment Support for such newly added Equipment.
b. MAI will, upon request from ONA and at no charge, provide ONA with such
technical consultation and assistance as is appropriate to enable ONA to
provide its service representatives with such training as its deems
appropriate. This shall include, without limitation, providing ONA with
a copy of MAI's educational materials pertaining to the Equipment and
permitting ONA to make such use of those materials as it deems
appropriate for its internal use in satisfying its commitment to provide
Equipment Support under this Agreement.
2. DOCUMENTATION
a. As soon as practicable after execution of this Agreement, MAI will
provide ONA, at no charge, with one complete set of documentation and
diagnostics for each model of Equipment.
b. As soon as practicable after any Equipment is added to the Appendix to
Schedule A, MAI will provide ONA, at no charge, with one complete set of
documentation and diagnostics for such additional Equipment.
c. As soon as practicable after updates or changes to the documentation and
diagnostics provided to ONA become available, MAI will provide ONA with
those updates and changes at no charge.
d. ONA may copy, modify, and use any or all of the documentation and
diagnostics provided to it by MAI as it deems necessary for its internal
use, while retaining all MAI trademarks and copyrights.
3. SECOND LEVEL SUPPORT
a. MAI will provide ONA with telephone technical support for ONA's service
representatives during MAI's normal technical support hours at no charge
to ONA.
Schedule D - 1 11/25/96
MAI Systems Corp.
<PAGE> 23
SCHEDULE E
SERVICE CITIES
Schedule E - 1 11/25/96
MAI Systems Corp.
<PAGE> 24
I. AMENDMENT
A. Service Cities may be deleted at ONA's discretion. ONA will
give Notice to MAI of the effective date of the Service City
deletion.
B. ONA will continue Equipment Support in locations previously
serviced by the closed Service City from an alternative
Service City of ONA's choice, at the rate in effect at the
time of closing, for a period of ninety (90) days. At the end
of the ninety (90) day period, MAI may continue Equipment
Support with ONA with a revised AMC or discontinue Equipment
Support with ONA in those cities.
Schedule E - 2 11/25/96
MAI Systems Corp.
<PAGE> 25
SCHEDULE F
EXISTING CUSTOMER AGREEMENTS
Schedule F - 1 11/25/96
MAI Systems Corp.
<PAGE> 26
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.1 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
1. STATEMENT OF INTENT
The general intent of the parties is to have ONA perform the service which
MAI is currently required to provide to MAI's customers under the Existing
Customer Agreements in return for [**] of the amounts MAI's customers are
paying MAI for that work. MAI is consigning its current inventory of spare
parts to ONA to permit it to perform that service and MAI will be providing
technical hardware and software support to ONA as required to assist it in
providing this service. Initially, MAI will be handling the incoming call
reception for all Existing Customer Agreements, however the parties intend
to begin working to transfer this function for certain of the Existing
Customer Agreements (the "Legacy Agreements") to ONA as soon as this
agreement has been executed. Eventually, MAI may also like to transfer the
billing and collection functions for the Legacy Agreements to ONA if it is
practical and economical to do so. The remainder of this schedule is
intended to define the precise terms and conditions pursuant to which this
general intent will be carried out.
2. IDENTIFICATION OF CUSTOMERS
Attached as Appendix F-1 is a list of those MAI customers for whom MAI will
retain the call reception, billing and collection functions throughout the
term of this Agreement (the "Open Customers"). All MAI customers with
Existing Customer Agreements who are not listed on Appendix F-1 are "Legacy
Customers" for purposes of this Agreement.
3. EQUIPMENT SUPPORT
a. Generally. With the exceptions listed below, ONA will perform MAI's
Equipment Support obligations under the Existing Customer Agreements
under the same terms and conditions as are required of MAI under those
agreements. This shall include Contract Service, Installation Service,
and Time and Materials Service to the extent such types of service are
covered by the Existing Customer Agreements. Provision of a particular
type of service for an Existing MAI Customer which is not covered by the
Existing Customer Agreement for that customer shall be considered the
provision of service under a New Customer Agreement for purposes of this
Agreement.
Prior to execution of this Agreement, MAI provided ONA with the form
customer agreements and sample customer agreements which are attached as
Appendix F-2. MAI represents and warrants to ONA that its Equipment
Support obligations under the
Schedule F - 2 11/25/96
MAI Systems Corp.
<PAGE> 27
Existing Customer Agreements are not materially different than those
required under these form customer agreements and sample customer
agreements.
b. EXCEPTIONS. MAI shall continue to perform the following Equipment
Support Obligations under the Existing Customer Agreements:
(1) MAI shall continue to receive incoming trouble calls from its
customers. MAI will screen these calls to determine whether the
problem is hardware or software related. With respect to calls
which MAI determines are hardware related, MAI shall notify ONA's
dispatch center and provide it with the information MAI has about
the problem so that ONA may dispatch a service technician to the
customer site to resolve the problem. Upon resolution of the
problem, ONA shall notify MAI of its resolution of the problem and
provide it with the information necessary to permit MAI to close
the call in its records. The parties agree to work together to link
their computer systems so that this entire process may ordinarily
be done via computer without the need for telephone or other
alternate means of communication.
Immediately following execution of this Agreement, the parties
agree to begin working together to transfer responsibility for
incoming trouble calls from Legacy Customers to ONA. ONA will
provide Legacy Customers with a toll free phone number to use to
call ONA with trouble calls to place requests for service. The
parties agree to cooperate to make this transition as smooth and as
customer friendly as reasonably possible. Upon completion of this
process, ONA shall be completely responsible for the call tracking
process and shall cease providing MAI with call closure information
for the Legacy Customers. At that time, ONA will begin to provide
MAI with mutually defined reports summarizing its handling of
Legacy Customer calls.
(2) MAI shall continue to invoice its customers pursuant to the
Existing Customer Agreements and be responsible for the collection
of those invoices from its customers. As part of this function,
MAI will retain the authority to determine if and when service to a
particular customer should be terminated and it will notify ONA of
any such termination of service. Until receipt of such
notification from MAI, ONA shall continue to provide service to
customers as required by that customer's Existing Customer
Agreement and shall be entitled to be paid by MAI for such service
as provided by this Agreement.
Following execution of this Agreement, the parties agree to begin
working together to determine if it is practical and economical to
transfer responsibility for the billing of and collection from
Legacy Customers to ONA. Part of this process will be negotiation
of the amount MAI will pay ONA to assume these functions if the
parties decide to proceed with a transfer of these functions to
ONA.
Schedule F - 3 11/25/96
MAI Systems Corp.
<PAGE> 28
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.1 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
4. TRANSITION
The parties agree to work together to make the transfer of the service work
for Existing Customers from MAI to ONA as smooth as possible. As part of
this transition, MAI will provide ONA with access to its customer service
database and work with ONA to transfer the information in that database
into ONA's customer service database so that it will be in place and useable
by ONA on the Effective Date of this Agreement.
5. PAYMENT
a. For ONA's provision of Equipment Support under an Existing Customer
Agreement MAI will pay [**] The parties recognize that MAI may bill its
customers in advance for the Equipment Support being provided by ONA and
that it may recognize revenue incrementally as the support is provided.
Further, the parties recognize that MAI may establish a reserve for
non-payment which reserve shall be consistent with GAAP accounting
principles and shall be consistent with MAI's past collection experience
of its Existing Customer Agreements.
b. MAI will pay ONA the payment required pursuant to subparagraph (a),
above, monthly in arrears on or before the fifteenth day of each
month.ONA will not invoice MAI for these amounts.
c. ONA will provide MAI with such information as is necessary for MAI to
bill its customers for non-recurring Equipment Support provided by ONA,
such as Installation, Time and Materials, and Warranty Service.
d. Both parties shall have the right to audit the billing and collection
being done by the other related to this Agreement and each shall provide
the other with full access to its pertinent financial records for the
purpose of such audits. Such access shall be at a reasonable time
agreed upon in advance and shall include the right to make copies of
material records upon confirmation of materiality by the audited party.
All records produced and/or copied by the auditing party are deemed
Confidential and protected by the confidentiality provisions of this
Agreement. Any variations from previously reported figures disclosed by
such audits shall be settled between the parties by payment within
thirty (30) days of the discovery of such variation.
Schedule F - 4 11/25/96
MAI Systems Corp.
<PAGE> 29
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.1 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
6. REVENUE BASED PAYMENT ADJUSTMENT
a. Adjustment. MAI has represented to ONA that, as of the Effective Date,
the Existing Customer Agreements are generating approximately [**] The
parties agree that if, during calendar years 1997, 1998, and 1999, the
actual revenue generated by the Existing Customer Agreements (the
"Actual Revenue") during a calendar quarter is less than the Target
Revenue, ONA's percentage of the revenue from the Existing Customer
Agreements shall be increased by [**] that the Actual Revenue is less
than the Target Revenue.
For example, if the Actual Revenue during the first full calendar
quarter of this Agreement is [**] MAI will at that time pay ONA the
difference between the amount MAI has paid ONA on Existing Customer
Agreement revenue during that calendar quarter at the [**] rate and what
it would have paid at the [**] rate.
Implementation. These changes in the revenue percentage, if any, will
be implemented by reviewing the Actual Revenue at the end of each full
calendar quarter during the contract term and adjusting the percentage
rate accordingly. This adjustment will be retroactive to the beginning
of that calendar quarter and any payments required to effectuate that
adjustment for the calendar quarter just ended will be made within ten
(10) business days. ONA's percentage of revenue during the following
calendar quarter will be based on the adjusted percentage rate, which
will then be re-evaluated and adjusted as necessary at the end of the
following calendar quarter.
b. Remanco. Revenue from MAI's agreement with Remanco International, Inc.
which has been assigned to ONA pursuant to a separate document has not
been included in the Target Revenue and shall not be considered for the
purposes of this Section of this Agreement.
7. PARTS
a. MAI will consign to ONA its current inventory of Parts being used by it
to perform Equipment Support pursuant to Existing Customer Agreements
(the "Consigned Parts"). MAI represents and warrants to ONA that this
inventory of Consigned Parts is adequate in size and mix to properly
perform the Equipment Support ONA will be providing for Existing
Customers as of the Effective Date of this Agreement.
Schedule F - 5 11/25/96
MAI Systems Corp.
<PAGE> 30
b. ONA will be responsible for the physical transfer of the Consigned Parts
from MAI to ONA. MAI agrees to cooperate fully with ONA in order to
enable the smooth transfer of the Consigned Parts. Within 90 days of
the Effective Date, ONA will perform a physical inventory of the
Consigned Parts and provide MAI with a written list of the Consigned
Parts.
c. ONA will be responsible for maintaining the Consigned Parts in the
general condition and quantities as they were received from MAI. ONA
shall keep the Consigned Parts in such a manner so that they are
separately identifiable from ONA owned Parts. As the Consigned Parts
are used by ONA to perform Equipment Support, ONA shall replace them
with the exchanged part from the customer equipment, after first making
any necessary repairs to the exchanged part. Exchanged parts which are
not repairable shall be replaced by ONA. ONA will be subcontracting the
actual repair of the Consigned Parts to a third party and MAI hereby
consents to that subcontracting.
Amounts or types of Parts added to the Consigned Parts by ONA shall be
the property of ONA and shall not be delivered to MAI upon termination
of this Agreement.
Should it become impractical for ONA to obtain replacement parts (either
because they are not reasonably available or not reasonably affordable)
ONA shall not be required to replace unrepairable portions of the
Consigned Inventory and shall be relieved of its obligation to provide
Equipment Support to the extent it is prevented from doing so by this
inability to obtain replacement parts.
d. Upon termination of this Agreement, ONA will return the Consigned Parts
to MAI in the quantities and condition it received them from MAI,
ordinary wear and tear excepted.
e. ONA agrees that MAI may search all pertinent public records, file
financing statements, and take other necessary steps to protect MAI's
ownership of the Consigned Parts against claims of creditors and carry
out the purposes of this Agreement. ONA agrees to promptly execute and
deliver to MAI all financing statements and other documents necessary to
permit MAI to carry out such steps and otherwise cooperate with MAI's
efforts to protect its ownership of the Consigned Parts.
8. TOOLS
a. MAI will loan to ONA its current inventory of tools (including laptop
computers and diagnostic software) being used by its field engineer work
force or repair center to perform Equipment Support pursuant to Existing
Customer Agreements (the "Consigned Tools"). MAI represents and
warrants to ONA that this inventory of Consigned Tools is adequate in
size and mix to properly perform the Equipment Support ONA will be
providing for Existing Customers as of the Effective Date of this
Agreement. The Consigned Tools shall remain the property of MAI. ONA
will be
Schedule F - 6 11/25/96
MAI Systems Corp.
<PAGE> 31
responsible for maintaining the Consigned Tools in the general condition
as they were received from MAI, ordinary wear and tear excepted.
b. ONA will be responsible for the physical transfer of the Consigned Tools
from MAI to ONA. MAI agrees to cooperate fully with ONA in order to
enable the smooth transfer of the Consigned Tools. Within 90 days of the
Effective Date, ONA will perform a physical inventory of the Consigned
Tools and provide MAI with a written list of the Consigned Tools.
c. ONA shall keep the Consigned Tools in such a manner so that they are
separately identifiable from ONA owned tools. Upon termination of this
Agreement, ONA will return the Consigned Tools to MAI in the condition
it received them from MAI, ordinary wear and tear excepted.
d. ONA agrees that MAI may search all pertinent public records, file
financing statements, and take other necessary steps to protect MAI's
ownership of the Consigned Tools against claims of creditors and carry
out the purposes of this Agreement. ONA agrees to promptly execute and
deliver to MAI all financing statements and other documents necessary to
permit MAI to carry out such steps and otherwise cooperate with MAI's
efforts to protect its ownership of the Consigned Tools.
Schedule F - 7 11/25/96
MAI Systems Corp.
<PAGE> 32
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.1 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
9. WARRANTY SERVICE
a. ONA will provide Warranty Service under warranty obligations in place on
the Effective Date of this Agreement in accordance with those warranties
and will seek reimbursement from the warranty provider in accordance
with its usual terms. Where the warranty provider is MAI, MAI will
reimburse ONA on a Time and Materials basis at the reduced rates of [**]
during Normal Service Hours and eighty-five dollars per hour [**]
outside Normal Service Hours
10. NEW BUSINESS DEVELOPMENT
a. EXISTING CUSTOMERS. Except for those Existing Customers with whom ONA
or its corporate affiliates has a pre-existing relationship as of the
Effective Date of this Agreement, ONA shall not solicit or contract
with Existing Customers for any products or services without MAI's
express written consent. Except as expressly prohibited by this
provision, ONA shall not be limited in its ability to conduct it
business as if it had not entered into this Agreement with MAI.
MAI agrees not to unreasonably withhold or delay its consent to
requests from ONA to solicit or contract with Existing Customers for
the sale of products or services which are not competitive with a
product or service sold by MAI. In granting its consent, MAI shall be
entitled to place reasonable restrictions on the manner in which ONA
interacts with the Existing Customers, for example by precluding the
involvement of the ONA employees who provide Equipment Support for that
Existing Customer pursuant to this Agreement. In the event MAI
withholds its consent to a request by ONA to solicit or contract with
an Existing Customer, ONA shall be entitled to terminate this Agreement
upon one hundred eighty (180) days prior written notice to MAI without
further liability or obligation to MAI. ONA's failure to exercise this
right to terminate on one or more occasions when it has the opportunity
to do so shall not be deemed to constitute a waiver of such right or
any other rights hereunder
b. MAI NON-SERVICE CUSTOMERS. There are persons using MAI hardware and
software who, as of the Effective Date, do not have an existing
agreement with MAI for Equipment Support ("MAI Non-Service Customers").
ONA is free to solicit contracts with MAI Non-Service Customers for any
types of products or services, including contracts for all types of
Equipment Support. Contracts for Equipment Support with MAI Non-
Service Customers shall be entered into between the customer and MAI,
on terms negotiated by ONA, and shall be treated as Existing Customer
Agreements for purposes of this Agreement.
Schedule F-32
11/25/96
MAI SYSTEMS CORP.
<PAGE> 33
MAI agrees to reimburse ONA for thirty percent (30%) of the sales costs
(including the sales commission) it incurs in connection with obtaining
a Contract for Equipment Support with an MAI Non-Service Customer.
Schedule F - 9 11/25/96
MAI Systems Corp.
<PAGE> 34
ASSIGNMENT OF SERVICES AGREEMENT
AGREEMENT MADE this __________________________ day of December, 1996 by and
between MAI Systems Corporation, a Delaware corporation, 9600 Jeronimo Road,
Irvine, California 92718 ("MAI") and Olivetti North America, Inc., a Washington
corporation, 22425 East Appleway, Liberty Lake, Washington, 99019-9532 ("ONA")
with reference to the following facts:
A. On or about October 1, 1995, MAI entered into a Services Agreement (the
"Services Agreement") with Remanco International, Inc. ("Remanco")
pursuant to which Remanco engaged MAI as the exclusive provider of
support services to certain Remanco customers.
B. Concurrent with the effective date of this Assignment, MAI will
discontinue providing support services of the type described in the
Service Agreement. MAI has engaged ONA to provide support services on
its behalf to its customer base.
C. Remanco has agreed to permit ONA to be the exclusive provider of
support services to its customers on the same terms and conditions that
MAI has provided such services that ONA agree to assume MAI's
obligations set forth in the Services Agreement.
D. MAI has agreed to assign to ONA all of its rights under the Services
Agreement, except as specifically provided herein.
NOW THEREFORE, INC CONSIDERATION OF THE COVENANTS PROVIDED HEREUNDER, the
parties agree as follows:
1. EFFECTIVE DATE
The Effective Date shall be the effective date set forth in the Equipment
Support Subcontract between ONA and MAI which the parties contemplate
executing concurrently with this Assignment.
2. ASSIGNMENT
MAI transfers and assigns all of its rights under the Services Agreement to
ONA subject to the following:
(a) MAI shall cosign the Service Assets described in Section 2.3 of the
Services Agreement to ONA. ONA shall keep the Service Assets in such a
manner that they are separately identifiable from ONA-owned tools. Upon
termination of the Services Agreement, ONA will return the cosigned
Service Assets to MAI in the condition it received them from MAO,
ordinary wear and tear expected. ONA agrees that MAI may search all
pertinent public records, file financing statements and take other
necessary steps to protect MAI's interest in the Service Assets against
claims of creditors and carry out the purposes of this Assignment. ONA
agrees to promptly execute and deliver to MAI all financing statements
and other documents necessary to permit MAI to carry out such steps and
otherwise cooperate with MAI's efforts to protect its interests in the
Service Assets.
(b) Nothing herein shall be deemed to entitle ONA to any fee which accrued
in favor of MAI on or before the Effective Date.
(c) Nothing herein shall be deemed to grant to ONA any interest in the loan
which is described in Section 8.3 of the Services Agreement.
(d) Section 11.2 of the Service Agreement shall be amended in its entirety
as follows:
"Remanco and ONA compete in the sale of POS equipment in North America. The
parties agree that if their competitive relationship interferes with the
services that ONA is obligated to provide hereunder, either party may, upon
ninety (90) days notice to the other, terminate this Agreement without penalty.
In the event of such termination, nothing in this Agreement shall be construed
to prevent Remanco from hiring or attempting to hire any former Remanco
employee then working for ONA."
3. ACCEPTANCE OF ASSIGNMENT
ONA accepts the assignment of the Service Agreement on the terms and
conditions herein provided.
IN WITNESS WHEREOF the parties have executed this Assignment of Services
Agreement on the day and year first written above.
MAI Systems Corporation Olivetti North America, Inc.
By: /s/ JAMES DUPLEX By:
------------------------------- -------------------------
James Duplex
Vice President
Schedule G - 1 11/25/96
MAI Systems Corp.
<PAGE> 35
Remanco International, Inc. hereby consents to the above assignment and
assumption and represents and warrants that MAI Corporation is in full
compliance with the terms and conditions of the Services Agreement and to the
best of its knowledge is not in default of any obligation thereunder.
Remanco International, Inc.
By: /s/ RAY S. ROBERTS
------------------------------
Ray S. Roberts
Chief Operating Officer
Schedule G - 2 11/25/96
MAI Systems Corp.
<PAGE> 1
EXHIBIT 10.2
EQUIPMENT SUPPORT SUBCONTRACT
This Agreement, consisting of this Equipment Support Subcontract along with
Schedules A through G, is between OLIVETTI CANADA LIMITED ("OCL"), a Canadian
corporation, with corporate headquarters at 2235 Sheppard Ave. E., Suite 1200,
North York, Ontario and MAI CANADA LIMITED, ("MAI"), a Canadian corporation,
with corporate headquarters at 691 Denison Street, Markham, Ontario, and is
effective on February 21, 1997 ("Effective Date").
1. PURPOSE
MAI sells computers and computer systems and provides service for the
equipment it sells to its customers. As part of that business, MAI
provides warranty service for many of the products it sells and has
also entered into contracts with many of its customers to provide
maintenance, repair, and related services for these products. In order
to provide these services, MAI employs a number of computer service
technicians working out of a number of field offices throughout Canada.
MAI is planning to discontinue its current field service operations and
needs a company with a qualified field service organization to perform
the field service portion of MAI's contracts with its customers. OCL is
also in the business of selling computers and computer systems and also
maintains a computer service field organization throughout Canada. OCL
has agreed to provide MAI with computer field service throughout Canada
under the terms and conditions set forth in this agreement.
2. APPLICATION OF AGREEMENT
This Agreement is intended to cover not only the provision of computer
field service operations under those contracts MAI has with its
customers as of the Effective Date of this Agreement ("Existing
Customer Agreements"), but contracts MAI enters into with its customers
after the Effective Date as well ("New Customer Agreements"). However,
the terms under which OCL will provide services related to Existing
Customer Agreements differ in some respects from those under which it
will provide services related to New Customer Agreements.
Schedules A through E define the services OCL will perform and the
manner in which MAI will support OCL and pay OCL for those services
with respect to New Customer Agreements. Schedule F identifies the ways
in which the treatment of these same issues will differ with respect to
Existing Customer Agreements.
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3. EXCLUSIVITY/RIGHT TO BID
This Agreement is intended to establish an exclusive relationship
whereby OCL will provide all of MAI's Maintenance Service needs (for
both Warranty Service and Contract Service) under Existing Customer
Agreements. MAI agrees to have OCL provide all its field service
requirements of this type under the Existing Customer Agreements and
that it will not perform those obligations itself or contract with any
other person or entity to provide such requirements so long as this
Agreement is in force.
MAI further agrees that with respect to all of its other Equipment
Support needs it may have during the term of this Agreement, it shall,
at a minimum, provide OCL with the opportunity to bid on the provision
of such services. MAI (or its affiliate MAI Systems Corporation)
further agrees to provide the use of office space and access to MAI's
existing office equipment (telephones, copiers, fax machine, etc.) for
OCL employee(s) to work at an MAI facility to serve as an account
contact and to respond to requests for bids from MAI. OCL agrees to
reimburse MAI for long distance telephone charges incurred by such
employee(s).
4. MAI EMPLOYEES
a. MAI shall terminate the employment of those MAI employees
identified by name and title on Schedule G (the "Target
Employees") effective February 20, 1997.
b. Prior to the Effective Date, OCL will offer employment to the
Target Employees on the following terms:
(1) a salary or hourly wage no less than that being paid
to the Target Employee by MAI,
(2) OCL's normal terms and conditions of employment for
similar employees,
(3) treatment of the Target Employees' credited years of
service with MAI (as shown on Schedule G) as service
with OCL,
(4) OCL agrees not to layoff any Target Employees
identified on Schedule G as managers during the
twelve (12) month period beginning on the Effective
Date. This shall not prohibit OCL from terminating
such employees for cause, and
(5) OCL's offer of employment to a Target Employee shall
be contingent on that Target Employee agreeing to
transfer his or her accrued vacation balance to OCL
instead of having the value of that balance paid in
cash by MAI upon termination of employment. MAI
agrees to reimburse OCL for
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the value of all vacation balances transferred to OCL
by Target Employees (the "Transferred Total"). This
reimbursement shall be made beginning March 1, 1997
in monthly payments equal to the greater of
(i)one-twelfth (1/12) of the Transferred Total or
(ii)the actual value of transferred vacation balances
taken by Target Employees in the prior month. MAI
agrees to indemnify OCL against any claims arising
from this provision on transferring vacation balances
in accordance with the provisions of Section 13(a) of
this Agreement.
c. The parties acknowledge that the success of this agreement is
partly dependent on most of the Target Employees agreeing to
go to work for OCL. Should either party feel that this
agreement will not be successful as a result of a significant
number of the Target Employees not accepting OCL's offered
employment (either because of the number of such non-accepting
Target Employees or their location or identity), then that
party shall be entitled to terminate this Agreement effective
as of the Effective Date by notice to the other party. Such
notice must be delivered no later than February 25, 1997 to be
effective.
In the event of termination as provided in this section, the
parties agree to cooperate to place both parties back in the
position each would have been in had the Agreement never gone
into effect, for example by transferring parts back to MAI and
working together to reinstate the Target Employees as MAI
employees. MAI shall be responsible for paying wages and
providing benefits during the time those Target Employees who
accepted employment with OCL were OCL employees and/or
reimbursing OCL for any such employment costs incurred by it
during this period, but shall have no other obligation to OCL
for its provision of Maintenance Service during this period.
d. The parties acknowledge that it is likely that if OCL needs to
incorporate more than twenty-seven and one-half (27 1/2)
Target Employees into OCL's current workforce, it may need to
layoff some number of Customer Service Engineers. If there are
more than twenty-seven and one-half (27 1/2) Target Employees
listed on Schedule G, MAI agrees to pay OCL Thirty Thousand
Dollars ($30,000) (CDN) for each Target Employee ($15,000 for
1/2 an employee) in excess of twenty-seven and one-half (27
1/2) to help offset the cost of these anticipated layoffs.
This amount shall be paid to OCL in twelve equal monthly
payments beginning on March 15, 1997.
e. In the event of a full or partial termination of this
Agreement by either party pursuant to the terms of this
Agreement for any reason at any time prior to the end of the
initial term of this Agreement, the parties agree as follows:
(1) OCL shall terminate the employment of as many of the
Target Employees as it deems appropriate in light of
the amount of business being lost by it as a result
of the full or partial termination of this Agreement.
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<PAGE> 4
(2) MAI will offer employment to the Target Employees
being terminated by OCL on account of the full or
partial termination of this Agreement on the
following terms:
a) a salary or hourly wage no less than that
being paid to the Target Employee by OCL,
b) MAI's normal terms and conditions of
employment for similar employees,
c) treatment of the Target Employees' credited
years of service with OCL as service with
MAI.
(3) MAI shall, at its option, be entitled to solicit for
hire any Target Employees not being terminated by
OCL, without regard to the provisions of Section 14,
Non-Solicitation of Employees.
f. MAI has decided to retain its field service engineers in
British Columbia as its own employees rather than outsourcing
that part of its operation to OCL. However, as part of this
agreement OCL will manage the work and operations of those MAI
employees and provide them with parts and other support
necessary for them to operate efficiently. MAI will be
responsible for providing these employees with any necessary
equipment, facilities and tools and will be responsible for
the hiring, firing and discipline of these employees.
g. The provisions of this section are intended solely for the
benefit of MAI and OCL and are not intended to create or
expand any rights, as third party beneficiaries or otherwise,
of any other person, including without limitation any of MAI's
employees. Nothing in this section shall be deemed to create
any additional rights to severance compensation for the Target
Employees who accept employment with OCL.
5. SOFTWARE LICENSE
MAI either owns or has the right to license certain software (including
diagnostic programs) which is either necessary or desirable to use in
providing Equipment Support (the "Software"). Subject to the terms and
conditions of this Agreement MAI hereby grants to OCL a non-exclusive
license to access and use the Software as OCL determines appropriate in
performing its responsibilities under this Agreement and only under
this Agreement. OCL shall be permitted to make copies of the Software
as it deems appropriate for use in performing its obligations under
this Agreement.
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OCL acknowledges that the Software is licensed, not sold, to it solely
for the purpose of performing its obligations under this Agreement. OCL
further acknowledges that the Software is "Confidential" and subject to
the provisions of Section 16, Non-Disclosure, of this Agreement. OCL
acknowledges that it is not permitted, nor shall it permit anyone else,
under any circumstances, to decode, reverse engineer, decompile, or
disassemble the Software.
6. OCL RESPONSIBILITIES
During the term of this Agreement, OCL will:
a. provide Equipment Support in Canada in the manner identified
in Schedules A & F;
b. maintain sufficient fully trained, competent and qualified
maintenance personnel to perform the Equipment Support
required by this Agreement;
c. perform the obligations imposed on it with respect to Parts in
Schedules C & F, and
d. except as permitted by this Agreement not enter into direct
Contract Service or Equipment Support agreements with any MAI
End Users pertaining to equipment which is the subject of a
service agreement with MAI.
7. MAI RESPONSIBILITIES
During the term of this Agreement, MAI will:
a. order Equipment Support from OCL in the manner identified in
Schedules A & F;
b. pay for Equipment Support rendered by OCL in the manner
identified in Schedules B & F;
c. perform the obligations imposed on it with respect to Parts in
Schedule F; and
d. provide OCL with the Technical Support necessary to permit it
to provide Equipment Support as identified in Schedule D.
8. DEFINITIONS
For the purposes of this Agreement the following terms shall have the
following meanings:
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a. "Contract Service" means performing Maintenance Service
pursuant to a contract with the End User in which the End User
pays MAI for its agreement to provide such service.
b. "Equipment Support" means performing any one or more of the
following types of service on the Equipment:
(1) Maintenance Service, (which includes both Contract
Service and Warranty Service)
(2) Installation Service, or
(3) Time and Materials Service
as those terms are defined in the Schedules to this Agreement.
c. "Existing Customer Agreement" means a contract between MAI and
its customer which is in effect on the Effective Date of this
Agreement and also means any subsequent renewal of such an
Agreement on substantially the same terms and conditions as
are in effect on the Effective Date of this Agreement.
d. "Location" means a site where Equipment is installed.
e. "New Customer Agreement" means
(1) a contract between MAI and its customer which was not
in effect on the Effective Date of this Agreement, or
(2) an Existing Customer Agreement which is renewed after
the Effective Date of this Agreement on terms and
conditions substantially different than those in
effect on the Effective Date of this Agreement.
MAI and OCL may agree in writing to continue to treat an
Existing Customer Agreement which is renewed after the
Effective Date of this Agreement on terms and conditions
different than those in effect on the Effective Date of this
Agreement as an Existing Customer Agreement despite the
changes in terms and conditions.
f. "Parts" means any modules, subassemblies, boards, components
and related materials of an item or unit of the Equipment.
g. "Service City" means those cities in which OCL maintains a
service office. Schedule E lists OCL's present Service Cities.
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h. "Warranty Service" means performing Maintenance Service in
fulfillment of a warranty given to the End User in connection
with the purchase of the Equipment.
In addition, capitalized terms not defined in this section shall have
the meanings stated in the text of this Agreement.
9. TERM
This Agreement shall take effect on the Effective Date, regardless of
when it is signed. Unless sooner terminated in accordance with the
terms of this Agreement, this Agreement shall have an initial term of
five (5) years ("Initial Term") and shall automatically be extended for
successive one (1) year periods thereafter. Either party may terminate
this Agreement at the end of the Initial Term or at the end of any
subsequent annual renewal upon not less than one hundred eighty (180)
days prior written notice.
10. WARRANTY
OCL warrants that all Equipment Support provided by it pursuant to this
Agreement will be performed in a competent and workmanlike manner. This
warranty is in lieu of all warranties, express or implied, which may be
deemed applicable to the subject matter of this agreement including,
but not limited to, any implied warranties of merchantability and
fitness for a particular purpose.
11. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE ENTITLED TO RECOVER ANY OF THE FOLLOWING TYPES
OF DAMAGES FROM THE OTHER IN CONNECTION WITH ANY CLAIM RELATED TO THIS
AGREEMENT, REGARDLESS OF WHETHER THAT CLAIM IS BASED IN TORT, CONTRACT
OR OTHERWISE:
(1) THE LOSS OF OR THE COST OF RECONSTRUCTING DATA STORED ON DISK
FILES, TAPES, OR MEMORIES, EXCEPT AS PART OF A CLAIM FOR
INDEMNIFICATION PURSUANT TO SECTION 13, BELOW(1),
(2) LOSS OF GOODWILL,
(3) INCIDENTAL DAMAGES,
(4) CONSEQUENTIAL DAMAGES,
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(1) MAI agrees to continue to include a limitation of liability provision
substantially similar to Section 13 of its current Services Agreement form
contract (see Appendix F-2) in future services agreements with Customers.
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<PAGE> 8
(5) PUNITIVE DAMAGES,
(6) ANY FORM OF INDIRECT DAMAGES OF ANY NATURE, OR
(7) DAMAGES FOR PERSONAL INJURY OR PROPERTY DAMAGE EXCEPT TO THE
EXTENT CAUSED BY THE NEGLIGENCE OF THAT PARTY OR ITS EMPLOYEE.
12. INDEMNIFICATION
a. MAI agrees to defend, indemnify and save OCL harmless from and
against any and all claims, suits, or proceedings brought
against it and in any way relating to either the allegedly
negligent or wrongful acts or omissions of MAI, or the
products sold by MAI covered by this Agreement and from the
costs, expenses and damages incurred by OCL in connection with
such claims, suits and proceedings. OCL agrees to promptly
notify MAI of any claim as to which indemnification is sought,
cooperate fully in the defense of such claim, and permit MAI
or its insurance carrier to control the defense and settlement
of such claim.
b. OCL agrees to defend, indemnify and save MAI harmless from and
against any and all claims, suits, or proceedings brought
against it and in any way relating to allegedly negligent or
wrongful acts or omissions of OCL, and from the costs,
expenses and damages incurred by MAI in connection with such
claims, suits and proceedings. MAI agrees to promptly notify
OCL of any claim as to which indemnification is sought,
cooperate fully in the defense of such claim, and permit OCL
or its insurance carrier to control the defense and settlement
of such claim.
13. INSURANCE
Each party represents and warrants to the other that it has and will
maintain liability insurance coverage throughout the Term of this
Agreement, in an amount appropriate in light of the potential liability
created by this Agreement.
14. NON-SOLICITATION OF EMPLOYEES
From the Effective Date until six (6) months after the termination of
this Agreement MAI shall not, directly or indirectly, hire or solicit
for hire any OCL employee connected with performance under this
Agreement without OCL's prior written approval. This section shall not
prevent MAI from soliciting or hiring any OCL employee after such
employee's employment with OCL has been ended through no involvement by
MAI. It is further agreed that the damages as a result of a breach of
this provision would be difficult to measure and that the amount of One
Hundred Thousand ($100,000.00) Dollars (CDN) is a good approximation of
the damages that would be caused by one violation of this
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<PAGE> 9
provision and should be payable as liquidated damages in the event of a
breach of this provision.
This paragraph shall not apply to prevent MAI from hiring or attempting
to hire the Target Employees following a full or partial termination of
this Agreement by MAI pursuant to the terms of this Agreement.
15. NON-DISCLOSURE
a. Both parties agree that any information disclosed to it by the
other party in connection with this Agreement which has been
designated in writing as "Confidential" (including information
disclosed orally and identified in writing as "Confidential"
within ten (10) days after the initial oral disclosure) shall
be treated as such. Additionally, all information provided by
MAI to OCL in connection with requests for bids or proposals
for Equipment Support, including the identity of MAI's
customers and their service requirements, shall be deemed
"Confidential" whether or not it is so identified. Each agrees
that with respect to such information it will:
(1) not disclose such information to third parties
without the written consent of the other,
(2) use such information solely for the purposes of this
Agreement,
(3) treat such information of the other with a degree of
care which is reasonably calculated to protect such
information from disclosure (but in any event with at
least the same degree of care as it treats its own
confidential information),
(4) inform its employees, agents or authorized
representatives of the confidential or proprietary
nature of such information, and
(5) direct such persons to comply with the terms of this
Agreement.
Either party may bring an action in equity to foreclose
violations of this section through injunctive relief.
b. The following types of information shall not be considered
"Confidential" information subject to the restrictions of this
provision:
(1) Information in the possession of or known to the
receiving party on the date of receipt,
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(2) Information in the public domain at the time of its
disclosure or which enters the public domain after
such disclosure through no fault of the receiving
party,
(3) Information independently developed by the receiving
party, its employees, agents or representatives
without reference to the other party's confidential
information,
(4) Information made available to the receiving party,
its employees, agents or representatives by a third
party having a right to do so, or
(5) Information ordered disclosed pursuant to judicial or
other lawful governmental action, provided, that the
party receiving such request gives prompt written
notice of the request to the other party.
c. MAI acknowledges that OCL's business includes the design,
development and servicing of products for the computer-based
industry, and nothing in this Agreement shall preclude or in
any way impair OCL's engaging or continuing to engage in that
business.
d. The non-disclosure obligations imposed by this Agreement shall
continue in force for so long as the information is maintained
as confidential by the disclosing party and for a minimum
period of three (3) years from the date of first disclosure,
regardless of any termination of this Agreement.
16. RELATIONSHIP BETWEEN PARTIES
OCL shall perform its duties under this Agreement as an independent
contractor, and not as an agent or affiliate of MAI. In particular:
a. nothing contained in this Agreement shall be construed to
constitute OCL as a partner, employee or agent of MAI, nor
shall either have any authority to bind the other in any
respect it being intended that each shall remain an
independent contractor responsible for its own actions,
b. MAI shall exercise no control over the activities and
operations of OCL, each being recognized hereunder as an
independent contractor,
c. The relationship between OCL and MAI's customers shall be that
of a subcontractor; OCL is not assuming any of the Customer
Agreements and shall have no direct obligation to MAI's
customers.
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17. ASSIGNMENT
Neither party may assign any of its rights, interests or duties under
this Agreement without the prior written consent of the other party ,
which consent shall not be unreasonably withheld. In the event one
party seeks consent to an assignment and the other party withholds its
consent to that proposed assignment, the party seeking consent may
terminate this Agreement upon sixty (60) days notice to the other
party.
18. AUTHORIZED REPRESENTATIVES AND NOTICES
a. Each party shall at all times designate one representative who
shall be authorized to take any and all action and/or grant
any approvals required in the course of performance of this
Agreement. Such representative shall be fully authorized to
act for and bind such party including the approval of
amendments to this Agreement. Until written notice to the
contrary, the authorized representatives of the parties are as
follows:
FOR OCL: FOR MAI:
President Vice President, Customer Service
Olivetti Canada Limited MAI Canada Limited
2235 Sheppard Ave. E. 691 Denison Street
Suite 1200 Markham, Ontario
North York, Ontario
b. Any notice or other communication required or permitted under
this Agreement shall be in writing and shall be delivered in
person or sent by overnight commercial courier service with
receipt, addressed as set forth below:
IN THE CASE OF OCL: WITH A COPY TO:
Vice President General Counsel
Customer Service Legal Department
Olivetti Canada Limited Olivetti North America, Inc.
2235 Sheppard Ave. E. 22425 E. Appleway
Suite 1200 Liberty Lake, WA 99019
North York, Ontario
Notice shall be deemed given when received.
c. Either party may change the name or address to which notices
or other communications are to be sent by giving written
notice of such change to the other party.
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19. EXCUSED NON-PERFORMANCE
A delay in or failure of performance under this Agreement caused by
circumstances beyond the reasonable control of the party affected shall
be excused to the extent necessary, provided that the party affected
shall make reasonable efforts to remove or circumvent such
circumstances. Such excusing circumstances shall include (without
limitation): shortages of materials; acts of God; fire; flood; war;
embargo; labor trouble; failure or delay by suppliers; riots; and laws,
rules, regulations and orders of any governmental authority. If any
delay or inability to perform continues for more than sixty (60) days,
the non-affected party shall have the right to terminate the affected
portion of this Agreement upon seven (7) days Notice to the affected
party, or to suspend its obligations under the Agreement until such
time as the delay or inability to perform is corrected.
If any delay or inability to perform on the part of OCL continues for a
period greater than the period of excused non-performance permitted in
MAI's contract with one of more of its Customers, MAI shall have the
right to terminate the affected portion of this Agreement upon
twenty-four (24) hours Notice to OCL. MAI agrees to continue to include
an excused nonperformance provision substantially similar to the first
two sentences of Section 15 of its current Services Agreement form
contract (see Appendix F-2) in future services agreements with
Customers.
20. DEFAULT AND TERMINATION
a. If either party defaults in performance of any material
obligation under this Agreement, and such default is not cured
within sixty (60) days after receipt of Notice from the
non-defaulting party, the non-defaulting party shall have the
right to immediately terminate this Agreement by Notice to the
defaulting party.
b. MAI may terminate this Agreement, as it relates to an
individual MAI Customer, for default by OCL on less than sixty
days notice as follows:
(1) If OCL is in default under this Agreement MAI shall
escalate that problem within OCL's service
organization as necessary in order to have the
problem addressed. This escalation shall include,
when necessary, bringing the problem to the attention
of OCL's vice president of customer service.
(2) If, after OCL has been given a reasonable opportunity
under the circumstances to resolve the problem, MAI
believes that OCL is still in default under this
Agreement, MAI will give OCL Notice of the alleged
default.
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(3) If OCL has not cured the default within forty-eight
(48) hours of its receipt of Notice, MAI may
terminate this Agreement as to the MAI Customer to
whom the default relates.
c. Should MAI become more than forty-five (45) days delinquent in
its obligation to pay, OCL may suspend its performance
hereunder until MAI's account is brought current. If MAI's
account remains delinquent for a total period of sixty (60)
days, OCL shall have the option to terminate this Agreement
immediately by Notice to MAI.
d. Termination of this Agreement shall not affect any rights
existing as of the effective date of termination.
e. The rights and remedies provided in this Agreement are
cumulative and in addition to any other rights or remedies
available at law or in equity.
f. The provisions of Section 16 shall survive termination of this
Agreement.
21. CONFLICT RESOLUTION
MAI and OCL agree to meet and work together to find acceptable
solutions to any disputes between them related to this Agreement. If,
after thirty (30) days, they are unable to so resolve the dispute, the
dispute will be referred to MAI's President and the President or CEO of
OCL, or their designated representatives, who shall meet or talk within
fifteen (15) business days after Notice is received to resolve such
dispute. Notice of the invocation of this procedure shall be directed
to such officers and shall include a reference to this Section 16. If
the dispute is not resolved by this meeting, then it shall be resolved
by arbitration in accordance with Section 17. If a party fails to meet
with the other party upon request, the requesting party may either
obtain an order of a court of competent jurisdiction requiring the
non-complying party to meet and confer or proceed to arbitration in
accordance with Section 17.
22. ARBITRATION
All disputes relating to this Agreement shall be submitted to
arbitration in accordance with the commercial rules of the Arbitration
Act RSO, 1990. The decision of the arbitrators shall be final, binding,
and without appeal and may be enforced in any court having jurisdiction
over the relevant parties or their assets.
23. GENERAL
a. This Agreement shall be governed by the laws of the Province
of Ontario.
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b. This Agreement together with the attached Schedules,
constitutes the complete and final agreement between the
parties with respect to the subject matter of this Agreement.
This Agreement supersedes all prior discussions, agreements
and writings with respect thereto. No agreement purporting to
modify, add to, terminate, waive or change any term or
condition of this Agreement shall be binding unless it is in
writing and signed by authorized representatives of both
parties.
c. The organization of this Agreement and section headings are
for convenience only and shall not be used to construe or
interpret this Agreement.
d. No delay or failure of either party in exercising any right
hereunder, and no partial or single exercise thereof, shall be
deemed to constitute a waiver of such right or any other
rights hereunder.
e. If any provision or term of this Agreement shall be deemed or
construed to be invalid, illegal or unenforceable by a court
of competent jurisdiction, such determination shall in no way
affect the validity, legality, or enforceability of the
remaining portions of this Agreement.
f. Should legal action be required to enforce or interpret any of
the provisions of this agreement the prevailing party shall be
entitled to all costs incurred in connection with that action,
including a reasonable attorney's fee.
"OCL" "MAI"
OLIVETTI CANADA LTD. MAI CANADA LTD.
By: By:
--------------------------------- -------------------------------
Its: Its:
-------------------------------- -------------------------------
Dated: Dated:
------------------------------ ------------------------------
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SCHEDULE A
NEW CUSTOMER AGREEMENTS EQUIPMENT SUPPORT
This Schedule sets out a beginning framework to define the manner in which
service will be ordered by MAI and provided by OCL for New Customer Agreements.
The parties anticipate that OCL will be submitting bids to MAI with respect to
most New Customer Agreements and that the provisions of this schedule may be
modified by the specific provisions of a bid provided by OCL. However, in the
absence of such changes specified in the OCL bid documents, OCL will be making
its bids on the basis of the provisions of this schedule. The parties also
anticipate that as they refine their relationship and the manner in which they
do business, they may decide to modify the provisions of this schedule and each
agrees to negotiate in good faith about any requests for changes made by the
other. Any agreed changes resulting from such negotiations will be reflected in
an amendment to this Agreement signed by both parties.
1. PLACING EQUIPMENT UNDER SERVICE
a. In order to initiate Equipment Support for a particular item
of Equipment MAI must prepare and submit a completed OCL
Maintenance Service Order ("MSO") to OCL and that MSO must be
accepted by OCL. The MSO must include such information about
the Equipment as is reasonably requested by OCL, including:
(1) the model, age and configuration of the Equipment,
(2) the Equipment Location,
(3) the name, address, and telephone number of the End
User,
(4) the identity of the End User contact person, and
(5) any applicable uplifts for Extended Maintenance
Service which apply to the Equipment, such as zone
uplifts, extended coverage hours uplifts and/or
response time uplifts.
b. Equipment Support will not begin for a particular item of
Equipment until OCL has received and accepted an MSO for that
item of Equipment. Following acceptance of an MSO, OCL will
label the Equipment with an ID tag. This ID number must be
used to identify the Equipment in all communications with OCL
about the Equipment.
c. All changes to the information provided to OCL about Equipment
under maintenance, such as a change in Equipment location,
must be documented by submission of a revised MSO.
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d. An MSO placing Equipment under service shall be valid until
discontinued in accordance with paragraph A7. Until OCL
receives an MSO discontinuing service the Equipment will be
kept under service and OCL will bill MAI for that service.
Requests for service received when no valid MSO is in force
will be treated as requests for Time & Materials Service.
2. REQUESTS FOR SERVICE
a. MAI, or its designated representative, will receive all End
User requests for service or repair.
b. MAI, or its designated representative, will, obtain as much
information as reasonably possible about the End User's
problem during its communications with the End User.
c. MAI, or its designated representative, will obtain from the
End User the information necessary to determine whether the
Equipment is eligible for Maintenance Service and to permit
OCL to properly perform Equipment Support. This shall include,
without limitation, the model and age of the Equipment and the
configuration in which it is installed.
d. MAI, or its designated representative, will contact OCL and
request Equipment Support for the End User's Equipment. This
request shall include all pertinent information MAI has about
the End User's Equipment and the problem being experienced, at
a minimum:
(1) the ID number for the Equipment, and
(2) the nature of the problem being experienced by the
End User,
3. MAINTENANCE SERVICE
a. Maintenance Service means service performed to correct
improper functioning of Equipment which occurs from normal
use, including making any necessary adjustments and/or
replacing defective assemblies or subassemblies.
b. Maintenance Service does not include:
(1) Service of equipment not specifically identified on
the MSO ordering the Maintenance Service, including
devices peripheral or connected to Equipment.
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(2) Electrical work external to the Equipment.
(3) Repair of damage or loss resulting from accident,
transportation, neglect, misuse or abuse, operator
error, failure of electrical power or air
conditioning or humidity control, or use for which
Equipment was not designed.
(4) Supplies or accessories, painting or refinishing
Equipment, furnishing material for Equipment, making
specification or field engineering changes,
performing services connected with relocation of
Equipment, or adding or moving accessories,
attachments or other devices.
(5) Software programming and software program
maintenance.
(6) Service which is impractical for OCL to render or
required because of any adjustment, repair,
maintenance, alteration, attachment, addition, or
connection to another machine or device.
(7) Service calls required as the result of modification,
work or service of the Equipment by non-OCL
personnel.
(8) Service of Equipment which, because of a safety
hazard, exposes OCL personnel to a risk of injury.
(9) Service in connection with the installation,
discontinuance or removal of Equipment.
(10) Installation of engineering changes, feature changes,
or safety changes.
c. Equipment shall be kept in or shall be restored to good
working order.
d. Maintenance Service will be performed in a prompt, courteous,
efficient and workmanlike manner.
e. Unless otherwise specified, Preventive Maintenance will be
performed on equipment only during a Maintenance Service call.
Preventive Maintenance includes general cleaning and
inspection, and any adjustments and/or lubrication as
specified by the Equipment manufacturer.
4. STANDARD MAINTENANCE SERVICE.
a. After receiving a Request for Service from MAI or its
designated representative, OCL will dispatch a properly
trained Customer Service Engineer (CSE) to the Equipment
Location along with such tools, parts and manuals as the CSE
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reasonably believes Will be required to repair the Equipment
based on the information provided to OCL by MAI. Upon arrival
the CSE will- diagnose the problem, if any, and perform the
Maintenance Service.
b. OCL will use all reasonable efforts to arrive at the Equipment
Location ready to complete the Maintenance Service within the
agreed upon response time for that Equipment.
c. Maintenance Service will be performed during the agreed upon
hours of service(2) and at the location agreed upon for that
Equipment.
5. INSTALLATION SERVICE
a. Installation Service shall consist of
(1) Any necessary unpacking of the Equipment;
(2) Connection of Equipment;
(3) Physical inspection of Equipment in place;
(4) Functional testing of Equipment according to
prescribed procedures for such Equipment;
(5) Resolution of normal installation problems; and
(6) notification to MAI and End User of unusual
installation problems (e.g., design or engineering
problems, transit damage, etc.). These problems must
be corrected before OCL will perform Maintenance
Service on this Equipment.
b. Installation Service does not include uncrating or major
movement of the Equipment.
c. OCL will use all reasonable efforts to provide Installation
Service in a timely manner, subject to the availability of
personnel and equipment, necessary travel time and other
factors affecting OCL's ability to provide this service.
- ----------------------
(2) Normal Service Hours are Monday through Friday, 8:00 a.m. to 5:00 p.m. local
time, excluding OCL observed holidays. Service started during Normal Service
Hours and completed within 1 hour after Normal Service Hours will be deemed
performed within Normal Service Hours.
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6. TIME AND MATERIALS SERVICE
a. OCL may, at its option and in its discretion, elect to accept
requests from MAI for service on a time and materials basis
("Time and Materials Service"). Such Service shall be on a
"best efforts" basis consistent with the availability and
location of trained personnel and Parts.
b. OCL will use all reasonable efforts to provide Time &
Materials Service in a timely manner, subject to the
availability of personnel and equipment, necessary travel time
and other factors affecting OCL's ability to provide this
service.
7. DISCONTINUANCE
MAI may discontinue Maintenance Service for any Equipment by sending
OCL a fully completed and properly signed MSO acceptable to OCL
identifying the Equipment to be discontinued. Such discontinuance shall
become effective thirty (30) days after it is received by OCL. Such
discontinuance shall be ineffective if any part of its purpose is to
allow the Maintenance Service to be performed by MAI or a third party.
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<PAGE> 20
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
SCHEDULE B
PRICES FOR NEW CUSTOMER AGREEMENTS
This Schedule sets out what will eventually become the standard pricing scheme
to be used by the parties when no other pricing arrangements are agreed upon for
a specific order. However, both parties recognize that the market for Equipment
Support services is very competitive and changes frequently. Accordingly, OCL
agrees that upon request by MAI it will re-evaluate the prices and pricing
methodology identified in this schedule to respond to competitive pressures or
to reflect appropriate volume discounts upon request by MAI. In addition, OCL
Will provide bids for major projects in accordance with Section 3 of this
Agreement. Any agreed changes resulting from this reevaluation and/or bidding
process will be reflected in a document signed by both parties which identifies
the Equipment to which such modified prices apply.
1. STANDARD MAINTENANCE SERVICE
MAI will pay OCL an Annual Maintenance Charge ("AMC") for each unit of
Equipment placed under Maintenance Service as payment for OCL's
agreement to provide Standard Maintenance Service for each such unit of
Equipment. The AMC for each model of Equipment staff be as identified
in any service order accepted by OCL or flat rate pricing schedule
subsequently provided to MAI by OCL.
2. TIME AND MATERIALS/INSTALLATION SERVICE
a. OCL will bill [**]for each hour of labor incurred during
Normal Service Hours and [**] for each hour of labor incurred
outside Normal Service Hours by a CSE in performing the
service.
b. Labor charges commence upon dispatch of the CSE to the End
User location and include travel to and from the site.
c. There is a minimum 1 hour charge per call and additional time
will be charged in increments of one-quarter (1/4) hour.
d. OCL will, upon request by MAI, provide flat rate installation
prices for items of Equipment identified by MAI.
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<PAGE> 21
3. COMMERCIAL TRAVEL
a. When Commercial Travel is required to perform Time and
Materials and/or Installation Service and has been approved in
advance by MAI, MAI will be charged the actual, reasonable
cost of such travel. Commercial travel includes, but is not
limited to, such items as airfare, ferry and rental vehicles.
4. LODGING EXPENSES
a. If OCL determines that it is in the best interests of OCL and
MAI to have a CSE remain overnight at or near the Equipment
Location in connection with Time and Materials and/or
Installation Service and MAI has approved such expenses in
advance, MAI will be charged the actual, reasonable lodging
and meal expenses incurred.
5. INVOICING/PAYMENT
a. OCL will invoice MAI monthly for Equipment for which Contract
or Warranty Service has been ordered. These invoices will be
issued on approximately the fifteenth (15th) of the month for
which the invoice is being issued. For example, OCL will
invoice MAI on approximately October 15th for the October
Contract Service being provided by OCL.
OCL will invoice MAI monthly, in arrears, for all other
Equipment Support.
b. Invoices are due and payable upon receipt and will begin to
accrue interest at 1.25% per month from the date of the
invoice if not paid in full within 45 days of the date of the
invoice.
c. MAI will pay or reimburse OCL for any and all sales, use and
excise taxes, and other fees or charges levied or imposed by
any governmental agency or authority on or in connection with
or measured by the value of the Services provided by OCL under
this Agreement.
6. AMENDMENT
a. This Schedule may be amended by OCL upon Notice to MAI.
b. The Amended Schedule shall become effective on the Effective
Date stated in the Amended Schedule, but no sooner than 30
days after Notice is given to MAI.
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<PAGE> 22
c. Price changes included in any Amended Schedule shall apply
only to Equipment Support requested after the Effective Date
of the Amended Schedule.
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<PAGE> 23
SCHEDULE C
SPARE PARTS
1. OCL'S OBLIGATIONS
a. OCL shall, at its expense, establish and maintain an inventory
of a sufficient quantity of all the Parts necessary to perform
the Equipment Service called for by this Agreement in each
Service City open for Equipment Service.
b. At its option, OCL may elect to maintain an inventory of
certain Parts in a centered depot or depots for distribution
within OCL as required.
c. OCL shall keep records of its receipt, disbursement and use of
such Parts.
d. OCL shall take all steps necessary to ensure the availability
of sufficient Parts to satisfy its commitments with respect to
all Equipment Service to be performed by it under this
Agreement.
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<PAGE> 24
SCHEDULE D
TECHNICAL SUPPORT
1. TRAINING
a. Because OCL will be hiring many of MAI's former service
engineers, the parties do not anticipate that any initial
training of OCL personnel will be required. Should training
subsequently be required as a result of adding new Equipment
to the Schedules to this Agreement the parties will at that
time determine who is required to provide such training. If no
agreement is reached on this issue, OCL shall not be required
to provide Equipment Support for such newly added Equipment.
b. MAI will, upon request from OCL and at no charge, provide OCL
with such technical consultation and assistance as is
appropriate to enable OCL to provide its service
representatives with such training as its deems appropriate.
This shall include, without limitation, providing OCL with a
copy of MAI's educational materials pertaining to the
Equipment and permitting OCL to make such use of those
materials as it deems appropriate for its internal use in
satisfying its commitment to provide Equipment Support under
this Agreement.
2. DOCUMENTATION
a. As soon as practicable after execution of this Agreement MAI
will provide OCL, at no charge, with one complete set of
documentation and diagnostics for each model of Equipment.
b. As soon as practicable after any Equipment is added to the
Appendix to Schedule A, MAI will provide OCL, at no charge,
with one complete set of documentation and diagnostics for
such additional Equipment.
c. As soon as practicable after updates or changes to the
documentation and diagnostics provided to OCL become
available, MAI will provide OCL with those updates and changes
at no charge.
d. OCL may copy, modify, and use any or all of the documentation
and diagnostics provided to it by MAI as it deems necessary
for its internal use, while retaining all MAI trademarks and
copyrights.
3. SECOND LEVEL SUPPORT
a. MAI will provide OCL with telephone technical support for
OCL's service representatives during MAI's normal technical
support hours at no charge to OCL.
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<PAGE> 25
SCHEDULE E
SERVICE CITIES
ALBERTA
Calgary ONTARIO
Edmonton Hamilton
Lethbridge London
Ottawa
BRITISH COLUMBIA Toronto
Richmond Waterloo
Victoria Windsor
MANITOBA QUEBEC
Winnipeg Chicoutimi
Montreal
NOVA SCOTIA Quebec City
Halifax Trois Rivieres
1. AMENDMENT
a. Service Cities may be deleted at OCL's discretion. OCL will
give Notice to MAI of the effective date of the Service City
deletion.
b. OCL will continue Equipment Support in locations previously
serviced by the closed Service City from an alternative
Service City of OCL's choice, at the rate in effect at the
time of closing, for a period of ninety (90) days. At the end
of the ninety (90) day period, MAI may continue Equipment
Support with OCL with a revised AMC or discontinue Equipment
Support with OCL in those cities.
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<PAGE> 26
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
SCHEDULE F
EXISTING CUSTOMER AGREEMENTS
1. STATEMENT OF INTENT
The general intent of the parties is to have OCL perform the service
which MAI is currently required to provide to MAI's customers under the
Existing Customer Agreements in return for [**] MAI is consigning its
current inventory of spare parts to OCL to permit it to perform that
service and MAI will be providing technical hardware and software
support to OCL as required to assist it in providing this service.
Initially, MAI will be handling the incoming call reception for all
Existing Customer Agreements, however the parties intend to begin
working to transfer this function for certain of the Existing Customer
Agreements (the "Legacy Agreements") to OCL as soon as this agreement
has been executed. Eventually, MAI may also like to transfer the
billing and collection functions for the Legacy Agreements to OCL if it
is practical and economical to do so. The remainder of this schedule is
intended to define the precise terms and conditions pursuant to which
this general intent will be carried out.
2. IDENTIFICATION OF CUSTOMERS
Attached as Appendix F-I is a list of those MAI customers for whom MAI
will retain the call reception, billing and collection functions
throughout the term of this Agreement (the "Open Customers"). All MAI
customers with Existing Customer Agreements who are not listed on
Appendix F-I are "Legacy Customers" for purposes of this Agreement.
3. EQUIPMENT SUPPORT
a. GENERALLY. With the exceptions listed below, OCL will perform
MAI's Equipment Support obligations under the Existing
Customer Agreements under the same terms and conditions as are
required of MAI under those agreements. This shall include
Contract Service, Installation Service, and Time and Materials
Service to the extent such types of service are covered by the
Existing Customer Agreements. Provision of a particular type
of service for an Existing MAI Customer which is not covered
by the Existing Customer Agreement for that customer shall be
considered the provision of service under a New Customer
Agreement for purposes of this Agreement.
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<PAGE> 27
Prior to execution of this Agreement, MAI provided OCL with
the form customer agreements and sample customer agreements
which are attached as Appendix F-2. MAI represents and
warrants to OCL that its Equipment Support obligations under
the Existing Customer Agreements are not materially different
than those required under these form customer agreements and
sample customer agreements.
b. EXCEPTIONS. MAI shall continue to perform the following
Equipment Support Obligations under the Existing Customer
Agreements:
(1) MAI shall continue to receive incoming trouble calls
from its customers. MAI will screen these calls to
determine whether the problem is hardware or software
related. With respect to calls which MAI determines
are hardware related, MAI shall notify OCL's dispatch
center and provide it with the information MAI has
about the problem so that OCL may dispatch a service
technician to the customer site to resolve the
problem. Upon resolution of the problem, OCL shall
notify MAI of its resolution of the problem and
provide it with the information necessary to permit
MAI to close the can in its records. The parties
agree to work together to link their computer systems
so that this entire process may ordinarily be done
via computer without the need for telephone or other
alternate means of communication.
Immediately following execution of this Agreement the
parties agree to begin working together to transfer
responsibility for incoming trouble calls from Legacy
Customers to OCL. OCL will provide Legacy Customers
with a to free phone number to use to call OCL with
trouble calls to place requests for service. The
parties agree to cooperate to make this transition as
smooth and as customer friendly as reasonably
possible. Upon completion of this process, OCL shall
be completely responsible for the call tracking
process and shall cease providing MAI with call
closure information for the Legacy Customers. At that
time, OCL will begin to provide MAI with mutually
defined reports summarizing its handling of Legacy
Customer calls.
(2) MAI shall continue to invoice its customers pursuant
to the Existing Customer Agreements and be
responsible for the collection of those invoices from
its customers. As part of this function, MAI will
retain the authority to determine if and when service
to a particular customer should be terminated and it
win notify OCL of any such termination of service.
Until receipt of such notification from MAI, OCL
shall continue to provide service to customers as
required by that customer's Existing Customer
Agreement and shall be entitled to be paid by MAI for
such service as provided by this Agreement.
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<PAGE> 28
Following execution of this Agreement the parties
agree to begin working together to determine if it is
practical and economical to transfer responsibility
for the billing of and collection from Legacy
Customers to OCL. Part of this process will be
negotiation of the amount MAI will pay OCL to assume
these functions if the parties decide to proceed with
a transfer of these functions to OCL.
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<PAGE> 29
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
4. TRANSITION
The parties agree to work together to make the transfer of the service
work for Existing Customers from MAI to OCL as smooth as possible. As
part of this transition, MAI will provide OCL with access to its
customer service database and work with OCL to transfer the information
in that database into OCL's customer service database so that it win be
in place and useable by OCL on the Effective Date of this Agreement.
5. PAYMENT
a. For OCL's provision of Equipment Support under an Existing
Customer Agreement MAI will pay [**] recognized by MAI for
financial accounting purposes in connection with the Equipment
Support being provided by OCL ("Revenue") less the burdened
employee cost and the necessary cost of providing facilities
related to the MAI field engineers in British Columbia [**].
The parties recognize that MAI may bill its customers in
advance for the Equipment Support being provided by OCL and
that it may recognize revenue incrementally as the support is
provided. Further, the parties recognize that MAI may
establish a reserve for non-payment which reserve shall be
consistent with GAAP accounting principles and shall be
consistent with MAI's past collection experience of its
Existing Customer Agreements.
b. MAI will pay OCL the payment required pursuant to subparagraph
(a), above, monthly in arrears on or before the fifteenth day
of each month. OCL will not invoice MAI for these amounts.
c. OCL will provide MAI with such information as is necessary for
MAI to bill its customers for nonrecurring Equipment Support
provided by OCL, such as Installation, Time and Materials, and
Warranty Service.
d. Both parties shall have the right to audit the billing and
collection being done by the other related to this Agreement
and each shall provide the other with full access to its
pertinent financial records for the purpose of such audits.
Such access shall be at a reasonable time agreed upon in
advance and shall include the right to make copies of material
records upon confirmation of materiality by the audited party.
All records produced and/or copied by the auditing party are
deemed Confidential and protected by the confidentiality
provisions of this Agreement. Any variations from previously
reported figures disclosed by such audits shall be settled
between the parties by payment within thirty (30) days of the
discovery of such variation.
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<PAGE> 30
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
6. REVENUE BASED PAYMENT ADJUSTMENT
a. ADJUSTMENT. MAI has represented to OCL that, as of the
Effective Date, the Existing Customer Agreements are
generating [**] The parties agree that if, during the initial
term of the Agreement the actual revenue generated by the
Existing Customer Agreements (the "Actual Revenue") during a
calendar quarter is less than the Target Revenue, OCL's
percentage of the revenue from the Existing Customer
Agreements shall be increased by [**] that the Actual Revenue
is less than the Target Revenue. Any partial calendar quarter
will be pro-rated accordingly.
For example, if the Actual Revenue during the first full
calendar quarter of this Agreement is [**] Revenue percentage
will be increased by [**] MAI will at that time pay OCL the
difference between the amount MAI has paid OCL on Existing
Customer Agreement revenue during that calendar quarter at the
[**] and what it would have paid at the [**].
b. IMPLEMENTATION. These changes in the revenue percentage, if
any, will be implemented by reviewing the Actual Revenue at
the end of each full calendar quarter during the contract term
and adjusting the percentage rate accordingly. This adjustment
will be retroactive to the beginning of that calendar quarter
and any payments required to effectuate that adjustment for
the calendar quarter just ended will be made within ten (10)
business days. OCL's percentage of revenue during the
following calendar quarter will be based on the adjusted
percentage rate, which will then be re-evaluated and adjusted
as necessary at the end of the following calendar quarter.
c. THIRD PARTY CONTRACTS. Revenue from MAI's agreements with the
following companies which have been assigned to OCL pursuant
to a separate document has not been included in the Target
Revenue and shall not be considered for the purposes of this
Section of this Agreement:
(1) Aegis Manufacturing Corporation
(2) AGFA Division, Bayer Corporation
(3) Logicsys Technologies, Inc.
(4) Northern Micro
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<PAGE> 31
(5) Patriot Computer Corporation
(6) Renaissance Computer Solutions, Inc.
(7) Sidus Systems, Inc.
7. PARTS
a. MAI will consign to OCL its current inventory of Parts being
used by it to perform Equipment Support pursuant to Existing
Customer Agreements (the "Consigned Parts"). MAI represents
and warrants to OCL that this inventory of Consigned Parts is
adequate in size and mix to properly perform the Equipment
Support OCL will be providing for Existing Customers as of the
Effective Date of this Agreement.
b. OCL will be responsible for the physical transfer of the
Consigned Parts from MAI to OCL. MAI agrees to cooperate fully
with OCL in order to enable the smooth transfer of the
Consigned Parts. Within 90 days of the Effective Date, OCL
will perform a physical inventory of the Consigned Parts and
provide MAI with a written list of the Consigned Parts. OCL
will immediately perform a physical inventory of those
Consigned Parts, if any, which are not the property of MAI and
which have been consigned to it by a third party. This
physical inventory of third party owned Consigned Parts will
be binding on the parties for purposes of adjusting any
shortage of such parts with the third party owner.
c. OCL will be responsible for maintaining the Consigned Parts in
the general condition and quantities as they were received
from MAI. OCL shall keep the Consigned Parts in such a manner
so that they are separately identifiable from OCL owned Parts.
As the Consigned Parts are used by OCL to perform Equipment
Support, OCL shall replace them with the exchanged part from
the customer equipment, after first making any necessary
repairs to the exchanged part. Exchanged parts which are not
repairable shall be replaced by OCL. OCL will be
subcontracting the actual repair of the Consigned Parts to a
third party and MAI hereby consents to that subcontracting.
Amounts or types of Parts added to the Consigned Parts by OCL
shall be the property of OCL and shall not be delivered to MAI
upon termination of this Agreement.
Should it become impractical for OCL to obtain replacement
parts (either because they are not reasonably available or not
reasonably affordable) OCL shall not be required to replace
unrepairable portions of the Consigned Inventory and shall be
relieved of its obligation to provide Equipment Support to the
extent it is prevented from doing so by this inability to
obtain replacement parts.
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<PAGE> 32
d. Upon termination of this Agreement, OCL will return the
Consigned Parts to MAI in the quantities and condition it
received them from MAI, ordinary wear and tear excepted.
e. OCL agrees that MAI may search all pertinent public records,
file financing statements, and take other necessary steps to
protect MAI's ownership of the Consigned Parts against claims
of creditors and carry out the purposes of this Agreement. OCL
agrees to promptly execute and deliver to MAI all financing
statements and other documents necessary to permit MAI to
carry out such steps and otherwise cooperate with MAI's
efforts to protect its ownership of the Consigned Parts.
8. TOOLS
a. MAI will loan to OCL its current inventory of tools (including
laptop computers and diagnostic software) being used by its
field engineer work force or repair center to perform
Equipment Support pursuant to Existing Customer Agreements
(the "Consigned Tools"). MAI represents and warrants to OCL
that this inventory of Consigned Tools is adequate in size and
mix to properly perform the Equipment Support OCL will be
providing for Existing Customers as of the Effective Date of
this Agreement. The Consigned Tools shall remain the property
of MAI. OCL win be responsible for maintaining the Consigned
Tools in the general condition as they were received from MAI,
ordinary wear and tear excepted.
b. OCL will be responsible for the physical transfer of the
Consigned Tools from MAI to OCL. MAI agrees to cooperate fully
with OCL in order to enable the smooth transfer of the
Consigned Tools. Within 90 days of the Effective Date, OCL
will perform a physical inventory of the Consigned Tools and
provide MAI with a written list of the Consigned Tools.
c. OCL shall keep the Consigned Tools in such a manner so that
they are separately identifiable from OCL owned tools. Upon
termination of this Agreement OCL will return the Consigned
Tools to MAI in the condition it received them from MAI,
ordinary wear and tear excepted.
d. OCL agrees that MAI may search all pertinent public records,
file financing statements, and take other necessary steps to
protect NW's ownership of the Consigned Tools against claims
of creditors and carry out the purposes of this Agreement. OCL
agrees to promptly execute and deliver to MAI all financing
statements and other documents necessary to permit MAI to
carry out such steps and otherwise cooperate with MAI's
efforts to protect its ownership of the Consigned Tools.
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<PAGE> 33
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
9. WARRANTY SERVICE
a. OCL will provide Warranty Service under warranty obligations
in place on the Effective Date of this Agreement in accordance
with those warranties and will seek reimbursement from the
warranty provider in accordance with its usual terms. Where
the warranty provider is MAI, MAI will reimburse OCL on a Time
and Materials basis at the reduced rates of [**] outside
Normal Service Hours.
10. NEW BUSINESS DEVELOPMENT
a. EXISTING CUSTOMERS. Except for those Existing Customers with
whom OCL or its corporate affiliates has a pre-existing
relationship as of the Effective Date of this Agreement OCL
shall not solicit or contract with Existing Customers for any
products or services without MAI's express written consent.
Except as expressly prohibited by this provision, OCL shall not
be limited in its ability to conduct it business as if it had
not entered into this Agreement with MAI.
MAI agrees not to unreasonably withhold or delay its consent to
requests from OCL to solicit or contract with Existing
Customers for the sale of products or services which are not
competitive with a product or service sold by MAI. In granting
its consent, MAI shall be entitled to place reasonable
restrictions on the manner in which OCL interacts with the
Existing Customers, for example by precluding the involvement
of the OCL employees who provide Equipment Support for that
Existing Customer pursuant to this Agreement. In the event MAI
withholds its consent to a request by OCL to solicit or
contract with an Existing Customer, OCL shall be entitled to
terminate this Agreement upon one hundred eighty (180) days
prior written notice to MAI without further liability or
obligation to MAI. OCL's failure to exercise this right to
terminate on one or more occasions when it has the opportunity
to do so shall not be deemed to constitute a waiver of such
right or any other rights hereunder
b. MAI NON-SERVICE CUSTOMERS. There are persons using MAI
hardware and software who, as of the Effective Date, do not
have an existing agreement with MAI for Equipment Support
("MAI Non-Service Customers"). OCL is free to solicit
contracts with MAI Non-Service Customers (except those who MAI
is prohibited from soliciting pursuant to its July 21, 1993
agreement with Banwell) for any types of products or services,
including contracts for all types of Equipment Support.
Contracts for Equipment Support with MAI Non-Service Customers
shall be entered into between the customer and MAI, on terms
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<PAGE> 34
negotiated by OCL, and shall be treated as Existing Customer
Agreements for purposes of this Agreement.
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT AND THE CONFIDENTIAL PORTIONS OF EXHIBIT 10.2 HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
MAI agrees to reimburse OCL for [**] of the sales costs
(including the sales commission) it incurs in connection with
obtaining a Contract for Equipment Support with an MAI
Non-Service Customer.
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<PAGE> 35
APPENDIX F-1
IDENTIFICATION OF CUSTOMERS
ATTACHED
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<PAGE> 36
APPENDIX F-2
SAMPLE CUSTOMER AGREEMENTS
ATTACHED
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<PAGE> 37
Page:
DEPOT AGREEMENT
Between Branch:
MAI CANADA, LTD Agreement:
And Date:
CUSTOMER:
BILLING ADDRESS:
CITY: PROVINCE: POSTAL CODE:
- --------------------------------------------------------------------------------
1. TERMS OF AGREEMENT
This Agreement shall have an initial term of one (1) year from the
effective date specified in Schedule one (1) hereof and shall continue in full
force thereafter until terminated in the manner hereinafter provided. This
Agreement may be terminated during the initial term or at any time thereafter by
either party giving three (3) months' prior written notice of termination to the
other party. Any item of equipment may be withdrawn from this agreement by
either party upon three (3) months' prior written notice to the other party.
2. PAYMENTS AND CHARGES
The annual charges provided for in this Agreement commence on the
effective date stated in Schedule one (1) hereof and will be invoiced as of the
first of the month. Payment of each invoice shall be made in full within thirty
(30) days after the date of the invoice. If this agreement is effective with
respect to any item of equipment for less than a full calendar month, the charge
for each day for such item shall be computed at the a rate of 1/30th of the
monthly rate.
The annual charges set out in Schedule one (1) hereof are those currently
in effect and are subject to charge by MAI giving three (3) months' prior
written notice of such change to the Customer. If the annual charges are
increased, the Customer may, on the effective date of such increase, terminate
this agreement or withdraw from this agreement any item of equipment affected by
the increase by giving one (1) months' prior written notice of such termination
or withdraw to MAI.
There shall be added to the charges payable hereunder amounts equal to
any sales, use, excise or other taxes or duties, however designated, which are
levied or based on such charges or on this agreement on the services rendered or
parts supplied pursuant hereto and which are paid or payable by MAI, exclusive,
however, of taxes based on net income.
3. SCOPE OF SERVICE
The remedial services to be provided under this agreement consist of
warranty service and repair and parts service. MAI will not provide preventative
maintenance under this agreement. Parts will be furnished on an exchange basis
and the replaced parts will become the property of MAI. The remedial services
performed at the MAI Repair Depot referred to in Schedule one (1) hereof.
The Customer will determine when remedial services are required utilizing
procedures supplied by MAI, and will ship the equipment or machine part
requiring remedial services to the MAI Repair Depot. Upon its return from the
MAI Repair Depot, the Customer will install the equipment or machine part in its
operational location and check it s performance in the operational location.
Machine parts within each type of equipment will be specified by MAI.
Charges for shipping equipment and machine parts to the MAI Repair Depot
will be prepaid by the Customer, and the return shipping charges will be paid by
the Customer on a collect basis.
Except for any loss or damage caused by MAI's negligence, MAI shall have
no responsibility for any risk of loss or damage to any equipment or machine
parts while in transit or while in the possession of MAI at the MAI Repair
Depot.
4. EXCLUSIONS
The remedial services to be provided by MAI under this agreement do not
include programming services or the repair of damage or replacement of parts or
other service required by reason of:
- - failure of the Customer to continually provide a suitable installation
environment as prescribed by MAI
- - failure or inadequacy of electrical power, air conditioning, or humidity
control
- - neglect, misuse, accident or disaster (including, without limitation, fire,
flood, and water) and other causes other than ordinary use
- - alterations of equipment or the connection of equipment to a non-MAI machine
or device or
- - the use of supplies.
The replacement of parts, such as cathode ray tubes is limited to "failure" of
such parts and does not include such occurrences as burnt phosphor of the CRT
screen.
5. OTHER SERVICES
At the Customer's request, services outside the scope of this agreement
will be furnished at MAI's applicable time and material rates in effect from
time to time.
6. INSTALLATION AND CONTROL OF ENGINEERING AND SAFETY CHANGES
MAI will control and install all engineering changes it deems necessary
on equipment covered by this agreement unless otherwise requested by the
Customer in writing. There will be no charge for such engineering changes.
MAI will control and install, without charge, all safety changes it deems
necessary. If the Customer refused to permit installation of safety change, or
removes once already installed, MAI may, if conditions warrant, discontinue
providing maintenance service until the hazard has been corrected.
7. LIMITATION OF LIABILITY
MAI shall not be in any way liable or responsible for any special,
incidental, or consequential losses or damages in any way arising from the
provision or the failure to provide any services to the equipment covered by
this agreement, or to the operating system or any application software, even if
MAI has been advised of the possibility of any such losses or damages, including
but not limited to loss of revenue, loss of profits, failure to realize savings
on any liability of the customer to another party, and in any event a liability
of MAI for losses or damages resulting from any cause whatsoever shall be
limited to an amount equal to the total annual charges payable hereunder.
8. GENERAL
The Customer represents that it is the owner of the equipment covered by
this agreement, or if not the owner, that it has the authority to enter into
this agreement.
Either party may terminate this agreement at any time for failure of the
other party to perform any of its obligations or agreements.
THIS AGREEMENT CONSTITUTES THE ENTIRE CONTRACT BETWEEN MAI AND THE
CUSTOMER WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND THERE ARE NO
UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, GUARANTEES OR WARRANTIES EXPRESS OR
IMPLIED BY STATUTE, USAGE OR TRADE OR OTHERWISE, OTHER THAN AS SET FORTH HEREIN.
Any notice or other communication to be given hereunder shall be in
writing and mailed, if to MAI to the address of the MAI Repair Depot shown in
Schedule one (1) hereof, and if to the Customer to the address of the Customer
shown in Schedule one (1) hereof, or to such other address as such party shall
have therefore designated by notice in writing to the other party. Such notice
or communication shall be deemed delivered when sent postage prepaid (air mail
if mailed more than 200 miles from the place of delivery), registered mail,
return receipt requested.
This agreement will be governed by the laws of the province in which the
equipment covered by this agreement is located.
Signature
---------------------------------
-37-
<PAGE> 38
SCHEDULE 1
MAI CANADA LTD PAGE:
6700 COTE DE LIESSE, SUITE 103
ST-LAURENT (QC) BRANCH OFFICE:
H4T 1E3 AGREEMENT:
ANNIVERSARY DATE:
DATE:
CUSTOMER NUMBER:
<TABLE>
<S> <C> <C> <C> <C> <C>
BILLING ADDRESS INSTALLATION ADDRESS
- ---------------------------------------------------------------------------------------------------------------------------
CUSTOMER NAME: CUSTOMER NAME:
- ---------------------------------------------------------------------------------------------------------------------------
ADDRESS: ADDRESS:
- --------------------- ------------------ ----------------------- -------------------- --------------------- ---------------
CITY: PROVINCE: POSTAL CODE: CITY PROVINCE: POSTAL CODE:
- --------------------- ------------------ ----------------------- -------------------- --------------------- ---------------
CONTACT: TELEPHONE NO.: CONTACT TELEPHONE NO.:
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAI BY ITS ACCEPTANCE HEREOF, AGREES TO PROVIDE ITS REMEDIAL AND PREVENTATIVE
MAINTENANCE SERVICES FOR THE EQUIPMENT AND FEATURES LISTED BELOW IN ACCORDANCE
WITH THE FOLLOWING TERMS.
PERIOD OF MAINTENANCE AVAILABILITY IS MONDAY TO FRIDAY, 8:30 A.M. TO 5:30 P.M.
<TABLE>
<CAPTION>
MAINTENANCE SERVICE SELECTION: BILLING PERIOD:
- ----------------------------- --------------
<S> <C> <C> <C> <C>
ON SITE $ DEPOT AGREEMENT $ PARTS ONLY AGREEMENT $ ANNUALLY $ OTHER
-------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FSM SERIAL MARKET EFFECTIVE WNT SERVICE
NUMBER NUMBER DESCRIPTION CODE DATE DAYS LEVEL
------ ------ ----------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
ACCEPTED AND AGREED MAI CANADA, LTD. AGREED:
<S> <C>
DATE: DATE:
---------------------------------------------- ---------------------------------------------------
BY: BY:
---------------------------------------------- ----------------------------------------------------
AUTHORIZED REPRESENTATIVE TITLE: AUTHORIZED REPRESENTATIVE TITLE:
------------------ -----------------------
REPRESENTATIVE NAME: REPRESENTATIVE NAME:
------------------------------ -----------------------------------
(PLEASE PRINT)
</TABLE>
-38-
<PAGE> 39
Page: 1 OF 2
MAINTENANCE AGREEMENT
Between Branch:
MAI CANADA, LTD Agreement:
And Date:
CUSTOMER:
BILLING ADDRESS:
CITY: PROVINCE: POSTAL CODE:
- --------------------------------------------------------------------------------
1. TERMS OF AGREEMENT
This Agreement shall have an initial term of one (1) year from the
effective date specified in Schedule one (1) hereof and shall continue in full
force thereafter until terminated in the manner hereinafter provided. This
Agreement may be terminated during the initial term or at any time thereafter by
either party giving three (3) months' prior written notice of termination to the
other party. Any item of equipment may be withdrawn from this agreement by
either party upon three (3) months' prior written notice to the other party.
2. ANNUAL CHARGES
The annual charges provided for in this agreement commence on the
effective date stated in the introduction hereof and will be invoiced as of the
first of the month. Payment shall be made in full within (3) days after the date
of invoice. If this agreement is effective with respect to any item of equipment
for less than a full calendar month, the charge for each day for such item shall
be computed at the rate of 1/30th of the monthly rate.
All charges specified are those currently in effect and are subject to
change upon three (3) months' prior written notice. If the charges are
increased, the Customer may, on the effective date of such increase, terminate
this agreement or withdraw from any service any item of equipment affected by
delivering one (1) months' prior written notice, otherwise, the new charges
shall become effective upon the date specified in the notice.
There shall be added to the charges payable hereunder amounts equal to
any sales, use, excise or other taxes or duties, however designated, which are
levied or based on such charges or on this agreement on the services rendered or
parts supplied pursuant hereto and which are paid or payable by MAI, exclusive,
however, of taxes based on net income.
3. SCOPE OF MAI'S MAINTENANCE SERVICE
MAI agrees to provide maintenance service during the periods selected by
the Customer to keep the equipment and features in good working order. This
includes:
(a) Scheduled preventative maintenance based upon the specific needs of the
individual machines as determined by MAI. Preventative maintenance includes
lubrication, necessary adjustments and replacement of unserviceable parts.
(b) Unscheduled, on call remedial maintenance, including replacement of
unserviceable parts. Parts will be furnished on an exchange basis and will be
new parts or parts equivalent in new performance when used in these machines.
Replaced parts become the property of MAI.
4. EXCLUSIONS
MAI's maintenance service provided hereunder does not include:
(a) Electrical work external to the machine.
(b) Repair or damage resulting from accident, transportation, neglect or misuse,
failure of electrical power, air conditioning or humidity control or causes
other than ordinary use.
(c) Furnishing platens, supplies or accessories, painting or refinishing the
machines or furnishing materials therefore making specification changes or
performing services connected with relocation of machines; or adding or
removing accessories, attachments or other devices.
(d) Furnishing of print heads, unless otherwise stated.
(e) Replacement of cathode ray tubes ("CRT's") for phosphur burn.
(f) Such service which is impractical for MAI Customer Engineers to render
because of alterations in the machines or their connection by mechanical or
electrical means to another machine or device.
(g) Programming or program maintenance.
(h) Network maintenance.
5. OTHER SERVICES
At the Customer's request, services outside the scope of this agreement
will be furnished at MAI's applicable time and material rates in effect.
6. ACCESS TO EQUIPMENT
(a) MAI shall have full and free access to the equipment to provide service
thereon and the customer shall provide a safe place in which to perform such
services. If persons other than MAI Customer Engineers shall repair, modify or
perform any maintenance on any equipment covered by this agreement and as a
result thereof further maintenance services by MAI is required to restore the
machine to good operating condition, such maintenance services will be made at
MAI's applicable time and material rates and terms then in effect.
(b) Customer shall be responsible for maintaining a procedure external t the
Product hardware for reconstruction of least or altered file, data or programs
to the extent deemed necessary by Customer, and for actual reconstruction of any
lost or altered files, data or programs.
7. EQUIPMENT CHANGES
If, with the consent of MAI, the Customer shall acquire any additional
equipment ("Additions"), discontinues the use of any equipment ("Deletions") or
replace any equipment with the same or a different type of equipment
("Changes"), MAI shall prepare and send to the Customer its standard form
Amendment to this agreement reflecting such Additions, Deletions and/or Changes
and stating the description including model and serial number, the effective
date and MAI's annual maintenance charge for the equipment involved in any such
Additions, Deletions or Changes. Any such Amendment shall not require execution
by the Customer and shall be binding on the Customer unless it gives notice of
objection in writing to MAI within thirty days after receipt of such Amendment.
Only the equipment and features described on the Maintenance Agreement
and as amended from time to time is covered. Substitutions by the original
equipment manufacturer and those authorized by MAI will be included in this
agreement without the need for an Amendment.
8. PERIODS OF MAINTENANCE SERVICE AVAILABILITY
The annual charges entitles the Customer to workday maintenance service
availability during any period of nine (9) consecutive hours between the hours
of 8:00 a.m. and 6:00 p.m. daily, as selected by the Customer, Monday through
Friday, except legal holidays. The hours of maintenance service availability for
a machine on Monday through Friday, except legal holidays, shall be the same on
each day.
9. TRAVEL EXPENSES
MAI will charge customers located beyond eighty (80) Km. From MAI's
designated servicing branch office or service point a Remote Incident Charge per
kilometer, measured in air kilometers. If the call necessitates an overnight
stay a per diem charge is payable. The Remote Incident Charge and the per diem
charge are charged at MAI's applicable rates then in effect.
10. MAINTENANCE SERVICES OUTSIDE SELECTED PERIODS
If the Customer requests unscheduled, on call remedial maintenance to be
performed at a time which is outside the selected periods of maintenance service
availability, the service will be furnished at MAI's standard hourly rates and
terms then in effect. Travel time and expenses are billable in connection with
such maintenance. There is a minimum charge of one hour including travel time
per MAI shift for calls taken within MAI's normal working hours, and two hours
including travel time, per MAI shift for calls taken outside of MAI's normal
working hours. For the purpose of this agreement, any request for unscheduled,
on-call remedial maintenance service received or started during the selected
periods of maintenance service availability and completed within one (1) hour
after such period will be treated as having been performed within such period
and no additional charges will be made therefor.
11. INSTALLATION AND CONTROL OF ENGINEERING AND SAFETY CHANGES
MAI will control and install all engineering changes it deems necessary
on equipment covered by this agreement unless otherwise requested by the
Customer in writing. There will be no charge for such engineering changes.
MAI will control and install, without charge, all safety changes it deems
necessary. If the Customer refused to permit installation of safety change, or
removes once already installed, MAI may, if conditions warrant, discontinue
providing maintenance service until the hazard has been corrected.
12. GENERAL
The Customer represents that it is the owner of the equipment covered by
this agreement, or if not the owner, that it has the authority to enter into
this agreement.
Either party may terminate this agreement at any time for failure of the
other party to perform any of its obligations or agreements.
Any notice or other communication to be given hereunder shall be in
writing and mailed, if to MAI to the address of the MAI Repair Depot shown in
Schedule one (1) hereof, and if to the Customer to the address of the Customer
shown in Schedule one (1) hereof, or to such other address as such party shall
have therefore designated by notice in writing to the other party. Such notice
or communication shall be deemed delivered when sent postage prepaid (air mail
if mailed more than 200 miles from the place of delivery), registered mail,
return receipt requested.
MAI shall not be in any way liable or responsible for any special,
incidental, or consequential losses or damages in any way arising from the
provision or the failure to provide any services to the equipment covered by
this agreement, or to the operating system or any application software, even if
MAI has been advised of the possibility of any such losses or damages, including
but not limited to loss of revenue, loss of profits, failure to realize savings
on any liability of the customer to another party, and in any event a liability
of MAI for losses or damages resulting from any cause whatsoever shall be
limited to an amount equal to the total annual charges payable hereunder.
THIS AGREEMENT CONSTITUTES THE ENTIRE CONTRACT BETWEEN MAI AND THE
CUSTOMER WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND THERE ARE NO
UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, GUARANTEES OR WARRANTIES EXPRESS OR
IMPLIED BY STATUTE, USAGE OR TRADE OR OTHERWISE, OTHER THAN AS SET FORTH HEREIN.
No provision of this agreement shall be deemed, waived, amended, or modified by
either party unless such waiver, amendment or modification be in writing signed
by the party against whom it is sought to enforce the waiver, amendment or
modification, and the terms and conditions hereof shall prevail notwithstanding
any variance with the terms and conditions of any order submitted by the
Customer for the repair or maintenance of the equipment.
This agreement will be governed by the laws of the province in which the
equipment is to be installed by MAI.
Signature
---------------------------------
-39-
<PAGE> 40
SCHEDULE 1
MAI CANADA LTD PAGE: 2 OF 2
6700 COTE DE LIESSE, SUIT 103
ST-LAURENT (QC) BRANCH OFFICE:
H4T 1E3 AGREEMENT:
ANNIVERSARY DATE:
DATE:
CUSTOMER NUMBER:
<TABLE>
<S> <C> <C> <C> <C> <C>
BILLING ADDRESS INSTALLATION ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------
CUSTOMER NAME: CUSTOMER NAME:
- ----------------------------------------------------------------------------------------------------------------------------
ADDRESS: ADDRESS:
- ----------------------------------------------------------------------------------------------------------------------------
CITY: PROVINCE: POSTAL CODE: CITY PROVINCE: POSTAL CODE:
- ----------------------------------------------------------------------------------------------------------------------------
CONTACT: TELEPHONE NO.: CONTACT TELEPHONE NO.:
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAIL BY ITS ACCEPTANCE HEREOF, AGREES TO PROVIDE ITS REMEDIAL AND PREVENTATIVE
MAINTENANCE SERVICES FOR THE EQUIPMENT AND FEATURES LISTED BELOW IN ACCORDANCE
WITH THE FOLLOWING TERMS. PERIOD OF MAINTENANCE AVAILABILITY IS MONDAY TO
FRIDAY, 8:30 A.M. TO 5:30 P.M.
<TABLE>
<CAPTION>
MAINTENANCE SERVICE SELECTION: BILLING PERIOD:
- ----------------------------- --------------
<S> <C> <C> <C> <C>
ON SITE $ DEPOT AGREEMENT $ PARTS ONLY AGREEMENT $ ANNUALLY $ OTHER______
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FSM SERIAL MARKET EFFECTIVE WNT SERVICE
NUMBER NUMBER DESCRIPTION CODE DATE DAYS LEVEL
------ ------ ----------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
*** BILLING WILL COMMENCE AT THE END OF THE WARRANTY PERIOD, WHICH IS
CALCULATES AS EFFECTIVE DATE + WARRANTY DAYS ***
TOTAL MONTHLY CHARGE:
<TABLE>
<CAPTION>
ACCEPTED AND AGREED MAI CANADA, LTD. AGREED:
<S> <C>
DATE: DATE:
------------------------------------------------- ---------------------------------------------------
BY: BY:
------------------------------------------------- ---------------------------------------------------
AUTHORIZED REPRESENTATIVE TITLE: AUTHORIZED REPRESENTATIVE TITLE:
----------------------- ------------------------
REPRESENTATIVE NAME: REPRESENTATIVE NAME:
--------------------------------- -----------------------------------
(PLEASE PRINT)
</TABLE>
-40-
<PAGE> 41
Page: 1 OF 2
PARTS ONLY AGREEMENT
Between Branch:
MAI CANADA, LTD Agreement:
And Date:
CUSTOMER:
BILLING ADDRESS:
CITY: PROVINCE: POSTAL CODE:
- --------------------------------------------------------------------------------
I. SCOPE OF AGREEMENT
a) Subject tot he terms of this Agreement, by its acceptance hereof, MAI
CANADA LTD, ("MAI") agrees to provide the customer specified n Schedule
one (1) hereof (the "Customer") with replacement parts for the u nit or
units of equipment specified in Schedule one (1) of this Agreement (the
"Equipment"). Such parts will be furnished on a replacement basis and
will be new parts or parts equivalent to new in performance when used
in or on the Equipment. Replaced parts shall become the property of
MAI. MAI agrees to provide replacement parts for the Equipment for the
charges set out in Schedule one (1) of this Agreement ( the "Annual
Charges) and subject to the terms of paragraph 3 hereof.
b) The Customer acknowledges and agrees that it is a condition of MAI's
obligations hereunder that maintenance services in respect of the
Equipment will be performed or furnished exclusively by MAI and further
agrees that the Equipment will not be worked on by anyone other than an
MAI representative or employee. All such maintenance service, excluding
the supply of replacement parts provided for above, shall be provided
or furnished at MAI's applicable hourly maintenance and repair charge
or rate and on terms then and from time to time in effect and only upon
request by the Customer.
c) If the Equipment is serviced or worked on by anyone other than an MAI
representative or employee, then in such event MAI's obligations under
this Agreement shall, at its option excersiable by notice to the
Customer, be immediately terminated.
2. TERMS OF AGREEMENT
This Agreement shall have an initial term of one (1) year from the
effective date specified on Schedule one (1) hereof, (the "Effective
Date"). This Agreement may be terminated by either party giving three (3)
months' prior written notice to that effect to the other.
3. ANNUAL CHARGES
a) The Annual Charges provided for in this Agreement commence on the
Effective Date. Each year during the term of this Agreement, the
Customer will be invoiced for one (1) year in advance, as of the
Effective Date. Payment in full shall be made within thirty (30) days
of the date of such invoice.
b) If this Agreement is effective for less than a full year, the Annual
Charges shall be pro rated by MAI for the period of this Agreement was
in effect and the balance, if any of pre-paid Annual Charges shall be
refunded to the Customer.
c) All Annual Charges specified are those currently in effect and are
subject to change upon three (3) months' prior written notice by MAI.
If the Annual Charges are changed, the new charges shall become
effective upon the date specified in such notice.
d) There shall be added to the Annual Charges due hereunder amounts equal
to any taxes, however, designated, levied or based on such charges,
this Agreement or the goods or services provided hereunder, including
any federal, provincial or municipal taxes or other amounts due or
payable by MAI in respect of the foregoing, exclusive however, of taxes
based on the net income of MAI.
4. EXCLUSIONS
MAI's obligations under this Agreement does not include:
a) Maintenance service required to keep the Equipment in good working
order.
b) Replacement of parts made necessary as a result of:
- accident, neglect or misuse to or of the Equipment,
- the attachment of equipment, parts or devices not approved by MAI, to
the Equipment,
- any mechanical or electrical alterations to the Equipment not
approved by MAI,
- any other cause other than ordinary use.
c) Replacement of cathode ray tubes ("CRT's") for phosphor burn.
5. ENGINEERING AND SAFETY CHANGES
MAI will control and install all engineering and safety changes it deems
necessary on the parts covered by this Agreement unless otherwise requested
by the Customer in writing.
6. GENERAL
a) The Customer represents that it is the owner of the Equipment or, if
not the owner, that it has the authority to enter into this Agreement.
b) Either party may terminate this agreement at any time, by notice to
that effect to the other, for the failure of the other to comply with
any of the terms and conditions hereof.
c) Any notice or other communication to be given hereunder shall be in
writing and mailed, if to MAI to the address of the MAI's branch office
shown in Schedule one (1) and, if to the Customer, to the address shown
in Schedule one (1), or to such other address as such party shall have
therefore designated by notice in writing to the other party. Such
notice or communication shall be deemed delivered ten (10) days after
having been sent postage prepaid, registered and return receipt
requested.
d) The Customer agrees that MAI shall not be in any way liable or
responsible for any special, incidental, or consequential losses or
damages in any way arising from the provision or the failure to provide
any services to the equipment covered by this Agreement, or to the
operating system or any application software, even if MAI has been
advised of the possibility of any such losses or damages, including but
not limited to loss of revenue, loss of profits, failure to realize
savings on any liability of the customer to another party, and in any
event a liability of MAI for losses or damages resulting from any cause
whatsoever shall be limited to an amount equal to the total annual
charges payable hereunder for one (1) year.
e) THIS AGREEMENT CONSTITUTES THE ENTIRE CONTRACT BETWEEN MAI AND THE
CUSTOMER WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND THERE ARE NO
UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, GUARANTEES OR WARRANTIES
EXPRESS OR IMPLIED BY STATUTE, USAGE OR TRADE OR OTHERWISE, OTHER THAN
AS SET FORTH HEREIN. No provision of this Agreement shall be deemed,
waived, amended, or modified by either party unless such waiver,
amendment or modification be in writing signed by the party against
whom it is sought to enforce the waiver, amendment or modification, and
the terms and conditions hereof shall prevail notwithstanding any
variance with the terms and conditions of any order submitted by the
Customer for the repair or maintenance of the Equipment.
f) This Agreement will be governed by the laws of the Province in which
the Equipment is installed.
g) In this Agreement the masculine shall include the feminine and neuter
and the singular shall include the plural and vice versa or as the
context otherwise requires.
Signature
------------------------------------
-41-
<PAGE> 42
SCHEDULE 1
MAI CANADA LTD PAGE: 2 OF 2
6700 COTE DE LIESSE, SUITE 103
ST-LAURENT (QC) BRANCH OFFICE:
H4T 1E3 AGREEMENT:
ANNIVERSARY DATE:
DATE:
CUSTOMER NUMBER:
<TABLE>
<S> <C> <C> <C> <C> <C>
BILLING ADDRESS INSTALLATION ADDRESS
- ---------------------------------------------------------------- -----------------------------------------------------------------
CUSTOMER NAME: CUSTOMER NAME:
- ---------------------------------------------------------------- -----------------------------------------------------------------
ADDRESS: ADDRESS:
- --------------------- ------------------ ----------------------- -------------------- --------------------- ----------------------
CITY: PROVINCE: POSTAL CODE: CITY PROVINCE: POSTAL CODE:
- --------------------- ------------------ ----------------------- -------------------- --------------------- ----------------------
CONTACT: TELEPHONE NO.: CONTACT TELEPHONE NO.:
- --------------------- ------------------ ----------------------- -------------------- --------------------- ----------------------
</TABLE>
MAIL BY ITS ACCEPTANCE HEREOF, AGREES TO PROVIDE ITS REMEDIAL AND PREVENTATIVE
MAINTENANCE SERVICES FOR THE EQUIPMENT AND FEATURES LISTED BELOW IN ACCORDANCE
WITH THE FOLLOWING TERMS. PERIOD OF MAINTENANCE AVAILABILITY IS MONDAY TO
FRIDAY, 8:30 A.M. TO 5:30 P.M.
<TABLE>
<CAPTION>
MAINTENANCE SERVICE SELECTION: BILLING PERIOD:
- ----------------------------- --------------
<S> <C> <C> <C> <C>
ON SITE $ DEPOT AGREEMENT $ PARTS ONLY AGREEMENT $ ANNUALLY $ OTHER___________
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FSM SERIAL MARKET EFFECTIVE WNT SERVICE
NUMBER NUMBER DESCRIPTION CODE DATE DAYS LEVEL
------ ------ ----------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
ACCEPTED AND AGREED MAI CANADA, LTD. AGREED:
<S> <C>
DATE: DATE:
-------------------------------------------------------- ----------------------------------------------------
BY: BY:
----------------------------------------------------------- ------------------------------------------------------
AUTHORIZED REPRESENTATIVE TITLE: AUTHORIZED REPRESENTATIVE TITLE:
------------------------------ ------------------------
REPRESENTATIVE NAME: REPRESENTATIVE NAME:
------------------------------------------ -------------------------------------
(PLEASE PRINT)
</TABLE>
-42-
<PAGE> 43
SCHEDULE G
TARGET EMPLOYEES
ATTACHED
-43-
<PAGE> 1
EXHIBIT 10.4
INDUSTRIAL LEASE
(SINGLE TENANT; NET; STAND-ALONE)
THIS LEASE is made as of the _____ day of_______________ , 19________, by
and between THE IRVINE COMPANY, a Michigan corporation, hereafter called
"Landlord," and MAI SYSTEMS CORPORATION, a Delaware corporation, hereinafter
called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean
and refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
2. Address of Building: 9601 Jeronimo, Irvine, CA 92618
3. Use of Premises: General office, manufacturing and warehousing of
computer products, or other lawful purposes, provided that in no event
shall retail uses be permitted.
4. Estimated Commencement Date: April 1, 1997
5. Lease Term: Seventy-Two (72) months, plus such additional days as may
be required to cause this Lease to terminate on the final day of the
calendar month.
6. Basic Rent: Thirty-Seven Thousand Six Hundred Fifty-Eight Dollars
($37,658.00) per month, based on Seventy-Five Cents ($.75) per rentable
square foot.
Basic Rent is subject to adjustment as follows:
Commencing on the first (1st) day of the thirty-seventh (37th) month of
the Lease Term, the Basic Rent shall be Forty Thousand One Hundred
Sixty-Eight Dollars ($40,168.00) per month, based on Eighty Cents ($.80)
per rentable square foot.
7. Guarantor(s): N/A
8. Floor Area of Premises: approximately 50,210 rentable square feet
9. Security Deposit: $44,185.00
10. Broker(s): CB Commercial
11. Additional Insureds: Insignia Commercial Group, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA COMMERCIAL GROUP, INC. MAI SYSTEMS CORPORATION
One Technology Drive, Suite F-207 9601 Jeronimo
Irvine, CA 92618 Irvine, CA 92618
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
13. Tenant's Liability Insurance Requirement: $1,000,000.00
14. Vehicle Parking Spaces: One Hundred Fifty-Seven (157)
15. Estimated Space Plan Approval Date: December 8, 1996
Exhibits:
A Description of Premises E Rules and Regulations
A-1 Description of the Site X Work Letter
B Environmental Questionnaire
C Landlord's Disclosures
D Insurance Requirements
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ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in EXHIBIT A (the "Premises"), including the
building identified in Item 2 of the Basic Lease Provisions (which together with
the underlying real property, is called the "Building"), and containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions.
The Building is located on the site (the "Site") shown on EXHIBIT A-1 attached
hereto.
SECTION 2.2. ACCEPTANCE OF PREMISES. Except as expressly provided in this
Lease, Tenant acknowledges that neither Landlord nor any representative of
Landlord has made any representation or warranty with respect to the Premises or
the Building or the suitability or fitness of either for any purpose, including
without limitation any representations or warranties regarding zoning or other
land use matters. Tenant further acknowledges that neither Landlord nor any
representative of Landlord has agreed to undertake any alterations or additions
or construct any improvements to the Premises except as expressly provided in
this Lease. The taking of possession or use of the Premises by Tenant for any
purpose other than construction shall conclusively establish that the Premises
and the Building were in satisfactory condition and in conformity with the
provisions of this Lease in all respects, except for those matters which Tenant
shall have brought to Landlord's attention on a written punch list. The list
shall be limited to any items required to be accomplished by Landlord under the
Work Letter attached as Exhibit X, and shall be delivered to Landlord within
forty-five (45) days after the term ("Term") of this Lease commences as provided
in Article III below. If no items are required of Landlord under the Work
Letter, by taking possession of the Premises Tenant accepts the improvements in
their existing condition, and waives any right or claim against Landlord arising
out of the condition of the Premises, except that Landlord hereby represents and
warrants that the Premises and the Site, including without limitation, the HVAC
system servicing the Premises, shall be constructed in compliance with all
applicable building codes and permits in effect, and shall be in good working
condition and repair, as of the Commencement Date of this Lease. Nothing
contained in this Section shall affect the commencement of the Term or the
obligation of Tenant to pay rent. Landlord shall diligently complete all punch
list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building as any part of Tenant's
corporate or trade name. Landlord shall have the right to change the name,
address, number or designation of the Building without liability to Tenant.
ARTICLE III. TERM
SECTION 3.1.
(a) General. The Term shall be for the period shown in Item 5 of the
Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the Term
shall commence ("Commencement Date") on the earlier of (a) the date upon which
all relevant governmental authorities have approved the Tenant Improvements in
accordance with applicable building codes, as evidenced by written approval
thereof in accordance with the building permits issued for the Tenant
Improvements or issuance of a temporary or final certificate of occupancy for
the Premises, or (b) the date Tenant acquires possession or commences use of the
Premises for any purpose other than construction of Tenant Improvements by
Tenant under the Work Letter. Within ten (10) days after possession of the
Premises is tendered to Tenant, the parties shall memorialize on a form provided
by Landlord the actual Commencement Date and the expiration date ("Expiration
Date") of this Lease. Tenant's failure to execute that form shall not affect the
validity of Landlord's determination of those dates.
(b) Right To Extend This Lease. Provided that Tenant is not in
material default under any provision of this Lease, either at the time of
exercise of the extension rights granted herein or at the time of the
commencement of such extension, and provided further that Tenant is occupying at
least seventy-five percent (75%) of the floor area of the Premises and/or has
not assigned its interest in this Lease, Tenant shall have two (2) successive
options to extend the Term of this Lease for periods of sixty (60) months each.
Tenant shall exercise its right to extend the Term by and only by delivering to
Landlord, not less than nine (9) months or more than twelve (12) months prior to
the then-current expiration date of the Term, Tenant's irrevocable written
notice of its commitment to extend (the "Commitment Notice"). The Basic Rent
payable under the Lease during each extension of the Term shall be at the fair
market rental, including subsequent adjustments, for comparable industrial space
being leased by Landlord in the Irvine Spectrum area; provided that such rate
shall in no event be less than the Basic Rent payable during the month
immediately preceding the commencement of such extension period. In the event
that the parties are not able to agree on the fair market rental within one
hundred twenty (120) days prior to then-current expiration date of the Term,
then either party may elect, by written notice to the other party, to cause said
rental, including subsequent adjustments, to be determined by appraisal as
provided hereinafter. Such determination by appraisal shall be conclusive and
binding on the parties as to Basic Rental payable by Tenant during the
applicable extension of the Term.
Within ten (10) days following receipt of such appraisal
election, the parties shall attempt to agree on an appraiser to determine the
fair market rental. If the parties are unable to agree in that time, then each
party shall designate an appraiser within ten (10) days thereafter. Should
either party fail to so designate an appraiser within that time, then the
appraiser designated by the other party shall determine the fair rental value.
Should each of the parties timely designate an appraiser, then the two
appraisers so designated shall appoint a third
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appraiser who shall, acting alone, determine the fair rental value of the
Premises. Any appraiser designated hereunder shall have an M.A.I. certification
with not less than five (5) years experience in the valuation of industrial
buildings in Orange County, California.
Within thirty (30) days following the selection of the
appraiser, such appraiser shall determine the fair market rental value,
including subsequent adjustments of the Premises. In determining such value, the
appraiser shall consider rental comparables involving similarly improved space
in the Irvine Spectrum area with appropriate adjustments for differences in
location and quality of project. In no event shall the appraiser attribute
factors for brokerage commissions to reduce said fair market rental. The fees of
the appraiser(s) shall be shared equally by both parties.
Within twenty (20) days after the determination of the fair
market rental, Landlord shall prepare a reasonably appropriate amendment to this
Lease for the applicable extension period and Tenant shall execute and return
same to Landlord within ten (10) days. Should the fair market rental not be
established by the commencement of the then-current extension period, then
Tenant shall continue paying rent at the rate in effect during the month
immediately preceding the commencement of such extension period, and a lump sum
adjustment shall be made promptly upon the determination of such new rental.
If Tenant fails to timely comply with any of the provisions of
this paragraph, Tenant's right to extend the Term shall be extinguished and the
Lease shall automatically terminate as of the expiration date of the Term,
without any extension and without any liability to Landlord. Any attempt to
assign or transfer any right or interest created by this paragraph shall be void
from its inception. Tenant shall have no other right to extend the Term beyond
the two (2) successive sixty (60) month extensions created by this paragraph.
Unless agreed to in a writing signed by Landlord and Tenant, any extension of
the Term, whether created by an amendment to this Lease or by a holdover of the
Premises by Tenant, or otherwise, shall be deemed a part of, and not in addition
to, any duly exercised extension period permitted by this paragraph.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy with any Tenant Improvements that have been approved as per
Section 3.1(a) above, except that if Landlord's failure to so deliver possession
on the Estimated Commencement Date is attributable to any action or inaction by
Tenant (including without limitation any Tenant Delay described in the Work
Letter, if any, attached to this Lease), then the Commencement Date shall not be
advanced to the date on which possession of the Premises is tendered to Tenant,
and Landlord shall be entitled to full performance by Tenant (including the
payment of rent) from the date Landlord would have been able to deliver the
Premises to Tenant but for Tenant's delay(s). Notwithstanding anything to the
contrary contained in this Section 3.2 to the contrary, however, if for any
reason other than Tenant Delays (as defined in the Work Letter) or other matters
beyond Landlord's reasonable control, the Commencement Date has not occurred by
the date that is ninety (90) days following the Estimated Commencement Date,
then Tenant may, by written notice to Landlord given at any time thereafter but
prior to the actual occurrence of the Commencement Date, elect to terminate this
Lease. Notwithstanding the foregoing, if at any time during the construction
period, Landlord reasonably believes that the Commencement Date will not occur
on or before the Estimated Commencement Date, Landlord shall notify Tenant in
writing of such fact prior to thirty (30) days prior to the Estimated
Commencement Date, and of a new outside date on or before which the Commencement
Date will occur. If the new Estimated Commencement Date is greater than ninety
(90) days after the original Estimated Commencement Date, then Tenant must elect
within ten (10) days of receipt of such notice to either terminate this Lease or
waive its right to terminate this Lease provided the Commencement Date occurs on
or prior to the new outside date established by Landlord in such notice to
Tenant. Upon any such termination by Tenant, Landlord shall promptly refund any
amounts paid to Landlord as the first month's Basic Rent (pursuant to Section
4.1 of this Lease) and as the Security Deposit (pursuant to Section 4.3 of this
Lease), and neither party shall have any further obligation or liability one to
the other under this Lease.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset, Basic Rent for the Premises
in the total amount shown (including subsequent adjustments, if any) in Item 6
of the Basic Lease Provisions. The rent shall be due and payable in advance
commencing on the Commencement Date (as prorated for any partial month) and
continuing thereafter on the first day of each successive calendar month of the
Term. No demand, notice or invoice shall be required for the payment of Basic
Rent. An installment of rent in the amount of one (1) full month's Basic Rent at
the initial rate specified in Item 6 of the Basic Lease Provisions shall be
delivered to Landlord concurrently with Tenant's execution of this Lease and
shall be applied against the Basic Rent first due hereunder. Landlord, however,
shall not deposit the foregoing amount in its account unless and until the Lease
is fully executed and a copy thereof is delivered to Tenant.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building
Costs" and "Property Taxes," as those terms are defined below, incurred by
Landlord in the operation of the Building. For convenience of reference,
Property Taxes and Building Costs shall be referred to collectively as
"Operating Expenses".
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(b) Commencing prior to the start of the first full "Expense
Recovery Period" (as defined below) of the Lease, and prior to the start of each
full or partial Expense Recovery Period thereafter, Landlord shall give Tenant a
written estimate of the amount of Operating Expenses for the Expense Recovery
Period. Tenant shall pay the estimated amounts to Landlord in equal monthly
installments, in advance, with Basic Rent. If Landlord has not furnished its
written estimate for any Expense Recovery Period by the time set forth above,
Tenant shall continue to pay cost reimbursements at the rates established for
the prior Expense Recovery Period, if any; provided that when the new estimate
is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any
accrued cost reimbursements based upon the new estimate. For purposes hereof,
"Expense Recovery Period" shall mean every twelve month period during the Term
(or portion thereof for the first and last lease years) commencing July 1 and
ending June 30.
(c) Within one hundred twenty (120) days after the end of each
Expense Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to Tenant's actual owed amounts as shown by the annual statement. Any delay
or failure by Landlord in delivering any statement hereunder shall not
constitute a waiver of Landlord's right to require Tenant to pay Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within sixty (60) days following
delivery of Landlord's expense statement, Landlord's determination of actual
Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred.
Tenant shall have the right to cause a trained accountant to
audit Landlord's Operating Expenses. In no event, however, shall such accountant
be compensated by Tenant on a "contingency" basis, or on any other basis tied to
the results of said audit. Tenant shall give notice to Landlord of Tenant's
intent to audit within sixty (60) days after Tenant's receipt of Landlord's
expense statement which sets forth Landlord's actual Operating Expenses. Such
audit shall be conducted at a mutually agreeable time during normal business
hours at the office of Landlord or its management agent where the records are
maintained. If Tenant's audit determines that actual Operating Expenses have
been overstated by more than five percent (5%), then subject to Landlord's right
to review and/or contest the audit results, Landlord shall reimburse Tenant for
the reasonable out-of-pocket costs of such audit. Tenant's rent shall be
appropriately adjusted to reflect any overstatement in Operating Expenses. In
the event of a dispute between Landlord and Tenant regarding the results of such
audit, either party may elect to submit the matter for binding arbitration with
JAMS/ENDISPUTE or its successor in Orange County, California.
All of the information obtained by Tenant and/or its auditor
in connection with such audit, as well as any compromise, settlement, or
adjustment reached between Landlord and Tenant as a result thereof, shall be
held in strict confidence and, except as may be required pursuant to litigation
and except for inadvertent disclosures despite Tenant's reasonable efforts to
keep the disclosed information confidential, shall not be disclosed to any third
party, directly or indirectly, by Tenant or its auditor or any of their
officers, agents or employees. Landlord may require Tenant's auditor to execute
a separate confidentiality agreement affirming the foregoing as a condition
precedent to any audit. In the event of a violation of this confidentiality
covenant in connection with any audit, then in addition to any other legal or
equitable remedy available to Landlord, Tenant shall forfeit its right to any
reconciliation or cost reimbursement payment from Landlord due to said audit
(and any such payment theretofore made by Landlord shall be promptly returned by
Tenant), and Tenant shall have no further audit rights under this Lease.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Operating Expenses for the
Expense Recovery Period in which the Lease terminates, Tenant shall upon notice
pay the entire increase due over the estimated expenses paid. Conversely, any
overpayment made in the event expenses decrease shall be rebated by Landlord to
Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Operating Expenses shall be increased for the month
in which such rate(s) or amount(s) becomes effective and for all succeeding
months by an amount equal to the increase. Landlord shall give Tenant written
notice of the amount or estimated amount of the increase, the month in which the
increase will become effective, and the month for which the payments are due.
Tenant shall pay the increase to Landlord as a part of Tenant's monthly payments
of estimated expenses as provided in paragraph (b) above, commencing with the
month in which effective.
(f) The term "Building Costs" shall include all expenses of
operation and maintenance of the Building and all landscaping, walkways, parking
areas and lighting of the Site to the extent such expenses are not billed to and
paid directly by Tenant, and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums or
reasonable premium equivalents should Landlord elect to self-insure any risk
that Landlord is authorized to insure hereunder; license, permit, and inspection
fees; heat; light; power; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, property tax or other
consultant reasonably utilized by Landlord in connection with the Building;
subject to express provisions of this Lease to the contrary, costs incurred in
connection with compliance of any laws or changes in
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laws applicable to the Building; the cost of any capital investments (other than
tenant improvements for specific tenants), as determined pursuant to generally
accepted accounting principles consistently applied, to the extent of the
amortized amount thereof over the useful life of such capital investments
calculated at a market cost of funds, all as determined by Landlord, for each
such year of useful life during the Term; labor; reasonably allocated wages and
salaries, fringe benefits, and payroll taxes for administrative and other
personnel directly applicable to the Building, including both Landlord's
personnel and outside personnel; any expense incurred pursuant to Sections 6.1,
6.2, 7.2, and 10.2; and a reasonable overhead/management fee for the
professional operation of the Building. Notwithstanding anything to the contrary
contained herein, the amount of such overhead/management fee to be charged to
Tenant shall be determined by multiplying the actual fee charged by a fraction,
the numerator of which is the floor area of the Building actually leased to
Tenant and the denominator of which is the total square footage of floor area of
the Building actually leased to tenants (including Tenant). It is understood
that Building Costs shall include competitive charges for direct services
provided by any subsidiary or division of Landlord, and may include the
Building's or the Site's proportionate share of the cost of maintenance or
repair contracts which cover the Building and/or the Site and other buildings
and/or projects in Landlord's portfolio, as reasonably allocated by Landlord.
(g) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease or to the
Building, and any improvements, fixtures and equipment and other property of
Landlord located in the Building, except that general net income and franchise
taxes imposed against Landlord shall be excluded; and (iii) all assessments and
fees for public improvements, services, and facilities and impacts thereon,
including without limitation arising out of any Community Facilities Districts,
"Mello Roos" districts, similar assessment districts, and any traffic impact
mitigation assessments or fees; and (iv) any tax, surcharge or assessment which
shall be levied in addition to or in lieu of real estate or personal property
taxes, other than taxes covered by Article VIII; and (v) costs and expenses
incurred in contesting the amount or validity of any Property Tax by appropriate
proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of
the Basic Lease Provisions, to be held by Landlord as security for the full and
faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Landlord, however, shall not deposit the foregoing sum in its account
unless and until the Lease is fully executed and a copy thereof is delivered to
Tenant. Subject to the last sentence of this Section, the Security Deposit shall
be understood and agreed to be the property of Landlord upon Landlord's receipt
thereof, and may be utilized by Landlord in its discretion towards the payment
of all prepaid expenses by Landlord for which Tenant would be required to
reimburse Landlord under this Lease, including without limitation brokerage
commissions and Tenant Improvement costs. Upon any default by Tenant, including
specifically Tenant's failure to pay rent or to abide by its obligations under
Sections 7.1 and 15.3 below, whether or not Landlord is informed of or has
knowledge of the default, the Security Deposit shall be deemed to be
automatically and immediately applied, without waiver of any rights Landlord may
have under this Lease or at law or in equity as a result of the default, as a
setoff for full or partial compensation for that default. If any portion of the
Security Deposit is applied after a default by Tenant, Tenant shall within five
(5) days after written demand by Landlord deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on the Security
Deposit. If Tenant fully performs its obligations under this Lease, the Security
Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest in this Lease) after the
expiration of the Term, provided that Landlord may retain the Security Deposit
to the extent and until such time as all amounts due from Tenant in accordance
with this Lease have been determined and paid in full (other than the final
determination, pursuant to Section 4.2(d), of Operating Expenses).
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ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not use or allow
the Premises to be used for any unlawful purpose, nor shall Tenant permit any
nuisance or commit any waste in the Premises. Tenant shall not do or permit to
be done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building or its contents, and shall comply with all
applicable insurance underwriters rules and the requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar function. Subject
to the provisions of Section 5.4 below, Tenant shall comply at its expense with
all present and future laws, ordinances, restrictions, regulations, orders,
rules and requirements of all governmental authorities that pertain to Tenant or
its use of the Premises, including without limitation all federal and state
occupational health and safety requirements, whether or not Tenant's compliance
will necessitate expenditures or interfere with its use and enjoyment of the
Premises. Tenant shall comply at its expense with all present and reasonable
future covenants, conditions, easements or restrictions now or hereafter
affecting or encumbering the Building, and any amendments or modifications
thereto, including without limitation the payment by Tenant of any periodic or
special dues or assessments charged against the Premises or Tenant which may be
allocated to the Premises or Tenant in accordance with the provisions thereof.
Tenant shall promptly upon demand reimburse Landlord for any additional
insurance premium charged by reason of Tenant's failure to comply with the
provisions of this Section, and shall indemnify Landlord from any liability
and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS.
(a) Except as approved in writing by Landlord, in its sole
discretion, Tenant shall have no right to maintain identification signs in any
location in, on or about the Premises or the Building and shall not place or
erect any signs, displays or other advertising materials that are visible from
the exterior of the Building. The size, design, graphics, material, style, color
and other physical aspects of any permitted sign shall be subject to Landlord's
written approval prior to installation (which approval may be withheld in
Landlord's discretion), any covenants, conditions or restrictions encumbering
the Premises, Landlord's signage program, if any, as in effect from time to time
and approved by the City of Irvine ("Signage Criteria"), and any applicable
municipal or other governmental permits and approvals. Tenant acknowledges
having received and reviewed a copy of the current Signage Criteria, if
applicable. Tenant shall be responsible for the cost of any permitted sign,
including the fabrication, installation, maintenance and removal thereof. If
Tenant fails to maintain its sign, or if Tenant fails to remove same upon
termination of this Lease and repair any damage caused by such removal, Landlord
may do so at Tenant's expense.
(b) Tenant shall have the right to install one (1) sign on the
exterior of the Building, which signage shall consist only of the name "MAI
Systems" or such other similar derivations of Tenant's corporate name as
Landlord shall reasonably approve. The type, location and design of such signage
shall be subject to the prior written approval of the City of Irvine and
Landlord. Landlord's approval shall not be withheld so long as the signage is in
conformance with the Signage Criteria. Fabrication, installation, insurance, and
maintenance of such signage shall be at Tenant's sole cost and expense. Except
for the foregoing, no sign, advertisement or notice visible from the exterior of
the Premises shall be inscribed, painted or affixed by Tenant on any part of the
Premises without the prior consent of Landlord. Tenant's signage right shall
belong solely to MAI Systems Corporation, a Delaware corporation and may not be
transferred or assigned without Landlord's prior written consent which may be
withheld by Landlord in Landlord's sole discretion. In the event Tenant,
exclusive of any subtenant(s), fails to occupy the entire Premises, then Tenant
shall, within thirty (30) days following notice from Landlord, remove the
exterior signage at Tenant's expense. Tenant shall also remove such signage
promptly following the expiration or earlier termination of this Lease. Any such
removal shall be at Tenant's sole expense, and Tenant shall bear the cost of any
resulting repairs to the Building that are reasonably necessary due to the
removal.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause any Hazardous Materials to be brought
upon, stored, used, generated, released or disposed of on, under, from or about
the Premises or the Site (including without limitation the soil and groundwater
thereunder), nor permit any Hazardous Materials to be brought upon, stored,
used, generated, released, or disposed of, on, under or about the Premises
(including without limitation the soil and groundwater thereunder), without the
prior written consent of Landlord. Notwithstanding the foregoing, Tenant shall
have the right, without obtaining prior written consent of Landlord, to utilize
within the Premises standard office products that may contain Hazardous
Materials (such as photocopy toner, "White Out", and the like), provided
however, that (i) Tenant shall maintain such products in their original retail
packaging, shall follow all instructions on such
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packaging with respect to the storage, use and disposal of such products, and
shall otherwise comply with all applicable laws with respect to such products,
and (ii) all of the other terms and provisions of this Section 5.3 shall apply
with respect to Tenant's storage, use and disposal of all such products.
Landlord may, in its sole discretion, place such conditions as Landlord deems
appropriate with respect to any such Hazardous Materials, and may further
require that Tenant demonstrate that any such Hazardous Materials are necessary
or useful to Tenant's business and will be generated, stored, used and disposed
of in a manner that complies with all applicable laws and regulations pertaining
thereto and with good business practices. Tenant understands that Landlord may
utilize a mutually acceptable environmental consultant to assist in determining
conditions of approval in connection with the storage, generation, release,
disposal or use of Hazardous Materials by Tenant on or about the Premises,
and/or to conduct periodic inspections of the storage, generation, use, release
and/or disposal of such Hazardous Materials by Tenant on and from the Premises,
and Tenant agrees that any reasonable costs incurred by Landlord in connection
therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder
upon demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous Materials
which were stored, generated, used, released and/or disposed of on, under or
about the Premises for the twelve-month period prior thereto, and which Tenant
desires to store, generate, use, release and/or dispose of on, under or about
the Premises and/or the Site for the succeeding twelve-month period. In
addition, to the extent Tenant is permitted to utilize Hazardous Materials upon
the Premises, Tenant shall promptly provide Landlord with complete and legible
copies of all the following environmental documents relating thereto: reports
filed pursuant to any self-reporting requirements; permit applications, permits,
monitoring reports, workplace exposure and community exposure warnings or
notices and all other reports, disclosures, plans or documents (even those which
may be characterized as confidential) relating to water discharges, air
pollution, waste generation or disposal, and underground storage tanks for
Hazardous Materials; orders, reports, notices, listings and correspondence (even
those which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises, the Site and/or the
soil or groundwater thereunder at any time to determine whether Tenant is
complying with the terms of this Section 5.3, and in connection therewith Tenant
shall provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under or
about the Premises and/or the Site caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees, Landlord and its agents shall
have the right, but not the obligation, without limitation upon any of
Landlord's other rights and remedies under this Lease, to immediately enter upon
the Premises and/or the Site without notice and to discharge Tenant's
obligations under this Section 5.3 at Tenant's expense, including without
limitation the taking of emergency or long-term remedial action. Landlord and
its agents shall endeavor to minimize interference with Tenant's business in
connection therewith, but shall not be liable for any such interference. In
addition, Landlord, at Tenant's expense, shall have the right, but not the
obligation, to join and participate in any legal proceedings or actions
initiated in connection with any claims arising out of the storage, generation,
use, release and/or disposal by Tenant or its agents, employees, contractors,
licensees or invitees of Hazardous Materials on, under, from or about the
Premises and/or the Site.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises and/or the Site caused by Tenant or its agents, employees,
contractors, licensees or invitees, or permitted by Tenant or its agent,
employees, contractors, licensees or invitees on, under, from or about the
Premises, results in (i) injury to any person, (ii) injury to or any
contamination of the Premises and/or the Site, or (iii) injury to or
contamination of any real or personal property wherever situated, Tenant, at its
expense, shall promptly take all actions necessary to return the Premises, the
Site and any other affected real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials and to
remedy or repair any such injury or contamination, including without limitation,
any cleanup, remediation, removal, disposal, neutralization or other treatment
of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall
not, without Landlord's prior written consent, take any remedial action in
response to the presence of any Hazardous Materials on, under or about the
Premises, the Site or any other affected real or personal property owned by
Landlord or enter into any similar agreement, consent, decree or other
compromise with any governmental agency with respect to any Hazardous Materials
claims; provided however, Landlord's prior written consent shall not be
necessary in the event that the presence of Hazardous Materials on, under or
about the Premises, the Site or any other affected real or personal property
owned by Landlord (i) imposes an immediate threat to the health, safety or
welfare of any individual or (ii) is of such a nature that an immediate remedial
response is necessary and it is not possible to obtain Landlord's consent before
taking such action. To the fullest extent permitted by law, Tenant shall
indemnify, hold harmless, protect and defend (with attorneys acceptable to
Landlord) Landlord and any successors to all or any portion of Landlord's
interest in the Premises, the Site and any other real or personal property owned
by Landlord from and against any and all liabilities, losses, damages,
diminution in value, judgments, fines, demands, claims, recoveries,
deficiencies, costs and expenses (including without limitation attorneys' fees,
court costs and other professional expenses), whether foreseeable or
unforeseeable, arising directly or indirectly out of the use, generation,
storage, treatment, release, on- or off-site disposal or transportation of
Hazardous Materials on, into, from, under or about the Premises, the Site and
any other real or personal property owned by Landlord caused by
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Tenant, its agents, employees, contractors, licensees or invitees, and/or out of
the use, generation, storage, treatment, release, on- or off-site disposal of
Hazardous Materials on, into, from, under or about the Premises permitted by
Tenant, its agents, employees, contractors, licensees or invitees. The foregoing
indemnity obligation shall include, without limitation, the cost of any required
or necessary repair, restoration, cleanup or detoxification of the Premises, the
Site and any other real or personal property owned by Landlord, and the
preparation of any closure or other required plans, whether or not such action
is required or necessary during the Term or after the expiration of this Lease.
If Landlord at any time discovers that Tenant or its agents, employees,
contractors, licensees or invitees may have caused or permitted the release of a
Hazardous Material on, under, from or about the Premises, the Site or any other
real or personal property owned by Landlord, Tenant shall, at Landlord's
request, immediately prepare and submit to Landlord a comprehensive plan,
subject to Landlord's approval, specifying the actions to be taken by Tenant to
return the Premises, the Site or any other real or personal property owned by
Landlord to the condition existing prior to the introduction of such Hazardous
Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at its
expense, and without limitation of any rights and remedies of Landlord under
this Lease or at law or in equity, immediately implement such plan and proceed
to cleanup such Hazardous Materials in accordance with all applicable laws and
as required by such plan and this Lease. The provisions of this subsection (e)
shall expressly survive the expiration or sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Premises
and/or the Site known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Tenant shall have no
liability or responsibility with respect to the Hazardous Materials facts
described in Exhibit C, nor with respect to any Hazardous Materials which were
not caused or permitted by Tenant, its agents, employees, contractors, licensees
or invitees. Notwithstanding the preceding two sentences, Tenant agrees to
notify its agents, employees, contractors, licensees, and invitees of any
exposure or potential exposure to Hazardous Materials at the Premises and/or the
Site that Landlord brings to Tenant's attention.
SECTION 5.4. ADA COMPLIANCE. Landlord shall correct, repair or replace, at
Landlord's sole cost and expense and not as an Operating Expense, any
non-compliance of the Tenant Improvements, the building shell improvements or
the Site with the provisions of Title III of the Americans With Disabilities Act
("ADA") in effect as of the Commencement Date. All other ADA compliance issues
regarding the Premises, including without limitation, Tenant's construction of
any alterations or other improvements in the Premises and in connection with the
operation of Tenant's business and employment practices in the Premises, shall
be the responsibility of Tenant at its sole cost and expense. The repairs,
corrections or replacements required of Landlord under this Section 5.4 shall be
made promptly following notice of non-compliance from any applicable
governmental agency. Tenant shall promptly forward any such notice that Tenant
receives to Landlord.
ARTICLE VI. SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon. Landlord shall not be liable for damages or otherwise for any failure
or interruption of any utility or other service furnished to the Premises, and
no such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder.
Notwithstanding the foregoing, if as a result of the actions of Landlord, its
agents, contractors or employees, for more than two (2) consecutive business
days following written notice to Landlord (or oral notice to Landlord if written
notice is not feasible), there is no HVAC or electricity services to the
Premises, or such an interruption of other essential utilities and building
services, such as fire protection or water, so that the Premises cannot be used
by Tenant, in Tenant's judgment reasonably exercised, then Tenant's Basic Rent
shall thereafter be abated until the Premises are again usable by Tenant;
provided, however, that if Landlord is diligently pursuing the repair of such
utilities or services and Landlord provides substitute services reasonably
suitable for Tenant's purposes, as for example, bringing in portable
air-conditioning equipment, then there shall not be an abatement of Basic Rent.
Any disputes concerning the foregoing shall be resolved by JAMS arbitration
pursuant to Section 22.7 of this Lease. The foregoing provisions shall not apply
in case of damage to, or destruction of, the Premises, which shall be governed
by the provisions of Article XI of the Lease. Landlord shall at all reasonable
times have free access to all electrical and mechanical installations of
Landlord.
SECTION 6.2. PARKING. Tenant shall be entitled to the number of vehicle
parking spaces on the Site set forth in Item 14 of the Basic Lease Provisions.
Tenant shall not use more parking spaces than such number. Tenant shall not
permit or allow any vehicles that belong to or are controlled by Tenant or
Tenant's employees, suppliers, shippers, customers or invitees to be loaded,
unloaded or parked in areas other than those designated by Landlord for such
activities. If Tenant permits or allows any of the prohibited activities
described above, then Landlord shall have the right, without notice, in addition
to such other rights and remedies that Landlord may have, to remove or tow away
the vehicle involved and charge the costs to Tenant. Parking shall be limited to
striped parking stalls, and no parking shall be permitted in any driveways,
access ways or in any similar area. Nothing contained in this Lease shall be
deemed to create liability upon Landlord for any damage to motor vehicles of
visitors or employees, for any loss of property from within those motor
vehicles, or for any injury to Tenant, its visitors or employees, unless
ultimately determined to be caused by the active negligence or willful
misconduct of Landlord, its agents, servants and employees. Landlord shall have
the right to establish, and from time to time
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amend, and to enforce against all users all reasonable rules and regulations
(including the designation of areas for employee parking) that Landlord may deem
necessary and advisable for the proper and efficient operation and maintenance
of parking. Landlord shall have the right to construct, maintain and operate
lighting facilities within the parking areas; to change the area, level,
location and arrangement of the parking areas and improvements therein; and to
do and perform such other acts in and to the parking areas and improvements
therein as, in the use of good business judgment, Landlord shall determine to be
advisable. Parking areas shall be used only for parking vehicles. Washing,
waxing, cleaning or servicing of vehicles, or the storage of vehicles for
24-hour periods, is prohibited unless otherwise authorized by Landlord. Tenant
shall be liable for any damage to the parking areas caused by Tenant or Tenant's
employees, suppliers, shippers, customers or invitees, including without
limitation damage from excess oil leakage. Tenant shall have no right to install
any fixtures, equipment or personal property in the parking areas.
From and after the Commencement Date, at the request of Tenant if it
determines that such additional parking spaces are needed, Landlord shall
provide for twenty (20) additional vehicle parking spaces as follows: subject to
the approval of the City, Landlord shall restripe the Site, at its sole cost and
expense, to provide for up to eight (8) of said additional spaces. The remainder
of said spaces shall be provided, at Landlord's election, either on Site or on
Landlord's project (9400, 9500, 9560, 9600, 9650 and 9700 Jeronimo) located
across Jeronimo from the Site (on a non-exclusive basis and subject to a license
agreement with Landlord). The license agreement for such licensed spaces shall
be terminable, without cause, on thirty (30) days' prior written notice from
either Landlord or Tenant. Tenant shall execute such license agreement, which
shall be provided by Landlord and shall be in form reasonably acceptable to
Tenant, prior to using such spaces. Landlord shall have no liability whatsoever
to Tenant, its agents, employees, invitees or licensees, in connection with the
use of said licensed spaces, and the provisions of Section 10.3(a) of this Lease
shall apply with respect to Tenant's use thereof.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense
shall comply with all applicable laws and governmental regulations governing the
Premises and make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear, including without
limitation the electrical and mechanical systems, any air conditioning,
ventilating or heating equipment which serves the Premises, all nonload-bearing
interior walls, glass, windows, doors, door closures, hardware, fixtures,
electrical, plumbing, fire extinguisher equipment and other equipment. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevented by good maintenance practices by
Tenant. As part of its maintenance obligations hereunder, Tenant shall, at
Landlord's request, provide Landlord with copies of all maintenance schedules,
reports and notices prepared by, for or on behalf of Tenant. Tenant shall obtain
preventive maintenance contracts from a licensed heating and air conditioning
contractor to provide for regular inspection and maintenance of the heating,
ventilating and air conditioning systems servicing the Premises, all subject to
Landlord's approval. All repairs shall be at least equal in quality to the
original work, shall be made only by a licensed contractor approved in writing
in advance by Landlord and shall be made only at the time or times approved by
Landlord. Any contractor utilized by Tenant shall be subject to Landlord's
standard requirements for contractors, as modified from time to time. Landlord
shall have the right at all times to inspect Tenant's maintenance of all
equipment (including without limitation air conditioning, ventilating and
heating equipment), and may impose reasonable restrictions and requirements with
respect to repairs, as provided in Section 7.3, and the provisions of Section
7.4 shall apply to all repairs. Alternatively, Landlord may elect to make any
repair or maintenance required hereunder on behalf of Tenant and at Tenant's
expense, and Tenant shall promptly reimburse Landlord for all costs incurred
upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Article XI,
Landlord shall provide service, maintenance and repair with respect to the roof,
foundations, load-bearing walls, columns and footings of the Building, all
landscaping, walkways, parking areas, exterior lighting of the Site, and the
exterior surfaces of the exterior walls of the Building, except that Tenant at
its expense shall make all repairs which Landlord deems reasonably necessary as
a result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or designate
any reputable person or firm, including any employee or agent of Landlord or any
of Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs to the roof, foundations, load-bearing walls,
columns or footings unless and until Tenant has notified Landlord in writing of
the need for such repair (or Landlord otherwise obtains actual knowledge of the
need for such repairs) and Landlord shall have a reasonable period of time
thereafter to commence and complete said repair, if warranted. All costs of any
maintenance and repairs on the part of Landlord provided hereunder shall be
considered part of Building Costs (subject to the limitations and qualifications
on "Building Costs" contained in Section 4.2(f) of this Lease).
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which cost
less than One Dollar ($1.00) per square foot of the improved
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portions of the Premises (excluding warehouse square footage) and do not (i)
affect the exterior of the Building or outside areas (or be visible from
adjoining sites), or (ii) affect or penetrate any of the structural portions of
the Building, including but not limited to the roof, or (iii) require any change
to the basic floor plan of the Premises, any change to any structural or
mechanical systems of the Premises, or any governmental permit as a prerequisite
to the construction thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical, electrical, plumbing or
HVAC systems, facilities or equipment located in or serving the Building, or (v)
diminish the value of the Premises. Landlord may impose, as a condition to its
consent, any requirements that Landlord in its discretion may deem reasonable or
desirable, including but not limited to a requirement that all work be covered
by a lien and completion bond satisfactory to Landlord and requirements as to
the manner, time, and contractor for performance of the work. Tenant shall
obtain all required permits for the work and shall perform the work in
compliance with all applicable laws, regulations and ordinances, all covenants,
conditions and restrictions affecting the Premises, and the Rules and
Regulations (hereafter defined). If any governmental entity requires, as a
condition to any proposed alterations, additions or improvements to the Premises
by Tenant, that improvements be made to the outside areas, and if Landlord
consents to such improvements to the outside areas, then Tenant shall, at
Tenant's sole expense, make such required improvements to the outside areas in
such manner, utilizing such materials, and with such contractors (including, if
required by Landlord, Landlord's contractors) as Landlord may require in its
sole discretion. Under no circumstances shall Tenant make any improvement which
incorporates any Hazardous Materials, including without limitation
asbestos-containing construction materials into the Premises. Any request for
Landlord's consent shall be made in writing and shall contain architectural
plans describing the work in detail reasonably satisfactory to Landlord. Unless
Landlord otherwise agrees in writing, all alterations, additions or improvements
affixed to the Premises (excluding moveable trade fixtures and furniture) shall
become the property of Landlord and shall be surrendered with the Premises at
the end of the Term, except that Landlord may, by notice to Tenant, require
Tenant to remove by the Expiration Date, or sooner termination date of this
Lease, all or any alterations, decorations, fixtures, additions, improvements
and the like installed either by Tenant or by Landlord at Tenant's request and
to repair any damage to the Premises arising from that removal. Except as
otherwise provided in this Lease or in any Exhibit to this Lease, should
Landlord make any alteration or improvement to the Premises for Tenant, Landlord
shall be entitled to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from
any liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees, and any consequential or other
damages incurred by Landlord arising out of such lien, shall be reimbursed by
Tenant promptly following Landlord's demand, together with interest from the
date of payment by Landlord at the maximum rate permitted by law until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times,
upon written or oral notice (except in emergencies, when no notice shall be
required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall have the
right, if desired, to retain a key which unlocks all of the doors in the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the right
to use any and all means which Landlord may deem proper to open the doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
SECTION 7.6. TENANT'S SELF-HELP. If Landlord shall fail to perform any
repair obligations required under this Lease within thirty (30) days following
Tenant's written request for such repairs, or if Landlord shall fail to perform
any repairs required under this Lease of an emergency condition within
twenty-four (24) hours' written notice from Tenant, then Tenant may elect to
make such repairs at Landlord's expense by complying with the following
provisions of this Section 7.6. Before making any such repair, Tenant shall
deliver to Landlord a notice for the need for such repair ("Self-Help Notice"),
which notice shall specifically advise Landlord that Tenant intends to exercise
its self-help right hereunder. Should Landlord fail, within ten (10) days
following receipt of the Self-Help Notice (or within twenty-four (24) hours
following notice in the event of necessary emergency repairs), to commence the
necessary repair or to make other arrangements reasonably satisfactory to
Tenant, then Tenant shall have the right to make such repair on behalf of
Landlord. Landlord shall reimburse Tenant for the reasonable costs of such
repairs within thirty (30) days following receipt of Tenant's invoice for such
costs, but in no event shall Tenant have the right to offset rent against such
costs. Any such costs not reimbursed to Tenant within said 30 days shall bear
interest at ten percent (10%) per annum from and after the expiration of such
30-day period until paid (provided, however, that the foregoing shall not
relieve Landlord of its obligation to pay the full amount of such costs within
said 30-day period). In the event that the work could affect the Building's
structural, mechanical, electrical, heating, ventilating, air conditioning, life
safety or plumbing components or systems, then Tenant shall use only those
contractors used by Landlord in the Project for such work. If those contractors
are unwilling or unable to perform the work, Tenant may retain the services of
qualified, reputable and licensed, bonded contractors
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with like experience in similar building systems. Tenant shall be responsible
for obtaining any necessary governmental permits before commencing the repair
work. Tenant shall be liable for any damage, loss or injury resulting from said
work to the extent of Tenant's or its agent's, employee's or contractor's
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negligence; additionally, the provisions of the second, third and fourth
sentences of Section 10.3(a) of this Lease shall apply in connection with any
alleged negligence asserted by any third party against Landlord which arises out
of, is occasioned by, or is in any way attributable to, such work. Any disputes
regarding this Section 7.6 shall be resolved by JAMS arbitration pursuant to
Section 22.7 of this Lease.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, and against any alterations, additions or like
improvements made to the Premises by or on behalf of Tenant. When possible
Tenant shall cause its personal property and alterations to be assessed and
billed separately from the real property of which the Premises form a part. If
any taxes on Tenant's personal property and/or alterations are levied against
Landlord or Landlord's property and if Landlord pays the same, or if the
assessed value of Landlord's property is increased by the inclusion of a value
placed upon the personal property and/or alterations of Tenant and if Landlord
pays the taxes based upon the increased assessment, Tenant shall pay to Landlord
the taxes so levied against Landlord or the proportion of the taxes resulting
from the increase in the assessment. In calculating what portion of any tax bill
which is assessed against Landlord separately, or Landlord and Tenant jointly,
is attributable to Tenant's alterations and personal property, Landlord's
reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(b). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting or attempted assignment
or subletting shall constitute a material default of this Lease. Notwithstanding
the foregoing, Tenant, upon written notice to Landlord, shall have the right to
assign or sublet any portion of this Lease, without Landlord's consent, to any
entity controlling, controlled by or under common control with Tenant ("Tenant's
Affiliate" herein), provided: (i) in the event of a merger or consolidation by
Tenant (where Tenant is not the surviving entity), the net worth of the Tenant's
Affiliate is at least equal to the net worth of Tenant immediately prior to the
date of such assignment, evidence of which, satisfactory to Landlord, shall be
presented to Landlord prior to such assignment, (ii) Tenant shall provide to
Landlord, prior to such assignment, written notice of such assignment and such
assignment documentation and other information as Landlord may request in
connection therewith, and (iii) the terms and requirements of Section 9.2 of
this Lease shall apply with respect to such assignment. Landlord shall not be
deemed to have given its consent to any assignment or subletting by any other
course of action, including its acceptance of any name for listing in the
Building directory. To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section
365(f)(1), Tenant on behalf of itself and its creditors, administrators and
assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless
the proposed assignee of the Trustee for the estate of the bankrupt meets
Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If
this Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered in
connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease other
than to a Tenant's Affiliate (as herein defined), it shall first notify Landlord
of its desire and shall submit in writing to Landlord: (i) the name and address
of the proposed transferee; (ii) the nature of any proposed subtenant's or
assignee's business to be carried on in the Premises; (iii) the terms and
provisions of any proposed sublease or assignment, including a copy of the
proposed assignment or sublease form; (iv) evidence of insurance of the proposed
assignee or subtenant complying with the requirements of Exhibit D hereto; (v) a
completed Environmental Questionnaire from the proposed assignee or subtenant;
and (vi) any other information requested by Landlord and reasonably related to
the transfer. Except as provided in Subsection (e) of this Section, Landlord
shall not unreasonably withhold its consent, provided: (1) the use of the
Premises will be consistent with the provisions of this Lease; (2) the proposed
assignee or subtenant has not been required by any prior landlord, lender or
governmental authority to take remedial action in connection with Hazardous
Materials contaminating a property arising out of the proposed assignee's or
subtenant's actions or use of the property in question and is not subject to any
enforcement order issued by any governmental authority in connection with the
use, disposal or storage of a Hazardous Material; (3) at Landlord's election,
insurance requirements shall be brought into conformity with Landlord's then
current leasing practice; (4) any proposed subtenant or assignee demonstrates
that it is financially responsible by submission to Landlord of all reasonable
information as Landlord may request concerning the proposed subtenant or
assignee, including, but not limited to, a balance sheet of the proposed
subtenant or assignee as of a date within ninety (90) days of the request
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for Landlord's consent and statements of income or profit and loss of the
proposed subtenant or assignee for the two-year period preceding the request for
Landlord's consent, and/or a certification signed by the proposed subtenant or
assignee that it has not been evicted or been in arrears in rent at any other
leased premises for the 3-year period preceding the request for Landlord's
consent; (5) any proposed subtenant or assignee demonstrates to Landlord's
reasonable satisfaction a record of successful experience in business; and (6)
the proposed transfer will not impose additional burdens or adverse tax effects
on Landlord. If Tenant has any exterior sign rights under this Lease, such
rights are personal to Tenant and may not be assigned or transferred to any
assignee of this Lease or subtenant of the Premises without Landlord's prior
written consent, which may be withheld in Landlord's sole and absolute
discretion.
If Landlord consents to the proposed transfer, Tenant may within
ninety (90) days after the date of the consent effect the transfer upon the
terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within thirty (30) days following receipt of Tenant's written request, the
information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in lieu
of consenting to a proposed assignment or subletting (other than to a Tenant's
Affiliate), Landlord may elect to (i) sublease the Premises (or the portion
proposed to be subleased), or take an assignment of Tenant's interest in this
Lease, upon the same terms as offered to the proposed subtenant or assignee
(excluding terms relating to the purchase of personal property, the use of
Tenant's name or the continuation of Tenant's business), or (ii) terminate this
Lease as to the portion of the Premises proposed to be subleased or assigned
with a proportionate abatement in the rent payable under this Lease, effective
on the date that the proposed sublease or assignment would have become
effective. Landlord may thereafter, at its option, assign or re-let any space so
recaptured to any third party, including without limitation the proposed
transferee of Tenant. Notwithstanding the foregoing, Landlord's rights and
elections set forth in this Section 9.1(c) shall not be applicable to any
sublease if the subleased area is less than fifty percent (50%) of the floor
area of the Premises.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by
the assignee or subtenant (other than to a Tenant's Affiliate), however
described, in excess of (i) the Basic Rent payable by Tenant hereunder, or in
the case of a sublease of a portion of the Premises, in excess of the Basic Rent
reasonably allocable to such portion, plus (ii) Tenant's direct out-of-pocket
costs which Tenant certifies to Landlord have been paid to provide occupancy
related services to such assignee or subtenant of a nature commonly provided by
landlords of similar space, shall be the property of Landlord and such amounts
shall be payable directly to Landlord by the assignee or subtenant or, at
Landlord's option, by Tenant. At Landlord's request, a written agreement shall
be entered into by and among Tenant, Landlord and the proposed assignee or
subtenant confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant (other than
to a Tenant's Affiliate). Such fee is hereby acknowledged as a reasonable amount
to reimburse Landlord for its costs of review and evaluation of a proposed
assignee/sublessee, and Landlord shall not be obligated to commence such review
and evaluation unless and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with
the consent of Landlord, shall relieve Tenant of its obligation to pay rent and
to perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any act
or omission by an assignee or subtenant. Each assignee, other than Landlord,
shall be deemed to assume all obligations of Tenant under this Lease and shall
be liable jointly and severally with Tenant for the payment of all rent, and for
the due performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document memorializing the
transfer is delivered to Landlord and both the assignee/subtenant and Tenant
deliver to Landlord an executed consent to transfer instrument prepared by
Landlord and consistent with the requirements of this Article. The acceptance by
Landlord of any payment due under this Lease from any other person shall not be
deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any transfer. Consent by Landlord to one or more transfers shall not
operate as a waiver or estoppel to the future enforcement by Landlord of its
rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and
conditions shall apply to any subletting by Tenant of all or any part of the
Premises and shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than
with respect to the payment of rent hereunder) is incorporated by reference into
and made a part of such sublease, with "Landlord" hereunder meaning the
sublandlord therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs and
is continuing in the performance of Tenant's obligations under this Lease,
Tenant shall have the right to receive and collect the sublease rentals.
Landlord shall not, by reason of this assignment or the collection of sublease
rentals, be deemed liable to the subtenant for the performance of any of
Tenant's obligations under the sublease. Tenant hereby irrevocably authorizes
and directs any subtenant, upon receipt of a written notice from Landlord
stating that an uncured default
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exists in the performance of Tenant's obligations under this Lease, to pay to
Landlord all sums then and thereafter due under the sublease. Tenant agrees that
the subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) In the event of the termination of this Lease, Landlord may, at
its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and
expense, shall provide and maintain in effect the insurance described in
Exhibit D. Evidence of that insurance must be delivered to Landlord prior to
the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide
any or all of the following types of insurance, with or without deductible and
in amounts and coverages as may be determined by Landlord in its discretion:
"all risk" property insurance, subject to standard exclusions, covering the
Building, and such other risks as Landlord or its mortgagees may from time to
time deem appropriate, including leasehold improvements made by Landlord, and
commercial general liability coverage. Landlord shall not be required to carry
insurance of any kind on Tenant's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and all other items
of personal property, and shall not be obligated to repair or replace that
property should damage occur. All proceeds of insurance maintained by Landlord
upon the Building shall be the property of Landlord, whether or not Landlord is
obligated to or elects to make any repairs. At Landlord's option, Landlord may
self-insure all or any portion of the risks for which Landlord elects to provide
insurance hereunder; provided, however, that if and when The Irvine Company, or
any entity controlling, controlled by or under common control with The Irvine
Company, is no longer the Landlord under this Lease, such successor Landlord
shall maintain a financial net worth reasonably proportionate to such successor
Landlord's election to self-insure.
SECTION 10.3. JOINT INDEMNITY.
(a) Tenant's Indemnity. To the fullest extent permitted by law,
Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its
agents, and any and all affiliates of Landlord, including, without limitation,
any corporations or other entities controlling, controlled by or under common
control with Landlord, from and against any and all claims, liabilities, costs
or expenses arising either before or after the Commencement Date from Tenant's
use or occupancy of the Premises or the Building, or from the conduct of its
business, or from any activity, work, or thing done, permitted or suffered by
Tenant or its agents, employees, invitees or licensees in or about the Premises
or the Building, or from any default in the performance of any obligation on
Tenant's part to be performed under this Lease, or from any act or negligence of
Tenant or its agents, employees, visitors, patrons, guests, invitees or
licensees; provided Tenant does not indemnify Landlord for any claims,
liabilities, costs or expenses to the extent the same is caused by the
negligence or willful misconduct on the part of Landlord, or its agents or
employees, or for which Tenant is otherwise indemnified hereunder. In cases of
alleged negligence asserted by third parties against Landlord which arise out
of, are occasioned by, or in any way attributable to Tenant's, its agents,
employees, contractors, licensees or invitees use and occupancy of the Premises
or the Building, or from the conduct of its business or from any activity, work
or thing done, permitted or suffered by Tenant or its agents, employees,
invitees or licensees on Tenant's part to be performed under this Lease, or from
any act of negligence of Tenant, its agents, employees, licensees or invitees,
Tenant shall accept any tender of defense for Landlord and shall,
notwithstanding any allegation of negligence or willful misconduct on the part
of the Landlord, defend Landlord and protect and hold Landlord harmless and pay
all costs, expenses and attorneys' fees incurred in connection with such
litigation, provided that Tenant shall not be liable for any such injury or
damage to the extent and in the proportion that such injury or damage is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Landlord) to be attributable to the
negligence or willful misconduct of Landlord. Upon Landlord's request, Tenant
shall at Tenant's sole cost and expense, retain a separate attorney selected by
Landlord to represent Landlord in any such suit if Landlord determines that the
representation of both Tenant and Landlord by the same attorney would cause a
conflict of interest; provided, however, that to the extent and in the
proportion that the injury or damage which is the subject of the suit is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Landlord) to be attributable to the
negligence or willful misconduct of Landlord, Landlord shall reimburse Tenant
for the legal fees of the separate attorney retained by Tenant. The provisions
of this Subsection 10.3(a) shall expressly survive the expiration or sooner
termination of this Lease.
(b) Landlord's Indemnity. To the fullest extent permitted by law,
but subject to the express limitations on liability contained in this Lease
(including, without limitation, the provisions of Sections 10.4, 10.5 and 14.8
of this Lease), Landlord shall defend, indemnify, protect, save and hold
harmless Tenant, its agents and
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any and all affiliates of Tenant, including, without limitation, any
corporations, or other entities controlling, controlled by or under common
control with Tenant, from and against any and all claims, liabilities, costs or
expenses arising either before or after the Commencement Date from any default
in the performance of any obligation on Landlord's part to be performed under
this Lease, or from any negligence in the performance by Landlord, its
employees, authorized agents or contractors, of its obligations under this
Lease; provided that Landlord does not indemnify Tenant for any claims,
liabilities, costs or expenses to the extent the same is caused by the
negligence or willful misconduct on the part of Tenant, or its agents,
employees, licensees or invitees, or for which Landlord is otherwise indemnified
hereunder. In cases of alleged negligence asserted by third parties against
Tenant which arise out of, are occasioned by, or in any way attributable to the
maintenance or repair of the Site or the Building by Landlord or its
contractors, authorized agents or employees, Landlord shall accept any tender
defense for Tenant and shall, notwithstanding any allegation of negligence or
willful misconduct on the part of Tenant, defend Tenant and protect and hold
Tenant harmless and pay all cost, expense and attorneys' fees incurred in
connection with such litigation, provided that Landlord shall not be liable for
any such injury or damage to the extent and in the proportion that such injury
or damage is ultimately determined by a court of competent jurisdiction (or in
connection with any negotiated settlement agreed to by Tenant) to be
attributable to the negligence or willful misconduct of Tenant. Upon Tenant's
request, Landlord shall at Landlord's sole cost and expense, retain a separate
attorney selected by Tenant to represent Tenant in any such suit if Tenant
determines that the representation of both Tenant and Landlord by the same
attorney would cause conflict of interest; provided, however, that to the extent
and the proportion that the injury or damage which is the subject of the suit is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Tenant) to be attributable to the
negligence or willful misconduct of Tenant, Tenant shall reimburse Landlord for
the legal fees of the separate attorney retained by Landlord. The provisions of
this Subsection 10.3(b) shall expressly survive the expiration or sooner
termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Except to the extent of Landlord's
(or its employee's, authorized agent's or contractor's) negligence or willful
misconduct, Landlord shall not be liable to Tenant, its employees, agents and
invitees, and Tenant hereby waives all claims against Landlord for loss of or
damage to any property, or any injury to any person, or any other loss, cost,
damage, injury or liability whatsoever resulting from the Acts of God, acts of
civil disobedience or insurrection, fire, explosion, falling plaster, steam,
gas, electricity, water or rain which may leak or flow from or into any part of
the Building or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical
works or other fixtures in the Building. Further, in no event shall Landlord be
liable to Tenant whatsoever, and Tenant waives all claims against Landlord, for
loss or interruption of business income (including without limitation any
consequential damages and lost profit) resulting from any of the conditions
described in the foregoing. It is understood that any such condition may require
the temporary evacuation or closure of all or a portion of the Building. Except
as expressly otherwise provided in Sections 6.1, 11.1 and 12.1 below, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business (including without limitation
consequential damages and lost profit or opportunity costs) arising from the
making of any repairs to any portion of the Building, including repairs to the
Premises, nor shall any related activity by Landlord constitute an actual or
constructive eviction; provided, however, that in making repairs, Landlord shall
interfere as little as reasonably practicable with the conduct of Tenant's
business in the Premises. Neither Landlord nor its agents shall be liable for
interference with light or other similar intangible interests. Tenant shall
immediately notify Landlord in case of fire or accident in the Premises or the
Building and of defects in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waives all rights of recovery against the other and the other's agents on
account of loss and damage occasioned to the property of such waiving party to
the extent only that such loss or damage is required to be insured against under
any "all risk" property insurance policies required by this Article X; provided
however, that (i) the foregoing waiver shall not apply to the extent of a
party's obligation to pay deductibles under any such policies and this Lease,
and (ii) if any loss is due to the act, omission or negligence or willful
misconduct of either party, or its agents, employees, contractors, guests or
invitees, such party's liability insurance shall be primary and shall cover all
losses and damages prior to any other insurance hereunder. By this waiver it is
the intent of the parties that neither Landlord nor Tenant shall be liable to
any insurance company (by way of subrogation or otherwise) insuring the other
party for any loss or damage insured against under any "all-risk" property
insurance policies required by this Article, even though such loss or damage
might be occasioned by the negligence of such party, its agents, employees,
contractors, guests or invitees. The provisions of this Section shall not limit
the indemnification provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage as
soon as reasonably possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by
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Landlord's fire and extended coverage insurance (including any portion of such
coverage which Landlord has elected to self-insure) plus such additional amounts
Tenant elects, at its option, to contribute, excluding however the deductible
(for which Tenant shall be responsible for Tenant's proportionate share, except
to the extent that Landlord's self-insurance coverage is in lieu of such
deductible); (ii) Landlord reasonably determines that the Premises cannot, with
reasonable diligence, be fully repaired by Landlord (or cannot be safely
repaired because of the presence of hazardous factors, including without
limitation Hazardous Materials, earthquake faults, and other similar dangers)
within two hundred seventy (270) days after the date of the damage; (iii) an
event of default by Tenant has occurred and is continuing at the time of such
damage; or (iv) the damage occurs during the final twelve (12) months of the
Term. Should Landlord elect not to repair the damage for one of the preceding
reasons, Landlord shall so notify Tenant in writing within thirty (30) days
after the damage occurs and this Lease shall terminate as of the date of that
notice.
(b) Unless Landlord elects to terminate this Lease in accordance
with subsection (a) above, this Lease shall continue in effect for the remainder
of the Term; provided that so long as Tenant is not in default under this Lease,
if the damage is so extensive that Landlord reasonably determines that the
Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot
be safely repaired because of the presence of hazardous factors, earthquake
faults, and other similar dangers) so as to allow Tenant's substantial use and
enjoyment of the Premises within two hundred seventy (270) days after the date
of damage, then Tenant may elect to terminate this Lease by written notice to
Landlord within the thirty (30) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and ending
on the sooner of the date the damage is repaired or the date this Lease is
terminated, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Building that is rendered unusable by the
damage from time to time bears to the total floor area of the Building, but only
to the extent that any business interruption insurance proceeds are or will be
received by Landlord therefor from Tenant's insurance described in Exhibit D.
Notwithstanding the foregoing, rental shall abate for such period in all events
to the extent the casualty was caused by the actions with Landlord, its
employees, authorized agents or contractors.
(d) Notwithstanding the provisions of subsections (a), (b) and (c)
of this Section, and subject to the provisions of Section 10.5 above, the cost
of any repairs shall be borne by Tenant, and Tenant shall not be entitled to
rental abatement or termination rights, if the damage is due to the fault or
neglect of Tenant or its employees, subtenants, invitees or representatives. In
addition, the provisions of this Section shall not be deemed to require Landlord
to repair any improvements or fixtures that Tenant is obligated to repair or
insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing Tenant's
personal property and any debris from the Premises to facilitate all inspections
of the Premises and the making of any repairs. Notwithstanding anything to the
contrary contained in this Lease, if Landlord in good faith believes there is a
risk of injury to persons or damage to property from entry into the Building or
Premises following any damage or destruction thereto, Landlord may restrict
entry into the Building or the Premises by Tenant, its employees, agents and
contractors in a non-discriminatory manner, without being deemed to have
violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of,
or evicted Tenant from, the Premises. Upon request, Landlord shall consult with
Tenant to determine if there are safe methods of entry into the Building or the
Premises solely in order to allow Tenant to retrieve files, data in computers,
and necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event title to a portion of the Premises is taken or sold
in lieu of taking, and if Landlord elects to restore the Premises in such a way
as to alter the Premises materially, either party may terminate this Lease, by
written notice to the other party, effective on the date of vesting of title. In
the event neither party has elected to terminate this Lease as provided above,
then Landlord shall promptly, after receipt of a sufficient condemnation award,
proceed to restore the Premises to substantially their condition prior to the
taking, and a proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of the taking and restoration. In the event
of a taking, Landlord shall be entitled to the entire amount of the condemnation
award without deduction for any estate or interest of Tenant; provided that
nothing in this Section shall be deemed to give Landlord any interest in, or
prevent Tenant from seeking any award against the taking authority for, the
taking of personal property and fixtures belonging to Tenant or for relocation
or business interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of
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the Premises shall belong entirely to Tenant. A temporary taking shall be deemed
to be a taking of the use or occupancy of the Premises for a period of not to
exceed one hundred eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking
of the parking area such that Landlord can no longer provide sufficient parking
to comply with this Lease, Landlord may substitute reasonably equivalent parking
in a location reasonably close to the Building; provided that if Landlord fails
to make that substitution within ninety (90) days following the taking and if
the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant
may, at its option, terminate this Lease by written notice to Landlord. If this
Lease is not so terminated by Tenant, there shall be no abatement of rent and
this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord and subject to the
terms and conditions of this Section 13.1, this Lease shall be either superior
or subordinate to all ground or underlying leases, mortgages and deeds of trust,
if any, which may hereafter affect the Premises, and to all renewals,
modifications, consolidations, replacements and extensions thereof; provided,
that so long as Tenant is not in default under this Lease, this Lease shall not
be terminated or Tenant's quiet enjoyment of the Premises disturbed in the event
of termination of any such ground or underlying lease, or the foreclosure of any
such mortgage or deed of trust, to which this Lease is subordinate. In the event
of a termination or foreclosure, Tenant shall become a tenant of and attorn to
the successor-in-interest to Landlord upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required by
Landlord's successor for that purpose. Tenant shall also, within ten (10)
business days following Landlord's noticed request, execute and deliver all
instruments as may be required from time to time to subordinate the rights of
Tenant under this Lease to any ground or underlying lease or to the lien of any
mortgage or deed of trust (provided that such instruments include the
nondisturbance and attornment provisions set forth above), or, if requested by
Landlord, to subordinate, in whole or in part, any ground or underlying lease or
the lien of any mortgage or deed of trust to this Lease. Landlord will use
reasonable efforts to obtain a non-disturbance agreement in favor of Tenant from
any existing or future lienholder, which agreement shall be on such lender's
standard form.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) business
days prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured
defaults on the part of Landlord, or specifying each default if any are claimed,
and (iii) setting forth all further information that Landlord may reasonably
require. Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be accurately represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more than
one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time within ten (10) business days following
Landlord's noticed request, Tenant's current public financial statements filed
with the Securities and Exchange Commission, including a balance sheet and
profit and loss statement for the most recent prior year (collectively, the
"Statements"), which Statements shall accurately and completely reflect the
financial condition of Tenant. Landlord agrees that it will keep the Statements
confidential, except that Landlord shall have the right to deliver the same to
any proposed purchaser or encumbrancer of the Premises.
(b) Tenant acknowledges that Landlord is relying on the Statements
in its determination to enter into this Lease, and Tenant represents to
Landlord, which representation shall be deemed made on the date of this Lease
and again on the Commencement Date, that no material change in the financial
condition of Tenant, as reflected in the Statements, has occurred since the date
Tenant delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of ten (10) days after written notice from
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Landlord to Tenant; provided, however, that any such notice shall be in lieu of,
and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. For purposes of these default and
remedies provisions, the term "additional rent" shall be deemed to include all
amounts of any type whatsoever other than Basic Rent to be paid by Tenant
pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement provided
by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements within the
required time periods following Landlord's notice as provided in, and in
accordance with the requirements of, Article XIII; provided that any such notice
to Tenant requesting such agreement, certificate or statement states that
Tenant's failure to timely provide such agreement, certificate or statement
shall constitute a default by Tenant under this Lease.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant of a petition to have
Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid
rent and additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by
which the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by
which the unpaid rent and additional rent for the balance of the Term after the
time of award exceeds the amount of such loss that Tenant proves could be
reasonably avoided;
(4) Any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which in the ordinary course of things would
be likely to result from Tenant's default, including, but not limited to, the
cost of recovering possession of the Premises, refurbishment of the Premises,
marketing costs, commissions and other expenses of reletting, including
necessary repair, the unamortized portion of any tenant improvements and
brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
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(5) At Landlord's election, all other amounts in
addition to or in lieu of the foregoing as may be permitted by law. The term
"rent" as used in this Lease shall be deemed to mean the Basic Rent and all
other sums required to be paid by Tenant to Landlord pursuant to the terms of
this Lease. Any sum, other than Basic Rent, shall be computed on the basis of
the average monthly amount accruing during the twenty-four (24) month period
immediately prior to default, except that if it becomes necessary to compute
such rental before the twenty-four (24) month period has occurred, then the
computation shall be on the basis of the average monthly amount during the
shorter period. As used in subparagraphs (1) and (2) above, the "worth at the
time of award" shall be computed by allowing interest at the rate of ten percent
(10%) per annum. As used in subparagraph (3) above, the "worth at the time of
award" shall be computed by discounting the amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy provided by this subsection (ii), Landlord shall not
unreasonably withhold its consent to an assignment or subletting of the Premises
subject to the reasonable standards for Landlord's consent as are contained in
this Lease.
(b) Landlord shall be under no obligation to observe or perform any
covenant of this Lease on its part to be observed or performed which accrues
after the date of any default by Tenant unless and until the default is cured by
Tenant, it being understood and agreed that the performance by Landlord of its
obligations under this Lease are expressly conditioned upon Tenant's full and
timely performance of its obligations under this Lease. The various rights and
remedies reserved to Landlord in this Lease or otherwise shall be cumulative
and, except as otherwise provided by California law, Landlord may pursue any or
all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult and impracticable to ascertain. Those costs
may include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) days after the date due, then Tenant shall pay to Landlord, in
addition to the interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars
($250.00) for each delinquent payment. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies. Notwithstanding the foregoing, the late charge for the initial
late payment of rental during each Expense Recovery Period of the Term shall be
waived by Landlord.
(b) Following each second consecutive installment of rent during any
24-month period that is not paid within five (5) days following notice of
nonpayment from Landlord, Landlord shall have the option (i) to require that
beginning with the first payment of rent next due, rent shall no longer be paid
in monthly installments but shall be payable quarterly three (3) months in
advance and/or (ii) to require that Tenant increase the amount, if any, of the
Security Deposit by one hundred percent (100%). Should Tenant deliver to
Landlord, at any time during any 24-month period, two (2) or more insufficient
checks, the Landlord may require that all monies then and thereafter due from
Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements
to be performed by Tenant under this Lease shall be performed at Tenant's sole
cost and expense and without any abatement of rent or right of set-off. If
Tenant fails to pay any sum of money, other than rent, or fails to perform any
other act on its part to be performed under this Lease, and the failure
continues beyond any applicable grace
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period set forth in Section 14.1, then in addition to any other available
remedies, Landlord may, at its election make the payment or perform the other
act on Tenant's part. Landlord's election to make the payment or perform the act
on Tenant's part shall not give rise to any responsibility of Landlord to
continue making the same or similar payments or performing the same or similar
acts. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all
sums paid by Landlord and all necessary incidental costs, together with interest
at the maximum rate permitted by law from the date of the payment by Landlord.
Landlord shall have the same rights and remedies if Tenant fails to pay those
amounts as Landlord would have in the event of a default by Tenant in the
payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the expiration or earlier termination
of this Lease, including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten percent
(10%) per annum. Should either Landlord or Tenant bring any action in connection
with this Lease, the prevailing party shall be entitled to recover as a part of
the action its reasonable attorneys' fees, and all other costs. The prevailing
party for the purpose of this paragraph shall be determined by the trier of the
facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord and
Tenant under this Lease do not constitute the personal obligations of the
individual partners, trustees, directors, officers or shareholders of Landlord
or Tenant, respectively. Should Tenant recover a money judgment against
Landlord, such judgment shall be satisfied only out of the proceeds of sale
received upon execution of such judgment and levied thereon against the right,
title and interest of Landlord in the Building and out of the rent or other
income from such property receivable by Landlord or out of consideration
received by Landlord from the sale or other disposition of all or any part of
Landlord's right, title or interest in the Building, and no action for any
deficiency may be sought or obtained by Tenant.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be the greater of (a) one
hundred fifty percent (150%) of the Basic Rent for the month immediately
preceding the date of termination or (b) the then currently scheduled Basic Rent
for comparable space in the Building. If Tenant fails to surrender the Premises
upon the expiration of this Lease despite demand to do so by Landlord, Tenant
shall indemnify and hold Landlord harmless from all loss or liability, including
without limitation, any claims made by any succeeding tenant relating to such
failure to surrender. Acceptance by Landlord of rent after the termination shall
not constitute a consent to a holdover or result in a renewal of this Lease. The
foregoing provisions of this Section are in addition to and do not affect
Landlord's right of re-entry or any other rights of Landlord under this Lease or
at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
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Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
from the Premises all personal property and debris, except for any items that
Landlord may by written authorization allow to remain. Tenant shall repair all
damage to the Premises resulting from the removal, which repair shall include
the patching and filling of holes and repair of structural damage, provided that
Landlord may instead elect to repair any structural damage at Tenant's expense.
If Tenant shall fail to comply with the provisions of this Section, Landlord may
effect the removal and/or make any repairs, and the cost to Landlord shall be
additional rent payable by Tenant upon demand. If Tenant fails to remove
Tenant's personal property from the Premises upon the expiration of the Term,
Landlord may remove, store, dispose of and/or retain such personal property, at
Landlord's option, in accordance with then applicable laws, all at the expense
of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and
deliver to Landlord an instrument in writing releasing and quitclaiming to
Landlord all right, title and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from
and after the Commencement Date, at the Premises (whether or not Tenant has
departed from, abandoned or vacated the Premises), or may be delivered by
telegram, telex or telecopy, provided that receipt thereof is telephonically
confirmed. Either party may, by written notice to the other, served in the
manner provided in this Article, designate a different address. If any notice or
other document is sent by mail, it shall be deemed served or delivered
twenty-four (24) hours after mailing. If more than one person or entity is named
as Tenant under this Lease, service of any notice upon any one of them shall be
deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises. Landlord shall not be liable to Tenant
for any violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under this
Lease. In the case of any conflict between the Rules and Regulations and this
Lease, this Lease shall be controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If Tenant fails to take possession of the Premises or
if this Lease otherwise terminates prior to the Expiration Date as the result of
failure of performance by Tenant, Landlord shall be entitled to recover from
Tenant the unamortized portion of any brokerage commission funded by Landlord in
addition to any other damages to which Landlord may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or deed
of trust to which this Lease is or may be subordinate, and no landlord under a
so-called sale-leaseback, shall be
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responsible in connection with the Security Deposit, unless the mortgagee or
holder of the deed of trust or the landlord actually receives the Security
Deposit. It is intended that the covenants and obligations contained in this
Lease on the part of Landlord shall, subject to the foregoing, be binding on
Landlord, its successors and assigns, only during and in respect to their
respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles
and sections of this Lease are for convenience only, are not a part of this
Lease and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall
be delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises and the Building, and all preliminary
negotiations, oral agreements, understandings and/or practices, except those
contained in this Lease, are superseded and of no further effect. Tenant waives
its rights to rely on any representations or promises made by Landlord or others
which are not contained in this Lease. No verbal agreement or implied covenant
shall be held to modify the provisions of this Lease, any statute, law, or
custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
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ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. Each individual
executing this Lease on behalf of Tenant and Landlord represents and warrants
that he or she is duly authorized to execute and deliver this Lease on behalf of
Tenant and Landlord, respectively, and that this Lease is binding upon Tenant
and Landlord, respectively, in accordance with its terms. Tenant shall, at
Landlord's request, deliver a certified copy of its board of directors'
resolution or certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Landlord, either directly or indirectly,
without the prior written consent of Landlord, provided, however, that Tenant
may disclose the terms to prospective subtenants or assignees under this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Building, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part
of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Premises
whose address has been furnished to Tenant and (b) such beneficiary is afforded
a reasonable opportunity to cure the default by Landlord (which in no event
shall be less than sixty (60) days), including, if necessary to effect the cure,
time to obtain possession of the Premises by power of sale or judicial
foreclosure, provided that such foreclosure remedy is diligently pursued and
such beneficiary diligently pursues the appointment of a receiver (if
appropriate in beneficiary's judgment). Tenant agrees that each beneficiary of a
deed of trust or mortgage covering the Premises is an express third party
beneficiary hereof, Tenant shall have no right or claim for the collection of
any deposit from such beneficiary or from any purchaser at a foreclosure sale
unless such beneficiary or purchaser shall have actually received and not
refunded the deposit, and Tenant shall comply, without liability to Landlord or
any other beneficiary, with any written directions by any beneficiary to pay
rent due hereunder directly to such beneficiary without determining whether an
event of default exists under such beneficiary's deed of trust. The provisions
of this Section 22.4 shall not impair or affect Tenant's "self-help" rights
provided in Section 7.6 of this Lease, but nothing contained in the foregoing
shall affect the provisions of, or the relative rights of the parties contained
in, Section 13.1 or Article XIX of this Lease.
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SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this
Lease shall be construed to be conditions as well as covenants as though the
words specifically expressing or imparting covenants and conditions were used in
each separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises. Tenant assumes all responsibility for
the protection of Tenant, its agents, invitees and property from acts of third
parties. Nothing herein contained shall prevent Landlord, at its sole option,
from providing security protection for the Premises or any part thereof, in
which event the cost thereof shall be included within the definition of Building
Costs.
SECTION 22.7 JAMS.
(a) All claims or disputes between Landlord and Tenant arising out
of, or relating to, the Lease which either party is expressly authorized by a
provision hereof to submit to arbitration, shall be decided by the
JAMS/Endispute, or its successor, in Orange, California ("JAMS"), unless the
parties mutually agree otherwise. Within ten (10) business days following
submission to JAMS, JAMS shall designate three arbitrators and each party may,
within five (5) business days thereafter, veto one of the three persons so
designated. If two different designated arbitrators have been vetoed, the third
arbitrator shall hear and decide the matter. Any arbitration pursuant to this
Section 22.7 shall be decided within thirty (30) days of submission of JAMS. The
decision of the arbitrator shall be final and binding on the parties. The
parties shall retain all rights of discovery and production of documents in
connection with such arbitration. All costs associated with arbitration shall be
awarded to the prevailing party as determined by the arbitrator.
(b) Notice of the demand for arbitration by either party to the
Lease shall be filed in writing with the other party to the Lease and with JAMS
and shall be made within a reasonable time after the dispute has arisen. The
award rendered by the arbitrators shall be final, and judgment may be entered
upon it in accordance with applicable law in any court having jurisdiction
thereof. Except by written consent of the person or entity sought to be joined,
no arbitration arising out of or relating to the Lease shall include, by
consolidation, joinder or in any other manner, any person or entity not a party
to the Lease under which such arbitration is filed if (1) such person or entity
is substantially involved in a common question of fact or law, (2) the presence
of such person or entity is required if complete relief is to be accorded in the
arbitration, or (3) the interest or responsibility of such person or entity in
the matter is not insubstantial.
(c) The agreement herein among the parties to the Lease and
any other written agreement to arbitrate referred to herein shall be
specifically enforceable under prevailing law.
[Signatures on following page.]
LANDLORD: TENANT:
THE IRVINE COMPANY, MAI SYSTEM CORPORATION,
a Michigan corporation a Delaware corporation
By By
-------------------------------------- ----------------------------
Richard G. Sim, Name
Executive Vice President Title
By By
-------------------------------------- ----------------------------
Clarence W. Barker, Name
President, Irvine Industrial Company, Title
a division of The Irvine Company
25
<PAGE> 25
INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net; Stand-Alone)
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premises
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
ARTICLE III. TERM
Section 3.1 General
Section 3.2 Delay in Possession
ARTICLE IV RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. SERVICES
Section 6.1 Utilities and Services
Section 6.2 Parking
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
Section 7.6 Tenant's Self-Help
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Tenant's Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIAL
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
<PAGE> 26
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
Section 14.9 Limitation of Actions Against Landlord
ARTICLE XV END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII. BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
EXHIBITS
Exhibit A Description of Premises
Exhibit A-1 Description of the Site
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
(i)
<PAGE> 27
INDUSTRIAL LEASE
(SINGLE TENANT; NET; STAND-ALONE)
BETWEEN
THE IRVINE COMPANY
AND
MAI SYSTEMS CORPORATION
<PAGE> 1
EXHIBIT 10.5
MAI SYSTEMS CORPORATION
1993 STOCK OPTION PLAN
ARTICLE I PURPOSES
1. PURPOSE OF PLAN. The purpose of the MAI Systems Corporation 1993 Stock Option
Plan (the "Plan") are to advance the interests of MAI Systems Corporation (the
"Company") and its shareholders by providing significant incentives to selected
officers and key employees of the Company who contribute and are expected to
contribute to the success of the Company, and to enhance the interest of such
officers and employees in the Company's success and progress by providing them
with an opportunity to become shareholders of the Company. Further, the Plan is
designed to enhance the Company's ability to attract and retain qualified
employees necessary for the success and progress of the Company.
ARTICLE II DEFINITIONS
2. DEFINITIONS. Certain terms used herein shall have the meaning below
stated, subject to the provisions of Section 7.1 hereof.
"Board" or "Board of Directors" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors or
such other committee of the Board as shall be appointed by the Board to
administer the Plan pursuant to Article VII hereof.
(d) "Common Stock" means, subject to the provisions of Section 9.3, the
authorized common stock of the Company, par value $.01 per share.
(e) "Company" means MAI Systems Corporation.
(f) "Effective Date" means the date on which the Company's plan of
reorganization is confirmed by the Bankruptcy Court.
(g) "Employee" means an officer or other common law employee of the Company or a
Subsidiary, including a member of the Board who is also a common law employee.
(h) "Fair Market Value" means, in respect of a share of Common Stock on any
date, the last reported sales price regular way on such date or, in case no such
reported sale takes place on such date, the last reported sales price regular
way on the day preceding such date on which a reported sale occurred, in either
case on the New York Stock Exchange or, if at the time the Common Stock is not
listed or admitted to trading on such Exchange, on the principal national
securities exchange
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<PAGE> 2
on which the Common Stock is listed or admitted to trading or, if at the time
the Common Stock is not listed or admitted to trading on any national securities
exchange, in the National Association of Securities Dealers Automated Quotations
National Market System or, if at the time the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted on such
National Market System, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the Company for that purpose or, if the Common
Stock is not traded over-the-counter, as determined by the Committee using any
reasonable valuation method.
(i) "Incentive Stock Option" means an Option to purchase Common Stock, granted
by the Company to an Employee pursuant to Section 5.1 hereof, which meets the
requirements of Section 422 of the Code.
(j) "Nonstatutory Stock Option" means and Option to purchase Common Stock,
granted by the Company to an Employee pursuant to Section 5.1 hereof, which does
not meet the requirements of Section 422 of the Code or which provides, as of
the time the Option is granted, that it will not be treated as an Incentive
Stock Option.
(k) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option.
(l) "Option Agreement" means an agreement between the Company and an Optionee
evidencing the terms of an Option Granted under the Plan.
(m) "Optionee" means an Employee to whom an Option has been granted under the
Plan.
(n) "Plan" means the MAI Systems Corporation 1993 Stock Option Plan, as set
forth herein and as from time to time amended.
(o) "Subsidiary" means a subsidiary of the Company within the meaning of
Section 424(f) of the Code.
ARTICLE III EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES
3.1 EFFECTIVE DATE. The Plan shall become effective as of the Effective Date.
3.2 SHARES RESERVED UNDER PLAN. The aggregate number of shares of Common Stock
which may be issued upon the exercise of Options granted under the Plan shall
not exceed 1,250,000 of the authorized shares of Common Stock on the Effective
Date, all or any part of which may be issued pursuant to Incentive Stock Options
or Nonstatutory Stock Options or any combination thereof. Shares of Common Stock
issued upon the exercise of Options granted under the Plan may consist of either
authorized but unissued shares or shares which have been issued and which shall
have been reacquired by the Company. The total number of shares authorized under
the Plan shall be subject to increase or decrease in order to give effect to the
provisions of Section 9.3 and to give effect to any amendment adopted pursuant
to Article VIII. If any Option granted under the Plan shall expire, terminate or
be cancelled for any reason without having been exercised in full, the number of
shares as to which such Option was not exercised shall again be available for
purposes of the Plan. The Company shall at all times while the Plan is in effect
reserve such number of shares of Common Stock as will be sufficient to satisfy
the requirements of the Plan.
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<PAGE> 3
ARTICLE IV PARTICIPATION IN PLAN
4.1 ELIGIBILITY. Options under the Plan may be granted to any key Employee of
the Company or a Subsidiary who performs services for the Company or a
Subsidiary that the Committee deems to be of special importance to the growth
and success of the Company. The Committee shall determine those Employees to
whom Options shall be granted, the type of Option to be granted to each such
person, and, subject to Sections 3.2 hereof, the number of shares of Common
Stock subject to each such Option.
4.2 PARTICIPATION NOT GUARANTEE OF EMPLOYMENT OR RETENTION. Nothing in this Plan
or in any Option Agreement shall in any manner be construed to limit in any way
the right of the Company or any Subsidiary to terminate an Employee's employment
at any time, without regard to the effect of such termination on any rights such
Employee would otherwise have under this Plan, or give any right to an Employee
to remain employed by the Company or a Subsidiary thereof in any particular
position or at any particular rate of compensation.
ARTICLE V GRANT AND EXERCISE OF OPTIONS
5.1 GRANT OF OPTIONS. The Committee may from time to time in its discretion
grant Incentive Stock Options and/or Nonstatutory Stock Options to Employees at
any time after the Effective Date. All Options under the Plan shall be granted
within ten (10) years from the date the Plan is adopted by the Board or the date
the Plan is approved by the stockholders of the Company, whichever is earlier.
5.2 OPTION TERMS. Options granted under the Plan shall be subject to the
following requirements:
(a) Option Price. The exercise price of each Incentive Stock Option shall not be
less than the higher of the par value or 100% of the Fair Market Value of the
shares of Common Stock subject to the Option on the date the Option is granted.
The exercise price of each Nonstatutory Stock Option shall be the amount
determined by the Committee as set forth in the applicable Option Agreement,
provided that such amount shall not be less than the higher of the par value or
85% of the Fair Market Value of the shares of Common Stock subject to the Option
on the date the Option is granted, provided further that options may only be
granted at less than 100% of the Fair Market Value of the shares of Common Stock
subject to the Option on the date of grant if the discount is expressly in lieu
of a reasonable amount of salary or cash bonus, as determined by the Board of
Directors of the Committee in its sole discretion. The exercise price of an
Option may be subject to adjustment pursuant to Section 9.3 hereof.
(b) Term of Option. The term during which an Option is exercisable shall be that
period determined by the Committee as set forth in the applicable Option
Agreement, provided that no Option shall have a term that exceeds a period of 10
years from the date of its grant.
(c) Nontransferability of Option. No Option granted under the Plan shall be
transferable by the Optionee otherwise than by will or the laws of descent and
distribution, and each such Option shall be exercisable during the Optionee's
lifetime only by him. No transfer of an Option by an Optionee by will or by the
laws of descent and distribution shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and a copy of
the will and/or such other evidence as the Committee may determine necessary to
establish the validity of the transfer.
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<PAGE> 4
(d) Exercise of Option. Unless the Option Agreement pursuant to which an Option
is granted provides otherwise, each Option shall become exercisable, on a
cumulative basis, with respect to 20% of the aggregate number of the shares of
Common Stock covered thereby on the first anniversary of the date of grant and
with respect to an additional 20% of the shares of Common Stock covered thereby
on each of the next four succeeding anniversaries of the date of grant. Any
portion of an Option which has become exercisable shall remain exercisable until
it is exercised in full or terminates pursuant to the terms of the Plan or the
Option Agreement pursuant to which it is granted.
(e) Acceleration of Exercise on Change of Control. Notwithstanding the
provisions of paragraph (d) of this Section or any other restrictions limiting
the number of shares of Common Stock as to which an Option may be exercised,
each Option shall become immediately exercisable in full upon and simultaneously
with any "Change of Control" of the Company. For purposes of this Plan, a
"Change of Control" shall be deemed to have occurred if:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Company, any employee benefit plan sponsored by the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities;
(ii) during any period of two consecutive years individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i), (iii) or (iv) of this
Section) whose election by the Board of or nomination for election by the
Company's stockholders was approved by a vote of at least two- thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; or
the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets. For the purposes of this subsection
(iv), "substantially all" of the Company's assets shall mean any of the
following:
(A) assets for which the price or consideration upon sale or disposition
equals or exceeds fifty percent (50%) or more of the book value of the
total assets of the Company;
(B) assets for which the price or consideration upon sale or disposition
equals or exceeds
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<PAGE> 5
fifty percent (50%) or more of the fair market value of the Company (which
for purposes of this subsection (iv) shall be the number of shares of
voting securities outstanding on the date on which the change of control
of the Company is deemed to occur multiplied by the Fair Market Value of
said securities); or
(C) assets that generated fifty percent (50%) or more of the Company's
reported net sales or net income in either of the two (2) taxable years
ended prior to the date on which the change of control of the Company is
deemed to occur.
Notwithstanding the foregoing provisions of this Section 5.3(e), as long as
Brooke Group, Ltd. (BGL) and/or any affiliate thereof shall own stock of the
Company representing 50% or more of the combined voting power for the election
of directors, (x) the beneficial ownership of such stock by BGL and/or any
affiliate, and (y) any acquisition of additional voting stock by BGL and/or any
affiliate shall not constitute a Change of Control.
(f) Incentive Stock Options Granted to Ten Percent Shareholders. No Incentive
Stock Options shall be granted to any Employee who owns, directly or indirectly
within the mean of Section 424(d) of the Code, stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary, unless at the time the Incentive Stock Option is granted, the
exercise price of the Incentive Stock Option is at least 110% of the Fair Market
Value of the Common Stock subject to such Incentive Stock Option and such
Incentive Stock Option, by its terms, is not exercisable after the expiration of
five years from the date such Incentive Stock Option is granted.
(g) Limitation on Incentive Stock Options. To the extent that the aggregate Fair
Market Value of the Common Stock with respect to which Incentive Stock Options
are exercisable for the first time by an Optionee during any calendar year
(under all plans of the Company and its parent and subsidiary corporations)
exceeds $100,000, such Options shall be treated as Nonstatutory Options. For
this purpose, Options shall be taken into account in the order in which they
were granted and the Fair Market Value of the Common Stock shall be determined
as of the time the Option with respect to such Common Stock is granted.
5.4. PAYMENT OF EXERCISE PRICE AND DELIVERY OF SHARES.
(a) Notice and Payment for Shares. Each Option shall be exercised by delivery of
a written notice to the Company in such form as the Committee shall approve
stating the number of the whole shares of Common Stock as to which the Option is
being exercised and accompanied by payment therefor. No Option shall be deemed
exercised in the event that payment therefor is not received and shares of
Common Stock shall not be issued upon the exercise of an Option unless the
exercise price is paid in full. Payment for shares of Common Stock purchased
upon the exercise of an Option shall be made by (i) cash, (ii) certified check
payable to the order of the Company, (iii) outstanding shares of Common Stock
duly endorsed to the Company (which shares of Common Stock shall be valued at
their Fair Market Value as of the day preceding the date of such exercise), (iv)
any combination of the foregoing, or (v) such other method of payment as may be
provided in the applicable Option Agreement.
(b) Rights of Optionee in Stock. Neither any Optionee nor the legal
representatives, heirs, legatees or distributees of any Optionee, shall be
deemed to be the holder of, or to have any of the
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<PAGE> 6
rights of a holder with respect to, any shares of Common Stock issuable upon
exercise of an Option granted hereunder unless and until such shares are issued
to him or them and such person or persons have received a certificate or
certificates therefor. Upon the issuance and receipt of such certificate or
certificates, such Optionee or the legal representatives, heirs, legatees or
distributees of such Optionee shall have absolute ownership of the shares of
Common Stock evidenced thereby, including the right to vote such shares, to the
same extent as any other owner of shares of Common Stock, and to receive
dividends thereon, subject, however, to the terms, conditions and restrictions
of this Plan.
ARTICLE VI TERMINATION AND DEATH
6.1 TERMINATION OTHER THAN BY DEATH OR FOR CAUSE. If an Optionee's position as
an Employee of the Company or a Subsidiary terminates for any reason other than
death or for Cause (as defined in Section 6.2) he may, unless the applicable
Option Agreement provides otherwise, exercise an Option previously granted
within three months after the date of such termination, but in no event later
than the date on which the Option would have expired in accordance with its
terms. To the extent the Option is not so exercised, it shall expire at the end
of such three-month period.
6.2 TERMINATION FOR CAUSE. If an Optionee's position as an Employee of the
Company or a Subsidiary is terminated for Cause, any Option theretofore granted
to him shall expire and cease to be exercisable on the date notice of such
termination is delivered to the Optionee. "Cause" shall mean (a) the willful and
continued failure by an Optionee to substantially perform his duties with the
Company (other than any such failure resulting from his incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Optionee by the Board, which demand specifically identifies
the manner in which the Board believes that the Optionee has not substantially
performed his duties, or (b) the willful engaging by the Optionee in conduct
which is demonstrably and materially injurious to the Company, monetarily or
otherwise. For purposes of this Section 6.2, no act, or failure to act, shall be
deemed "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that such action or omission was in the best interest
of the Company.
6.3 DEATH. If an Optionee dies (i) while he is an Employee of the Company or a
Subsidiary or (ii) during the three-month period after the termination of his
position as an Employee of the Company or a Subsidiary, and at the time of his
death the Optionee was entitled to exercise an Option theretofore granted to
him, such Option shall, unless the applicable Option Agreement provides
otherwise, expire one year after the date of his death, but in no event later
than the date on which the Option would have expired if the Optionee had lived.
During such one-year period the Option may be exercised by the Optionee's
executor or administrator or by any person or persons who shall have acquired
the Option directly from the Optionee by bequest or inheritance, but only to the
extent that the Optionee was entitled to exercise the Option at the date of his
death and, to the extent the Option is not so exercised, it shall expire at the
end of such one-year period.
ARTICLE VII ADMINISTRATION OF PLAN
7.1 ADMINISTRATION. The Plan shall be administered by the Board of Directors,
Compensation Committee of the Board of Directors, or such other committee as may
be appointed by the Board of Directors of the Company, which Committee shall
consist of not less than two members, all of whom are members of the Board of
Directors and "disinterested persons" within the
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meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Members of the Committee shall not be eligible to participate in the Plan. A
majority of the Committee shall constitute a quorum thereof and the actions of a
majority of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. Vacancies occurring on the Committee shall be filled
by the Board. The Committee shall have full and final authority (i) to interpret
the Plan and each of the Option Agreements, (ii) to prescribe, amend and rescind
rules and regulations, if any, relating to the Plan, (iii) to make all
determinations necessary or advisable for the administration of the Plan and
(iv) to correct any defect, supply any omission and reconcile any inconsistency
in the Plan and any Option Agreement. The Committee's determination in all
matters referred to herein shall be conclusive and binding for all purposes and
upon all persons including, but without limitation, the Company, the
shareholders of the Company, the Committee, and each of the members thereof,
Employees and their respective successors in interest.
7.2 LIABILITY. No member of the Committee shall be liable for anything done or
omitted to be done by him or by any other member of the Committee in connection
with the Plan, except for his own willful misconduct or gross negligence. The
Committee shall have power to engage outside consultants, auditors or other
professional help to assist in the fulfillment of the Committee's duties under
the Plan at the Company's expense.
7.3 DETERMINATIONS. In making its determinations concerning the key Employees
who shall receive Options as well as the number of shares to be covered thereby
and the time or times at which they shall be granted, the Committee shall take
into account the nature of the services rendered by such key Employees, their
past, present and potential contribution to the Company's success and such other
factors as the Committee may deem relevant. The Committee shall determine the
form of Option Agreements under the Plan and the terms and conditions to be
included therein, provided such terms and conditions are not inconsistent with
the terms of the Plan. The Committee may waive any provisions of any Option
Agreement, provided such waiver is not inconsistent with the terms of the Plan
as then in effect. The Committee's determinations under the Plan need not be
uniform and may be made by it selectively among persons who receive, or are
eligible to receive, Options under the Plan, whether or not such persons are
similarly situated.
ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN
8.1 AMENDMENT OF PLAN
(a) Generally. The Plan may be amended at any time and from time to time by the
Board, but, except as provided by Section 9.3, no amendment which (i) increases
the aggregate number of shares of Common Stock which may be issued pursuant to
Options granted under the Plan, (ii) decreases the minimum Incentive Stock
Option exercise price provided in the Plan, (iii) extends the period during
which Options may be granted pursuant to the Plan, (iv) changes the class of
individuals eligible to the granted Options, (v) materially increases the
benefits provided by the Plan, or (vi) has the effect of any of the above shall
be effective unless and until the same is approved by the affirmative vote of
the holders of a majority of the outstanding shares of the Company's voting
stock, either in person or by proxy, in accordance with the applicable
provisions of the charter and bylaws of the Company and applicable State law. No
amendment to the Plan shall, without the consent of an Optionee, affect such
Optionee's rights under an Option previously granted.
(b) Amendments Relating to Incentive Stock Options. To the extent applicable,
the Plan is
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intended to permit the issuance of Incentive Stock Options to Employees in
accordance with the provisions of Section 422 of the Code. Subject to paragraph
8.1(a) above, the Plan and Option Agreements may be modified or amended at any
time, both prospectively and retroactively, and in a manner that may affect
Incentive Stock Options previously granted, if such amendment or modification is
necessary for the Plan and Incentive Stock Options granted hereunder to qualify
under said provisions of the Code.
8.2 TERMINATION. The Board may at any time terminate the Plan as of any date
specified in a resolution adopted by the Board. If not earlier terminated, the
Plan shall terminate on June 27, 2003. No Options may be granted after the Plan
has terminated, but the Committee shall continue to supervise the administration
of Options previously granted.
ARTICLE IX MISCELLANEOUS PROVISIONS
9.1 RESTRICTIONS UPON GRANT OF OPTIONS. If the listing upon any stock exchange
or the registration or qualification under any federal or state law of any
shares of Common Stock to be issued on the exercise of Options granted under
this Plan (whether to permit the grant of Options or the resale or other
disposition of any such shares of Common Stock by or on behalf of Optionees
receiving such shares) should be or become necessary or desirable, the Board in
its sole discretion may determine that delivery of the certificates for such
shares of Common Stock shall not be made until such listing, registration or
qualification shall have been completed. The Company agrees that it will use its
best efforts to effect any such listing, registration or qualification,
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933 other than
on Form S-8 or such other forms as may be in effect from time to time calling
for information comparable to that presently required to be furnished under Form
S-8.
9.2 RESTRICTIONS UPON RESALE OF UNREGISTERED STOCK. Each Optionee shall, if the
Company deems it advisable, represent and agree in writing (i) that any shares
of Common Stock acquired by such Optionee pursuant to this Plan will not be sold
except pursuant to an effective registration statement under the Securities Act
of 1933 or pursuant to an exemption from registration under said Act, (ii) that
such Optionee is acquiring such shares of Common Stock for his own account and
not with a view to the distribution thereof, and (iii) to such other customary
matters as the Company may request. In such case, no shares of Common Stock
shall be issued to such Optionee unless such Optionee provides such
representations and agreements and the Company is reasonably satisfied that such
representations and agreements are correct.
9.3 ADJUSTMENTS. The number of shares of Common Stock of the Company authorized
for issuance under the Plan, as well as the price to be paid and the number of
shares issued upon exercise of outstanding Options, shall be subject to
adjustment by the Committee, in its sole discretion, to reflect any stock split,
stock dividend, recapitalization, merger, consolidation, reorganization,
combination or exchange of shares or other similar event.
9.4 WITHHOLDING OF TAXES.
(a) Each Optionee who exercises a Nonstatutory Stock Option shall agree that no
later than the date of such exercise or receipt of shares of Common Stock
pursuant thereto he will pay to the Company, or make arrangements satisfactory
to the Committee regarding payment of, any Federal, state or local taxes of any
kind required by law to be withheld with respect to the transfer to him of such
shares of Common Stock.
-8-
<PAGE> 9
(b) The applicable Option Agreement may provide that an Optionee may satisfy, in
whole or in part, the requirements of paragraph (a):
(i) by delivery of shares of Common Stock owned by the Optionee for at
least six months (or such shorter or longer period as the Committee may approve)
having a Fair Market Value (determined as of the date of such delivery) equal to
all or part of the amount to be so withheld, or
(ii) by electing to have the Company withhold the requisite number of
shares from shares otherwise deliverable pursuant to the exercise of the Option
giving rise to the tax withholding obligation provided, however, that
(A) the Optionee's election and the withholding pursuant thereto take
effect during the period beginning on the third business day following the
date of release for publication of the quarterly and annual summary
statements of the Company's sales and earning's and ending on the twelfth
business day following such date, and six months have elapsed since the
date the Option was granted, or
(B) such election was irrevocably made by the Optionee and filed with the
Committee in writing at least six months in advance of the date on which
such withholding occurs.
The Committee may require, as a condition of accepting any such delivery of
Common Stock or any such election by the Optionee, that the Optionee furnish to
the Company an opinion of counsel to the effect that such delivery or election
will not result in the Optionee incurring any liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended.
9.5 USE OF PROCEEDS. The proceeds from the sale of Common Stock pursuant to
Options granted under the Plan shall constitute general funds of the Company and
may be used for such corporate purposes as the Company may determine.
9.6 SUBSTITUTION OF OPTIONS.
(a) The Committee may, with the consent of the holder of any Option granted
under the Plan, cancel such Option and grant a new Option in substitution
therefor, provided that the Option as so substituted shall satisfy all of the
requirements of the Plan as of the date such new Option is granted.
(b) Options may be granted under this Plan in substitution for options held by
individuals who are employees of another corporation and who become Employees of
the Company or any Subsidiary of the Company eligible to receive Options
pursuant to the Plan as a result of a merger, consolidation, reorganization or
similar event. The terms and conditions of any Options so granted may vary from
those set forth in the Plan to the extent deemed appropriate by the Committee in
order to conform the provisions of Options granted pursuant to the Plan to the
provisions of the options in substitution for which they are granted.
(c) Notwithstanding the foregoing, Options granted under this Plan may not be
replaced or repriced unless all of the following conditions are met:
The substitution or repricing is authorized by a compensation committee
composed entirely
-9-
<PAGE> 10
of independent directors to fulfill a legitimate
corporate purpose such as retention of a key employee;
(ii) The substitution or repricing is not utilized more often than
once every two (2) years and then only to maintain option value due
to extreme circumstances beyond management's control; and
The substitution or repricing is limited to no more than five percent
(5%) of the shares authorized for issuance under the Plan.
9.7 NOTICES. Any notice required or permitted hereunder shall be sufficiently
given only if sent by registered or certified mail, return receipt requested,
postage prepaid, addressed to the Company at its principal place of business,
and to the Optionee at the address on file with the Company at the time of grant
hereunder, or to such other address as either party may hereafter designate in
writing by notice similarly given by one party to the other.
9.8 GOVERNING LAW. The Plan and all determinations made and actions taken
hereunder, to the extent not otherwise governed by the Code or the laws of the
Untied States of America, shall be governed by the laws of the State of
California and construed accordingly.
-10-
<PAGE> 1
EXHIBIT 10.6
Amendment No. 2 to Letter Agreement Dated August 15, 1994
This Amendment No. 2 ("Amendment No. 2") to the Letter Agreement dated August
15, 1994 (the "Letter Agreement") amended as of October 17, 1994 ("Amendment
No. 1") by and between Orchard Capital Corporation, 1999 Avenue of the Stars,
Suite 1910, Los Angeles, California 90067 ("Consultant") and MAI Systems
Corporation, a Delaware corporation, 9600 Jeronimo Road, Irvine, California
92718 ("MAI") with reference to the following facts:
A. On or about August 15, 1994, the parties entered into the Letter
Agreement pursuant to which Consultant was to provide the services of its
employee, Richard S. Ressler, to MAI, on various terms and conditions in
exchange for certain consideration to be paid by MAI to Consultant.
B. On or about October 17, 1994, pursuant to Amendment No. 1, certain
terms of the Agreement were amended.
C. The Agreement was for a period of twenty-four (24) months.
D. The term of the Agreement has expired but Consultant has continued to
perform services for MAI and the parties seek to extend the term of the
consultancy and to amend certain terms of the Agreement to be effective
during the term extension.
Now, therefore, in consideration of the mutual benefits to be derived
hereunder, the parties agree as follows:
1. Extension of Term. The term of the consultancy shall be extended up
through and including August 31, 1997.
2. Fixed Compensation. During the period of the extension, i.e., from
August 16, 1996 up through and including August 31, 1997, Consultant shall be
compensated at the monthly rate of Twenty-four Thousand and no/100 Dollars
($24,000.00) prorated for partial months.
3. Equity Compensation. MAI shall consider the appropriate equity
compensation for Consultant for services rendered during the extension
period. The parties acknowledge that equity compensation may take the form
of warrants to purchase shares of MAI's Common Stock, participation in one of
its stock option plans, or otherwise. Nothing herein shall be construed to
commit MAI to pay any equity compensation to Consultant for services during
the period of extension.
4. Confirmation of Other Terms and Conditions. In all other respects the
parties reaffirm and acknowledge all of the terms and conditions set forth in
the Agreement and Amendment No. 1.
In witness whereof, the parties have executed this Amendment No. 2 as of the
day and year first written above.
Orchard Capital Corporation MAI Systems Corporation
By: By:
------------------------ ----------------------------
Richard S. Ressler George G. Bayz
President President
<PAGE> 1
EXHIBIT 11.1
MAI SYSTEMS CORPORATION
COMPUTATION OF INCOME (LOSS) PER SHARE
Years ended December 31, 1994 and 1995 (as restated) and 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Income before extraordinary item $ 3,628 $ 8,623 $(13,487)
Extraordinary item 916 1,566 --
-------- -------- --------
Net income (loss) $ 4,544 $ 10,189 $(13,487)
======== ======== ========
Number of shares of Common Stock expected
to be issued pursuant to the Plan of
Reorganization 6,820 6,820 6,820
Weighted average number of
shares of Common Stock issued during the year -- -- 489
Weighted average number of shares of Common
Stock equivalents outstanding -- 904 --
-------- -------- --------
6,820 7,724 7,309
======== ======== ========
Primary and fully diluted income (loss) per
share of Common Stock:
Income (loss) before extraordinary item $ 0.53 $ 1.12 $ (1.85)
Extraordinary item 0.14 0.20 --
-------- -------- --------
Net income (loss) $ 0.67 $ 1.32 $ (1.85)
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13.1.1
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three-Month
Transitional
Year Ended Period Ended Year Ended December 31,
(dollars in thousands except September 30 December 31, ----------------------------------------
per share data) 1992 1992(1) 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2)
Revenue $ 279,370 $ 63,821 $115,291 $66,095 $66,294 $ 64,164
Operating income (loss) (159,608) (83,992) 34,993 1,741 9,399 (12,744)
Income (loss) before extraordinary (181,962) (92,755) 28,177 3,628 8,623 (13,487)
items
Net income (loss) (181,962) (92,755) 145,489 4,544 10,189 (13,487)
Primary and fully diluted income
(loss) per share of Common Stock (3):
Income (loss) before extraordinary
item $ 4.13 $ 0.53 $ 1.12 $ (1.85)
Net income (loss) $ 21.33 $ 0.67 $ 1.32 $ (1.85)
Balance Sheet Data
Working capital (deficiency) (217,700) (251,232) (5,744) (4,974) 337 (8,270)
Total assets 136,937 121,071 21,784 16,016 21,033 32,853
Long-term debt 3,857 3,909 3,853 1,742 1,021 485
Stockholders' equity (deficiency) (191,709) (222,557) (19,787) (7,542) 2,472 2,058
</TABLE>
(1) Effective October 1, 1992, the Company changed its fiscal year from
September 30 to December 31.
(2) No cash dividends have been declared by the Company.
(3) Income (loss) per share is computed using 6,820,338 shares of common stock
(as adjusted for the Company's 25% stock split in August 1995) expected to
be issued in accordance with the Plan of Reorganization as discussed in
Note 16 to the consolidated financial statements, the weighted average
shares of Common Stock issued outside the Plan of Reorganization, and the
weighted average number of Common Stock equivalents outstanding during the
period. The total shares of Common Stock expected to be issued in
accordance with the Plan of Reorganization have been adjusted down to
reflect the resolution of certain claims with creditors during the fourth
quarter of 1996. Income (loss) per share has been restated for all periods
to reflect the resolution of such claims. Common Stock equivalents consist
of dilutive outstanding stock options and warrants and are calculated using
the treasury stock method. Common Stock equivalents are not included in the
1996 calculation as they would be antidilutive. For all periods presented,
fully diluted income (loss) per share approximates primary income (loss)
per share. Per share data for periods prior to January 1, 1993, have been
omitted since these amounts do not reflect the current capital structure.
<TABLE>
<CAPTION>
QUARTERLY DATA (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
(dollars in millions YEAR ENDED DECEMBER 31, 1995 Year Ended December 31, 1996
except per share data) ----------------------------------------- -----------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $17.0 $16.5 $15.6 $17.2 $ 16.6 $17.8 $15.0 $14.7
Gross profit 6.2 6.3 5.6 6.9 3.7 6.2 6.3 5.1
Operating income (loss) 2.2 1.4 2.5 3.3 (24.2) .2 9.6 1.6
Income (loss) before
extraordinary item 2.2 0.8 2.7 2.9 (25.2) .4 9.5 1.8
Net income (loss) $ 2.2 $ 2.4 $ 2.7 $ 2.9 (25.2) .4 9.5 1.8
Primary and fully diluted
income per share of
Common Stock
Income (loss) before
extraordinary item $ 0.29 $ 0.10 $ 0.45 $ 0.54 $ (3.06) $0.05 $ 1.39 $ 0.26
Net income (loss) $ 0.29 $ 0.31 $ 0.45 $ 0.54 $ (3.06) $0.05 $ 1.39 $ 0.26
- --------------------------------------------------------------------------------------------------------------
Share Prices (1)
High $ 9.38 $10.76 $ 5.80 $ 3.20 $ 8.81 $9.50 $10.63 $ 7.88
Low $ 6.00 $ 5.60 $ 2.60 $ 0.80 $ 5.50 $6.75 $ 5.63 $ 6.13
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to August 23, 1995, prices reflect interdealers' prices in the over
the counter market.
(2) The Company's Common Stock was issued on April 10, 1994 pursuant to the
Plan of Reorganization
(3) The fourth quarter of 1996 includes charges of $556 relating to the
write-down of the net assets of a subsidiary held for sale, $14,279
relating to the impairment of goodwill, $2,534 relating to acquired
in-process technology and $940 relating to severance costs and excess
facilities.
<PAGE> 2
EXHIBIT 13.1.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain important factors and risks, including the
rapid change in hardware and software technology, market conditions, the
anticipation of growth of certain market segments and the positioning of the
Company's products and services in those segments, seasonality in the buying
cycles of certain of the Company's customers, the timing of product
announcements, the release of new or enhanced products, the introduction of
competitive products and services by existing or new competitors and the
significant risks associated with the acquisition of new products, product
rights, technologies, businesses, the management of growth, MAI's ability to
retain highly skilled technical, managerial and sales and marketing personnel,
and the other risks detailed from time to time in the Company's SEC reports,
including reports on Form 10-K and Form 10-Q, that could cause results to differ
materially from those anticipated by the statements made herein. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period. See "Factors that May
Affect Future Results," in the Company's Annual Report on Form 10-K for 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, working capital decreased from a working capital
of $337,000 at December 31, 1995 to a negative working capital of $8,270,000.
Excluding unearned revenue (which will not give rise to cash disbursements) of
$11,010,000 the Company's working capital is $2,740,000 or a ratio of current
assets to current liabilities of 1.15 to 1.0 compared to 1995 unearned revenue
of $3,181,000, working capital excluding unearned revenue is $3,518,000
resulting in a current ratio of 1.27 to 1.0. The decline in the Company's
working capital is attributable to the increase of unearned revenue arising
primarily from the HIS acquisition ($7,829,000). Excluding unearned revenues,
the decrease of $778,000 is due primarily to the increase in the current portion
of long term debt associated with the Company's acquisition of the minority
shares of GSI. The changes in other components of working capital during 1996
reflect a decrease in (net) inventory of approximately $448,000, an increase in
accounts receivable of $3,745,000, an increase in customer deposits of
$1,018,000 and an increase in accounts payable and accrued liabilities of
$2,954,000
Cash and cash equivalents decreased from $4,086,000 at December 31,
1995, compared to $3,857,000 at December 31, 1996. In addition, availability
under the Company's existing $4,000,000 secured revolving credit facility
established in May 1995, based on a calculation reflecting the age and nature
of certain accounts receivable, at December 31, 1996, was approximately
$2,200,000; however, no balances were drawn down at December 31, 1996.
Net cash used in investing activities in 1996 totaled $1,622,000,
mainly related to capital expenditures.
Net cash used in financing activities in 1996 totaled $2,162,000 which
is comprised of $1,913,000 used to repay long-term debt and a receipt of notes
receivable of $500,000 offset by $174,000 of payments received on notes
receivable.
Stockholders' equity decreased from $2,472,000 at December 31, 1995, to
$2,058,000 at December 31, 1996, primarily reflecting a net loss of $13,487,000
for the year, the issuance of shares relate primarily to the Company's
acquisition of HIS in August 1996 and the 30% minority shareholding of GSI in
May 1996 ($12,824,000).
The Company believes it will continue to generate sufficient cash flows
from operations to fund its operating and capital requirements through 1996.
As of March 25, 1997, the Company had issued and outstanding 8,643,776
shares of Common Stock.
-17-
<PAGE> 3
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996.
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1995 Revenues December 31, 1996 Revenues
----------------- ------------- ----------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue $66,294 100.0% 64,164 100.0%
Gross profit 25,045 37.8% 21,234 33.1%
Selling, general and administrative expenses 12,982 19.6% 21,378 33.3%
Research and development expenses 2,667 4.0% 3,117 4.9%
Amortization and impairment of intangibles -- -- 14,776 23.0%
Acquired in-process technology -- -- 2,534 3.9%
Other operating income (3) -- (7,827) (12.2)%
Loss on subsidiary held for sale -- -- 556 0.9%
Equity in net losses of
unconsolidated subsidiaries -- -- 26 --
Interest expense, net 228 0.3% 102 0.2%
Minority interest in consolidated subsidiary 165 0.2% -- --
Provision for income taxes 383 0.6% 59 0.1%
Extraordinary item 1,566 2.4% -- --
Net income (loss) 10,189 15.4% (13,487) (21.0)%
</TABLE>
Revenue for 1996 was $64,164,000 compared to $66,294,000 in 1995 or a
3.2% decline. The Company's revenue from its sales of enterprise solutions in
its chosen industries (hotel, resort, gaming, manufacturing and distribution),
grew at 11.4% year over year, however that growth was more than offset by a
decrease in the Company's legacy revenue which declined 17.3% year over year
(traditional hardware contract service revenues and proprietary add-on sales).
Excluding gaming revenue, sale of enterprise solutions increased by 46.5%.
The Company continues to transition away from legacy revenue and in 1996 that
trend continued as approximately 57% of the Company's revenue was produced from
its new businesses compared to 49% in 1995. Gross profit for 1996 was
$21,234,000 (33.1%) which is down from $25,045,000 (37.8%) in 1995. The
decline in overall gross margin
-18-
<PAGE> 4
from 37.8% in 1995 to 33.1% in 1996 is due primarily to lower network and
computer equipment margins reflective of the Company's change in product mix,
supply sources and larger, but more competitive installations which require
higher discounting, however, the decline in gross margin excluding gaming is
from 38.8% in 1995 to 24.2 % in 1996; a lower professional services margin
(19.7% in 1995, 17.6% in 1996) reflecting the Company's second half 1996
investment in technical staff and the additional short term cost of the
additional HIS professional services staff in advance of revenue; and the
reduction in margins in the legacy hardware and service revenues from 36.3% in
1995 to 34.6% in 1996. Legacy margins will continue to decline as the product
mix in the hardware maintenance base changes and the Company's older proprietary
product customers install new solutions presently not offered by the Company. In
recognition of these trends and the need for improved service coverage for its
new businesses, the Company entered into an outsourcing agreement with Olivetti
N.A. and Olivetti Canada Ltd. The Company believes increased sale content of
software and professional services will continue to offset the declining legacy
base. Software revenue increased 81% in 1996 representing 12% of the total
revenue.
Selling, general and administrative expenses increased 64.7% from
$12,982,000 in 1995 to $21,378,000 in 1996. The increase of $8,396,000 reflects
the Company's significant investment in expanding and rebuilding its sales and
marketing organization with the addition of approximately 77 new personnel;
increased advertising and promotion expense of $400,000; increased travel and
entertainment in pursuit of bookings of approximately $600,000; $940,000 of one
time costs consisting of severance costs and excess facilities related to the
outsourcing of hardware services to Olivetti and approximately $1,300,000 of
favorable adjustments in 1995 not available in 1996. The company anticipates the
investment in sales and marketing made in 1996 will contribute to improved
solution sales growth in 1997.
Research and development costs were $2,667,000 in 1995, compared to
$3,117,000 in 1996. Research and development costs increased 16.9% primarily, as
a result of increased development resources associated with the addition of HIS,
Lodging Touch and the general expansion of the company's hospitality business.
Other operating income is comprised largely of a favorable settlement
of $7,434,000 net of legal costs and reserves with respect to the Company's
litigation covering the 1992 failed sale of the Company's then European
subsidiaries.
The Company has recognized charges for impaired goodwill and acquired
in-process technology associated with its acquisition of Hotel Information
Systems and ManBase 8.0 in the amount of $17,310,000 in 1996. There were no such
amounts in 1995. The goodwill impairment was due to the discontinuance of
product lines resulting from the subsequent acquisitions of software. In-process
technology charged to operations was due to certain acquired technology which
was determined to have no future use or value.
Net interest expense was $228,000 for 1995 compared to $102,000 in
1996. The decrease in 1996 is reflective of generally higher cash levels during
the course of the year.
The income tax provision reflects a tax provision for the Company's
domestic and foreign operations (including the Company's majority owned
subsidiary) offset by net operating losses and certain other tax benefit
carryforwards available in 1995 and 1996. The Company's income tax provision in
1996 largely results from the recognition of impaired goodwill which is not
deductible for tax purposes.
The extraordinary item in 1995 relates to the favorable settlement of
certain tax liabilities pursuant to the Company's bankruptcy proceedings and, as
such, have been classified as an extraordinary item. The Company continues to
attempt to resolve the remaining disputed tax liabilities from the bankruptcy
proceedings of $758,000.
Results of Operations
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995.
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1994 Revenue December 31, 1995 Revenue
----------------- ------------- ----------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C>
</TABLE>
-19-
<PAGE> 5
<TABLE>
<S> <C> <C> <C> <C>
Revenue $66,095 100.0% $66,294 100.0%
Gross profit 24,190 36.6% 25,045 37.8%
Selling, general and administrative expenses 20,333 30.8% 12,982 19.6%
Research and development costs 2,698 4.1% 2,667 4.0%
Other operating income (582) (0.9)% (3) --
Other non-operating income 2,007 3.0% -- --
Interest expense, net 57 0.1% 228 0.3%
Minority interest in consolidated subsidiary -- -- 165 0.2%
Provision for income taxes 63 0.1% 383 0.6%
Extraordinary item 916 1.4% 1,566 2.4%
Net income 4,544 6.9% 10,189 15.4%
</TABLE>
Revenue for 1994 was $66,095,000 compared to $66,294,000 in 1995.
Revenue in 1994 and 1995 included approximately $6,900,000 and approximately
$800,000, respectively, of revenue generated by operations that were disposed
or closed in 1994 or prior to March 31, 1995. Excluding those operations that
were disposed or closed, revenue increased approximately $6,300,000 (10.6%) on a
comparable basis, comprised of an increase in sales to the Company's network
solutions customers in various industries (hotel, resort, gaming, manufacturing
and distribution), partially offset by a decrease in the Company's traditional
hardware contract service revenues. Revenue in 1995 reflects a 24.4% increase in
enterprise solutions sales and a 15.5% decline in legacy revenue.
Gross profit for 1994 was $24,190,000 (36.6%) which is comparable with
$25,045,000 (37.8%) in 1995.
Selling, general and administrative expenses declined 36.2% from
$20,333,000 in 1994 to $12,982,000 in 1995. Selling, general and administrative
expenses in 1994 included charges of approximately $2,168,000 relating to
restructuring costs of $1,814,000 and foreign exchange losses of $354,000 and
credits of approximately $1,818,000 relating to the reversal of certain
litigation reserves no longer required. Selling, general and administrative
expenses for 1995 included charges of approximately $1,830,000 relating to a
bad debt reserve of approximately $642,000 established in connection with a
transaction by the Company's gaming solutions subsidiary and a reserve
established for a contingent incentive bonus of $1,188,000 pursuant to a
consulting agreement with an officer of the Company and credits of
approximately $1,991,000 relating to restructuring costs no longer required of
$1,088,000, a gain on the disposal of a property net of foreign currency losses
of approximately $346,000 and approximately $557,000 relating to the resolution
of disputed accounts. Excluding those adjustments, the selling, general and
administrative expenses decrease is attributable to cost savings resulting from
the restructuring of the Company's activities along functional lines of business
rather than independent business units, the consolidation of the Company's
operations by reducing the number of locations from which it conducts business
and the reduction in the workforce in the United States, Canadian and Latin
American operations.
Research and development costs were $2,698,000 in 1994, compared to
$2,667,000 in 1995. Excluding the operations that were disposed or closed,
research and development costs increased by approximately $800,000,
-20-
<PAGE> 6
primarily, as a result of increased research and development costs incurred at
the Company's gaming solutions subsidiary.
Other operating income of $582,000 reflects a settlement of software
copyright infringement litigation.
-21-
<PAGE> 7
Other non operating income in 1994 of $2,007,000 related to a purchase
price settlement comprising a reduction in the note payable of $1,614,000 and
accrued interest of $393,000. See Note 9 to the consolidated financial
statements.
Interest expense, net, was $57,000 for 1994 compared to $228,000 in
1995. The increase in 1995 relates to interest on current debt (as
re-negotiated) and interest and amortization of loan fees in connection with a
revolving line of credit which the Company negotiated in May 1995.
The minority interest reflects the share of income in 1995, offset by
prior year losses incurred, attributable to the minority shareholders in the
Company's gaming solutions subsidiary.
The income tax provision reflects a tax provision for the Company's
domestic and foreign operations (including the Company's majority owned
subsidiary) offset by net operating losses and certain other tax benefit
carryforwards available.
The extraordinary item in both 1994 and 1995 related to the favorable
settlement of certain tax liabilities pursuant to the Company's bankruptcy
proceedings and, as such, have been classified as an extraordinary item.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that the common stock equivalents
are not considered in computing basic EPS, (b) eliminating the modified treasury
stock method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not yet determined
the impact of the implementation of SFAS No. 128.
<PAGE> 8
EXHIBIT 13.1.3 Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MAI Systems Corporation:
We have audited the accompanying consolidated balance sheets of MAI Systems
Corporation and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAI Systems
Corporation and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Orange County, California
March 27, 1997
<PAGE> 9
EXHIBIT 13.1.4 CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
( in thousands except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $1,883 in 1995
and $282 in 1996 $ 4,086 $ 3,857
Receivables, less allowance for doubtful accounts
of $1,092 in 1995 and $2,578 in 1996 7,662 11,407
Inventories 3,769 3,321
Prepaids and other assets 913 1,938
--------- ---------
Total current assets 16,430 20,523
Furniture, fixtures and equipment, net 3,766 4,065
Intangibles 300 6,804
Other assets 537 1,461
--------- ---------
Total assets $ 21,033 $ 32,853
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 620 $ 1,394
Accounts payable 4,778 6,852
Customer deposits 745 1,763
Accrued liabilities 6,432 7,312
Income taxes payable 337 462
Unearned revenue 3,181 11,010
--------- ---------
Total current liabilities 16,093 28,793
Long-term debt 1,021 485
Deferred income taxes 132 --
Minority interest in consolidated subsidiary 165 --
Other liabilities 1,150 1,517
Total liabilities 18,561 30,795
Stockholders' equity:
Common Stock, par value $.01 per share; authorized
25,000,000 shares; 7,356,250 and 8,828,847 shares
issuable at December 31, 1995 and 1996, respectively 74 88
Additional paid-in capital 199,364 212,351
Cumulative translation adjustment 28 100
Accumulated deficit (196,994) (210,481)
--------- ---------
Total stockholders' equity 2,472 2,058
Commitments and contingencies
Subsequent event
Total liabilities and stockholders' equity $ 21,033 $ 32,853
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-26-
<PAGE> 10
EXHIBIT 13.1.5 CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software, networks and professional services:
Software sales $ 5,643 $ 4,250 $ 7,675
Network and computer equipment 9,103 16,602 15,843
Professional services 11,435 11,724 12,773
-------- -------- --------
26,181 32,576 36,291
Legacy revenue 39,914 33,718 27,873
-------- -------- --------
Total revenue 66,095 66,294 64,164
-------- -------- --------
Direct costs:
Software, networks and professional services:
Software sales 1,548 604 1,233
Network and computer equipment 6,312 9,751 12,936
Professional services 7,347 9,414 10,524
-------- -------- --------
15,207 19,769 24,693
Legacy costs 26,698 21,480 18,237
-------- -------- --------
Total direct costs 41,905 41,249 42,930
-------- -------- --------
Gross profit 24,190 25,045 21,234
Selling, general and administrative expenses 20,333 12,982 21,378
Research and development costs 2,698 2,667 3,117
Amortization and impairment of intangibles -- -- 14,776
Acquired in-process technology -- -- 2,534
Other operating income (582) (3) (7,827)
-------- -------- --------
Operating income (loss) 1,741 9,399 (12,744)
Other nonoperating income 2,007 -- --
Loss on subsidiary held for sale -- -- (556)
Equity in net losses of unconsolidated subsidiaries -- -- (26)
Interest income 110 120 243
Interest expense (167) (348) (345)
Minority interest in consolidated subsidiary -- (165) --
-------- -------- --------
Income (loss) before income taxes and
extraordinary item 3,691 9,006 (13,428)
Provision for income taxes 63 383 59
-------- -------- --------
Income (loss) before extraordinary item 3,628 8,623 (13,487)
Extraordinary item 916 1,566 --
-------- -------- --------
Net income (loss) $ 4,544 $ 10,189 $(13,487)
======== ======= ========
</TABLE>
(Continued)
-27-
<PAGE> 11
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(in thousands)
Primary and fully diluted income (loss)per share of Common Stock:
<TABLE>
<S> <C> <C> <C>
Income (loss) before extraordinary item $ 0.53 $ 1.12 $ (1.85)
Extraordinary item 0.14 0.20 --
Net income (loss) $ 0.67 $ 1.32 $ (1.85)
Weighted average common shares and common share
equivalents used in determining income (loss) per share 6,820 7,724 7,309
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE> 12
EXHIBIT 13.1.6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(in thousands)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL CUMULATIVE STOCKHOLDERS'
COMMON PAID-IN TRANSLATION ACCUMULATED EQUITY
STOCK CAPITAL ADJUSTMENT DEFICIT (DEFICIENCY)
------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 59 $ 191,866 $ -- $(211,712) $ (19,787)
Reclassification of deferred gain -- 7,500 -- -- 7,500
on foreclosure
Foreign currency gains -- -- 201 -- 201
Net income -- -- -- 4,544 4,544
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 59 199,366 201 (207,168) (7,542)
Capitalization in connection with
stock split 15 (2) -- (15) (2)
Foreign currency translation
losses -- -- (173) -- (173)
Net income -- -- -- 10,189 10,189
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 74 199,364 28 (196,994) 2,472
Issuance of common stock for
acquisition of HIS, net 12 10,638 -- -- 10,650
Issuance of common stock for
acquisition of GSI minority
interest 1 959 -- -- 960
Issuance of common stock for
repayment of debt 1 1,136 -- -- 1,137
Exercise of stock options and
warrants -- 77 -- -- 77
Stock option compensation -- 177 -- -- 177
Foreign currency translation losses -- -- 72 -- 72
Net loss -- -- -- (13,487) (13,487)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 $ 88 $ 212,351 $ 100 $(210,481) $ 2,058
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
<PAGE> 13
EXHIBIT 13.1.7 CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,544 $ 10,189 $(13,487)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Acquired in-process technology -- -- 2,534
Amortization and impairment of intangibles -- -- 14,776
Loss on subsidiary held for sale -- -- 556
Depreciation and amortization 1,839 1,175 1,296
Stock option compensation expense -- -- 177
Write-off of furniture, fixtures and equipment 506 --
Write-off of software development costs -- -- 736
Equity in net losses of unconsolidated subsidiaries -- -- 26
Provision for doubtful accounts receivable 137 613 603
Provision for inventory obsolescence 1,400 734 490
Net loss (gain) from foreign currency 354 (258) 125
Extraordinary gain (916) (1,566)
Minority interest in consolidated subsidiary -- 165
Gain on sale of assets -- (346)
Other nonoperating income (2,007) --
Changes in assets and liabilities:
(Increase) decrease in receivables 1,301 (1,750) (2,123)
(Increase) decrease in inventories 107 (2,092) (621)
Decrease in prepaids and other assets 297 30 319
Decrease in other assets 375 -- 187
(Decrease) increase in accounts payable
and customer deposits 1,364 (110) 2,213
Decrease in accrued liabilities (4,959) (1,848) (3,477)
(Decrease) increase in income taxes payable (492) 225 56
(Decrease) increase in unearned revenue 160 585 (613)
Increase (decrease) in deferred income taxes (202) 72 (132)
Decrease in other liabilities (1,507) (1,290) (33)
-------- -------- --------
Net cash provided by operating activities
before reorganization items 2,301 4,528 3,608
Payments for reorganization items (1,517) (153) --
-------- -------- --------
Net cash provided by operating activities 784 4,375 3,608
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,104) (2,029) (1,105)
Proceeds from sale of furniture, fixtures and equipment -- 515 --
Payments for business assets (300) -- --
Net cash acquired from the purchase of HIS -- -- 219
Software development costs -- -- (736)
-------- -------- --------
Net cash used in investing activities (1,404) (1,514) (1,622)
-------- -------- --------
</TABLE>
(Continued)
30
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Payments received on notes receivable -- -- 174
Repayments of long-term debt (352) (1,077) (1,913)
Receipt of notes receivable -- (805) (500)
Net decrease in short-term borrowings (85) -- --
Issuance of stock under stock option plans -- -- 77
------- ------- -------
Net cash used in financing activities (437) (1,882) (2,162)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (66) (44 (53)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (1,123) 935 (229)
Cash and cash equivalents at beginning of year 4,274 3,151 4,086
------- ------- -------
Cash and cash equivalents at end of year $ 3,151 $ 4,086 $ 3,857
======= ======= =======
Cash paid during the period for:
Interest $ 99 $ 171 $ 350
======= ======= =======
Income taxes $ 142 $ 25 $ 5
======= ======= =======
</TABLE>
Supplemental disclosure of noncash investing and financing activities (see Note
6).
The accompanying notes are an integral part of these consolidated
financial statements.
31
<PAGE> 15
EXHIBIT 13.1.8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
MAI Systems Corporation (the "Company" or "MAI") designs, sells, installs
and supports total information system solutions featuring complex wide and local
area networks primarily in the hospitality and gaming industries, for mid-size
manufacturers and distributors. The Company provides a wide array of products
and services to its customers who continue to use its proprietary host-based
computer systems, including field engineering services, new and replacement
equipment, operating systems and software application products. These products
and services upgrade, enhance and integrate these legacy systems with currently
available computer technologies. Directly and through its arrangement with a
third party service provider, the Company provides on-site warranty service,
remanufacturing and depot service to third-party computer distributors and
manufacturers.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four, Inc. to
MAI Systems Corporation on November 6, 1990.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
its domestic operations and its majority and wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The minority interest relates to Gaming Systems International
("GSI"), the Company's gaming solutions subsidiary. The Company acquired the
remaining 30% minority interest in GSI during 1996 (see Note 6).
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the balance sheets and
revenues and expenses for the periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Sales of hardware products are generally recorded when the hardware is
shipped. Software revenue is recorded when the application software programs are
installed. Hardware and software service fees are recognized as income on a
time-apportioned basis over the period in which the services are provided. For
certain fixed-price contracts, revenue is recognized upon installation.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments which are readily
convertible into known amounts of cash and have original maturities of three
months or less. For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
33
<PAGE> 16
INVENTORIES
Inventories other than replacement parts are valued at the lower of cost or
market using the first-in, first-out ("FIFO") method. Replacement parts used for
hardware maintenance are valued at cost and are amortized to expense over the
period of benefit.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3 to 10 years for
furniture, fixtures and equipment and 3 to 5 years for equipment held for
demonstration and administrative purposes. Leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or their estimated
useful lives.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally five to seven years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income (loss) and pro forma net income (loss) per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
34
<PAGE> 17
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be 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 future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. During the fourth quarter of 1996, the Company recorded impairment charges
of $14,279,000 uner SFAS No. 121 (see Notes 6 and 7).
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that the common stock equivalents
are not considered in computing basic EPS, (b) eliminating the modified treasury
stock method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not yet determined
the impact of the implementation of SFAS No. 128.
35
<PAGE> 18
FOREIGN CURRENCY TRANSLATION
Since January 1, 1994, as a result of the reorganization of the Company's
operations, the functional currency for all foreign subsidiaries is the
applicable local currency except for MAI de Venezuela, S.A. ("Venezuela"), which
operated in a highly inflationary economy during 1994 and 1995 used the U.S.
dollar as its functional currency in accordance with SFAS No. 52, "Foreign
Currency Translation." Accordingly, in 1995 and 1996, all translation gains and
losses for foreign subsidiaries, except Venezuela in 1995, and gains and losses
on intercompany foreign currency transactions that are of a long-term nature,
are included in the cumulative translation adjustment as a separate component of
stockholders' equity.
Assets and liabilities outside the United States are translated into dollars
at the rate of exchange in effect at the balance sheet date except for
inventories and noncurrent assets which are translated at historical rates.
Income and expense items are translated at the weighted average exchange rates
prevailing during the period.
Net foreign exchange losses for 1994, 1995 and 1996 were $354,000, $155,000
and $107,000, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs related to the development of certain software
products. In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" capitalization of costs when
technological feasibility is established and end when the product is available
for general release to customers.
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.
During the second and third quarters of 1996, the Company capitalized
approximately $736,000 of software development costs in accordance with SFAS No.
86. In connection with the Company's decision to discontinue certain product
lines (see Notes 6 and 7), the Company wrote-off the $736,000 of capitalized
software costs during the fourth quarter of 1996 based upon management's
assessment of the recoverability of such costs, which are included in research
and development costs in the accompanying consolidated statement of operations
in 1996.
In 1994 and 1995, all software development costs (consisting of the cost to
purchase software and to develop software internally) were expensed when
incurred, as part of research and development costs, as any amounts
capitalizable in accordance with SFAS No. 86 were immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
1995 and 1996, carrying value of all financial instruments approximates fair
value.
37
<PAGE> 19
As of December 31, 1995 and 1996, the carrying value of cash and a cash
equivalents, receivables, accounts payable, accrued liabilities, income taxes
payable and other liabilities approximate fair value due to the short term
nature of such instruments. The carrying value of long-term debt approximates
fair value as the related interest rates approximate rates currently available
to the Company.
38
<PAGE> 20
INCOME (LOSS) PER SHARE OF COMMON STOCK
Income (loss) per share is computed using 6,820,338 shares of common stock
(as adjusted for the Company's 25% stock split in August 1995) expected to
be issued in accordance with the Plan of Reorganization ("Common Stock") as
discussed in Note 16, the weighted average shares of Common Stock issued
outside the Plan of Reorganization, and the weighted average number of
Common Stock equivalents outstanding during the period. The total shares of
Common Stock expected to be issued in accordance with the Plan of
Reorganization have been adjusted down to reflect the resolution of certain
claims with creditors during the fourth quarter of 1996. Income (loss) per
share has been restated for all periods to reflect the resolution of such
claims. Common Stock equivalents consist of dilutive outstanding stock
options and warrants and are calculated using the treasury stock method.
Common Stock equivalents are not included in the 1996 calculation as they
would be antidilutive. For all periods presented, fully diluted income
(loss) per share approximates primary income (loss) per share. As of
December 31, 1996, 6,728,256 shares had been issued pursuant to the Plan of
Reorganization.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform with the 1996
presentation.
NOTE 2 INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1995 1996
----------------------------------------------------------------
<S> <C> <C>
Finished goods $2,649 $2,277
Replacement parts 1,120 1,044
----------------------------------------------------------------
$3,769 $3,321
----------------------------------------------------------------
</TABLE>
The Company has purchased many products and components from single
sources of supply. Because the Company's current products are industry
standard, the Company believes that alternative sources of supply of
similar products would be available to the Company in the event of any
interruption of delivery of a single source supplier.
NOTE 3 ASSETS HELD FOR SALE
In October 1996, the Company entered into negotiations with a third
party to sell 100% of the common stock of its Venezuelan subsidiary for
approximately $300,000. At December 31, 1996, the net assets of the
Venezuelan subsidiary have been written down to net realizable value
resulting in charge of $556,000 in the fourth quarter of 1996. The net
assets have been classified as current assets and are included in
prepaids and other assets in the accompanying consolidated balance sheet
at December 31, 1996 as the sale is expected to be completed during the
second quarter of 1997.
39
<PAGE> 21
NOTE 4 FURNITURE, FIXTURES AND EQUIPMENT
The major classes of furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1995 1996
------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and
equipment $ 2,006 $ 2,006
Equipment held for
administrative purposes 10,751 10,356
Leasehold improvements 432 497
------ --------
13,189 12,859
Less: accumulated depreciation
and amortization (9,423) (8,794)
------------------------------------------------------------------------
$ 3,766 $ 4,065
------------------------------------------------------------------------
</TABLE>
NOTE 5 JOINT VENTURES
In July 1996, the Company entered into a joint venture agreement with
Novo-Invest Casino Development for the purpose of marketing and selling the
Company's gaming software in Europe. In accordance with the joint venture
agreement, the Company invested $40,000 cash. This joint venture is
organized under the laws of Austria and is known as Gaming Systems
International Gessellschaft m.b.H. ("GSI Europe"). The Company has a 40%
interest in the joint venture and accounts for this investment using the
equity method of accounting.
The Company is a joint venture partner with Metro Systems Corporation
Limited ("MSC") for the purpose of marketing and selling the Company's
software in Thailand. The Company has a 49.9% interest in the joint venture
and accounts for this investment using the equity method of accounting.
The Company's investments in GSI Europe and MSC are included in other assets
in the accompanying consolidated balance sheets.
NOTE 6 ACQUISITIONS AND AGREEMENTS
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 shares of 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 include 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. A preliminary allocation of the purchase price is
as follows:
<TABLE>
<CAPTION>
Allocation of Amortization
(dollars in thousands) Purchase Price (Useful Life)
--------------------------------------------------------------------
<S> <C> <C>
Goodwill $17,914 5 years
Customer list 925 5 years
In-process technology charged to
operations 2,534 N/A
--------------------------------------------------------------------
$21,373
--------------------------------------------------------------------
</TABLE>
40
<PAGE> 22
Included in the net liabilities assumed in connection with the acquisition
of HIS was $2,185,000 of debt. Subsequent to such acquisition, the Company
issued 122,919 shares of its Common Stock valued at $1,137,000 to repay certain
of the outstanding debt assumed.
The Company is currently in arbitration proceedings regarding the purchase
price of HIS. The Company has placed 681,082 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 the purchase price by the
arbitrator. Any reduction in the purchase price, as determined by the
arbitrator, will reduce recorded goodwill.
In connection with the acquisition of HIS, a restructuring plan was implemented
comprising an employee severance program, an employee relocation program and
excess facilities. An amount of $1,360,000 relating to this restructuring plan
was included in the cost of acquiring HIS. During the five-month period ended
December 31, 1996, approximately $274,000 of costs were paid. The remaining
balance of $1,086,000 is included in accrued liabilities in the accompanying
consolidated balance sheet at December 31, 1996. Any changes in the estimated
amounts will adjust recorded goodwill.
Gaming Systems International
In May 1996, the Company acquired the remaining 30% minority interest shares
of GSI for 98,462 shares of Common Stock, which were valued at $960,000, and
issued $1,175,000 of notes payable. The acquisition was accounted for as a "step
acquisition" using the purchase method of accounting. In connection with the
acquisition of GSI, the Company recorded goodwill of $1,970,000.
In March 1997, the Company acquired options to purchase 3.5% of GSI common
stock from two individuals in exchange for 14,930 shares of the Company's Common
Stock valued at $104,500 and notes payable of $104,500. The transaction will
result in an increase in goodwill of $209,000 in 1997.
The Company will, as needed, pursuant to the agreements to acquire the 30%
minority interest shares and options, issue additional shares in order that the
recipients ultimately receive shares worth a fair market value of $960,000 and
$104,500, respectively. It is currently estimated that up to 44,334 additional
shares will be issued in connection with the agreements.
MANBASE
In May 1996, the Company reacquired the distribution rights to MANBASE 8.0,
a manufacturing software application, from Sextant Corporation for approximately
$30,000 cash and the forgiveness of $500,000 accounts and notes receivable due
from Sextant. The acquisition was accounted for using the purchase method of
accounting. In connection with the acquisition, the Company recorded goodwill of
$530,000.
The Company expects a significant decrease in the future cash flows from
sales of MANBASE 8.0 due, in part, to the acquisition of CIMPRO in March 1997
(see Note 18). Accordingly, the Company recorded an impairment charge of
$492,000 to goodwill in the fourth quarter of 1996. The impairment of goodwill
was determined based upon projected discounted future cash flows.
41
<PAGE> 23
The following unaudited summary presents pro forma consolidated results of
operations of the Company as if the above mentioned acquisitions had occurred at
the beginning of each respective period presented, exclusive of the write-off of
$2,534,000 of in-process technology related to the HIS acquisition. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made as of the first day of the fiscal years presented or the results which may
occur in the future.
<TABLE>
<CAPTION>
Year ended December 31,
Pro Forma (unaudited) (in thousands, except per share data) 1995 1996
------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 89,311 $ 73,572
Net income (loss) $ 10,705 $(13,186)
Net income (loss) per share $ 1.17 $ (1.59)
</TABLE>
Enterprise Hospitality Solutions
Effective October 1, 1996, the Company entered into an exclusive and
indefinite license agreement with Enterprise Hospitality Solutions
("Licensor") for substantially all current and future versions of software,
derivative works, enhancements, modifications and improvements relating to
the hotel, resort, hospitality, or gaming industry products of Licensor.
In consideration for the rights and licenses granted to the Company by
Licensor, the Company shall pay a $1,000,000 license acquisition fee. As of
December 31, 1996, the Company had paid $125,000 of the license acquisition
fee. Of the remaining $875,000 due, $465,000 was classified as accrued
liabilities and $400,000 was included in other long-term liabilities in the
accompanying consolidated balance sheet at December 31, 1996 (see Note 10).
The $1,000,000 license acquisition fee is included in other assets in the
accompanying consolidated balance sheet at December 31, 1996 and will be
amortized over a three-year period commencing in 1997.
Additionally, under the license agreement, the Company shall pay Licensor
royalties of 20% of net revenues subject to certain minimum royalties
commencing April 1997. Minimum annual royalties payable to Licensor for the
three successive twelve-month periods subsequent to April 1997 are
$1,000,000, $1,500,000 and $2,500,000, respectively.
NOTE 7 INTANGIBLE ASSETS
Intangible assets consist of the following
<TABLE>
<CAPTION>
December 31,
(in thousands) 1995 1996
----------------------------------------------------------------
<S> <C> <C>
Goodwill $ 300 $ 6,397
Customer list -- 925
------- -------
300 7,322
Less: accumulated amortization -- (518)
----------------------------------------------------------------
$ 300 $ 6,804
----------------------------------------------------------------
</TABLE>
In October 1996, the Company recorded an impairment charge of $13,787,000 to
goodwill relating to the discontinuance of product lines acquired from HIS
(see Note 6). The impairment of goodwill was determined based upon projected
discounted future cash flows.
42
<PAGE> 24
NOTE 8 LINE OF CREDIT
In 1995, the Company negotiated a $4,000,000 secured revolving credit
facility. The availability of this line of credit is based on a calculation
reflecting the age and nature of certain accounts receivable. The facility
is secured by domestic and Canadian accounts receivable and inventory and
bears interest at prime plus 2%. The facility expires in May 1997. At
December 31, 1996, the available balance was approximately $2,200,000. As of
December 31, 1995 and 1996, no balances were outstanding under the facility.
The facility contains various restrictions and covenants, including
maintaining minimum tangible net worth and working capital. The Company was
in compliance with or received waivers for all restrictions and covenants at
December 31, 1996.
Loan origination fees of approximately $121,000 were incurred in connection
with this line of credit and are being amortized to interest expense over
the term of the facility.
NOTE 9 LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1995 1996
------------------------------------------------------------------------
<S> <C> <C>
Notes payable $ 1,167 $ 1,240
Tax claims 261 266
Other 213 373
------------------------------------------------------------------------
1,641 1,879
Less: current installments (620) (1,394)
------------------------------------------------------------------------
Noncurrent portion $ 1,021 $ 485
------------------------------------------------------------------------
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
--------------------------------------
Year ending December 31:
<S> <C>
1997 $1,394
1998 401
1999 41
2000 43
--------------------------------------
$1,879
--------------------------------------
</TABLE>
NOTES PAYABLE
Two notes payable were issued in connection with the Company's May 1996
acquisition of the remaining 30% minority interest shares of GSI (the "GSI
Notes") (see Note 6). The GSI notes are unsecured and bear an imputed
interest rate of 10% per annum. The GSI notes require monthly payments of
$51,500 and $40,000 (commencing April 1, 1997) and mature on February 28,
1997 and May 31, 1998, respectively, at which times all remaining principal
and accrued interest are due.
44
<PAGE> 25
A note payable arose in connection with the acquisition of a business in
April 1990 (the "CLS Note"). In November 1994, an agreement was reached
whereby the purchase price of the business acquired was reduced by
$1,614,000 and a new CLS Note was issued in the amount of $1,700,000. The
CLS Note is payable over three years on a quarterly basis. Interest is
compounded monthly at prime plus 1%. The CLS Note is guaranteed by BGLS (the
Company's former parent).
45
<PAGE> 26
The reduction in the purchase price of the business acquired of $1,614,000
together with the interest accrued on the original CLS Note for 1993 of
$393,000 are included in other nonoperating income in the consolidated
statement of operations for 1994. Interest expense for 1994 is net of the
interest accrued throughout the year on the original CLS note. The
underlying assets (mainly goodwill and capitalized software) acquired in
April 1990 were written off in the year ended December 31, 1993 and prior
periods.
TAX CLAIMS
Tax claims include pre-petition unsecured tax claims for income and property
taxes from various taxing authorities. Under the terms of the Plan of
Reorganization (see Note 16), such amounts are to be paid in full in cash in
annual installments over six years with interest at 6%. Upon agreement with
the respective taxing authority, tax claims are classified as debt,
otherwise such claims are classified as accrued liabilities and other
long-term liabilities in the accompanying consolidated balance sheets at
December 31, 1995 and 1996. Currently, the Company is disputing tax claims
of $758,000 of the remaining tax claims of approximately $1,010,000.
During 1994 and 1995, certain of these claims were settled and paid and
others were expunged by the Bankruptcy Court. The favorable settlement of
these claims of $916,000 and $1,566,000 are classified as extraordinary
gains in the accompanying consolidated statements of operations for 1994 and
1995, respectively.
OTHER
Other long-term debt at December 31, 1995 and 1996 include capital lease
obligations and other third-party notes payable.
NOTE 10 ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1995 1996
--------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and commissions $1,361 $1,767
Accrued bonus (including related party bonus of
$1,188) 2,280 1,188
Accrued vacation 992 1,190
Restructuring and field service outsourcing accrual 448 1,818
Other 1,351 1,349
--------------------------------------------------------------------
$6,432 $7,312
--------------------------------------------------------------------
</TABLE>
In December 1996, the Company decided to outsource its field service
operations to a third party. Pursuant to the decision to outsource its field
service operations, the Company charged approximately $940,000 to selling,
general and administrative expenses in the accompanying consolidated
statement of operations in 1996 comprising of $434,000 of termination
benefits to involuntarily terminated employees and $506,000 associated with
vacating certain business premises relating to its Canadian operations.
46
<PAGE> 27
As of December 31, 1995 and 1996, $448,000 and $658,000 was classified as
accrued liabilities and $430,000 and $445,000 was classified as long-term
liabilities, respectively, in the accompanying consolidated balance sheets
relating to the outsourcing of the Company's field service operations in
1996 and its restructuring plan (see Note 15). Also included in accrued
liabilities as of December 31, 1996 is $1,086,000 of restructuring costs
associated with the acquisition of HIS (see Note 6).
Other long-term liabilities also include disputed tax claims which would be
payable in 1997 and beyond and $400,000 due under a license agreement (see
Note 6).
47
<PAGE> 28
NOTE 11 INCOME TAXES
The components of income (loss) before income taxes and extraordinary items
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(in thousands) 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
U.S. $ 1,874 $ 7,952 $(12,452)
Foreign 1,817 1,054 (976)
---------------------------------------------------
Total $ 3,691 $ 9,006 $(13,428)
---------------------------------------------------
</TABLE>
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
(in thousands) 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. Federal $ -- $ 331 $ 129
State -- 27 39
Foreign 265 (47) 23
---------------------------------------------------
Total 265 311 191
Deferred:
U.S. Federal -- -- --
Foreign (202) 72 (132)
-------------------------------------------------
Total (202) 72 (132)
---------------------------------------------------
$ 63 $ 383 $ 59
---------------------------------------------------
</TABLE>
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
(in thousands) 1995 1996
------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,869 $ 10,064
Property, plant and equipment 1,614 1,200
Restructuring and other reserves 799 667
Inventory reserves 540 714
Allowance for doubtful accounts 296 992
Capitalized software and intangibles 6,178 5,473
Accrued expenses -- 1,486
Other 748 1,001
------------------------------------------------------------------
20,044 21,597
Less valuation allowance (20,044) (21,597)
------------------------------------------------------------------
Net deferred tax assets -- --
------------------------------------------------------------------
Deferred tax liabilities:
Foreign earnings (132) --
------------------------------------------------------------------
Total deferred tax liabilities (132) --
------------------------------------------------------------------
Net deferred tax liabilities $ (132) $ --
------------------------------------------------------------------
</TABLE>
48
<PAGE> 29
The Company recorded certain deferred tax assets as of December 31, 1995 and
1996 that were previously omitted due to contingencies that were resolved
during such years. However, the Company has recorded a valuation allowance
in the amount set forth above for certain deductible temporary differences
where it is not certain whether the Company will receive future tax
benefits. The net change in the valuation allowance for the year ended 1996
was $1,553,000.
The deferred tax assets at December 31, 1996 have been stated on the
assumption that Federal net operating loss benefits derived from the BGLS
group and HIS of approximately $24,000,000, which expire in the years 2005
through 2011, will be available for use in future periods. The utilization
of these net operating losses is limited to approximately $2,500,000 on an
annual basis. Net operating losses attributable to foreign operations total
approximately $1,300,000 and will expire in the years 1997 through 2002.
The provision (benefit) for income taxes differs from the amount computed by
applying the Federal corporate income tax rate of 34% to income (loss)
before income taxes and extraordinary items as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1994 1995 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% (34.0%)
Change in valuation allowance due to
net operating loss and credit
carryforwards (15.0) -- --
Write-off of intangibles -- -- 44.4
Deferred tax assets realized but
previously reserved including
utilization of net operating losses -- (29.4) (12.7)
Effect of foreign operations (17.0) (4.0) 1.5
Other (0.3) 3.7 1.2
------------------------------------------------------------------------
Effective tax rate 1.7% 4.3% 0.4%
------------------------------------------------------------------------
</TABLE>
49
<PAGE> 30
NOTE 12 GEOGRAPHIC AREA INFORMATION
The Company operates in one industry segment, the design, sale, installation
and support of total information system solutions. Information with respect
to the Company's operations by significant geographic area is set forth
below. "United States" includes operations in Puerto Rico. "Other foreign"
includes operations in Mexico, Costa Rica, Venezuela, Singapore, Malaysia,
Hong Kong, the Netherlands and Australia. During 1994, the Company closed
its operations in Mexico and a decision was taken to discontinue certain of
its operations in Costa Rica, Singapore, Malaysia and Hong Kong. In
connection with the acquisition of HIS (see Note 6), the Company acquired
operations in Singapore, Hong Kong and Australia.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(in thousands) 1994 1995 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
United States $ 53,792 $ 56,410 $ 54,898
Canada 8,544 7,482 5,931
Other foreign 3,759 2,402 3,335
-------------------------------------------------------------------------------
$ 66,095 $ 66,294 $ 64,164
-------------------------------------------------------------------------------
United States revenue from
foreign affiliates $ 983 $ 898 $ 665
United States export sales $ 61 $ 163 $ 73
-------------------------------------------------------------------------------
Operating income (loss):
United States (including export sales) $ (38) $ 8,377 $(12,285)
Canada 3,963 1,712 589
Other foreign (2,184) (690) (1,048)
-------------------------------------------------------------------------------
$ 1,741 $ 9,399 $(12,744)
-------------------------------------------------------------------------------
Identifiable assets:
United States $ 12,629 $ 17,436 $ 26,308
Canada 2,176 2,167 1,414
Other foreign 1,211 1,430 5,131
-------------------------------------------------------------------------------
$ 16,016 $ 21,033 $ 32,853
-------------------------------------------------------------------------------
</TABLE>
United States revenue from foreign affiliates consists of net intercompany
sales and services from the United States to the Company's foreign
subsidiaries and is eliminated from consolidated net revenue. Intercompany
sales are based on current selling prices or list prices less discounts.
Discounts typically are influenced by competitive pricing, market conditions
and relative foreign exchange rates.
NOTE 13 STOCK OPTION AND COMPENSATION PLANS
In connection with the Plan of Reorganization (see Note 16), the Company
adopted the MAI Systems Corporation 1993 Stock Option Plan (the "1993 Plan")
which became effective on January 27, 1994. Under the 1993 Plan, 10% of the
authorized shares of Common Stock are reserved for issuance of options.
Pursuant to the Plan of Reorganization, the number of shares subject to the
1993 Plan will be reduced to 10% of the total issued shares. Options under
the 1993 Plan may be granted at exercise prices determined by the
Compensation Committee of the Board of Directors, provided that the exercise
prices shall not be less than the fair market value of the Common Stock on
the date of grant. At December 31, 1996, 148,367 options under the 1993 Plan
were exercisable and the weighted-average exercise price of these options
was $2.14.
50
<PAGE> 31
In July 1995, the Board of Directors adopted the Non-Employee Director's
Stock Option Plan (the "Director's Plan"). Under the Director's Plan,
certain directors who are not employees of the Company or any affiliate of
the Company are eligible to receive stock options. The Director's Plan
provides each non-employee director who is elected or appointed and duly
qualified, be granted automatically a one-time option to purchase 31,250
shares of Common Stock. The option vests in five equal installments, the
first of which occurs on the six-month anniversary of the non-employee
director's election or appointment to the Board, and thereafter on the date
of each successive re-election to another annual term. The number of shares
of Common Stock reserved for issuance pursuant to the Director's Plan is
125,000 shares. The exercise price shall not be lower than the fair market
value of the Common Stock on the date of grant. As of December 31, 1996,
25,000 options under the Director's Plan were exercisable and the
weighted-average exercise price of these options was $7.80.
At December 31, 1996, there were 412,043 additional shares available for
grant under the stock option plans. The per share weighted-average fair
value of stock options granted during 1995 and 1996 was $2.56 and $4.90 on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 1995 - risk-free interest rate of
6.20%, volatility of 65% and an expected life of 5 years; 1996 - risk-free
interest rate of 6.20%, volatility of 65% and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been reduced (increased) to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
(in thousands except per share data) 1995 1996
------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) As reported $ 10,189 $ (13,487)
Pro forma $ 9,971 $ (14,210)
------------------------------------------------------------------------------
Net income (loss) per share As reported $ 1.32 $ (1.85)
Pro forma $ 1.29 $ (1.94)
------------------------------------------------------------------------------
</TABLE>
Pro forma net income (loss) and pro forma net income (loss) per share
reflects only options granted in 1995 and 1996. Therefore, the full impact
of calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) amounts presented above because
compensation cost is reflected over the options' vesting period of four
years.
The following is a summary of stock option activity under the Company's
stock option plans:
<TABLE>
<CAPTION>
Number of Weighted-average
shares exercise price
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1994 -- $ --
Granted 715,625 2.56
Canceled (58,334) 1.65
- ----------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 657,291 2.56
Granted 393,500 9.16
Exercised (66,830) 1.87
Canceled (21,004) 5.02
- ----------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 962,957 $ 5.36
- ----------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 32
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options under the Company's stock
option plans were $1.65 - $10.13 and 9.5 years, respectively.
During 1996, the Company accelerated the vesting period of certain stock
options granted to certain employees of the Company resulting in a new
measurement date of such options. The exercise prices of the options were
below the fair market value on the date of acceleration. Accordingly, earned
compensation of approximately $177,000 has been recorded for the difference
between the option exercise price and fair market value on the date of
acceleration.
NOTE 14 EMPLOYEE BENEFITS
SAVINGS PLANS
On October 1, 1995, the Company established a Savings and Investment Plan
covering substantially all the Company's domestic employees (the "Domestic
Plan"). The Domestic Plan qualifies under Sections 401(k) and 401(a) of the
Internal Revenue Code. Participating employees are allowed to contribute
from 1% to 15% of their annual compensation. In 1995, the Company
contributed a discretionary matching contribution of 10% of employee
contributions up to a maximum of 6% of their annual compensation. For 1995,
contributions to the Domestic Plan by the Company were approximately
$18,000.
The Company's Canadian subsidiary offers to its employees a money purchase
plan for benefits accruing in respect of service from August 1, 1985 for
substantially all full-time employees (the "Canadian Plan"). Participating
employees are allowed to contribute between 2% and 6% of their annual
compensation. The Company contributes an amount equal to 50% of the employee
contributions up to a maximum of 2% of annual compensation. Contributions to
the Canadian Plan by the Company were approximately $39,000, $32,000 and
$31,000 for 1994, 1995 and 1996, respectively.
On September 30, 1994, the Company froze a defined contribution and savings
plan existing at that date. This plan was merged into the Domestic Plan
during 1996.
DEFINED BENEFIT PLANS
In April 1992, the Company elected to cease benefit accruals under the
defined benefit plan to current participants. The curtailment had no effect
on the accrued pension cost of the defined benefit plan.
Company contributions under this plan are funded annually. Plan assets are
comprised primarily of guaranteed investment/annuity contracts. Employee
benefits are based on years of service and the employees' compensation
during their employment.
The actuarially computed domestic pension costs included the following
components:
52
<PAGE> 33
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(in thousands) 1994 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the year $ 40 $ 40 $ 40
Interest cost on projected
benefit 91 98 109
Actual loss (return) on assets
for the period 28 (213) (145)
Amortization and deferral, net (97) 132 64
----- ----- -----
Net periodic pension expense $ 62 $ 57 $ 68
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth the domestic defined benefit plan's funded
status and amounts recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
-------------------
(dollars in thousands) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 1,506 $ 1,532
------- -------
Accumulated benefit obligation $ 1,506 $ 1,532
------- -------
Projected benefit obligation for service
rendered to date $ 1,506 $ 1,532
Plan assets at fair value 1,087 1,244
------- -------
Projected benefit obligation in excess of
plan assets 419 288
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (210) (150)
- --------------------------------------------------------------------------------
Accrued pension cost $ 209 $ 138
- --------------------------------------------------------------------------------
</TABLE>
The actuarial assumptions used are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate 9.0% 7.25% 7.75%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
--- ---- ----
</TABLE>
The Company had various employee retirement plans which covered
substantially all of the employees in the Company's foreign operations.
Obligations related to the European Subsidiaries were extinguished in
connection with the Foreclosure (see Note 16). The plans were funded in
accordance with local statutory requirements. Plan assets for the funded
plans were comprised principally of guaranteed investment contracts.
53
<PAGE> 34
NOTE 15 RESTRUCTURING COSTS
Prior to 1994, a restructuring plan was implemented comprising employee
severance programs, excess facilities and lease termination costs. At
December 31, 1994, the remaining balances relating to this restructuring
program were approximately $1,342,000. During 1995 and 1996, approximately
$464,000 and $397,000, respectively, of costs and payments have been charged
against this balance. During 1996, $244,000 was reversed due to changes in
the underlying estimates for excess space and credited to selling, general
and administrative expenses in the accompanying consolidated statement of
operations in 1996. The remaining balance at December 31, 1996 of $237,000
mainly comprised lease obligations for excess space which have been
classified as accrued liabilities and other long-term liabilities in the
accompanying consolidated balance sheet at December 31, 1996 (see Note 10).
In 1994, to facilitate operating efficiencies, the Company restructured
along functional lines of business and disposed or closed certain
operations. An amount of $1,814,000 was charged to selling, general and
administrative expenses in the accompanying consolidated statement of
operations in 1994 comprising termination benefits to involuntarily
terminated employees, costs associated with vacating certain business
premises and severance obligations to past officers of the Company. At
December 31, 1994, the remaining balance was approximately $2,044,000.
During 1995, approximately $380,000 of costs were paid, a settlement was
reached with a past officer of the Company, whereby severance benefits for
$576,000 were offset against a note receivable from such officer and lease
obligations for excess facilities no longer required of approximately
$1,088,000 were reversed and credited to selling, general and administrative
expenses in the accompanying consolidated statement of operations in 1995.
There were no remaining balances relating to this restructuring program at
December 31, 1995.
NOTE 16 PLAN OF REORGANIZATION AND FORECLOSURE
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 anticipates that
approximately 6,820,338 shares of Common Stock will be issued. As of
December 31, 1996, 6,728,256 shares had been issued pursuant to the Plan of
Reorganization.
On March 22, 1993, a syndicate of banks (the "Banks") foreclosed (the
"Foreclosure") on all of the outstanding capital stock of certain of the
Company's European subsidiaries (the "European Subsidiaries"), on certain
intellectual property of the Company and on amounts due to the Company from
certain European Subsidiaries in satisfaction of all amounts due under the
Company's term loan facilities and revolving facilities with the Banks.
At December 31, 1993, $7,500,000 of the gain on Foreclosure was deferred due
to a potential obligation of the Company's parent at the time to the Banks.
During 1994, the Company determined that it had no continuing obligation and
accordingly, the $7,500,000 was classified as additional paid-in capital in
the accompanying consolidated statement of stockholders' deficiency for
1994.
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 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.
54
<PAGE> 35
NOTE 17 COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment, some of which are in
excess of the Company's current and anticipated needs (and have been
included in accrued liabilities and other long-term liabilities in the
balance sheet at December 31, 1995 and 1996) (see Note 10), under both
month-to-month and fixed-term agreements.
The aggregate minimum rentals under operating leases with noncancelable
terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
(in thousands)
----------------------------------
<S> <C>
1997 $2,058
1998 1,172
1999 725
2000 618
2001 566
Thereafter 708
----------------------------------
$5,847
----------------------------------
</TABLE>
55
<PAGE> 36
Rental expense was approximately:
<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------
<S> <C>
Year ended December 31, 1994 $2,283
Year ended December 31, 1995 1,467
Year ended December 31, 1996 1,961
--------------------------------------------
</TABLE>
LEGAL PROCEEDINGS
In June 1996, the Company received an $8,500,000 cash settlement relating to
the proposed sale of certain of its subsidiaries in 1993. The settlement,
net of $525,000 of legal fees, is included in other operating income in the
1996 consolidated statement of operations.
The Company has filed and will continue to file objections to claims
asserted in its Chapter 11 bankruptcy proceedings. The majority of these
claims would, if upheld, give rise to allowed unsecured claims entitling the
respective claimants to distributions of Common Stock. A number of filed
objections in respect of secured claims, administrative claims, priority
claims, tax claims, convenience claims and cure claims were still
outstanding at December 31, 1996. To the extent the Company's objection to
such claims are not sustained, the Company will be obligated to pay such
claims in a lump sum in the case of convenience claims and administrative
claims and in the case of secured claims, priority claims, tax claims and
cure claims, on a deferred basis over six to seven years, depending on the
type of claim, at an interest rate of 6% in accordance with the Plan of
Reorganization. The Company does not believe the outcome of these objections
to be material.
During 1993, the Company commenced legal actions involving competitors
offering maintenance services to the Company's end users. During 1994 and
1995, favorable legal settlements were received. The settlements and costs
incurred have been included in other operating income in the consolidated
statements of operations. In 1994 and 1995, the settlements (net of
expenses) were approximately $582,000 and $3,000, respectively. The Company
is recovering ongoing royalty income from defendants with whom settlements
have been achieved. Similar actions are pending against other alleged
copyright infringers.
The Company is also involved in various other legal proceedings which are
incident to its business. Management believes the ultimate outcome of these
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
RELATED PARTY TRANSACTIONS
Under the terms of a consulting agreement dated August 15, 1994, between
Orchard Capital Corp. ("Orchard") and the Company, Orchard provides the
services of Richard S. Ressler as the Company's. Orchard was paid a
consulting fee of $20,000 per month through August 15, 1996 and $24,000 per
month thereafter until August 15, 1997. In addition, Orchard earned a bonus
of $1,188,000 payable in cash or freely transferable Common Stock (at the
option of the Company) when the closing trading price of the shares of the
Company's Common Stock for 20 consecutive trading days ending on or after
January 1, 1996 exceeded $4.00 per share (adjusted for the 25% stock split -
see Note 1). The $1,188,000 (of which $594,000 was accrued in both the third
and the fourth quarters of 1995) is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations and as part of accrued liabilities in the accompanying balance
sheet at December 31, 1995 and 1996 (see Note 10). In addition to such
compensation, Orchard was granted warrants (adjusted for the August 1995 25%
stock split) to purchase up to 625,000 shares of Common Stock at a price of
$1.90 per share, the fair market value of Common Stock on the date of grant.
The warrants were fully exercisable on the date of grant. The consulting
agreement expires August 15, 1997. Mr. Ressler is the principal stockholder
of Orchard.
56
<PAGE> 37
On February 13, 1995, BGLS distributed, by way of a special dividend, its
approximate 3,200,000 shares of the Company's Common Stock to holders of
Brooke Group, Ltd. common stock. Accordingly, the Company is no longer a
subsidiary of BGLS. As a result of the distribution, a former Chairman of
the Company held approximately 1,652,433 shares of Common Stock. During
1996, the Company recognized $390,000 of revenues relating to the sale of
network and computer equipment and services in the normal course of business
to an affiliated Company. In November 1996, the Company also entered into a
maintenance and service contract with this related company for $350,000
which will be recognized ratably over the succeeding 12-month period. In
January 1997, former Chairman of the Company divested all of his shares of
the Company's Common Stock.
During 1994, the Company loaned $550,000 to a former officer of the Company.
The loan was originally repayable by December 30, 1994. In 1995, the loan
was offset against remaining severance reserves of approximately $576,000
subsequently established for this officer (See Note 15).
NOTE 18 SUBSEQUENT EVENT
On March 6, 1997, the Company acquired substantially all the assets and
assumed certain liabilities of CIMPRO, which develops and markets process
manufacturing software, for $5,900,000 in cash. To finance the acquisition
of CIMPRO, the Company sold 400,000 shares of its Common Stock in a private
placement for $6.50 per share and issued $6,000,000 of 11% subordinated
notes payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). Additionally, warrants to purchase 750,000 shares
of the Company's Common Stock at $8 per share were issued in connection with
the 11% subordinated debt. The warrants are exercisable and callable (by the
Company) under certain circumstances at any time within seven years and the
11% subordinated notes may be used to exercise the warrants. The acquisition
of CIMPRO will be accounted for using the purchase method of accounting.
58
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAI SYSTEMS CORPORATION
(12/31/96)
The following is a list showing MAI Systems Corporation and each of its
subsidiaries, as of December 31, 1996, indicating each jurisdiction under the
laws of which it was organized (the names of the subsidiaries are indented below
the names of their respective parent corporation):
<TABLE>
<CAPTION>
NAME JURISDICTION OF
---- ---------------
INCORPORATION
-------------
<S> <C>
MAI SYSTEMS CORPORATION DELAWARE
Gaming Systems International Nevada
MAI Canada LTD. Canada
CLS Software International, Inc. California
CLS de Mexico, S.A. de C.V. Mexico
MAI del Caribe, Inc. Delaware
Computerized Lodging Netherlands
Systems B.V.
MAI de Venezuela S.A. Venezuela
Hotel Information Systems, Ltd. Hong Kong
Hotel Information Singapore
Systems, Pte. Limited
Hotel Information Systems de Mexico
Mexico, S.A. de C.V.
Hotel Information Systems, Pty. Australia
Limited
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MAI Systems Corporation:
The audits referred to in our report dated March 27, 1997, included the related
financial statement schedule as of December 31, 1996, and for each of the years
in the three-year period ended December 31, 1996, included in the annual report
on Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and incorporated herein
by reference.
/s/ KPMG Peat Marwick LLP
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,857
<SECURITIES> 0
<RECEIVABLES> 13,985
<ALLOWANCES> 2,578
<INVENTORY> 3,321
<CURRENT-ASSETS> 20,523
<PP&E> 4,065
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,853
<CURRENT-LIABILITIES> 28,793
<BONDS> 485
0
0
<COMMON> 88
<OTHER-SE> 1,970
<TOTAL-LIABILITY-AND-EQUITY> 32,853
<SALES> 64,164
<TOTAL-REVENUES> 64,164
<CGS> 42,930
<TOTAL-COSTS> 42,930
<OTHER-EXPENSES> 33,978
<LOSS-PROVISION> 603
<INTEREST-EXPENSE> 345
<INCOME-PRETAX> (13,428)
<INCOME-TAX> 59
<INCOME-CONTINUING> (13,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,487)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
