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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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.)
9601 Jeronimo Road
Irvine, California 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 598-6000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.1 par value per share
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Securities registered pursuant to Section 12(g) of the Act: None
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 31, 1998, the number of issued and outstanding shares
of the Company's Common Stock was 10,298,539 shares. The aggregate market value
of all of the shares of Common Stock held by non-affiliates of the registrant as
of March 31, 1998 was approximately $31,356,288. Directors and officers and ten
percent or greater stockholders are considered affiliates for the purposes of
this calculation but should not necessarily be deemed affiliates for any other
purpose.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's 1993 Annual Report on Form 10-K are incorporated herein
by reference in Part I; portions of registrant's 1997 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 29, 1998 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 mid-sized
process manufacturers. The solutions provided by the Company typically include
applications software, computer hardware, peripherals and wide and local area
network design, implementation, installation and support. The software
applications are generally the Company's proprietary software, or software which
is licensed to the Company on an exclusive or non-exclusive basis. The hardware,
peripherals and networking systems are generally third-party products which the
Company distributes. Directly and through its arrangement with 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 mid-sized process
manufacturers, it designs, sells, installs and supports information management
solutions featuring complex wide area networks ("WANs") and local area networks
("LANs"). It provides a wide array of products and services to its installed
base of approximately 6,000 customers and continues to make direct sales of
certain products and services which enhance, upgrade and extend the useful life
of the Company's legacy systems.
MAI markets its products and services primarily through a team selling approach,
which utilizes the Company's nationwide network of sales offices. The Company
also markets certain products and services through a limited number of
distributors, independent value-added resellers ("VARs"), authorized service
representatives and independent software vendors ("ISVs").
The Company's activities are conducted principally in the United States, Canada,
the United Kingdom, Hong Kong, Singapore and Mexico. The Company also operates
subsidiaries in Puerto Rico and Venezuela and operates offices in the People's
Republic of China and Malaysia. Additionally, the Company sells its products
through indirect channels in the United States and abroad. These independent
channels include VARs, distributors, ISVs and local sales agents.
The Company provides software support services (both procedural and technical
support) to its hospitality, process manufacturing and gaming systems customers
from its offices in the United States, the United Kingdom and Singapore. In some
countries the Company relies on certain foreign distributors of its products to
provide software support services to customers located within the distributors'
regions.
The Company provides on-site service and help support desk services to its
legacy system customers in the United States, Canada, Puerto Rico and Venezuela.
In the United States and Canada, the Company and its 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.
PRODUCTS AND SERVICES
In 1997, the Company's revenue was derived from the following sources:
<TABLE>
<CAPTION>
Percentage of
Total Revenue
-------------
<S> <C>
Hospitality 46.1%
Process Manufacturing 15.4%
Gaming 6.5%
Legacy 28.9%
Other 3.1%
-------
Total 100.0%
=======
</TABLE>
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Products and Services
MAI designs, implements, maintains and supports total information system
solutions utilizing WANs and LANs. In conjunction with these solutions, the
Company's approach is to analyze a customer's information system requirements,
propose a solution and then design, integrate, install and maintain the system.
One of the principal objectives of the Company is to help its customers utilize
their data across their entire enterprise so that information that was once
limited to one area of a business can now be available to other areas where it
can be utilized for new purposes. Once a system is on-line, the Company
typically continues its relationship with the customer by providing
around-the-clock telephonic support and, through its contracts with Olivetti,
on-site field support. The systems designed by the Company utilize the Company's
property management system for hotels, resorts and destinations and enterprise
resource planning ("ERP") applications software for midsize process
manufacturers, which the Company markets with industry-standard hardware and
software products from leading technology vendors including Cisco Systems,
Compaq Computer, Hewlett Packard, IBM, Data General, Larscom, Microsoft and
Novell.
Hospitality - 46.1%
The Company markets three property management systems. Hotel CompuSystem II has
been marketed by the Company since 1990, when the Company acquired Computerized
Lodging Systems ("CLS"). In August 1996 the Company acquired Hotel Information
Systems, Inc. ("HIS") and began marketing its Paragon product line. In October
1996, the Company became the exclusive distributor of the Lodging Touch
International products from Enterprise Hospitality Solutions. Each of the
product lines has features which make it particularly well-suited to a different
segment of the hospitality marketplace.
Hotel CompuSystem II, which targets hotels and resorts in the 300 to 1,000 room
range, runs under UNIX. Hotel CompuSystem II is full-featured and provides
customers with front desk, night audit, housekeeping and numerous other
functions. Additionally, the CLS products interface to more than 250 other
hospitality-related information system products, such as point-of-sale systems,
telephone call monitoring systems and minibar maintenance systems. The ease of
connectivity with third-party products is one of the system's competitive
advantages. Hotel CompuSystem II is installed in over 1,500 sites worldwide.
The Paragon property management system, from HIS, is designed to serve the needs
of larger hotels and resorts. Running on IBM AS/400 or System 36 minicomputers,
the Paragon product line provides the full range of features and functionality
required by premier properties, such as Disneyland Paris or Renaissance Hotels
International. Paragon is installed in more than 1,000 hotels and resorts around
the world, and is a major presence in the Pacific Rim.
The Lodging Touch 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 to fully utilize the features of the Windows NT
operating system and Microsoft Sequel Server. With the LTI products, MAI has
been named a Microsoft Solutions Partner.
Process Manufacturing - 15.4%
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 $20 million and $500 million. These manufacturers
convert raw materials into finished goods or into products used to manufacture
other goods. Typical users of the Company's ERP product would be manufacturers
who convert raw milk into cheese and other dairy 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.
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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.
Gaming - 6.5%
The Company markets the Gaming Systems International ("GSI") products for the
gaming industry. 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.
Legacy - 28.9%
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.
Other - 3.1%
During 1997, the Company closed down a business it had entered in 1996 in which
the Company provided customers outside its core markets with integration and
implementation services. These customers utilized the Company's professional
services, consulting, network and system products and/or partner products, to
re-host their legacy application to modern client/server technology. These
customers did not use the Company's hospitality or process manufacturing
applications, but had an in-house or third party application. The Company no
longer conducts that business, but it continued to have revenue from contracts
commenced in 1996 and 1997.
MARKETING AND SALES
MAI markets its products and services primarily through a team-selling approach,
which utilizes the Company's nationwide network of sales offices and its Irvine,
California-based account representatives. The Company also markets certain
products and services through limited numbers of VARs, authorized service
representatives and ISVs.
In the United States, the Company's systems are marketed by a direct sales and
marketing organization which included, as of February 28, 1998, 33 sales and
marketing personnel located in the corporate headquarters and five satellite
offices. In addition, the Company markets its systems internationally through
its subsidiaries which operate in Canada, the United Kingdom, Mexico, Hong Kong,
Singapore, Puerto Rico and Venezuela and through various distributors that are
exclusive in their jurisdictions. The Company's international subsidiaries
employed, as of February 28, 1998, 25 sales and marketing personnel who are
engaged in the marketing of MAI products from sales offices in Canada, Mexico,
the
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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 1997, the Company's aggregate revenue was derived from geographic areas
as follows:
<TABLE>
<CAPTION>
Percentage of Total
-------------------
Revenues
--------
<S> <C>
United States 80.8%
Pacific Rim 9.3%
Canada 6.9%
Other Areas 3.0%
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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 19.2% of the Company's 1997 revenues were generated outside the
United States, even though most of this activity is in the Pacific Rim which has
recently incurred significant economic and currency disruptions, the risk
associated with these foreign operations in relation to the Company's overall
financial performance is limited.
SUPPORT AND MAINTENANCE
The provision of around-the-clock customer service is a cornerstone of the
Company's business. As of February 28, 1998, the Company had software support
agreements with approximately 2,000 customers. Additionally, it had hardware
maintenance agreements with approximately 4,000 other customers. The Company
employs approximately 45 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, Tarrytown, New York, Singapore and the
United Kingdom. The Company utilizes the latest developments in telephony and
artificial intelligence-enhanced technology to enable its support technicians to
quickly identify and resolve customers' software related computing problems.
The Company's maintenance services are generally provided pursuant to individual
maintenance contracts with customers, although time and material services are
provided in some areas. Such support and maintenance are of varying duration,
provide 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
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, Data General,
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.
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ORDER, SHIPMENT AND BACKLOG
The Company records and enters into backlog a purchase order for equipment and
software when it receives a customer's written order requesting delivery within
six months, and systems configuration and contract provisions are verified.
Orders that are canceled by the customer and orders that are not shipped within
one year are removed from backlog. Orders that are removed from backlog for
non-shipment are restored if they are reinstated by the customer.
Set forth below is certain information concerning orders, shipments and backlog
for 1997 and 1996:
<TABLE>
<CAPTION>
(dollars in millions)
1997 1996
---- ----
<S> <C> <C>
Orders received (net of cancellations) $ 22.4 $ 32.8
Shipments (net of equipment returns) 30.0 23.8
Backlog (at period end) 8.1 15.7
</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. In addition, it includes orders for hardware in the
networking business where the Company no longer competes. Further, in the
second half of 1997, the Company began directing a large portion of the
hardware component of its system sales to its strategic partners.
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, 1998, the Company employed 41 engineers, programmers and
other technical personnel in research and development activities. During 1995,
1996 and 1997, the Company incurred $2,667,000, $3,117,000, and $5,583,000
respectively, for research and development activities. The Company's research
and development expenditures related primarily to support and enhancement of
existing software products.
CUSTOMERS
The Company's customers in hospitality are generally hotels and resorts with
fifty or more rooms, in gaming are casinos with electronic gaming equipment such
as slot machines, and in process manufacturing are generally midsize process
manufacturers. Legacy comprises a highly diversified group of customers in
various industries who use hardware sold by MAI over the years. During 1997, no
single customer accounted for ten percent or more of the Company's revenues.
COMPETITION
Competition is vigorous in all sectors of the worldwide market for
computer-based applications systems, networked solutions and the maintenance and
support of the software and hardware which comprise those systems. The Company
has numerous competitors (and potential competitors, including the manufacturers
of products which the Company distributes) varying widely in their size,
capabilities, market segment and geographic area, many of which are larger and
have financial resources far greater than the Company.
Within its targeted application markets, the Company has positioned itself to
sell complete solutions featuring WANs and LANs to its customers. Within this
marketplace, competition comes primarily from vendors of competing information
technology in the markets in which the Company competes. There are several
providers of information technology to the hotel, resort and destination
industry against which the Company regularly competes. The primary competitors
are of similar size to the Company, and provide technology that is also similar
to the Company. They also cover essentially the same territory, which is
anywhere in the developed world.
The competition in the ERP market is diffuse and new or different competitors
often appear with each sales opportunity. In the lower end of the market, the
Company competes with local VARs and ISVs who usually resell hardware or
networking products of larger equipment manufacturers. These VARs and ISVs
usually sell one or two specialized software application products targeted for
specific industry market segments. Within the mid-range market, the
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Company competes with several companies of similar size and technology. On the
high end of the market, the Company competes with companies that are much larger
and have financial resources far greater than the Company.
Within the gaming industry, the Company competes with manufacturers of gaming
equipment. Some of those competitors are substantially larger than the Company.
In the legacy arena, there are some third-party maintenance organizations
("TPMS") who provide service to users of the Company's hardware products. The
competition is minimal, as outside companies cannot provide complete solutions
to the Company's existing proprietary customer base.
TRADEMARKS, COPYRIGHTS AND LICENSES
The Company is the owner or licensee of certain trademarks, copyrights and other
property rights associated with its businesses, including rights associated with
its proprietary application software. The Company owns or has licensing rights,
generally with terms of three years (although the term of the license to the LTI
software is perpetual), to the principal application software products marketed
by the Company. Such licensing rights are generally renewable. Although there is
some risk that independent vendors who own such products may elect not to renew
their licensing agreements with the Company and enter into exclusive
arrangements with, or elect to install their software on systems sold by
competitors of the Company, such vendors generally tend to continue to support
the Company's marketing efforts so long as the Company's systems provide a good
opportunity for them to market their products.
The Company is party to license agreements with IBM relating to a variety of
patents, with Novell, Inc. relating to UNIX and with a number of other suppliers
of software products. These licenses are terminable at the Company's option and
certain of the licenses require the Company to make royalty payments.
OpenBASIC and certain other intellectual property formerly owned by the Company
is currently owned by Triple P management BV ("Triple P"), a corporation
organized under the laws of the Netherlands, which acquired the rights from
Application Systems, Inc., a Delaware corporation controlled by the Company's
former bank lenders (the "Banks"), which held the stock of certain of the
Company's former European subsidiaries, originally acquired by the Banks in
connection with the foreclosure described under "Chapter 11 Bankruptcy
Proceedings". MAI retained an exclusive license to use OpenBASIC and other
intellectual property in the western hemisphere and has a nonexclusive license
to use it in certain other parts of the world. The license is perpetual and
royalty-free, but subject to termination under certain conditions.
EMPLOYEES
As of February 28, 1998, the Company had 467 employees, of which 291 were
employed in the United States, 14 in Canada, 10 in Mexico, 10 in Puerto Rico, 4
in the Netherlands, 8 in the United Kingdom, 74 in Asia (Hong Kong, Indonesia,
Malaysia, Singapore and the People's Republic of China) and 56 in Venezuela. The
Company has not experienced any work stoppages and considers its relationship
with its employees to be good.
CHAPTER 11 BANKRUPTCY PROCEEDINGS
Prior to its Chapter 11 bankruptcy proceedings, the Company had followed certain
business strategies that eventually led to its defaulting on its and its
Canadian subsidiary's US and Canadian Credit Agreements (the "Credit
Agreements"). Thereafter, shortly before the Company filed for bankruptcy
protection, the Company's banks, parties to the Credit Agreements, foreclosed on
all of the outstanding capital stock of certain 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 systems. 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 systems 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.
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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
non-appealable 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, 1997, the aggregate amount of tax claims had been reduced to
approximately $970,000 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, 1997, the Company had
distributed 6,755,751 shares of Common Stock to its former creditors and the
Company estimated that an approximate additional 65,000 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, 1997, $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 shares of 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 contained herein. 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
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.
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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. The
Company was profitable in 1994 and 1995, but then incurred significant losses in
1996 and 1997. There can be no assurance that the Company will be able to
achieve or maintain profitability or avoid losses on a quarterly or annual basis
in the future.
FLUCTUATIONS IN OPERATING RESULTS
A variety of factors may cause period-to-period fluctuations in the Company's
operating results, including the timing of significant orders, the timing of
product enhancements and new product introductions by the Company, its
technology vendors and its competitors, the pricing of the Company's products
and services, competitive conditions and general economic conditions. Many of
the Company's systems sales involve lengthy sales cycles and installations.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or revenue will be recognized. As a result, the
operating results of the Company may be materially skewed if a single
transaction is completed earlier or later than expected. The Company has
experienced fluctuations in its operating results and expects to continue to
experience such fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Fluctuations in operating
results may also result in volatility in the market price of the Common Stock.
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, variances between actual
results of operations and the results expected by securities analysts, and the
factors mentioned under "Fluctuations in Operation Results", among other
factors, may have significant impact on the market price of the Common Stock.
RISKS OF CONTRACT SERVICES BUSINESS
The Company is subject to the risks associated with a contract services
business, including dependence on reputation with existing customers, volatility
of workload and dependence on ability to retain qualified technical personnel.
The Company is party to an agreement with Olivetti pursuant to which Olivetti
performs certain field engineering services for the Company. If the quality of
services provided by Olivetti is not perceived as comparable to that previously
provided by the Company, there is a probability that some of the Company's field
service customers will terminate their service agreements.
-9-
<PAGE> 10
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 1998. There can be no assurances that Mr. Ressler will
continue with the Company after such date or that the Company will be able to
find a replacement in the event that either the Company or Mr. Ressler
determines not to continue their relationship.
RISK OF FOREIGN OPERATIONS
The financial performance of the Company is affected by the fluctuation in the
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including import
and export restrictions, possible expropriation or other governmental actions,
taxes and political changes.
YEAR 2000 COMPLIANCE RISKS
The Year 2000 compliance issue arises from the fact that a significant
percentage of the software utilized by United States businesses relies on
two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. The Company is currently in the process of evaluating its
information technology systems for year 2000 compliance and believes that most
of its operating systems have been modified to address Year 2000 issues. At this
time, the Company does not believe that the costs associated with implementing
its Year 2000 compliance plan will be material to the Company's financial
condition or operations.
The Company does not currently have any information concerning the Year 2000
compliance of its key suppliers or customers. In the event that any of the
Company's key suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected. The Company's Year 2000 compliance plan will address the Year 2000
compliance status of key suppliers, customers and other third parties. The
Company has designed and tested the most current versions of its products to be
Year 2000 compliant. However, some of the Company's customers are running
earlier product versions that are not Year 2000 compliant. Although the Company
has been encouraging such customers to upgrade to current product versions, no
assurance can be given that all of them will do so in a timely manner, if at
all. Moreover, the Company also relies on certain software that it licenses
-10-
<PAGE> 11
from third parties, including software that is integrated with internally
developed software and is used in the Company's products to perform key
functions. There can be no assurance that such third party software will be free
of errors and defects or be Year 2000 compliant. Although the Company has not
experienced any product liability claims to date regarding year 2000 compliance,
there can be no assurance that errors or defects, whether associated with Year
2000 functions or otherwise, will not result in product liability claims against
the Company in the future. The Company's license agreements with customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims; however, it is possible that such limitation
of liability provisions may not be effective under the laws of certain
jurisdictions. Defective products or releases could result in loss of revenues,
increased service and warranty costs and product liability claims, and could
adversely affect the Company's market penetration and reputation, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
ITEM 2. PROPERTIES
As of February 28, 1998, the principal properties utilized by the Company were
as follows:
<TABLE>
<CAPTION>
Approximate
Type of Facility Total Square Footage Location
---------------- -------------------- --------
<S> <C> <C>
Corporate and Hospitality Headquarters, warehousing, administration, marketing,
sales, development and support 50,210 Irvine, California
Product development, sales and support 8,911 Concord, California
Product development, sales and support 6,558 Irving, Texas
Process Manufacturing headquarters, marketing, sales, development, and support 16,370 Tarrytown, 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 Markham, Ontario, Canada
Hotel Information Systems (Ltd) Hong Kong headquarters, marketing, sales, and support 3,638 Hong Kong
Hotel Information Systems (Ltd) Singapore sales and support 4,527 Singapore
MAI Information Solutions Limited, European Headquarters, marketing, sales and
support 3,000 London
</TABLE>
All of the properties noted above were occupied by the Company pursuant to
leases with various expiration dates. In addition to the premises identified
above, the Company leases offices in three additional locations in the United
States, one additional location in Canada and seven other locations around the
world. Generally such leases are for terms of five years or less, although
several of the leases in the United States are for terms of one year or less.
ITEM 3. 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, 1997. 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 March 31,
1998, there were 590 stockholders of record.
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
Fiscal 1996:
First Quarter ............................ $ 7.88 $ 6.13
Second Quarter ........................... $ 10.63 $ 5.63
Third Quarter ............................ $ 9.50 $ 6.75
Fourth Quarter ........................... $ 8.81 $ 5.50
Fiscal 1997:
First Quarter ............................ $ 8.00 $ 6.00
Second Quarter ........................... $ 6.13 $ 3.75
Third Quarter ............................ $ 4.88 $ 2.94
Fourth Quarter ........................... $ 4.13 $ 2.50
Fiscal 1998:
First Quarter Through February 28, 1998 .. $ 3.31 $ 1.44
</TABLE>
On March 3, 1997, at the same time that it issued its 11% subordinated debt to
four investment funds managed by Canyon Capital Management LP ("Canyon"), the
Company issued to such investment funds detachable warrants to purchase 750,000
shares of the Company's Common Stock at $8.00 per share, and sold as 400,000
shares of the Company's Common Stock for $6.50 per share. The purchase price for
the shares of Common Stock was paid in cash. At the time of issuance of the
detachable warrants, the Company recorded an original issue discount of
$1,027,000 (which represented the fair value of the warrants at the time of
issuance) on the subordinated notes. The fair value of the warrants was
recorded as a reduction in the face value of the subordinated notes.
On March 6, 1997, the Company issued warrants to purchase 50,000 shares of the
Company's Common Stock at $7.50 per share to Orchard Capital Corporation
("Orchard") (which Orchard subsequently transferred to Richard S. Ressler,
Chairman of the Company). These warrants were issued as additional compensation
under the consulting agreement, dated April 15, 1994, as amended, between
Orchard and the Company, pursuant to which Orchard provides the services of Mr.
Ressler.
On September 4, 1997, the Company issued 157,895 shares of its Common Stock to
Mr. Ressler, upon his exercise of previously outstanding warrants, exercisable
at $1.90 per share in cash, and on September 8, 1997, the Company issued 398,510
shares of its Common Stock to Mr. Ressler in payment for services rendered
pursuant to the consulting agreement between Orchard and the Company.
Additionally, in order to induce exercises, on September 12, 1997, the Company
temporarily re-priced all of its outstanding "out of the money" warrants to an
exercise price of $3.04 per share. As a result, holders of warrants, being Mr.
Ressler with respect to 50,000 warrants, and the four Canyon investment funds
with respect to 750,000 warrants, exercised such warrants and acquired an
aggregate of 800,000 shares of the Company's Common Stock at $3.04 per share.
Such exercises were paid in cash except that the investment funds paid a portion
of the consideration for their shares by surrendering $750,000 aggregate
principal of promissory notes of the Company (which were credited at the
-12-
<PAGE> 13
principal amount together with accrued interest). This use of notes to pay a
portion of the warrant exercise price was authorized by the terms of the
warrants and notes. Such issuances closed on September 18, 1997.
The foregoing issuances were made in transactions exempt under Section 4(2)
under the Securities Act of 1933, as transactions not involving any public
offering. The shares issued were legended and appropriate investment
representations were obtained from the purchases.
ITEM 6. SELECTED FINANCIAL INFORMATION
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Selected Financial Information".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURS ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Company's Annual Report under the headings, "Consolidated Balance Sheets",
"Consolidated Statements of Operations", Consolidated Statement of Stockholders'
Equity (Deficiency)", "Consolidated Statements of Cash Flows", "Notes to
Consolidated Financial Statements" and "Independent Auditors' Report".
Schedule II Valuation and Qualifying Accounts is set forth in this Annual Report
on Form 10-K.
All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be found in the
section captioned "Election of Directors" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held May 29, 1998. Information required by this Item with
respect to executive officers may be found in the section captioned "Proposal
1--Election of Directors, --Executive Officers" appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held May 29, 1998. Such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held May 29, 1998. Such information is incorporated herein by reference.
-13-
<PAGE> 14
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 29, 1998. 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 29, 1998. Such information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The consolidated financial statements of the Company, the
notes thereto and the Independent Auditors' Report are
incorporated herein by reference to the Company's 1997
Annual Report.
Schedule II Valuation and Qualifying Accounts
3. Exhibits:
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
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, as filed as Exhibit 3.1 to the Company's
1996 Annual Report on Form 10-K.
3.2 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation as filed as Exhibit
3.2 to the Company's 1996 Annual Report on Form 10-K.
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.
10.1 Stock Option Agreement between George G. Bayz and the
Registrant dated September 12, 1997.
10.2 Stock Option Agreement between Lewis H. Stanton and the
Registrant dated February 10, 1997.
10.3 Stock Option Agreement between Lewis H. Stanton and the
Registrant dated September 12, 1997.
</TABLE>
-14-
<PAGE> 15
<TABLE>
<S> <C>
10.4 Stock Option Agreement between Richard DeMayo and the
Registrant dated September 12, 1997.
10.5 Stock Option Agreement between Luke Brown and the Registrant
dated September 12, 1997.
10.6 Stock Option Agreement between Luke Brown and the Registrant
dated September 12, 1997.
10.7 Registration Rights Agreement dated as of September 8, 1997 by
and between the Registrant and Orchard Capital Corporation and
Richard S. Ressler, Chairman of the Board.
10.8 Consulting Agreement dated as of August 15, 1994, as amended
as of October 17,1994, August 16, 1996 and August 31, 1997 by
and between Registrant and Orchard Capital Corporation,
relating to the services of Richard S. Ressler, Chairman of
the Board. 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. The August 16, 1996
amendment is incorporated herein by reference to the Company's
1996 Annual Report on Form 10-K.
10.9 Warrant dated March 6, 1997 covering 50,000 shares of the
Registrant's common stock and issued by the Registrant to
Orchard Capital Corporation (Richard S. Ressler).
10.10 Note Purchase Agreement dated March 3, 1997 between the
Registrant and The Value Realization Fund, L.P., Canyon Value
Realization Fund (Cayman), Ltd., GRS Partners II and CPI
Securities L.P.
10.11 Amendment No. 1 dated May 6, 1997 to Note Purchase Agreement
between the Registrant and The Value Realization Fund, L.P.
Canyon Value Realization Fund, Ltd., GRS Partners II and CPI
Securities, L.P.
10.12 Registration Rights Agreement dated February 13, 1997 between
Registrant and The Value Realization Fund, L.P., Canyon Value
Realization Fund (Cayman), Ltd., GRS Partners II and CPI
Securities, L.P.
10.13 MAI Systems Corporation Amended 1993 Stock Option Plan.
10.14 MAI Systems Corporation Amended 401(k) Plan.
13.1 Portions of the Company's Annual Report to Stockholders for
the year ended December 31, 1997, but only to the extent such
report is expressly incorporated by reference into Items 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 Year Ended 1997.
27.2 Financial Data Schedule Restated Year Ended 1995.
(b) Reports on Form 8-K during the fourth quarter of 1997.
None.
</TABLE>
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAI SYSTEMS CORPORATION
By: /s/ RICHARD S. RESSLER
------------------------------
Richard S. Ressler
Chairman
Dated: April 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 15, 1998.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/RICHARD S. RESSLER Chairman, Director
- ---------------------------
Richard S. Ressler
/s/GEORGE G. BAYZ President and Chief Executive Officer,
- --------------------------- Director
George G. Bayz
/s/ZOHAR LOSHITZER Director
- ---------------------------
Zohar Loshitzer
/s/MORTON O. SCHAPIRO Director
- ---------------------------
Morton O. Schapiro
/s/LEWIS H. STANTON Executive Vice President and Chief
- --------------------------- Operating and Financial Officer
Lewis H. Stanton (Chief Accounting Officer)
</TABLE>
-16-
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
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, as filed as Exhibit 3.1 to the Company's
1996 Annual Report on Form 10-K.
3.2 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation as filed as Exhibit
3.2 to the Company's 1996 Annual Report on Form 10-K.
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.
10.1 Stock Option Agreement between George G. Bayz and the
Registrant dated September 12, 1997.
10.2 Stock Option Agreement between Lewis H. Stanton and the
Registrant dated February 10, 1997.
10.3 Stock Option Agreement between Lewis H. Stanton and the
Registrant dated September 12, 1997.
</TABLE>
-17-
<PAGE> 18
<TABLE>
<S> <C>
10.4 Stock Option Agreement between Richard DeMayo and the
Registrant dated September 12, 1997.
10.5 Stock Option Agreement between Luke Brown and the Registrant
dated September 12, 1997.
10.6 Stock Option Agreement between Luke Brown and the Registrant
dated September 12, 1997.
10.7 Registration Rights Agreement dated as of September 8, 1997 by
and between the Registrant and Orchard Capital Corporation and
Richard S. Ressler, Chairman of the Board.
10.8 Consulting Agreement dated as of August 15, 1994, as amended
as of October 17,1994, August 16, 1996 and August 31, 1997 by
and between Registrant and Orchard Capital Corporation,
relating to the services of Richard S. Ressler, Chairman of
the Board. 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. The August 16, 1996
amendment is incorporated herein by reference to the Company's
1996 Annual Report on Form 10-K.
10.9 Warrant dated March 6, 1997 covering 50,000 shares of the
Registrant's common stock and issued by the Registrant to
Orchard Capital Corporation (Richard S. Ressler).
10.10 Note Purchase Agreement dated March 3, 1997 between the
Registrant and The Value Realization Fund, L.P., Canyon Value
Realization Fund (Cayman), Ltd., GRS Partners II and CPI
Securities L.P.
10.11 Amendment No. 1 dated May 6, 1997 to Note Purchase Agreement
between the Registrant and The Value Realization Fund, L.P.
Canyon Value Realization Fund, Ltd., GRS Partners II and CPI
Securities, L.P.
10.12 Registration Rights Agreement dated February 13, 1997 between
Registrant and The Value Realization Fund, L.P., Canyon Value
Realization Fund (Cayman), Ltd., GRS Partners II and CPI
Securities, L.P.
10.13 MAI Systems Corporation Amended 1993 Stock Option Plan.
10.14 MAI Systems Corporation Amended 401(k) Plan.
13.1 Portions of the Company's Annual Report to Stockholders for
the year ended December 31, 1997, but only to the extent such
report is expressly incorporated by reference into Items 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 Year Ended 1997.
27.2 Financial Data Schedule Restated Year Ended 1995.
</TABLE>
-18-
<PAGE> 19
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
(dollars in thousands)
ADDITIONS
<TABLE>
<CAPTION>
BALANCE CHARGED TO CHARGED TO ADDITIONS BALANCES
BEGINNING COSTS AND OTHER FROM END OF
OF YEAR EXPENSES ACCOUNTS ACQUISITIONS WRITE-OFFS YEAR
--------- ---------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts $ 2,588 $ 613 $ -- $ -- $ (2,109) $ 1,092
Provision for inventory
obsolescence $15,980 $ 734 $ -- $ -- $ (1,578) $15,136
======= ====== ==== ====== ======== =======
Year ended December 31, 1996
Allowance for doubtful accounts $ 1,092 $ 603 $ -- $1,138 $ (255) $ 2,578
Provision for inventory
obsolescence $15,136 $ 490 $ -- $ -- $(12,433) $ 3,193
======= ====== ==== ====== ======== =======
Year ended December 31, 1997
Allowance for doubtful accounts $ 2,578 $ 6 $ -- $ 646 $ (1,247) $ 1,983
Provision for inventory
obsolescence $ 3,193 $1,174 $ -- $ -- $ (2,197) $ 2,170
======= ====== ==== ====== ======== =======
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.1
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to George Bayz (the "Optionee") an option to purchase a total of 30,000 shares
of Common Stock (the "Shares") of the Company, at the price set forth herein,
and in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on September 12, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than
September 12, 2007. If the Option is not exercised within ten years of the date
of grant, it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $3.50 per
share, which price is not less than eighty-five percent (85%) of the Fair Market
Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows:
(a) RIGHT TO EXERCISE. This Option shall vest and be
exercisable, cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
------------------ ----------------
<S> <C> <C>
After September 12, 1998 10,000
After September 12, 1999 10,000
After September 12, 2000 10,000
------------------ ------
Total 30,000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum of
at least 100 shares per transaction concerning the exercise of the Option. This
Option shall be exercisable by actual receipt by the Company of written notice
provided by the Optionee which shall state the election to exercise this Option,
the number of whole Shares in respect to which this Option is being exercised,
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail return
receipt requested to the then current President or Chief Financial Officer of
the Company or any other person as may be designated by the
<PAGE> 2
Company. The written notice shall be accompanied by payment of the purchase
price for the number of Shares in respect to which this Option shall be
exercised. Payment of the purchase price shall be by check payable to the order
of the Company, outstanding shares of Common Stock duly endorsed to the Company
(which shares shall be valued at their Fair Market Value as of the day preceding
the day of such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
Cause (as defined in the Plan), this Option shall cease to be exercisable ten
(10) days following the date the notice of such termination is delivered to the
Optionee.
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
2
<PAGE> 3
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the Company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee or the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: March 16, 1998 By: /s/ LEWIS H. STANTON
------------------------------------
Lewis H. Stanton
Executive Vice President and Chief
Operating and Financial Officer
Dated: March 16, 1998 By: /s/ GEORGE G. BAYZ
------------------------------------
George G. Bayz
Optionee
3
<PAGE> 1
EXHIBIT 10.2
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Lewis Stanton (the "Optionee") an option to purchase a total of 90,000 shares
of Common Stock (the "Shares") of the Company, at the price set forth herein,
and in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on February 10, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than February
10, 2007. If the Option is not exercised within ten years of the date of grant,
it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $6.875
per share, which price is not less than eighty-five percent (85%) of the Fair
Market Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows:
(a) RIGHT TO EXERCISE. This Option shall vest and be
exercisable, cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C> <C>
After February 10, 1998 30,000
After February 10, 1999 30,000
After February 10, 2000 30,000
----------------- ----------------
Total 90,000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum of
at least 100 shares per transaction concerning the exercise of the Option. This
Option shall be exercisable by actual receipt by the Company of written notice
provided by the Optionee which shall state the election to exercise this Option,
the number of whole Shares in respect to which this Option is being exercised,
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail return
receipt requested to the then current President or Chief Financial Officer of
the Company or any other person as may be designated by the
<PAGE> 2
Company. The written notice shall be accompanied by payment of the purchase
price for the number of Shares in respect to which this Option shall be
exercised. Payment of the purchase price shall be by check payable to the order
of the Company, outstanding shares of Common Stock duly endorsed to the Company
(which shares shall be valued at their Fair Market Value as of the day preceding
the day of such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
Cause (as defined in the Plan), this Option shall cease to be exercisable ten
(10) days following the date the notice of such termination is delivered to the
Optionee.
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
2
<PAGE> 3
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the Company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee or the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: April 9, 1998 By: /s/ GEORGE G. BAYZ
-------------------------------------
President and Chief Executive Officer
Dated: April 9, 1998 By: /s/ LEWIS H. STANTON
-------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.3
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Lewis Stanton (the "Optionee") an option to purchase a total of 30,000 shares
of Common Stock (the "Shares") of the Company, at the price set forth herein,
and in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on September 12, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than
September 12, 2007. If the Option is not exercised within ten years of the date
of grant, it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $3.50 per
share, which price is not less than eighty-five percent (85%) of the Fair Market
Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows:
(a) RIGHT TO EXERCISE. This Option shall vest and be
exercisable, cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C> <C>
After February 10, 1998 10,000
After February 10, 1999 10,000
After February 10, 2000 10,000
----------------- ----------------
Total 30,000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum of
at least 100 shares per transaction concerning the exercise of the Option. This
Option shall be exercisable by actual receipt by the Company of written notice
provided by the Optionee which shall state the election to exercise this Option,
the number of whole Shares in respect to which this Option is being exercised,
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail return
receipt requested to the then current President or Chief Financial Officer of
the Company or any other person as may be designated by the
<PAGE> 2
Company. The written notice shall be accompanied by payment of the purchase
price for the number of Shares in respect to which this Option shall be
exercised. Payment of the purchase price shall be by check payable to the order
of the Company, outstanding shares of Common Stock duly endorsed to the Company
(which shares shall be valued at their Fair Market Value as of the day preceding
the day of such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
Cause (as defined in the Plan), this Option shall cease to be exercisable ten
(10) days following the date the notice of such termination is delivered to the
Optionee.
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be
sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the foregoing and the
terms of the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
2
<PAGE> 3
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the Company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee or the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: March 13, 1998 By: /s/ GEORGE G. BAYZ
---------------------------------------
President and Chief Executive Officer
Dated: March 12, 1998 By: /s/ LEWIS H. STANTON
---------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.4
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Richard DeMayo (the "Optionee") an option to purchase a total of 37,750
shares of Common Stock (the "Shares") of the Company, at the price set forth
herein, and in all respects subject to the terms, conditions, and provisions of
this Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which
was incorporated into and approved as part of the Company's Plan of
Reorganization, approved by the Bankruptcy Court, and which is attached as
Exhibit "A" and is incorporated herein by this reference. Terms defined in the
Plan shall have the same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on September 12, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than
September 12, 2007. If the Option is not exercised within ten years of the date
of grant, it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $3.75 per
share, which price is not less than eighty-five percent (85%) of the Fair Market
Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows.
(a) RIGHT TO EXERCISE. This Option shall vest and be exercisable,
cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C> <C>
After September 12, 1998 12,583
After September 12, 1999 12,583
After September 12, 2000 12,584
------------------ ------
Total 37,750
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum of
at least 100 shares per transaction concerning the exercise of the Option. This
Option shall be exercisable by actual receipt by the Company of written notice
provided by the Optionee which shall state the election to exercise this Option,
the number of whole Shares in respect to which this Option is being exercised,
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the
1
<PAGE> 2
Optionee and shall be delivered in person or by certified mail, return receipt
requested, to the then current President or Chief Financial Officer of the
Company or any other person as may be designated by the Company. The written
notice shall be accompanied by payment of the purchase price for the number of
Shares in respect to which this Option shall be exercised. Payment of the
purchase price shall be by check payable to the order of the Company,
outstanding shares of Common Stock duly endorsed to the Company (which shares
shall be valued at their Fair Market Value as of the day preceding the day of
such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
cause (as defined in the Plan), this Option shall cease to be
2
<PAGE> 3
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be sold,
ledged, assigned, hypothecated, gifted, transferred or disposed of in any manner
either voluntarily or involuntarily by operation of law, other than by will or
by the laws of descent of distribution, and may be exercised during the lifetime
of the Optionee only by such Optionee. Subject to the foregoing and the terms of
the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee of the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: December 26, 1997 By: /s/ LEWIS H. STANTON
---------------------------------------
Executive Vice President,
Chief Operating and Financial Officer
& Secretary
Dated: December 26, 1997 By: /s/ RICHARD DeMAYO
---------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.5
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Luke Brown (the "Optionee") an option to purchase a total of 9,000 shares of
Common Stock (the "Shares") of the Company, at the price set forth herein, and
in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on September 12, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than
September 12, 2007. If the Option is not exercised within ten years of the date
of grant, it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $3.75 per
share, which price is not less than eighty-five percent (85%) of the Fair Market
Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows.
(a) RIGHT TO EXERCISE. This Option shall vest and be exercisable,
cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C> <C>
After September 12, 1998 3,000
After September 12, 1999 3,000
After September 12, 2000 3,000
------------------ -----
Total 9,000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum of
at least 100 shares per transaction concerning the exercise of the Option. This
Option shall be exercisable by actual receipt by the Company of written notice
provided by the Optionee which shall state the election to exercise this Option,
the number of whole Shares in respect to which this Option is being exercised,
and such other representations and agreements as to the Optionee's investment
intent with respect to such Shares as may be required by the Company hereunder
or pursuant to the provisions of the Plan. Such written notice shall be signed
by the
1
<PAGE> 2
Optionee and shall be delivered in person or by certified mail, return receipt
requested, to the then current President or Chief Financial Officer of the
Company or any other person as may be designated by the Company. The written
notice shall be accompanied by payment of the purchase price for the number of
Shares in respect to which this Option shall be exercised. Payment of the
purchase price shall be by check payable to the order of the Company,
outstanding shares of Common Stock duly endorsed to the Company (which shares
shall be valued at their Fair Market Value as of the day preceding the day of
such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
cause (as defined in the Plan), this Option shall cease to be exercisable ten
(10) days following the date the notice of such termination is delivered to the
Optionee.
2
<PAGE> 3
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be sold,
ledged, assigned, hypothecated, gifted, transferred or disposed of in any manner
either voluntarily or involuntarily by operation of law, other than by will or
by the laws of descent of distribution, and may be exercised during the lifetime
of the Optionee only by such Optionee. Subject to the foregoing and the terms of
the Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee of the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: February 27, 1998 By: /s/ LEWIS H. STANTON
----------------------------------------------
Executive Vice President,
Chief Operating and Financial Officer
& Secretary
Dated: February 27, 1998 By: /s/ LUKE BROWN
----------------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.6
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Luke Brown (the "Optionee") an option to purchase a total of 3,000 shares of
Common Stock (the "Shares") of the Company, at the price set forth herein, and
in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on September 12, 1997. The term of the Option is ten years from the date
of grant and this Option may not, in any event, be exercised later than
September 12, 2007. If the Option is not exercised within ten years of the date
of grant, it will expire and terminate.
3. OPTION EXERCISE PRICE. The Option exercise price is $3.75 per
share, which price is not less than eighty-five percent (85%) of the Fair Market
Value of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable
during its term only in accordance with the terms, conditions, and provisions of
the Plan and this Agreement as follows.
(a) RIGHT TO EXERCISE. This Option shall vest and be
exercisable, cumulatively, as follows:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C> <C>
After September 12, 2000 3,000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a
minimum of at least 100 shares per transaction concerning the exercise of the
Option. This Option shall be exercisable by actual receipt by the Company of
written notice provided by the Optionee which shall state the election to
exercise this Option, the number of whole Shares in respect to which this Option
is being exercised, and such other representations and agreements as to the
Optionee's investment intent with respect to such Shares as may be required by
the Company hereunder or pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail, return receipt requested, to the then current President or Chief
Financial Officer of the Company or any other person as may be designated by the
Company. The written notice shall be accompanied by payment of the purchase
price for the number of Shares in respect to which this Option shall be
exercised.
1
<PAGE> 2
Payment of the purchase price shall be by check payable to the order of the
Company, outstanding shares of Common Stock duly endorsed to the Company (which
shares shall be valued at their Fair Market Value as of the day preceding the
day of such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall be legended
as set forth in the Plan or as required under applicable regulatory, state or
federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases
to serve as an Employee for any reason other than death or for Cause (as defined
in the Plan) and thereby terminates his status as an Employee, the Optionee
shall have the right to exercise this Option at any time within one hundred and
eighty (180) days following the date of such termination, to the extent that the
Optionee was entitled to exercise the Option at the date of such termination,
but in no event after the expiration of the term of the Option set forth in
Section 2 hereof.
If the Optionee ceases to serve as an Employee due to death, this
Option may be exercised at any time within one hundred and eighty (180) days
following the date of death by the Optionee's executor or administrator or the
person or persons who shall have acquired the Option by bequest or inheritance
but only to the extent the Optionee was entitled to exercise this option at the
date of death. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination or death, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate.
Notwithstanding the foregoing, this Option shall not be exercisable after the
expiration of the term set forth in Section 2 hereof. If the Optionee ceases to
serve as an Employee due to termination of his employment by the Company for
cause (as defined in the Plan), this Option shall cease to be exercisable ten
(10) days following the date the notice of such termination is delivered to the
Optionee.
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be sold,
ledged, assigned, hypothecated, gifted, transferred or disposed of in any manner
either voluntarily or involuntarily by operation of law, other than by will or
by the laws of descent of distribution, and may be exercised during the lifetime
of the Optionee only by such Optionee. Subject to the
2
<PAGE> 3
foregoing and the terms of the Plan, the terms of this Option shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and agrees
that the company may be required to withhold part or all of the Optionee's
regular compensation to pay any taxes required to be withheld under federal,
state, or local law as a result of the exercise of this Option, and that if such
regular compensation is insufficient, the Company may require the Optionee, as a
condition of exercise of this Option, to pay in cash the amount of such
withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee of the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: February 27, 1998 By: /s/ LEWIS H. STANTON
-----------------------
Executive Vice President,
Chief Operating and Financial Officer
& Secretary
Dated: February 27, 1998 By: /s/ LUKE BROWN
-----------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.7
REGISTRATION RIGHTS AGREEMENT IN FAVOR OF
THE HOLDERS OF REGISTRABLE SECURITIES
(ORCHARD CAPITAL AND RICHARD S. RESSLER)
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of September 8, 1997 by and among MAI Systems Corporation, a Delaware
corporation, and the holders of Registrable Securities signatory to this
Agreement.
This Agreement is made with reference to the letter agreement (the
"Letter Agreement") dated August 15, 1994, as amended, between the Company and
Orchard Capital Corporation ("Orchard"), pursuant to which Orchard and/or its
designee, Richard S. Ressler, are acquiring certain shares of Common Stock of
the Company. Richard S. Ressler ("Ressler") and, together with Orchard, the
("Holders") is the principal owner of Orchard. In order to induce the Holders to
acquire the Registrable Securities, on terms which vary somewhat from the Letter
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement for the benefit of the Holders.
The parties hereby agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the
following respective meanings:
(a) AFFILIATE of a specified Person means any other Person that
directly, or indirectly through one or more intermediates, controls, is
controlled by or is under common control with the Person specified, or who holds
or beneficially owns 50% or more of the equity interest in the Person specified
or 50% or more of the voting securities of the Person specified. A managed
account of a Person is also an Affiliate of such Person.
(b) COMMISSION means the Securities and Exchange Commission.
(c) COMPANY means MAI Systems Corporation or any successor to it
or to its business.
(d) COMMON STOCK means (except where the context otherwise
indicates) the Common Stock of the Company, par value $0.01 per share, as
constituted on the date hereof, and any capital stock into which such Common
Stock may thereafter be changed, and shall also include (i) capital stock of the
Company of any other class (regardless of how denominated) issued to the holders
of shares of any Common Stock upon any reclassification thereof which is also
not preferred as to dividends or liquidation over any other class of stock of
the Company and which is not subject to redemption and (ii) shares of common
stock of any successor corporation,
<PAGE> 3
acquiring corporation or constituent corporation to any corporate combination
involving the Company.
(e) CONTINUOUSLY EFFECTIVE means, with respect to a specified
registration statement, that it shall not cease to be effective and available
for transfers of Registrable Securities thereunder for longer than any
forty-five (45) consecutive Business Days, prior to the Expiration Date.
(f) DEMAND REGISTRATION shall have the meaning set forth in
Section 2(b)(i).
(g) DEMANDING HOLDERS shall have the meaning set forth in Section
2(b)(i).
(h) EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
(i) EXPIRATION DATE means the earlier of (i) the tenth (10th)
anniversary of the date of this Agreement or (ii) the date on which no Holder
holds any Registrable Securities.
(j) HOLDERS shall have the meaning set forth in the second
paragraph hereof.
(k) PERSON means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
(l) REGISTRABLE SECURITIES means any shares of Common Stock of
the Company which are currently or may hereafter be acquired and owned by a
Holder, or any securities received by a Holder in exchange for such securities.
As to any particular Registrable Securities, such securities shall cease to be
Registrable Securities when (x) such securities shall have been disposed of
pursuant to an effective registration statement, (y) such securities shall have
been transferred to any Person other than the Holders pursuant to Rule 144 (or
any successor provision) or shall be transferable pursuant to paragraph (k)
thereof (or any successor provision) under the Securities Act, or (z) they shall
have ceased to be held by the Holders or any Affiliate of the Holders or any
Transferee of the Holders or their Affiliates.
(m) REGISTRATION EXPENSES means all expenses incident to the
performance of or compliance with the registration rights granted herein,
including, without limitation, all registration, filing, listing and NASD fees,
all fees and expenses of complying with securities or blue sky laws, all word
processing, duplicating and printing expenses, messenger and delivery expenses,
the fees and expenses of the Company's counsel, the fees and expenses of one
counsel for the Selling Holders chosen by a majority vote of them, the fees and
expenses of the Company's independent public accountants, including the expenses
of any special audits or "cold comfort" letters required by or incident to such
performance and compliance, and any fees and
<PAGE> 4
disbursements of underwriters customarily paid by issuers and sellers of
securities; provided, however, that Registration Expenses shall not include
underwriting discounts, commissions and transfer taxes, if any, all of which
shall be borne by the Selling Holders.
(n) SECURITIES ACT means the Securities Act of 1933, as amended,
or any successor statute thereto, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder, all as the same shall
be in effect at the time.
(o) SELLING HOLDERS means those Holders who have requested
registration pursuant to Section 2(b) hereof and who are selling securities
thereunder.
(p) SHARES means the Company's common stock, as constituted on
the date hereof, or any stock or other securities, for which such common stock
shall have been exchanged, or any stock or other securities resulting from any
reclassification of such Shares.
(q) SHELF REGISTRATION shall have the meaning set forth in
Section 2(a).
(r) TRANSFEREE shall mean the first holder of Registrable
Securities by a transfer from a Holder or an Affiliate of a Holder provided,
however, that a Person acquiring such Registrable Securities pursuant to a
transfer under an effective registration statement or pursuant to a sale under
Rule 144 shall not be a Transferee.
(s) UNDERWRITERS' REPRESENTATIVE shall mean the managing
underwriter, or, in the case of a co-managed underwriting, the managing
underwriter designated as the Underwriters' Representative by the co-managers.
(t) VIOLATION shall have the meaning set forth in Section 6(a).
2. REGISTRATION RIGHTS.
(a) SHELF REGISTRATION. The Company may, at its election, file a
registration statement for purposes of permitting an offering of all of the
Registrable Securities for the Holders on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act, which shall initially cover at least the
shares purchased pursuant to the Letter Agreement, and shall be amended or
supplemented from time to time as necessary to cover all Registrable Securities
(a "Shelf Registration"), and the Company shall, if the Company so elects, use
reasonable efforts cause such Shelf Registration to be and continue to be, until
the Expiration Date, Continuously Effective within one hundred-twenty (120) days
from the date of such filing.
-3-
<PAGE> 5
(b) (i) DEMAND REGISTRATION. If the registration specified in
Section 2(a) is not effected, then in addition to any other rights of the
Holders, at any time commencing ninety (90) days from the date of this
Agreement, upon written request by the Holders of at least 10% of the
Registrable Securities then outstanding (the "Demanding Holders") to the Company
that the Company effect a registration of any or all of the Registrable
Securities and specifying the intended method of disposition thereof (a "Demand
Registration"), such demands to be given on not more than two (2) separate
occasions except as the Company shall agree to additional demands, then the
Company will use its reasonable efforts to effect the registration under the
Securities Act of the Registrable Securities which the Company has been so
requested to register by such Holders for disposition in accordance with the
intended method of disposition stated in such request within sixty (60) days of
the request therefor. However, this Section 2(b) shall terminate on the
Expiration Date.
(ii) Notwithstanding anything in the foregoing paragraphs of
this Section 2(b), the Company shall have the right to delay any registration of
Registrable Securities requested pursuant to this Section 2(b) for up to ninety
(90) days if such registration would, in the sole reasonable judgment of the
Company's Board of Directors (or equivalent governing body), substantially
interfere with any material transaction being considered at the time of receipt
of the request.
(c) REGISTRATION STATEMENT FORM. The Company may, if permitted by
law, effect any registration requested under Section 2(b) by the filing of a
registration statement on Form S-3 (or any successor or similar short-form
registration statement).
(d) EXPENSES. The Company shall pay all Registration Expenses
incurred in connection with the registration of Registrable Securities pursuant
to Section 2(a) or 2(b).
(e) EFFECTIVE REGISTRATION STATEMENT. The registration requested
pursuant to Section 2(b) shall not be deemed to have been effected unless it has
become effective with the Commission, provided, however, that a registration
which does not become effective after the Company has filed a registration
statement with respect thereto with the Commission solely by reason of the
Demanding Holders failing to proceed with the registration shall be deemed to
have been effected by the Company in satisfaction of the Company's obligation to
register Registrable Securities pursuant to a Demand Registration, unless the
Demanding Holders reimburse the Company for all of its costs and expenses
incurred in connection with such registration statement. Notwithstanding the
foregoing, a registration statement will not be deemed to have been effected if
(i) after it has become effective with the Commission, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or any court proceeding for any
reason other than a misrepresentation or omission by the Holders or (ii) the
conditions to closing specified in the purchase agreement or underwriting
-4-
<PAGE> 6
agreement entered into in connection with such registration are not satisfied,
other than by reason of some act or omission or failure to agree to close by a
Selling Holder.
(f) CONFLICTING INSTRUCTIONS FROM HOLDERS. (i) The Company may
rely and shall be protected in relying upon any resolution, certificate,
opinion, request, communication, demand, receipt or other paper or document in
good faith believed by it to be genuine and to have been signed or presented by
the proper party or parties. The Company may act in reliance upon the advice of
its counsel in reference to any matter in connection with this Agreement and
shall not incur any liability for any action taken in good faith in accordance
with such advice.
(ii) In the event the Company receives conflicting
instructions regarding any action to be taken or withheld hereunder, the Company
may suspend further action relating to such action until such time as the
conflicting instructions are resolved by the parties giving the same or until
the Company is instructed to take or withhold the requested action by a final
order from which no appeal may be taken issued by a court of competent
jurisdiction.
3. REGISTRATION PROCEDURES.
(a) Whenever the Company is required to effect the registration
of any Registrable Securities under the Securities Act as provided in Section 2,
the Company, as expeditiously as possible and subject to the terms and
conditions herein, will:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and use its best efforts to
cause such registration to become effective;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement Continuously
Effective and to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
until such time as all of such securities have been disposed of in accordance
with the intended methods of disposition by the Selling Holders thereof set
forth in such registration statement or, if earlier, until the Expiration Date;
(iii) furnish to the Selling Holders such number of conformed
copies of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under the
Securities Act, in conformity with the requirements of the Securities Act, and
such other documents, as the Selling Holders may reasonably request;
-5-
<PAGE> 7
(iv) use its best efforts to register or qualify all
Registrable Securities covered by such registration statement under such other
United States state securities or blue sky laws of such jurisdictions as the
Selling Holders shall reasonably request, to keep such registration statement
qualification in effect for so long as such registration remains in effect, and
take any other action which may be reasonably necessary or advisable to enable
the Selling Holders to consummate the disposition in such jurisdictions of the
securities owned by the Selling Holders, except that the Company shall not for
any such purpose be required to (a) qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified, (b)
subject itself to taxation in any such jurisdiction or (c) consent to general
service of process in any such jurisdiction;
(v) in any underwritten offering, and if reasonable and
customary in the context of such offering, use its best efforts to furnish to
the Selling Holders a signed counterpart, addressed to the Selling Holders or
seller of Registrable Securities (and the underwriters, if any), of
(x) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement),
reasonably satisfactory to the Selling Holders in their
reasonable judgment, and
(y) a "comfort" letter, reasonably satisfactory to the
Selling Holders dated the effective date of such registration
statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public
accountants who have certified the Company's financial
statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters as such seller or such holder (or the underwriters, if any)
may reasonably request;
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<PAGE> 8
(vi) immediately notify the Selling Holders at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of the
Selling Holders promptly prepare and furnish to the Selling Holders a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made;
(vii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first full calendar month after the effective date of
such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act, and not file any amendment or
supplement to such registration statement or prospectus to which the Selling
Holders shall have reasonably objected in writing on the grounds that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations thereunder,
having been furnished with a copy thereof (other than with respect to a pricing
amendment) at least two business days prior to the filing thereof;
(viii) provide a transfer agent and registrar for all
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement; and
(ix) use its best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the Registrable Securities of the same class and series are then listed.
(b) As a condition of these Registration Rights, the Company may
require the Demanding Holders, at their own expense, to furnish the Company with
such information and undertakings regarding such Holders and the distribution of
such securities as the Company may from time to time reasonably request in
writing, and the Holders, by their execution hereof, agree to provide such
information and make such undertakings as are requested.
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<PAGE> 9
(c) The Selling Holders agree (A) that upon receipt of any notice
from the Company of the happening of any event of the kind described in
subdivision (vi) of Section 3(a), the Selling Holders will forthwith discontinue
their disposition of Registrable Securities pursuant to the registration
statement relating to such Registrable Securities until the Selling Holders'
receipt of the copies of the supplemented or amended prospectus contemplated by
subdivision (vi) of Section 3(a) and, if so directed by the Company, will
deliver to the Company all copies, other than permanent file copies, then in the
Selling Holders' possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice and (B) that they will
immediately notify the Company, at any time when a prospectus relating to the
registration of such Registrable Securities is required to be delivered under
the Securities Act, of the happening of any event as a result of which
information previously furnished by the Selling Holders to the Company for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.
(d) Notwithstanding anything in this agreement to the contrary,
the Company will not be required to file such a registration statement if it
receives an opinion of counsel in form and substance reasonably satisfactory to
the Selling Holders, or counsel to the Selling Holders, to the effect that the
sale of the Registrable Securities in the manner contemplated by the Selling
Holders may be effected without registration regardless of the identity or
status of the buyer(s) of such Registrable Securities.
4. UNDERWRITTEN OFFERINGS.
(a) UNDERWRITTEN OFFERINGS. If requested by the underwriters for
any underwritten offering by the Selling Holders pursuant to a registration
requested under Section 2(b), the Company will enter into an underwriting
agreement with such underwriters for such offering, such agreement to be in form
and substance reasonably satisfactory to the Company, the Selling Holders and
its underwriters and to contain such representations and warranties by the
Company and such other terms as are customarily contained in agreements of this
type, including, without limitation, indemnities to the effect and to the extent
provided in Section 6. The Selling Holders shall be a party to such underwriting
agreement and may, at their option (reasonably exercised), require that any or
all of the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall also be
made to and for the benefit of the Selling Holders and that any or all of the
conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of the Selling
Holders.
(b) SELECTION OF UNDERWRITERS. If a requested registration
pursuant to Section 2(b) involves an underwritten offering, then the Demanding
Holders may by majority select the
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<PAGE> 10
underwriter from underwriting firms of national reputation, provided their
selection is reasonably satisfactory to the Company.
(c) HOLDBACK AGREEMENTS. (i) Each Holder agrees, if so required
by the managing underwriter, not to effect any public sale or distribution of
Registrable Securities or sales of such Registrable Securities pursuant to Rule
144 or Rule 144A under the Securities Act, during the seven days prior to and
the 90 days after any firm commitment underwritten registration pursuant to
Section 2(b) has become effective (except as part of such registration), whether
or not the Holder participates in such registration.
5. PREPARATION, REASONABLE INVESTIGATION.
In connection with the preparation and filing of each
registration statement under the Securities Act, the Company will give the
Selling Holders, the underwriters, if any, and their respective counsel and
accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the reasonable opinion of the Selling Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
6. INDEMNIFICATION; CONTRIBUTION. If any Registrable Securities are
included in a registration statement under this Agreement:
(a) To the extent permitted by applicable law, the Company shall
indemnify and hold harmless each Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including reasonable attorneys' fees and
disbursements and expenses of investigation, incurred by such party pursuant to
any actual or threatened action, suit, proceeding or investigation, or to which
any of the foregoing Persons may become subject under the Securities Act, the
Exchange Act or other federal or state laws, insofar as such losses, claims,
damages, liabilities and expenses arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"):
(i) Any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein, or any amendments
or supplements thereto;
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<PAGE> 11
(ii) The omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; or
(iii) Any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any applicable state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
applicable state securities law; provided, however, that the indemnification
required by this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or expense if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or expense to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished to the Company by the indemnified party
expressly for use in connection with such registration; provided, further, that
the indemnity agreement contained in this Section 6 shall not apply to any
underwriter to the extent that any such loss is based on or arises out of an
untrue statement or alleged untrue statement of a material fact, or an omission
or alleged omission to state a material fact, contained in or omitted from any
preliminary prospectus if the final prospectus shall correct such untrue
statement or alleged untrue statement, or such omission or alleged omission, and
a copy of the final prospectus has not been sent or given to such person at or
prior to the confirmation of sale to such person if such underwriter was under
an obligation to deliver such final prospectus and failed to do so. The Company
shall also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers, directors, agents and employees and each person who controls such
persons (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Selling Holders.
(b) To the extent permitted by applicable law, each Selling
Holder shall indemnify and hold harmless the Company, each of its directors,
each of its officers who shall have signed the registration statement, each
Person, if any, who controls the Company within the meaning of the Securities
Act, any other Selling Holder, any controlling Person of any such other Selling
Holder and each officer, director, partner, and employee of such other Selling
Holder and such controlling Person, against any and all losses, claims, damages,
liabilities and expenses (joint and several), including reasonable attorneys'
fees and disbursements and expenses of investigation, incurred by such party
pursuant to any actual or threatened action, suit, proceeding or investigation,
or to which any of the foregoing Persons may otherwise become subject under the
Securities Act, the Exchange Act or other federal or state laws, insofar as such
losses, claims, damages, liabilities and expenses arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration; provided, however, that (x) the indemnification required by this
Section 6(b) shall not
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<PAGE> 12
apply to amounts paid in settlement of any such loss, claim, damage, liability
or expense if settlement is effected without the consent of the relevant Selling
Holder of Registrable Securities, which consent shall not be unreasonably
withheld, and (y) in no event shall the amount of any indemnity under this
Section 6(b) exceed the gross proceeds from the applicable offering received by
such Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, suit, proceeding,
investigation or threat thereof made in writing for which such indemnified party
may make a claim under this Section 6, such indemnified party shall deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel at its own expense except as provided
below. The failure to deliver written notice to the indemnifying party within a
reasonable time following the commencement of any such action, if prejudicial to
its ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 but shall not relieve
the indemnifying party of any liability that it may have to any indemnified
party otherwise than pursuant to this Section 6. Any fees and expenses incurred
by the indemnified party (including any fees and expenses incurred in connection
with investigating or preparing to defend such action or proceeding) shall be
paid to the indemnified party, as incurred, within sixty (60) days of written
notice thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder, but in such event such amounts shall be refunded). Any such
indemnified party shall have the right to employ separate counsel in any such
action, claim or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be the expenses of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees and expenses
or (ii) the indemnifying party shall have failed to promptly assume the defense
of such action, claim or proceeding or (iii) the named parties to any such
action, claim or proceeding (including any impleaded parties) include both such
indemnified party and the indemnifying party, and such indemnified party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or in addition to those available to
the indemnifying party and that the assertion of such defenses would create a
conflict of interest such that counsel employed by the indemnifying party could
not faithfully represent the indemnified party (in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction
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<PAGE> 13
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all such indemnified
parties, unless in the reasonable judgment of such indemnified party a conflict
of interest may exist between such indemnified party and any other of such
indemnified parties with respect to such action, claim or proceeding, in which
event the indemnifying party shall be obligated to pay the reasonable fees and
expenses of such additional counsel or counsels). No indemnifying party shall be
liable to an indemnified party for any settlement of any action, proceeding or
claim without the written consent of the indemnifying party, which consent shall
not be unreasonably withheld.
(d) If the indemnification required by this Section 6 from
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to in
this Section 6:
(i) The indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any Violation has been committed by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such Violation. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 6(a) and Section 6(b), any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in Section 6(d)(i). No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
(e) If indemnification is available under this Section 6, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 6 without regard to the relative fault of such
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 6(d).
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<PAGE> 14
(f) The obligations of the Company and the Selling Holders of
Registrable Securities under this Section 6 shall survive the completion of any
offering of Registrable Securities pursuant to a registration statement under
this Agreement, and otherwise.
7. COVENANTS OF THE COMPANY. The Company hereby agrees and covenants as
follows:
The Company shall file as and when applicable, on a timely
basis, all reports required to be filed by it under the Exchange Act. If the
Company is not required to file reports pursuant to the Exchange Act, upon the
request of any Holder of Registrable Securities, the Company shall make publicly
available the information specified in subparagraph (c)(2) of Rule 144 of the
Securities Act, and take such further action as may be reasonably required from
time to time and as may be within the reasonable control of the Company, to
enable the Holders to transfer Registrable Securities to a Transferee without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 under the Securities Act or any similar rule or regulation
hereafter adopted by the Commission.
8. MISCELLANEOUS.
8.1 SPECIFIC PERFORMANCE. The parties hereto acknowledge that
there may be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, may be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement.
8.2 NOTICES. All notices, requests, claims, demands, waivers and
other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered by hand, if delivered
personally by courier, or three days after being deposited in the mail
(registered or certified mail, postage prepaid, return receipt requested) as
follows:
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<PAGE> 15
(a) To the Holders at the addresses indicated on the
signature page hereof; and
(b) To the Company at:
MAI Systems Corporation
9601 Jeronimo Road
Irvine, California 92618
Attention: President and Legal Department
Telecopy No. (714) 598-6324
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8.3 LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICT OF LAWS.
8.4 ATTORNEY'S FEES. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees (including any fees incurred in any appeal) in
addition to its costs and expenses and any other available remedy.
8.5 HEADINGS. The descriptive headings of the several Sections
and paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
8.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire understanding of the parties with respect to its
subject matter. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter. This
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only by a written instrument duly executed by the Company and the
Holders. Each holder of any Registrable Securities at the time or thereafter
outstanding shall be bound by an amendment or waiver authorized by this Section
8.6, whether or not any such Registrable Securities shall have been marked to
indicate such consent.
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<PAGE> 16
8.7 ASSIGNABILITY. This Agreement shall be binding upon and inure
to the benefit of the respective successors and assigns of the parties hereto
provided, however, that the Registration Rights hereunder shall only be
available to the Holders, their Affiliates and to their Transferees.
8.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 17
8.9 VALIDITY, DUE AUTHORIZATION. By its execution hereof, the
Company represents and warrants that it has the corporate power to execute,
deliver and perform the terms and provisions of this Agreement and that it has
taken all appropriate and necessary corporate action to authorize the
transactions contemplated hereby and the execution, delivery and performance of
this Agreement.
MAI Systems Corporation
By:
-------------------------------------
HOLDERS:
Orchard Capital Corporation Address: Orchard Capital Corporation
Attention: Richard S. Ressler
By: 10960 Wilshire Boulevard
------------------------------ Suite 500
Los Angeles, CA 90024
Fax: (310) 734-1617
Richard S. Ressler Address: same as above
By:
------------------------------
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<PAGE> 1
EXHIBIT 10.8
Amendment No. 3 to Letter Agreement Dated August 15, 1994
This Amendment No. 3 ("Amendment No. 3") to the Letter Agreement dated August
15, 1994 (the "Letter Agreement") amended as of October 17, 1994 ("Amendment No.
1") and amended as of August 16, 1996 ("Amendment No. 2") , is made as of the
31st day of August, 1997 by and between Orchard Capital Corporation, a
California corporation, 10960 Wilshire Blvd., Suite 500, Los Angeles, California
90024 ("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. On or about August 16, 1996, pursuant to Amendment No. 2 the term of the
Agreement expired but the Consultant continued to perform services to
MAI and the parties extended the term of the consultancy up through and
including August 31, 1997 and amended certain terms of the Agreement to
be effective during the term extension.
D. The extended term of the Agreement in Amendment No. 2 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, 1998.
2.) Fixed Compensation. During the period of extension, i.e. from September
1, 1997 up through and including August 31, 1998. Consultant shall be
compensated at the monthly rate of Twenty-four Thousand and no/100
Dollars ($24,000) prorated, if necessary, 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 Amendments No. 1 and 2.
In witness whereof. the parties have executed this Amendment No.3 as of the day
and year first written above.
Orchard Capital Corporation MAI Systems Corporation
By: /s/ RICHARD S. RESSLER By: /s/ GEORGE G. BAYZ
------------------------------- --------------------------------
Richard S. Ressler George G. Bayz
President President
<PAGE> 1
EXHIBIT 10.9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF FOR A PERIOD OF 90 DAYS AFTER THE
DATE OF THIS CERTIFICATE, AND THEREAFTER MAY NOT BE SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY IN THE
UNITED STATES OF AMERICA, ITS TERRITORIES OR POSSESSIONS, OR TO A CITIZEN,
NATIONAL OR RESIDENT OF, OR AN ENTITY ORGANIZED OR CHARTERED UNDER THE LAWS OF,
OR RESIDENT IN, THE UNITED STATES OF AMERICA, ITS TERRITORIES OR POSSESSIONS,
UNLESS (i) THE TRANSACTION IS REGISTERED UNDER THE SECURITIES ACT OF 1993 (THE
"ACT") AND ALL APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND ALL APPLICABLE STATE SECURITIES LAWS IS AVAILABLE
AND THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT SATISFACTORY
TO IT.
Warrants to Purchase 50,000
Shares of Common Stock
MAI SYSTEMS CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Void after March 5, 2002
THE WARRANTS evidenced by this Certificate have been issued in
consideration, the receipt and sufficiency of which are acknowledged hereby, for
(1) the payment of ONE DOLLAR (US$1.00) by Richard S. Ressler (the "Purchaser")
to MAI Systems Corporation (the "Company") and (2) the representations and
warranties of the Purchaser made in that certain letter from the Purchaser to
the Company dated as of March 6, 1997.
THIS CERTIFICATE evidences the right of the Purchaser, for value received,
to purchase 50,000 shares of $.01 par value Common Stock of the Company (the
"Shares") at a price of Seven and 50/100 Dollars (US$7.50) per Share; subject,
however, to the terms and conditions hereinafter set forth.
1. Term of Warrants. The Warrants may be exercised only during a period
commencing on March 6, 1997 through the close of business on March 5, 2002 (the
"Warrant Term") and may be exercised only in accordance with the terms and
conditions hereinafter set forth.
2. Exercise of Warrants. The Warrants shall be exercisable as follows:
(a) Right to Exercise. From time to time during the Warrant Term, the
Purchaser shall have the right to exercise Warrants to purchase the maximum
number of Shares specified in the following table:
Aggregate Maximum Number of Shares for
Portion of Warrant Term Which Warrants Are Exercisable
----------------------- ------------------------------
March 6, 1997 through March 5, 2002 50,000
(b) Method of Exercise, Payment; Issuance of New Warrant; Transfer and
Exchange. Subject to the provisions of Subsection (a) of this Section 2, the
Warrants may be exercised by the
<PAGE> 2
Purchaser, in whole or in part, by the surrender of this Certificate, properly
endorsed, at the principal office of the Company, and by the payment to the
Company by certified or cashier's check of the then applicable Warrant Price (as
such term is hereafter defined). In the event of any exercise of the Warrants,
certificates for the Shares so purchased shall be delivered to the Purchaser
within a reasonable time after the Warrants shall have been so exercised, and
unless the Warrants have expired, a new certificate representing the right to
purchase the number of Shares, if any, with respect to which this Certificate
shall not then have been exercised shall also be issued to the Purchaser within
such time. All such new certificates shall be dated the date hereof and shall be
identical with this Certificate except as to the number of Shares issuable
pursuant thereto.
(c) Restrictions on Exercise. The Warrants may not be exercised if the
issuance of the Shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other laws or regulations. As a
condition to the exercise of the Warrants, the Company may require the Purchaser
to make such representations and warranties to the Company as may be required by
applicable law or regulation.
3. Stock Fully Paid; Reservation of Shares. The Company covenants and agrees
that all Shares will, upon issuance and payment in accordance herewith, be fully
paid, validly issued and nonassessable. The Company further covenants and agrees
that during the Warrant Term the Company will at all times have authorized and
reserved for the purpose of issuance upon exercise of the Warrants at least the
maximum number of Shares as are issuable upon the exercise of the Warrant.
4. Adjustment of Purchase Price and Number of Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
(a) Consolidation or Merger. If the Company at any time while the Warrants
remain outstanding and unexpired shall sell all or substantially all of the
assets of the Company to another corporation, merge, consolidate or reorganize
the Company with or into another corporation as a result of which the Company is
not the surviving corporation or as a result of which the outstanding shares of
Common Stock are exchanged for or converted into cash or property or securities
not of the Company (any of which shall constitute a "Reorganization"), the
Company shall, at its option, either (i) make provision for the assumption of
the Warrants by the successor corporation or a parent or a subsidiary thereof
and the Warrants evidenced by this Certificate shall continue to vest in
accordance with the schedule set forth in Section 2(a) hereof or (ii) the
Company may declare, in the notice to be provided to the Purchaser pursuant to
Section 4(f) hereof, that the Warrants shall terminate on the effective date of
such Reorganization and, provided termination shall not have occurred prior to
the date of such Notice, give the Purchaser the right to exercise the Warrants
prior to the effective date of such Reorganization as to all or any of the
Shares, including any Shares as to which the Warrants would not otherwise be
exercisable pursuant to Section 2(a) hereof. Notwithstanding anything in this
Section 4(a) to the contrary, the prior sentence shall be inoperative and of no
force and effect if upon completion of any such Reorganization the stockholders
of the Company Immediately prior to such event do not own at least fifty percent
(50%) of the equity interest of the corporation resulting from such
Reorganization and those Warrants which are unexercised shall expire upon the
completion of such Reorganization if the notice required by Section 4(f) hereof
has been duly given.
(b) Reclassification. If the Company at any time while the Warrants remain
outstanding and unexpired shall reclassify or in any manner change the
securities then purchasable upon the exercise of the Warrants, then the number
of shares which were purchasable or would have become purchasable under the
warrants immediately prior to the reclassification shall be adjusted so that the
Purchaser shall be entitled to receive the number and kind of shares or other
securities of the Company which he would
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<PAGE> 3
have owned or have been entitled to receive after the consummation of the
reclassification had the Warrants been exercised immediately prior to the
reclassification. An adjustment made pursuant to this Section 4(b) shall become
effective immediately after the date of the reclassification, retroactive to the
record date, if any.
(c) Subdivision or Combination of Shares. If the Company at any time
while the Warrants remain outstanding and unexpired shall subdivide or combine
its Common Stock, the Warrant Price shall be adjusted to that price determined
by multiplying the Warrant Price in effect immediately prior to such subdivision
or combination by a fraction (i) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such
subdivision or combination and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision
or combination.
(d) Certain Dividends and Distribution. If the Company at any time while
the Warrants are outstanding and unexpired shall take a record of the holders of
its Common Stock for the purpose of:
(i) Stock Dividends. Entitling them to receive a dividend
payable in, or other distribution without consideration of, Common Stock, then
the Warrant Price shall be adjusted to that price determined by multiplying the
Warrant Price in effect immediately prior to each dividend or distribution by a
fraction (A) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution and
(B) the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution; or
(ii) Distribution of Assets, Securities, etc. Making any
distribution without consideration with respect to its Common Stock (other than
a cash dividend) payable otherwise than in its Common Stock, the Purchaser
shall, upon the exercise thereof, be entitled to receive in addition to the
number of Shares receivable thereupon, and without payment of any additional
consideration thereof, such assets or securities as would have been payable to
him as owner of that number of Shares receivable by exercise of the Warrants had
he been holder of record of such Shares on the record date for such
distribution.
(e) Adjustment of Number of Shares. Upon each adjustment in the Warrant
price pursuant to Subsections (c) or (d)(i) of this Section 4, the number of
Shares purchasable hereunder shall be adjusted to that number determined by
multiplying the number of Shares purchasable upon the exercise of the Warrants
immediately prior to such adjustment by a fraction, the numerator of which shall
be the Warrant price immediately prior to such adjustment and denominator of
which shall be the Warrant Price immediately following such adjustment.
(f) Notice. In case at any time:
(i) The Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution, excluding a
cash dividend, to the holders of its Common Stock;
(ii) The Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock
of any class or other rights;
(iii) There shall be any reclassification of the Common Stock of
the Company, or consolidation or merger of the Company,
with or sale of all or substantially all of its assets to,
another corporation; or
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<PAGE> 4
(iv) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to the Purchaser
at least ten (10) days' prior written notice (or, in the event of notice
pursuant to Section 4(f)(iii), at least thirty (30) days' prior written notice)
of the date on which the books of the Company shall close or record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect to any such reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up. Such notice in accordance with the
foregoing clause shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Each such written
notice shall be given by first-class mail, postage prepaid, addressed to the
Purchaser at the address of the Purchaser as shown on the books of the Company.
(g) No Change in Certificate. The form of this Certificate need not be
changed because of the adjustment in the Warrant Price or in the number of
Shares purchasable on its exercise. The Warrant Price or the number of Shares
shall be considered to have been so changed as of the close of business on the
date of adjustment.
5. Fractional Shares. No fractional Shares will be issued in connection with any
subscription hereunder, but in lieu of such fractional Shares, the Company shall
make payment therefor upon the basis of the fair market value of the Shares.
6. Non-transferability of Warrants. The Warrants may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner, in
whole or in part, without the prior written consent of the Company in its sole
discretion.
7. No Rights as Stockholder. The holder of the Warrants, as such, shall not be
entitled to vote or receive dividends or be considered a stockholder of the
Company for any purpose, nor shall anything in this Certificate be construed to
confer on such holder, as such, any rights of a stockholder of the Company or
any right to vote, give or withhold consent to any corporate action, to receive
notice of meetings of stockholders, to receive dividends or subscription rights
or otherwise.
8. Definitions. As used in this Certificate:
(a) "Warrants" shall mean the rights evidenced by this
Certificate.
(b) "Warrant Price" shall mean Seven and 50/100 Dollars
(US$7.50) as adjusted in accordance with Section 4
hereof.
Dated as of March 6, 1997.
MAI SYSTEMS CORPORATION
By: /s/ GEORGE G. BAYZ
-------------------------------------
George G. Bayz
President and Chief Executive Officer
Attest:
/s/ STANLEY P. WITKOW
- ----------------------------------
Stanley P. Witkow, Secretary
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<PAGE> 1
EXHIBIT 10.10
================================================================================
NOTE PURCHASE AGREEMENT
Among
MAI SYSTEMS CORPORATION
and
THE VALUE REALIZATION FUND, L.P.
CANYON VALUE REALIZATION FUND (CAYMAN), LTD.
GRS PARTNERS II
and
CPI SECURITIES L.P.
Dated as of March 3, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
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ARTICLE I
Definitions
<S> <C>
1.1. Definitions.............................................................1
1.2. Interpretation..........................................................4
ARTICLE II
Purchase and Sale of Notes
2.1. Purchase and Sale of Notes..............................................4
2.2. Closing.................................................................5
ARTICLE III
Representations and Warranties and Covenants
3.1. Representations and Warranties and Covenants of MAI.....................5
3.2. Representations and Warranties of Each Investor.........................7
3.3. Covenants of MAI........................................................8
ARTICLE IV
Events of Default
4.1. Events of Default......................................................14
4.2. Acceleration...........................................................15
4.3. Other Remedies.........................................................16
4.4. Waiver of Past Defaults................................................16
4.5. Other Provisions.......................................................16
ARTICLE V
Subordination of Notes
5.1. Notes Subordinate to Senior Debt.......................................16
5.2. Payment Over of Proceeds Upon Dissolution, Etc.........................16
5.3. No Payment When Senior Debt in Default.................................18
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.4. Payment Permitted If No Default........................................18
5.5. Subrogation to Rights of Holders of Senior Debt........................18
5.6. Provisions Solely to Define Relative Rights............................19
5.7. No Waiver of Subordination Provisions..................................19
5.8. Reliance on Judicial Order or Certificate of Liquidating Agent.........20
ARTICLE VI
Redemption
6.1. Right of Redemption....................................................20
6.2. Election to Redeem; Notice to Holders..................................20
6.3. Notes to Be Redeemed...................................................20
6.4. Notes Payable on Redemption Date.......................................21
6.5. Notes Redeemed in Part.................................................21
6.6. No Limitation on Repurchase............................................21
ARTICLE VII
General Provisions
7.1. Amendments; Waivers....................................................21
7.2. Notices................................................................22
7.3. Counterparts...........................................................23
7.4. Entire Agreement; No Third-Party Beneficiaries.........................23
7.5. Assignment; Security Register..........................................23
7.6. Governing Law..........................................................24
7.7. Severability...........................................................24
</TABLE>
EXHIBITS
Exhibit A Form of Note
Exhibit B Form of legal opinion and officers' certificate
Schedule II Schedule of Exceptions
-ii-
<PAGE> 4
NOTE PURCHASE AGREEMENT, dated as of March 3, 1997 (this
"Agreement"), between MAI Systems Corporation, a Delaware corporation ("MAI" or
the "Company"), The Value Realization Fund, L.P., Canyon Value Realization Fund
(Cayman), Ltd., GRS Partners II and CPI Securities L.P. (each an "Investor").
RECITALS
WHEREAS, MAI desires to sell, and the Investors desire to
purchase, MAI's 11% Subordinated Notes due 2004 (the "Notes");
WHEREAS, MAI and the Investors have entered into a Subscription
and Commitment Agreement, dated February 13, 1997 (the "Subscription and
Commitment Agreement"); and
WHEREAS, the Subscription and Commitment Agreement contemplates
that, at the election of MAI, exercised in whole or in part, MAI shall issue and
sell, and the Investors shall purchase, up to $6 million of the Notes with
warrants attached (the "Warrants") to purchase up to 750,000 shares of MAI's
common stock at $8 per share, subject to customary adjustments, and the Warrants
shall be issuable pursuant to a Warrant Agreement (the "Warrant Agreement")
among the parties hereto and dated on or about the date hereof.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained herein and for other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
1.1. Definitions. For purposes of this Agreement:
"Agreement" has the meaning set forth in the first paragraph
hereof.
"Business Day" means each Monday, Tuesday, Wednesday,
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<PAGE> 5
Thursday and Friday which is not a day on which banking institutions in Los
Angeles, California are authorized or obligated by law or executive order to
close.
"Capital Lease Obligation" of any person means the obligation to
pay rent or other payment amounts under a lease of (or other Debt arrangements
conveying the right to use) real or personal property of such person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such person in accordance with generally accepted
accounting principles. The stated maturity of such obligation shall be the date
of the last payment of rent or any other amount due under such lease prior to
the first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Closing" has the meaning set forth in Section 2.2 hereof.
"Common Stock" means the common stock, par value $0.01 per
share, of MAI.
"Commission" or "SEC" has the meaning set forth in Section
3.1(a).
"Debt" means (without duplication), with respect to any person,
whether recourse is to all or a portion of the assets of such person and whether
or not contingent, (i) every obligation of such person for money borrowed, (ii)
every obligation of such person evidenced by bonds, debentures, notes or other
similar instruments, including obligations Incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such person, (iv)
every obligation of such person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business), (v) every Capital Lease
Obligation of such person, and (vi) every obligation of the type referred to in
Clauses (i) through (v) of another person and all dividends of another person
the payment of which, in either case, such person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise.
"Default" means any event that with notice or lapse of time or
both would be an Event of Default.
"Event of Default" has the meaning set forth in Section 4.1.
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<PAGE> 6
"Exchange Act" has the meaning set forth in Section 3.1(a).
"Exchange Act Reports" has the meaning set forth in
Section 3.1(a).
"Guaranty" by any person means any obligation, contingent or
otherwise, of such person guaranteeing any Debt of any other person (the
"primary obligor") in any manner, whether directly or indirectly, and including,
without limitation, any obligation of such person, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such Debt, (ii) to purchase property, securities or services for the purpose
of assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the Guaranty by any
person shall not include endorsements by such person for collection or deposit,
in either case, in the ordinary course of business.
"holder" or "Holder" of any Note means the registered owner of
such Note as shown on the registry maintained by MAI pursuant to Section 7.5
hereof.
"Incur" means, with respect to any Debt or other obligation of
any person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on the
balance sheet of such person (and "Incurrence", "Incurred", "Incurrable" and
"Incurring" shall have meanings correlative to the foregoing); provided,
however, that a change in generally accepted accounting principles that results
in an obligation of such person that exists at such time becoming Debt shall not
be deemed an Incurrence of such Debt.
"Notes" has the meaning set forth in the recitals hereto.
"Officer's Certificate" means a certificate signed by the
Chairman of the Board, the President or a Vice President, and by the Treasurer,
an Assistant Treasurer, the Secretary or an assistant Secretary, of MAI, and
delivered to the Holders.
-3-
<PAGE> 7
"Person" or "person" means any individual, corporation,
partnership, joint venture, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Securities Act" has the meaning set forth in Section 3.1(h).
"Senior Debt" means (i) all Debt of MAI, including Debt pursuant
to the Loan and Security Agreement, dated May 26, 1995, as amended, with
Congress Financial Corporation (Western), whether Incurred on or prior to the
date of this Agreement or thereafter Incurred, other than the Notes and (ii)
amendments, renewals, extensions, modifications, refinancings and refundings of
any such Debt; provided, however, the following shall not constitute Senior
Debt: (A) any Debt owed to a person when such person is a subsidiary of MAI or
(B) any Debt which by the terms of the instrument creating or evidencing the
same is not superior in right of payment to the Notes. For purposes of this
definition, "Debt" includes any obligation to pay principal, premium (if any)
and interest.
"Subsidiary" or "subsidiary" means a majority-owned subsidiary as
defined in Rule 405 under the Securities Act.
"Subscription and Commitment Agreement" has the meaning set
forth in the recitals hereto.
"Warrants" and "Warrant Agreement" have the meanings set forth
in the recitals hereto.
1.2. Interpretation. When a reference is made in this Agreement
to a Section or Exhibit, such reference shall be to a Section of, or an Exhibit
to, this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". For purposes
of this Agreement, the knowledge of any party shall mean the knowledge of such
party and its subsidiaries after due inquiry.
ARTICLE II
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<PAGE> 8
Purchase and Sale of Notes
2.1. Purchase and Sale of Notes. Subject to the terms and
conditions herein set forth, the Investors shall purchase from MAI, and MAI
shall sell to the Investors, the Notes in an aggregate principal amount of
$6,000,000, at a purchase price of 100% of the principal amount thereof, such
amount to be allocated between the Investors as indicated on Schedule I to the
Subscription and Commitment Agreement.
2.2. Closing. The closing of the purchase and sale of the Notes
(the "Closing") shall take place at the time of execution and delivery of this
Agreement. At the Closing, (i) each Investor shall deliver to MAI its portion of
$6,000,000 by wire transfer of immediately available funds to an account as
previously specified, and (ii) MAI shall deliver to the Investors the Notes (in
substantially the form of Exhibit A hereto). The closing in respect of the
Warrants and the Warrant Agreement shall occur simultaneously therewith. At the
Closing the parties shall deliver customary legal opinions, officers'
certificates and other documents, including the legal opinion and officers'
certificate of MAI substantially in the forms attached hereto as Exhibit B.
ARTICLE III
Representations and Warranties and Covenants
3.1. Representations and Warranties and Covenants of MAI. MAI
represents and warrants to and covenants with the Investors as follows:
(a) The reports (the "Exchange Act Reports") since and including
MAI's Annual Report on Form 10-K for the year ended December 31, 1995,
previously filed by MAI with the Securities and Exchange Commission (the
"Commission" or the "SEC") pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"), when they were filed with the Commission,
conformed in all material respects to the applicable requirements of the
Exchange Act and the applicable rules and regulations of the Commission
thereunder and did not, as of their respective dates, and (taken
together) do not, as of the date hereof, contain an untrue statement of
a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
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<PAGE> 9
(b) Except as set forth in Schedule II, since the date of the
latest Exchange Act Report, there has been: (i) no material adverse
change in the assets, business, operations, liabilities, profits,
prospects or condition (financial or otherwise) of MAI and its
subsidiaries (taken as a whole), and no fact or condition exists or is
contemplated or threatened which might reasonably be expected to cause
such a change in the future; and (ii) no damage, destruction, loss or
claim, whether or not covered by insurance, or condemnation or other
taking materially adversely affecting the assets, business, operations,
condition or prospectus of MAI and its subsidiaries (taken as a whole);
(c) Except as set forth in Schedule II, MAI is not subject to any
material liability (including unasserted claims, whether known or
unknown), whether absolute, contingent, accrued or otherwise, which is
not shown or which is in excess of amounts shown or reserved for in its
balance sheets (including the notes thereto) other than liabilities of
the same nature as those set forth in the balance sheets and the notes
thereto and incurred after the date of the balance sheets in the
ordinary course of business consistent with past practice and other than
liabilities not required to be shown or reserved for on such balance
sheets in accordance with generally accepted accounting principles;
(d) MAI has filed all tax returns that are required to have been
filed in any jurisdiction, and has paid all taxes shown to be due and
payable on such returns and all other taxes and assessments that have
become due and payable and before they have become delinquent, except
for any taxes and assessments (i) the amount of which will not
individually or in the aggregate have a material adverse effect on MAI's
business or operations or (ii) the amount, applicability or validity of
which is currently being contested in good faith by appropriate
proceedings and with respect to which MAI has established adequate
reserves in accordance with generally accepted accounting principles;
(e) MAI has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Exchange Act Reports, and has
been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of
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<PAGE> 10
the failure to be so qualified in any such jurisdiction;
(f) This Agreement and the Notes have been duly authorized,
executed and delivered and constitute valid and binding obligations of
MAI enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
(g) The issue and sale of the Notes and the compliance by MAI
with all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement,
shareholders agreement, registration rights agreement or other material
agreement or instrument to which MAI is a party or by which MAI is bound
or to which any of the property or assets of MAI is subject, nor will
such action result in any violation of the provisions of the Certificate
of Incorporation or By-laws of MAI or any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over MAI or any of its properties; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Notes or the consummation by MAI of the transactions
contemplated by this Agreement; and
(h) Neither MAI, nor any person acting on its behalf (other than
the Investors, as to which MAI makes no representation), has offered or
sold the Notes by means of any general solicitation or general
advertising within the meaning of Rule 502(c) under the Securities Act
of 1933, as amended (the "Securities Act").
3.2. Representations and Warranties of Each Investor. Each
Investor severally and not jointly represents and warrants to MAI as follows:
(a) The Notes are not registered under the Securities Act or any
state securities laws; it understands that the offering and sale of the
Notes are intended to be exempt from registration under the Securities
Act, by virtue of Section 4(2) and the provisions of Regulation D
promulgated thereunder, based, in part, upon the representations,
warranties and agreements contained in this Agreement; and it
understands that the
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<PAGE> 11
Notes will bear a legend to that effect;
(b) With respect to this transaction, it is an accredited
investor within the meaning of Regulation D under the Securities Act,
and it has such knowledge and experience in financial, tax and business
matters so as to enable it to utilize the information contained in the
Exchange Act Reports and other sources including this Agreement to
evaluate the merits and risks of an investment in the Notes and to make
an informed investment decision with respect thereto;
(c) It is acquiring the Notes solely for his own account for
investment and not with a view to resale or distribution; and
(d) This Agreement has been duly authorized, executed and
delivered by such Investor.
3.3. Covenants of MAI. MAI covenants that so long as any of the
Notes are outstanding:
(a) Payment of Notes. MAI shall pay the principal of and interest
on the Notes on the dates and in the manner provided in the Notes and in
accordance with the terms hereof.
(b) SEC Reports; Reports to Holders. Within 15 days after MAI
files with the SEC copies of its annual reports and other information,
documents and reports (or copies of such portions of any of the
foregoing as the SEC may by rules and regulations prescribe) which it is
required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act, MAI shall provide copies of the same to the Holders. If at
any time MAI is not subject to such reporting requirement under the
Exchange Act, so long as the Notes remain outstanding, MAI shall cause
quarterly unaudited financial statements for the first three quarters of
each fiscal year and annual audited financial statements and an opinion
thereon by MAI's independent certified public accountants to be mailed
to the Holders at their addresses appearing in the register of Notes
maintained by MAI within 60 days after the end of each such quarter and
105 days after the end of each such fiscal year.
(c) Compliance Certificate. MAI shall deliver to the Holders,
within 15 days after its filing with the SEC of copies of its annual
reports required to be filed with the SEC pursuant to Section 13 or
Section 15(d) of the Exchange Act, but in no event later than 105 days
after the end of MAI's
-8-
<PAGE> 12
fiscal year, an Officers' Certificate stating whether or not the signers
know of any Default or Event of Default that occurred during such year.
If they do know of such a Default or Event of Default, the certificate
shall describe any such Default or Event of Default and its status. The
first certificate to be delivered pursuant to this Section shall be for
the first fiscal year ending after the execution of this Agreement.
(d) Notice of Default. MAI will deliver to the Holders an
Officer's Certificate promptly upon becoming aware of any Default or
Event of Default, which Officers' Certificate will specify such Default
or Event of Default.
(e) Waiver of Stay, Extension or Usury Laws. MAI covenants (to
the extent that it may lawfully do so) that it will not at any time
insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or
other law which would prohibit or forgive MAI from paying all or any
portion of the principal of or interest on the Notes as contemplated
herein, wherever enacted, now or at any time hereafter in force, or
which may materially affect the covenants or the performance of this
Agreement in a manner inconsistent with the provision of this Agreement
and (to the extent that it may lawfully do so) MAI hereby expressly
waives all benefit or advantage of any such law, and covenants that it
will not hinder, delay or impede the execution of any power herein
granted to the Holders, but will suffer and permit the execution of
every such power as though no such law had been enacted. This Section
shall not prevent MAI from complying with any judgment or order of a
court of competent jurisdiction which judgment or order was not sought
by MAI.
(f) Corporate Existence. Subject to Section 3.3(i) below, MAI
will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence in accordance with its
organizational documents and will use its best efforts to do or cause to
be done all things necessary to preserve and keep in full force and
effect its materials rights (charter and statutory) and material
franchises; provided, however, that MAI shall not be required to
preserve any such right or franchise if MAI shall determine that the
preservation thereof is no longer desirable in the conduct of the
business of MAI and its Subsidiaries taken as a whole and that the loss
thereof is not disadvantageous in any material respect to the Holders.
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<PAGE> 13
(g) Maintenance of Properties. MAI shall cause all properties
used or useful in the conduct of its business or the business of each of
its Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and shall cause
to be made all necessary repairs, renewals, replacements, betterments
and improvements thereof, all as in the judgment of MAI may be
necessary, so that the business carried on in connection therewith may
be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent MAI from
discontinuing the operation or maintenance of any such properties, or
disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Board of Directors of MAI or the Subsidiary concerned,
or of an Officer (or other agent employed by MAI or any of the
Subsidiaries) of MAI or such Subsidiary having managerial responsibility
for any such property, desirable in the conduct of the business of MAI
or the Subsidiary.
(h) Maintenance of Books and Records. MAI will make and keep, and
cause each Subsidiary to make and keep, books, records and accounts in
which full, true and correct entries in accordance with GAAP and all
requirements of its governing instruments and of law are made of all
dealings and transactions in relation to its business and activities.
(i) MAI May Consolidate, etc. Only on Certain Terms.
(i) MAI shall not, in a single transaction or through a
series of related transactions, consolidate with or merge with or
into any other Person or, sell, assign, convey, transfer, lease
or otherwise dispose of ("Transfer") all or substantially all of
its properties and assets to any other Person or group of
affiliated Persons other than to a Subsidiary or Subsidiaries of
MAI, unless the other provisions of this Agreement are complied
with; and
(ii) either (A) MAI shall be the continuing corporation or (B)
the Person (if other than MAI) formed by such consolidation or
into which MAI is merged or the Person which acquires by Transfer
all or substantially all the properties and assets of MAI (I)
shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of
Columbia and (II) shall expressly assume, by an Agreement
supplemental hereto, executed and delivered to the Holders, in
form reasonably satisfactory to the Holders, the due and punctual
payment of the
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principal of and interest (including any defaulted interest) on
all the Notes and the performance and observance of every
covenant and obligation of this Agreement on the part of MAI, to
be performed or observed (in which event, upon the execution and
delivery of such supplemental Agreement, MAI shall be released
from all obligations and covenants in this Agreement and in the
Notes); and
(iii) immediately after giving effect to such transaction (and
treating any Debt not previously an obligation of MAI or any of
its Subsidiaries which becomes the obligation of MAI or any of
its Subsidiaries in connection with or as a result of such
transaction as having been incurred at the time of such
transaction), no Default or Event of Default shall have occurred
and be continuing; and
(iv) MAI or such Person, as the case may be, shall have
delivered to the Holders an Officer's Certificate, stating that
such consolidation, merger or Transfer and, if a supplemental
Agreement is required in connection with such transaction, such
supplemental Agreement, comply with this Section and this
Agreement and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
(j) Prepayment Upon Change in Control. Promptly and in any event
within five Business Days after the occurrence of a Change in
Control, MAI will give written notice thereof to the Holders of all
outstanding Notes, which notice shall (A) refer specifically to this
Section 3.3(j), (B) describe the Change in Control in reasonable detail
and specify the Change in Control Prepayment Date and the Response Date
(as respectively defined below) in respect thereof and (C) contain an
offer to prepay all Notes at the price specified below and in such
notice on the date therein specified (the "Change in Control Prepayment
Date"), which shall be a Business Day not less than 20 nor more than 30
days after the date of such notice. Each Holder shall notify MAI of such
Holder's acceptance or rejection of such offer by giving written notice
of such acceptance or rejection to MAI at least ten days prior to the
Change in Control Prepayment Date (the "Response Date"); provided,
however, that the failure by a Holder to respond to such offer in
writing on or before the Response Date shall be deemed to be a rejection
of such offer in respect of such Change in Control. MAI shall prepay on
the Change in Control Prepayment Date all of the Notes held by the
Holders as to which such offer has been so accepted, at the unpaid
principal amount of each such
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<PAGE> 15
Note, together with the accrued interest thereon to the Change in
Control Prepayment Date (the "Repurchase Price"). If any holder shall
reject such prepayment offer, such Holder shall be deemed to have waived
its rights under this Section 3.3(j) to require prepayment of all Notes
held by such Holder in respect of such Change in Control, but not in
respect of any subsequent Change in Control. A Holder of more than one
Note may exercise its option under this Section 3.3(j) in respect of all
or any one or more of such Notes.
A Change in Control shall be deemed to have occurred at such time
after the original issuance of the Notes as there shall occur:
(i) the acquisition by any Person (including any syndicate or
group deemed to be a "person" under Section 13(d)(3) of the
Exchange Act) of beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or
series of transaction, of shares of capital stock of MAI
entitling such Person to exercise 50% or more of the total voting
power of all shares of capital stock of MAI entitled to vote
generally in elections of directors, other than any such
acquisition by MAI, any Subsidiary of MAI or any employee benefit
plan of MAI, or
(ii) any consolidation of MAI with, or merger of MAI into, any
other Person, any merger of another Person into MAI, or any sale
or transfer of all or substantially all of the assets (other than
to a wholly-owned Subsidiary of MAI) of MAI to any other Person
(other than (a) any such transaction pursuant to which the
holders of 50% or more of the total voting power of all shares of
capital stock of MAI entitled to vote generally in elections of
directors immediately prior to such transaction have, directly or
indirectly, at least 50% or more of the total voting power of all
shares of capital stock of the continuing or surviving
corporation entitled to vote generally in elections of directors
of the continuing or surviving corporation immediately after such
transaction and (b) a merger (x) which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock of MAI or (y) which is
effected solely to change the jurisdiction of incorporation of
MAI and results in a reclassification, conversion or exchange of
outstanding shares of Common Stock into solely shares of common
stock);
provided, however, that a Change in Control shall not be deemed to have
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occurred if either (a) the closing price per share of MAI's Common Stock for any
five trading days within the period of 10 consecutive trading days ending
immediately after the later of the Change in Control or the public announcement
of the Change in Control (in the case of a Change in Control under clause (i)
above) or ending immediately before the Change in Control (in the case of a
Change in Control under clause (ii) above) shall equal or exceed 125% of the
exercise price of the Warrants (as provided for in the Warrants) in effect on
each such trading day or (b) all of the consideration (excluding cash payments
for fractional shares and cash payments made pursuant to dissenters' appraisal
rights) in a merger or consolidation otherwise constituting the Change in
Control described in clause (i) and/or clause (ii) above consists of shares of
common stock traded on a national securities exchange or quoted on the Nasdaq
National Market and as a result of such transaction or transactions the Warrants
become exercisable solely for such common stock. "Beneficial owner" shall be
determined in accordance with Rule 13d-3 promulgated by the Commission under the
Exchange Act, as in effect on the date of original execution of this Agreement.
As a condition to accepting any offer of MAI to repurchase Notes
based upon a Change in Control, each Holder of Notes wishing to accept such
offer shall also surrender to MAI (without further charge or consideration) all
Warrants then held or beneficially owned by such Holder, and MAI may refuse to
register the transfer of the Notes or the Warrants during the period commencing
with the occurrence or announcement of a Change in Control and ending with the
Change in Control Prepayment Date.
MAI's ability to repurchase Notes upon the occurrence of a Change
in Control is subject to limitations. There can be no assurance that MAI would
have the financial resources, or would be able to arrange financing, to pay the
Repurchase Price for all the Notes that might be delivered by Holders of Notes
seeking to exercise the purchase right. In addition, MAI's ability to purchase
Notes may be limited or prohibited by the terms of its Senior Debt. Any failure
by MAI to repurchase the Notes when required following a Change in Control could
result in an Event of Default under this Agreement whether or not such
repurchase is permitted by the subordination provisions of this Agreement. Any
such default may, in turn, cause a default under Senior Debt of MAI. Moreover,
the occurrence of a Change in Control may cause an event of default under Senior
Debt of MAI. As a result, in any such case, any repurchase of the Notes would,
absent a waiver, be prohibited under the subordination provisions of this
Agreement until the Senior Debt is paid in full.
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<PAGE> 17
Rule 13e-4 under the Exchange Act requires the dissemination of
certain information to security holders in the event of an issuer tender offer
and may apply in the event that the repurchase option becomes available to
Holders of the Notes. MAI will comply with this rule to the extent applicable at
that time.
The foregoing provisions would not necessarily afford Holders of
the Notes protection in the event of highly leveraged or other transactions
involving MAI that may adversely affect Holders.
(k) Provisions applicable to a Spin-Off by MAI. In case MAI shall
effect a "Spin-Off", as defined below, it shall (at its option) either
(a) offer to prepay the Notes on the same terms and conditions as set
forth in Section 3.3(j) above following a Change in Control (as if the
Spin-Off were the equivalent of a Change in Control), but without any
requirement on the part of Holders to surrender their Warrants to MAI as
set forth in the first full paragraph following the definition of Change
in Control above, or (b) cause the "Spin-Off Entity", as defined below,
to guarantee the Notes, as a contingent or secondary obligor, and not as
primary obligor, on a subordinated basis substantially as set forth in
Article V hereof, and to enter into an Agreement supplemental hereto, in
which it shall agree to comply with the covenants and agreements
included in Section 3.3 hereof (other than Sections 3.3(j) and 3.3(k))
and in Article VII, mutatis mutandis, as if references to MAI therein
also included the Spin-Off Entity. For this purpose, a "Spin-Off" shall
mean the distribution or dividend by MAI to its stockholders (or
substantially equivalent transaction in which MAI effects a disposition
to its stockholders without receiving consideration in return) of all or
substantially all of the capital stock of a Subsidiary or division of
MAI (the "Spin-Off Entity") that with respect to MAI, immediately prior
thereto, represented a "significant subsidiary" at at least a 20%
significance level (as opposed to 10%) within the meaning of Regulation
S-X, Rule 1-02(w), as in effect at the date of this Agreement, under
both the Exchange Act and the Securities Act.
(l) Notes may be used to pay Warrant Exercise Price. MAI agrees
that the Notes may be used, and credited at the principal amount thereof
(or portion surrendered for this purpose) together with accrued interest
to the date of exercise, by the Holders in making payment of the
exercise price of the Warrants in lieu of cash.
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ARTICLE IV
Events of Default
4.1. Events of Default. An "Event of Default" occurs if:
(a) MAI defaults in the payment of interest on any Note when the
same becomes due and payable and such Default continues for a period of
15 days, whether or not such payment shall be prohibited by the
provisions of Article V;
(b) MAI defaults in the payment of the principal of any Note when
the same becomes due and payable at maturity, upon redemption or
otherwise, whether or not such payment shall be prohibited by the
provisions of Article V;
(c) MAI fails to comply with any of its other agreements in the
Notes or this Agreement and such Default continues for a period of 30
days after written notice from an Investor;
(d) (i) MAI or any of its Subsidiaries defaults in the
performance of any mortgage, indenture, loan agreement or other debt
instrument providing for or securing Debt of MAI or any of its
Subsidiaries for borrowed money having an aggregate principal amount of
more than $3,000,000 with the result that more than $3,000,000 of the
principal amount of such Debt shall have been accelerated and become due
and payable prior to its stated maturity; or (ii) MAI or any Subsidiary
defaults in the payment in full of any Debt having an aggregate
principal amount of more than $3,000,000 when the same shall become due
and payable at its stated maturity and payment thereof has been demanded
unless, in the case of Debt other than for borrowed money or Capital
Lease Obligations, MAI or such Subsidiary is contesting in good faith
its obligation to pay such Debt; and in the case of either (i) or (ii)
such default continues for 30 days without such acceleration having been
rescinded or such Debt having been discharged;
(e) one or more judgments, orders or decrees for payment of
money, either individually or in the aggregate, in excess of $3,000,000
is entered by a court of competent jurisdiction against MAI or any
Subsidiary of MAI and such judgment, order or decree remains
undischarged and unbonded and an enforcement proceeding has been
commenced by any
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<PAGE> 19
creditor on such judgment, order or decree for a period (during which
execution shall not be effectively stayed) of 30 consecutive days after
the date on which the right of appeal has expired;
(f) MAI or any Subsidiary of MAI, pursuant to or within the
meaning of any Bankruptcy Law (A) becomes insolvent within the context
of a Bankruptcy filing, (B) commences a voluntary case or proceeding,
(C) consents to, or acquiesces in, the institution of a bankruptcy,
liquidation or an insolvency proceeding against it or the entry of a
judgment, decree or order for relief against it in an involuntary case
or proceeding, (D) applies for, consents to or acquiesces in the
appointment of or taking possession by a Custodian of MAI or any
Subsidiary of MAI or of any substantial part of its property, (E) makes
a general assignment for the benefit of its creditors, or (F) takes any
corporate action in furtherance of or to facilitate, conditionally or
otherwise, any of the foregoing;
(g) a court of competent jurisdiction enters a judgment, decree
or order under any Bankruptcy Law which (A) is for relief against MAI or
any Subsidiary in an involuntary case, (B) appoints a Custodian of MAI
or any Subsidiary of MAI or for any substantial part of its property or
(C) orders the winding-up or liquidation of its affairs, and such
judgment, decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or any bankruptcy, insolvency, or
liquidation petition or application is filed, or any bankruptcy case or
insolvency proceeding is commenced, against MAI or any Subsidiary of MAI
and such petition, application, case or proceeding is not dismissed
within 60 days; or any warrant, order or writ of attachment is issued
against all or substantially all of the property of MAI and its
Subsidiaries on a consolidated basis which is not released within 60
days of service.
The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar federal or state law now or hereafter in effect for the relief,
supervision, conservation, reorganization or liquidation of debtors or for the
benefit of creditors. The term "Custodian" means any receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law.
4.2. Acceleration. If an Event of Default occurs, all unpaid
principal of an the accrued interest on the Notes then outstanding shall
automatically become due and payable without any declaration or other act on
the part of the Holders or any Holder.
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<PAGE> 20
4.3. Other Remedies. If an Event of Default occurs and is
continuing and the Holders are entitled to payment as a result of an
acceleration or at maturity, the Holders may pursue any available remedy to
collect the payment of principal of or interest on the Notes or to enforce the
performance of any provision of the Notes or this Agreement.
4.4. Waiver of Past Defaults. Any Holder may waive any past
default or an existing Default and its consequences without regard to the
actions by any other Holder. When a Default or Event of Default is waived, it is
cured and ceases.
4.5. Other Provisions. MAI hereby agrees to pay on demand
reasonable costs and expenses, including without limitation reasonable
attorneys' fees, incurred or paid by the Investors and any subsequent holder of
a Note in enforcing the Notes upon the occurrence of an Event of Default.
No delay or omission on the part of the Investors or any
subsequent holder of a Note in exercising any right hereunder shall operate as a
waiver of such right or of any other right under the Notes, and a waiver, delay
or omission on any one occasion shall not be construed as a bar to or waiver of
any such right on any future occasion.
ARTICLE V
Subordination of Notes
5.1. Notes Subordinate to Senior Debt. MAI covenants and agrees,
and each holder of a Note, by his acceptance thereof, likewise covenants and
agrees, that, to the extent and in the manner hereinafter set forth, the payment
of the principal of and interest on the Notes is hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt.
5.2. Payment Over of Proceeds Upon Dissolution, Etc. In the event
of (a) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to MAI or to its creditors, as such, or to its assets, or
(b) any liquidation, dissolution or other winding up of MAI, whether voluntary
or involuntary and whether or not involving insolvency or bankruptcy, or (c) any
assignment for the benefit of creditors or any other marshalling of assets and
liabilities of MAI, then and in any such event specified in (a), (b) or (c)
above
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(each such event, if any, herein sometimes referred to as a "Proceeding")
the holders of Senior Debt shall be entitled to receive payment in full of all
amounts due or to become due on or in respect of all Senior Debt, or provision
shall be made for such payment in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of Senior Debt, before a holder of a Note is
entitled to receive any payment or distribution of any kind or character,
whether in cash, property or securities, on account of principal of or interest
on the Notes or on account of any purchase or other acquisition of the Notes by
MAI or any subsidiary of MAI (all such payments, distributions, purchases and
acquisitions herein referred to, individually and collectively, as a "Note
Payment"), and to that end the holders of Senior Debt shall be entitled to
receive, for application to the payment thereof, any Note Payment which may be
payable or deliverable in respect of the Notes in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of
this Section, a holder of a Note shall have received any Note Payment before all
Senior Debt is paid in full or payment thereof provided for in cash or cash
equiva lents or otherwise in a manner satisfactory to the holders of Senior
Debt, then and in such event such Note Payment shall be paid over or delivered
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other person making payment or distribution of
assets of MAI for application to the payment of all Senior Debt remaining
unpaid, to the extent necessary to pay all Senior Debt in full, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
For purposes of this Article only, the words "any payment or
distribution of any kind or character, whether in cash, property or securities"
shall not be deemed to include a payment or distribution of stock or securities
of MAI provided for by a plan of reorganization or readjustment authorized by an
order or decree of a court of competent jurisdiction in a reorganization
proceeding under any applicable bankruptcy law or of any other corporation
provided for by such plan of reorganization or readjustment which stock or
securities are subordinated in right of payment to all then outstanding Senior
Debt to substantially the same extent as the Notes are so subordinated as
provided in this Article.
5.3. No Payment When Senior Debt in Default. In the event and
during the continuation of any default in the payment of principal of (or
premium, if any) or interest on any Senior Debt beyond any applicable grace
period with respect thereto, or in the event that any event of default with
respect to any Senior Debt shall have occurred and be continuing permitting the
holders of such
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Senior Debt (or a trustee on behalf of the holders thereof) to declare such
Senior Debt due and payable prior to the date on which it would otherwise have
become due and payable, unless and until such event of default shall have been
cured or waived or shall have ceased to exist, or in the event any judicial
proceeding shall be pending with respect to any such default in payment or event
of default, then no Note Payment shall be made.
In the event that, notwithstanding the foregoing, MAI shall make
any Note Payment to any holder prohibited by the foregoing provisions of this
Section, then and in such event such Note Payment shall be paid over and
delivered forthwith to MAI.
The provisions of this Section shall not apply to any Note
Payment with respect to which Section 5.2 would be applicable.
5.4. Payment Permitted If No Default. Nothing contained in this
Article or elsewhere in this Agreement shall prevent MAI, at any time except
during the pendency of any Proceeding referred to in Section 5.2 or under the
conditions described in Section 5.3, from making Note Payments.
5.5. Subrogation to Rights of Holders of Senior Debt. Subject to
the payment in full of all amounts due or to become due on or in respect of
Senior Debt, or the provision for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of Senior Debt, the holders of
the Notes shall be subrogated to the rights of the holders of such Senior Debt
to receive payments and distributions of cash, property and securities
applicable to the Senior Debt until the principal of and interest on the Notes
shall be paid in full. For purposes of such subrogation, no payments or
distributions to the holders of the Senior Debt of any cash, property or
securities to which the holders of the Notes would be entitled except for the
provisions of this Article, and no payments over pursuant to the provisions of
this Article to the holders of Senior Debt by holders of the Notes, shall, as
among MAI, its creditors other than holders of Senior Debt and the holders of
the Notes, be deemed to be a payment or distribution by MAI to or on account of
the Senior Debt.
5.6. Provisions Solely to Define Relative Rights. The provisions
of this Article are and are intended solely for the purpose of defining the
relative rights of the holders of the Notes on the one hand and the holders of
Senior Debt on the other hand. Nothing contained in this Article or elsewhere in
this Agreement is intended to or shall (a) impair, as among MAI, its creditors
other than holders of Senior Debt and the holders of the Notes, the obligation
of MAI, which is absolute and unconditional, to pay to the holders of the Notes
the
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<PAGE> 23
principal of and interest on the Notes as and when the same shall become due and
payable in accordance with their terms; or (b) affect the relative rights
against MAI of the holders of the Notes and creditors of MAI other than the
holders of Senior Debt; or (c) prevent the holders of the Notes from exercising
all remedies otherwise permitted by applicable law upon default under this
Agreement, subject to the rights, if any, under this Article of the holders of
Senior Debt to receive cash, property and securities otherwise payable or
deliverable to such holders.
5.7. No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Debt to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of MAI or by any act or failure to act, in good
faith, by any such holder, or by any noncompliance by MAI with the terms,
provisions and covenants of this Agreement, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Debt may, at any time and from time to time,
without the consent of or notice to the holders of the Notes, without incurring
responsibility to the holders of the Notes and without impairing or releasing
the subordination provided in this Article or the obligations hereunder of the
holders of the Notes to the holders of Senior Debt, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement
in any manner Senior Debt or any instrument evidencing the same or any agreement
under which Senior Debt is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Debt; (iii) release any person liable in any manner for the collection of Senior
Debt; and (iv) exercise or refrain from exercising any rights against MAI or any
other person.
5.8. Reliance on Judicial Order or Certificate of Liquidating
Agent. Upon any payment or distribution of assets of MAI referred to in this
Article, the holders of the Notes shall be entitled to rely upon any order or
decree entered by any court of competent jurisdiction in which such Proceeding
is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other person
making such payment or distribution, delivered to the holders of Notes, for the
purpose of ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other indebtedness of MAI, the
amount thereof or payable
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<PAGE> 24
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article.
ARTICLE VI
Redemption
6.1. Right of Redemption. The Notes may be redeemed at the
election of MAI as a whole or from time to time in part at any time after the
second anniversary of the date of this Agreement at a redemption price equal to
100% of the principal amount of such Notes, together with accrued interest to
the Redemption Date.
6.2. Election to Redeem; Notice to Holders. MAI shall give each
holder of Notes written notice of each optional redemption pursuant to Section
6.1 hereof not less than 30 nor more than 60 days prior to the date fixed for
such redemption (the "Redemption Date"), specifying the Redemption Date, the
aggregate principal amount of such Notes to be redeemed on such Redemption Date,
the redemption price applicable to such redemption, and, if less than all such
Notes that are outstanding are to be redeemed on such Redemption Date, the
principal amount of each Note held by such holder to be redeemed on such date.
6.3. Notes to Be Redeemed. In the case of each partial
redemption, the principal amount of the Notes to be redeemed shall be allocated
among the Notes at the time outstanding in proportion, as nearly as practicable,
to the respective outstanding principal amounts thereof, with adjustments, to
the extent practicable, to compensate for any prior payments not made exactly in
such proportion, but so that Notes remaining outstanding after the redemption
are in the authorized denominations specified in the Notes.
6.4. Notes Payable on Redemption Date. Notice of redemption
having been given, the Notes or portions thereof so to be redeemed shall, on the
date fixed for such redemption, become due and payable at the applicable price
therein specified, and from and after such date (unless MAI shall default in the
payment of such price and accrued interest) such Notes or portions, as the case
may be, shall cease to bear interest. The amount to be paid in respect of each
such Note or portion thereof shall be paid by MAI at such price together with
accrued interest to such date; provided, however, that installments of interest
due on or prior to such date shall be payable to the holders of such Notes or
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portions registered at the close of business on the relevant record dates
according to their terms. If the amount payable in respect of any Note or
portion thereof selected for redemption shall not be so paid or made available
for payment, the unpaid amount shall, until paid, bear interest from the date
fixed for such redemption at 11% per annum.
6.5. Notes Redeemed in Part. Upon each redemption of the Notes or
portions thereof, any Note which is redeemed in part only shall, at the option
of the holder thereof, be endorsed by such holder to show the amount of
principal thereof which remains outstanding after such redemption and the date
of such redemption or be presented to MAI at its principal office for the
purpose of making such endorsement thereon. Notwithstanding the foregoing, the
failure of any holder to so endorse or to present for endorsement such Note
shall not affect the obligation of MAI to pay the amount of principal of such
Note which remains outstanding, but only such amount, and to pay interest
thereon from the last date to which interest has actually been paid or made
available for payment. Any Note which is paid in full shall be surrendered to
MAI for cancellation and shall not be reissued.
6.6. No Limitation on Repurchase. Nothing contained in this
Article VI, or elsewhere in this Agreement shall be construed as a limitation on
the right of MAI to purchase a Note or Notes from the holder thereof in
negotiated transactions or otherwise, at any time or from time to time.
ARTICLE VII
General Provisions
7.1. Amendments; Waivers. (a) This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
(b) Any agreement on the part of a party to any waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to assert any of its rights under this Agreement
shall not constitute a waiver of such rights.
7.2. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
facsimile transmission, telegram or telex or by registered or certified mail
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(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 7.2):
(i) If to MAI, to:
MAI Systems Corporation
9600 Jeronimo Road
Irvine, California 92718
Attention: General Counsel
Facsimile: (714) 580-2378
with a copy to:
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Attention: Frank H. Golay, Jr.
Facsimile: (213) 683-0457
(ii) If to any Investor, to it care of:
Canyon Partners Incorporated,
9665 Wilshire Boulevard,
Beverly Hills, California 90212
Attention: Mitch Julis
Facsimile: (310) 247-2701
with a copy to:
Sidley & Austin
555 West 5th Street
Los Angeles, California 90013
Attention: Gary J. Cohen
Facsimile: (213) 896-6600
(iii) If to any other Holder, to it at its address shown on the
Notes register to be maintained by MAI pursuant to Section 7.5 hereof.
7.3. Counterparts. This Agreement may be executed in one or
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<PAGE> 27
more counterparts, all of which shall be considered one and the same agreement.
7.4. Entire Agreement; No Third-Party Beneficiaries. This
Agreement (a) constitutes the entire agreement, and supersedes all prior
agreements and understandings, both written and oral, between the parties hereto
with respect to the subject matter hereof and (b) is not intended to confer upon
any person other than the parties and their permitted successors and assigns any
rights or remedies.
7.5. Assignment; Security Register. This Agreement shall be
deemed to be assigned by each Investor (or subsequent Holder) to the extent of
any transfer by it of any of the Notes hereunder. Otherwise, the Investors, on
the one hand, and MAI, on the other hand, shall not assign any of their
respective rights or obligations hereunder, in each case without the prior
written consent of the other party hereto (provided that no party will
unreasonably withhold any such consent). MAI shall cause to be kept at its
principal corporate office a register in which MAI shall register the Notes and
transfers thereof. MAI may treat the registered owner (the "holder" or "Holder")
of any Note as the owner thereof for all purposes, notwithstanding any notice to
the contrary. As a condition to any transfer of a Note, MAI may require
appropriate documentation to evidence compliance with applicable securities
laws, including an opinion of counsel with respect thereto.
MAI hereby acknowledges and makes each Note a registered
obligation for United States withholding tax purposes. MAI shall be the
registrar for the Notes ("Registrar") with the full power of substitution. In
the event Registrar becomes unable or unwilling to act as registrar under the
Notes, MAI shall reasonably designate a successor Registrar. Each Holder who is
a foreign person, by its acceptance of a Note, hereby agrees to provide MAI with
a completed Internal Revenue Service From W-8 (Certificate of Foreign Status) or
a substantially similar form for Holders, participants or other affiliates who
are holders of beneficial interests in the Note. Notwithstanding any contrary
provision contained in each Note, the Note or any interest therein may not be
sold, transferred, hypothecated, participated or assigned to any person or
entity except upon satisfaction of the conditions specified in this Paragraph.
Holder, by its acceptance of the Note, agrees to be bound by the provisions of
this Paragraph and to indemnify and hold harmless the Registrar against any loss
or liability arising from the disposition by such holder of the Note or any
interest therein in violation of this Paragraph. Registrar shall keep at its
principal executive office (or an office or agency designated by it by notice to
the last registered holder) a ledger, in which, subject to such reasonable
regulations as it
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<PAGE> 28
may prescribe, but at its expense (except as specified below), it shall provide
for the registration and transfer of Notes. No sale, transfer, hypothecation,
participation or assignment of any Note or any interest therein shall be
effective for any purpose until it shall be registered on the books of the
Registrar to be maintained for such purpose. The Registrar shall record the
transfer of each Note on the books maintained for this purpose upon receipt by
the Registrar at the office or agency designated by the registrar of (i) a
written assignment of the Note (or interest therein); (ii) funds sufficient to
pay any transfer taxes payable upon the making of such transfer as well as the
cost of reviewing the documents presented to the Registrar; and (iii) such
evidence of due execution as the Registrar shall reasonably require. The
Registrar shall record the transfer of any Note on the books maintained for such
purpose at the cost and expense of the assignee.
7.6. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
7.7. Severability. If any term or provision of this Agreement or
the application thereof to either party or set of circumstances shall, in any
jurisdiction and to any extent, be finally held invalid or unenforceable, such
term or provision shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without invalidating or
rendering unenforceable any other terms or provisions of this Agreement or under
any other circumstances, and the parties shall negotiate in good faith a
substitute provision which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a position as
nearly comparable as possible to the position it would have been in but for the
finding of invalidity or unenforceability, while remaining valid and
enforceable.
-25-
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MAI SYSTEMS CORPORATION
By:
--------------------------------------------
Name:
Title:
THE VALUE REALIZATION FUND, L.P.,
a California limited partnership
By: Canpartners Investments III, L.P., a
California limited partnership, its
general partner
By: Canyon Capital Management, L.P., a
California limited partnership, its
general partner
By: Canpartners Incorporated, a
California corporation, its general
partner
By:
--------------------------------------------
Name:
Title:
CANYON VALUE REALIZATION FUND
(CAYMAN), LTD.
By: MeesPierson (Cayman) Limited, its
Administrator
By:
--------------------------------------------
Name:
Title:
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<PAGE> 30
GRS PARTNERS II
By: Grosvenor Capital Management L.P.,
its Administrator
By: Grosvenor Capital Management, Inc.,
its general partner
By:
------------------------------------------
Name:
Title:
CPI SECURITIES L.P.,
a California limited partnership
By: Canpartners Incorporated,
a California corporation, its general
partner
By:
------------------------------------------
Name:
Title:
-27-
<PAGE> 31
EXHIBIT A TO NOTE PURCHASE AGREEMENT
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH ON THE
REVERSE.
MAI SYSTEMS CORPORATION
11% Subordinated Note due 2004
No. 1 $[__________]
MAI Systems Corporation, a Delaware corporation ("MAI"), for
value received, hereby promises to pay to______________, or registered assigns
(the "holder"), the principal sum of $[________] on _______________, 2004, and
to pay interest thereon from ___________, 1997 (the "Funding Date") or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, semi-annually on _________ and __________ in each year (each, an
"Interest Payment Date"), commencing __________, 1997, at a rate of 11% per
annum. Interest shall be computed on the basis of a 360-day year of twelve
30-day months. The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will be paid to the person in whose name this
Note (or a predecessor Note) is registered at the close of business on the
regular record date for such interest, which shall be the ___________ and
____________ (whether or not a business day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the holder on such regular
record date and may either be paid to the person in whose name this Note is
registered at the close of business on a special record date for the payment of
such defaulted interest to be fixed by MAI, or be paid at any time in any other
lawful manner.
Payment of interest on this Note will be made by wire transfer to
the address or account specified by the holder or, in the absence of such
specification, by check mailed to the holder at his address appearing in the
Notes register.
This Note is issued pursuant to a Note Purchase Agreement, dated
as of the Funding Date, among MAI and the initial Investors named therein (the
"Note Purchase Agreement") and is subject to the provisions thereof, including
the restrictions on transfer contained therein. The Notes shall be issuable
solely
A-1
<PAGE> 32
in denominations of $100,000 and integral multiples of $1,000 in excess thereof.
Terms used herein and not otherwise defined shall have the meanings set forth in
the Note Purchase Agreement.
The indebtedness evidenced by this Note is, to the extent
provided in the Note Purchase Agreement, subordinate and subject in right of
payment to the prior payment in full of all Senior Debt and this Note is issued
subject to the provisions of the Note Purchase Agreement with respect thereto.
The holder of this Note, by accepting the same, agrees to and shall be bound by
such provisions.
Upon the occurrence of any Event of Default under the Note
Purchase Agreement, this Note (including principal, interest, and all other
amounts) shall be immediately due and payable. This Note is subject to
redemption, in whole or in part, at the option of MAI after the second
anniversary of the Funding Date, at 100% of the principal amount hereof (or the
portion to be redeemed) together with accrued interest to the redemption date,
as set forth in the Note Purchase Agreement.
MAI may be required to offer to prepay this Note at 100% of the
principal amount hereof (or the portion to be prepaid) together with accrued
interest to the prepayment date, upon the occurrence of a Change in Control, as
defined in, and subject of the terms and conditions of, the Note Purchase
Agreement with respect thereto.
The Notes are issuable only in registered form without coupons
and transfers will be effected only on the Notes register maintained by the
Registrar as provided in Section 7.5 of the Note Purchase Agreement.
The undersigned maker hereby waives presentment, demand, notice
of dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note.
A-2
<PAGE> 33
IN WITNESS WHEREOF, MAI has caused this Note to be duly executed.
Dated: _______________, 1997
MAI SYSTEMS CORPORATION
By:
--------------------------
Name:
Title:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE THEREWITH.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THE NOTE
PURCHASE AGREEMENT, DATED AS OF ___________________, 1997, AMONG MAI SYSTEMS
CORPORATION AND THE INITIAL INVESTORS NAMED THEREIN, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL EXECUTIVE OFFICES OF MAI SYSTEMS CORPORATION, AND WHICH
RESTRICTIONS REQUIRE, AS A CONDITION TO ANY TRANSFER, APPROPRIATE DOCUMENTATION
TO EVIDENCE COMPLIANCE WITH APPLICABLE SECURITIES LAWS, INCLUDING AN OPINION OF
COUNSEL WITH RESPECT THERETO.
NO REGISTRATION OF TRANSFER OF THIS SECURITY WILL BE EFFECTED ON THE BOOKS OF
MAI SYSTEMS CORPORATION UNLESS AND UNTIL SUCH RESTRICTIONS ARE COMPLIED WITH.
A-3
<PAGE> 34
The remaining exhibits and schedules are omitted from this copy.
<PAGE> 1
EXHIBIT 10.11
AMENDMENT NO. 1
TO
NOTE PURCHASE AGREEMENT
AMENDMENT NO. 1, dated as of May __, 1997 (this "Amendment"), to
the Note Purchase Agreement, dated as of March 3, 1997 (the "Agreement"),
between MAI Systems Corporation, a Delaware corporation ("MAI" or the
"Company"), and The Value Realization Fund, L.P., Canyon Value Realization Fund
(Cayman), Ltd., GRS Partners II and CPI Securities L.P. (each an "Investor").
RECITALS
WHEREAS, the parties previously entered into the Agreement which
provided for the issuance by MAI and purchase by the Investors of MAI's 11%
Subordinated Notes due 2004 (the "Notes");
WHEREAS, the Investors have entered into an Intercreditor and
Subordination Agreement with Congress Financial Corporation (Western)
("Congress"), dated as of May __, 1997 (the "Intercreditor Agreement"), which
provides, among other things, for certain provisions respecting subordination as
between Congress and the Investors, and MAI has signed an acknowledgment
thereof; and
WHEREAS, MAI and the Investors wish to amend the Agreement in
certain respects so as to conform and coordinate its provisions more closely
with those of the Intercreditor Agreement;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
SECTION 1. The definitions included in Section 1.1 of the
Agreement shall be supplemented by adding the following definitions:
"Congress" means Congress Financial Corporation (Western).
"Notice Giver" has the meaning set forth in the following
definition of Payment Stoppage Notice.
"Payment Stoppage Notice" means a notice that an event of default
has occurred under any Senior Debt (other than a default in the payment of the
principal of (or premium, if any) or interest on such Senior Debt) permitting
the holder or holders of such Senior Debt (or a trustee on behalf of the holders
thereof) to declare such Senior Debt due and payable prior to the date on which
it would otherwise have become due and payable, which notice is given to the
Company and the Holders of the Notes by Congress or by any other holder of the
Senior Debt to which such default applies (or by a trustee on behalf of the
holders thereof) (the "Notice Giver") and which states that such notice is a
Payment Stoppage Notice delivered pursuant to Article V of this Agreement.
However, until such time as the Intercreditor Agreement has been terminated,
only Congress shall be entitled to give a Payment Stoppage Notice and to be a
Notice Giver hereunder.
The "Payment Stoppage Period" with respect to any Payment
Stoppage Notice means the period commencing upon the receipt by the Company and
the Holders
-2-
<PAGE> 3
of the Notes of such Payment Stoppage Notice and ending on the date which is 179
days after the date of such receipt.
SECTION 2. Section 5.3 of the Agreement shall be amended and
restated to read in its entirety as follows:
5.3 No Payment when Senior Debt in Default. In the event
that any default in the payment of principal of (or premium, if any) or
interest on any Senior Debt beyond any applicable grace period with
respect thereto shall have occurred and be continuing, then no Note
Payment shall be made, unless and until such event of default shall have
been cured or waived or shall have ceased to exist. Additionally, in the
event that any other event of default (i.e., other than a default in the
payment of principal of (or premium, if any) or interest on any Senior
Debt) with respect to any Senior Debt shall have occurred and be
continuing permitting the holder or holders or trustee of such Senior
Debt to declare such Senior Debt due and payable prior to the date on
which it would otherwise have become due and payable, and any Notice
Giver has given a Payment Stoppage Notice with respect to such Senior
Debt, then no Note Payment shall be made, unless and until the earliest
to occur of (i) the expiration of the related Payment Stoppage Period,
(ii) the Company and the Holders of the Notes receive written notice
from the Notice Giver
-3-
<PAGE> 4
terminating such Payment Stoppage Period, or (iii) such event of default
shall have been cured or waived or shall have ceased to exist.
Notwithstanding anything herein to the contrary, in no
event will a Payment Stoppage Period extend beyond 179 days after the
date any Note Payment was due and not paid as a consequence of such
Payment Stoppage Period, and only one such Payment Stoppage Period may
be commenced within any period of 365 consecutive days. For purposes of
this Section 5.3, no default which existed or was continuing with
respect to the Senior Debt to which the Payment Stoppage Period relates
on the date such Payment Stoppage Period commenced shall be or be made
the basis for the commencement of any subsequent Payment Stoppage Period
by any holder of such Senior Debt unless such default is cured or waived
for a period of not less than 90 consecutive days.
In the event that, notwithstanding the foregoing, the
Company shall make any Note Payment to any Holder of the Notes
prohibited by the foregoing provisions of this Section, then and in such
event, such Note Payment shall be paid over and delivered forthwith to
the Company.
The provisions of this Section 5.3 shall not apply to any
Note Payment with respect to which Section 5.2 would be applicable.
-4-
<PAGE> 5
SECTION 3. This Amendment is made by the parties as of the date
first above written, but shall become effective only upon the acknowledgment
hereof by Congress in the form attached.
SECTION 4. Upon the effectiveness of this Amendment, on and after
the date hereof, each reference in the Agreement to "this Agreement",
"hereunder", "hereof" or words of like import shall mean and be a reference to
the Agreement as amended hereby. Except as specifically amended above, all of
the terms of the Agreement remain unchanged and in full force and effect.
SECTION 5. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, REGARDLESS OF THE LAWS
THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS
THEREOF.
SECTION 6. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
MAI SYSTEMS CORPORATION
By:
-------------------------------------------
Name:
Title:
THE VALUE REALIZATION FUND, L.P., a
California limited partnership
By: Canpartners Investments III, L.P., a
California limited partnership, its general
partner
By: Canyon Capital Management, L.P., a
California limited partnership, its general
partner
By: Canpartners Incorporated, a California
corporation, its general partner
By:
-------------------------------------------
Name:
Title:
CANYON VALUE REALIZATION FUND
(CAYMAN), LTD.
By: MeesPierson (Cayman) Limited, its
Administrator
By:
-------------------------------------------
Name:
Title:
-6-
<PAGE> 7
GRS PARTNERS II
By: Grosvenor Capital Management L.P., its
Administrator
By: Grosvenor Capital Management, Inc., its
general partner
By:
-------------------------------------------
Name:
Title:
CPI SECURITIES L.P.,
a California limited partnership
By: Canpartners Incorporated, a California
corporation, its general partner
By:
-------------------------------------------
Name:
Title:
-7-
<PAGE> 8
ACKNOWLEDGMENT BY
CONGRESS FINANCIAL CORPORATION (WESTERN)
The undersigned hereby approves of, and agrees and consents to,
the foregoing Amendment, dated as of May ___, 1997, to the Note Purchase
Agreement, dated as of March 3, 1997.
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By:
----------------------------------------
Title:
---------------------------------
-8-
<PAGE> 1
EXHIBIT 10.12
REGISTRATION RIGHTS AGREEMENT IN FAVOR OF
THE HOLDERS OF REGISTABLE SECURITIES
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of February 13, 1997 by and among MAI Systems Corporation, a Delaware
corporation, and the holders of Registrable Securities (the "Holders") signatory
to this Agreement.
This Agreement is made pursuant to the Subscription and Commitment
Agreement (the "S&C Agreement") dated as of February 13, 1997 by and among MAI
Systems Corporation, the ("Company"), and the Holders pursuant to which the
Holders are purchasing certain shares of Common Stock of the Company and may
purchase other securities of the Company at a later date. In order to induce the
Holders to purchase the Registrable Securities, the Company has agreed to
provide the registration rights set forth in this Agreement for the benefit of
the Holders. The execution and delivery of this Agreement is called for in the
S&C Agreement.
The parties hereby agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the
following respective meanings:
(a) AFFILIATE of a specified Person means any other Person that
directly, or indirectly through one or more intermediates, controls, is
controlled by or is under common control with the Person specified, or who holds
or beneficially owns 50% or more of the equity interest in the Person specified
or 50% or more of the voting securities of the Person specified. A managed
account of a Person is also an Affiliate of such Person.
(b) COMMISSION means the Securities and Exchange Commission.
(c) COMPANY means MAI Systems Corporation or any successor to it
or to its business.
(d) COMMON STOCK means (except where the context otherwise
indicates) the Common Stock of the Company, par value $0.01 per share, as
constituted on its original date of issue by the Company, and any capital stock
into which such Common Stock may thereafter be changed, and shall also include
(i) capital stock of the Company of any other class (regardless of how
denominated) issued to the holders of shares of any Common Stock upon any
reclassification thereof which is also not preferred as to dividends or
liquidation over any other class of stock of the Company and which is not
subject to redemption and (ii) shares of common stock of any successor
corporation, acquiring corporation or Constituent Corporation (as defined in the
Warrant Agreement).
<PAGE> 3
(e) CONTINUOUSLY EFFECTIVE means, with respect to a specified
registration statement, that it shall not cease to be effective and available
for transfers of Registrable Securities thereunder for longer than any
forty-five (45) consecutive Business Days, during which time the Company shall
not be permitted to call the Warrants, prior to the Expiration Date.
(f) DEMAND REGISTRATION shall have the meaning set forth in
Section 2(b)(i).
(g) DEMANDING HOLDERS shall have the meaning set forth in Section
2(b)(i).
(h) EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
(i) EXPIRATION DATE means the earlier of (i) the tenth (10th)
anniversary of the date of this Agreement or (ii) the date on which no Holder
holds any Registrable Securities.
(j) HOLDERS shall have the meaning set forth in the first
paragraph hereof.
(k) PERSON means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
(l) REGISTRABLE SECURITIES means any shares of Common Stock of
the Company acquired pursuant to the S&C Agreement, any shares of common stock
of any Constituent Corporation (as defined in the Warrant Agreement) which may
become issuable pursuant to new warrants issued pursuant to Section 6.7 of the
Warrant Agreement or any Warrant Shares (as defined below) which may be acquired
and owned by a Holder, or any securities received by a Holder in exchange for
such securities. As to any particular Registrable Securities, such securities
shall cease to be Registrable Securities when (x) such securities shall have
been disposed of pursuant to an effective registration statement, (y) such
securities shall have been transferred to any Person other than the Holders
pursuant to Rule 144 (or any successor provision) or shall be transferable
pursuant to paragraph (k) thereof (or any successor provision) under the
Securities Act, or (z) they shall have ceased to be held by the Holders or any
Affiliate of the Holders or any Transferee of the Holders or their Affiliates.
(m) REGISTRATION EXPENSES means all expenses incident to the
performance of or compliance with the registration rights granted herein,
including, without limitation, all registration, filing, listing and NASD fees,
all fees and expenses of complying with securities or blue sky laws, all word
processing, duplicating and printing expenses, messenger and delivery expenses,
the fees and expenses of the Company's counsel, the fees and expenses of one
counsel for the Selling Holders chosen by a majority vote of them, the fees and
expenses of the Company's independent public accountants, including the expenses
of any special audits or "cold comfort" letters required by or incident to such
performance and compliance, and any fees and disbursements of underwriters
customarily paid by issuers and sellers of securities; provided, however, that
Registration Expenses
-2-
<PAGE> 4
shall not include underwriting discounts, commissions and transfer taxes, if
any, all of which shall be borne by the Selling Holders.
(n) S&C AGREEMENT means the Subscription and Commitment
Agreement, dated as of February 13, 1997 between the Company and the Purchasers
named therein.
(o) SECURITIES ACT means the Securities Act of 1933, as amended,
or any successor statute thereto, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder, all as the same shall
be in effect at the time.
(p) SELLING HOLDERS means those Holders who have requested
registration pursuant to Section 2(b) hereof and who are selling securities
thereunder.
(q) SHARES means the Company's common stock, as constituted on
the date hereof, or any stock or other securities, for which such common stock
shall have been exchanged, or any stock or other securities resulting from any
reclassification of such Shares.
(r) SHELF REGISTRATION shall have the meaning set forth in
Section 2(a).
(s) TRANSFEREE shall mean the first holder of Registrable
Securities by a transfer from a Holder or an Affiliate of a Holder provided,
however, that a Person acquiring such Registrable Securities pursuant to a
transfer under an effective registration statement or pursuant to a sale under
Rule 144 shall not be a Transferee.
(t) UNDERWRITERS' REPRESENTATIVE shall mean the managing
underwriter, or, in the case of a co-managed underwriting, the managing
underwriter designated as the Underwriters' Representative by the co-managers.
(u) VIOLATION shall have the meaning set forth in Section 6(a).
(v) WARRANT AGREEMENT means the Warrant Agreement, dated as of
________, 1997 between the Company and the Warrant Holders listed therein.
(w) WARRANTS shall mean any warrants issued pursuant to the
Warrant Agreement.
(x) WARRANT SHARES shall mean the Shares of Company Common Stock
and other securities issuable upon exercise of the Warrants.
2. REGISTRATION RIGHTS.
(a) SHELF REGISTRATION. The Company shall, within thirty (30)
days from the date of this Agreement, use all reasonable efforts to file a
registration statement for purposes of permitting an offering of all of the
Registrable Securities for the Holders on a delayed or continuous
-3-
<PAGE> 5
basis pursuant to Rule 415 under the Securities Act which shall initially cover
the shares purchased pursuant to the S&C Agreement and shall be amended from
time to time as neccessary to cover all Registrable Securities, including any
Warrant Shares underlying the Warrants once the Warrants are issued (a "Shelf
Registration") and shall use reasonable efforts cause such Shelf Registration to
be and continue to be, until the Expiration Date, Continuously Effective within
one hundred-twenty (120) days from the date of this Agreement.
(b) (i) DEMAND REGISTRATION. If the conditions specified in
Section 2(a) are not satisfied, then in addition to any other rights of the
Holders, at any time commencing sixty (60) days from the date of this Agreement,
upon written request by the Holders of at least 10% of the Registrable
Securities then outstanding (the "Demanding Holders") to the Company that the
Company effect a registration of any or all of the Registrable Securities and
specifying the intended method of disposition thereof (a "Demand Registration"),
the Company will use its best efforts to effect the registration under the
Securities Act of the Registrable Securities which the Company has been so
requested to register by such Holders for disposition in accordance with the
intended method of disposition stated in such request within 45 days of the
request therefore. However, this Section 2(b) shall terminate on the Expiration
Date.
(ii) Notwithstanding anything in the foregoing paragraphs of
this Section 2(b), the Company shall have the right to delay any registration of
Registrable Securities requested pursuant to this Section 2(b) for up to 60 days
if such registration would, in the sole reasonable judgment of the Company's
Board of Directors (or equivalent governing body), substantially interfere with
any material transaction being considered at the time of receipt of the request.
(c) REGISTRATION STATEMENT FORM. The Company may, if permitted by
law, effect any registration requested under Section 2(b) by the filing of a
registration statement on Form S-3 (or any successor or similar short-form
registration statement).
(d) EXPENSES. The Company shall pay all Registration Expenses
incurred in connection with the registration of Registrable Securities pursuant
to Section 2(a) or 2(b).
(e) EFFECTIVE REGISTRATION STATEMENT. The registration requested
pursuant to Section 2(b) shall not be deemed to have been effected unless it has
become effective with the Commission, provided, however, that a registration
which does not become effective after the Company has filed a registration
statement with respect thereto with the Commission solely by reason of the
Demanding Holders failing to proceed with the registration shall be deemed to
have been effected by the Company in satisfaction of the Company's obligation to
register Registrable Securities pursuant to a Demand Registration, unless the
Demanding Holders reimburse the Company for all of its costs and expenses
incurred in connection with such registration statement. Notwithstanding the
foregoing, a registration statement will not be deemed to have been effected if
(i) after it has become effective with the Commission, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or any court proceeding for any
reason other than a misrepresentation or omission by the Holders or (ii)
-4-
<PAGE> 6
the conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied,
other than by reason of some act or omission or failure to agree to close by a
Selling Holder.
(f) CONFLICTING INSTRUCTIONS FROM HOLDERS. (i) The Company may
rely and shall be protected in relying upon any resolution, certificate,
opinion, request, communication, demand, receipt or other paper or document in
good faith believed by it to be genuine and to have been signed or presented by
the proper party or parties. The Company may act in reliance upon the advice of
its counsel in reference to any matter in connection with this Agreement and
shall not incur any liability for any action taken in good faith in accordance
with such advice.
(ii) In the event the Company receives conflicting
instructions regarding any action to be taken or withheld hereunder, the Company
may suspend further action relating to such action until such time as the
conflicting instructions are resolved by the parties giving the same or until
the Company is instructed to take or withhold the requested action by a final
order from which no appeal may be taken issued by a court of competent
jurisdiction.
3. REGISTRATION PROCEDURES.
(a) Whenever the Company is required to effect the registration
of any Registrable Securities under the Securities Act as provided in Section 2,
the Company, as expeditiously as possible and subject to the terms and
conditions herein, will:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and use its best efforts to
cause such registration to become effective;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement Continuously
Effective and to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
until such time as all of such securities have been disposed of in accordance
with the intended methods of disposition by the Selling Holders thereof set
forth in such registration statement or, if earlier, until the Expiration Date;
(iii) furnish to the Selling Holders such number of conformed
copies of such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under the
Securities Act, in conformity with the requirements of the Securities Act, and
such other documents, as the Selling Holders may reasonably request;
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<PAGE> 7
(iv) use its best efforts to register or qualify all
Registrable Securities covered by such registration statement under such other
United States state securities or blue sky laws of such jurisdictions as the
Selling Holders shall reasonably request, to keep such registration statement
qualification in effect for so long as such registration remains in effect, and
take any other action which may be reasonably necessary or advisable to enable
the Selling Holders to consummate the disposition in such jurisdictions of the
securities owned by the Selling Holders, except that the Company shall not for
any such purpose be required to (a) qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified, (b)
subject itself to taxation in any such jurisdiction or (c) consent to general
service of process in any such jurisdiction;
(v) in any underwritten offering, and if reasonable and
customary in the context of such offering, use its best efforts to furnish to
the Selling Holders a signed counterpart, addressed to the Selling Holders or
seller of Registrable Securities (and the underwriters, if any), of
(x) an opinion of counsel for the Company, dated
the effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), reasonably satisfactory
to the Selling Holders in their reasonable judgment, and
(y) a "comfort" letter, reasonably satisfactory to
the Selling Holders dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have
certified the Company's financial statements included in such
registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters as such seller or such holder (or the underwriters, if any)
may reasonably request;
(vi) immediately notify the Selling Holders at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of the
Selling Holders promptly prepare and furnish to the Selling Holders a reasonable
number of copies of a supplement to or an amendment of such
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<PAGE> 8
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(vii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first full calendar month after the effective date of
such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act, and not file any amendment or
supplement to such registration statement or prospectus to which the Selling
Holders shall have reasonably objected in writing on the grounds that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations thereunder,
having been furnished with a copy thereof (other than with respect to a pricing
amendment) at least two business days prior to the filing thereof;
(viii) provide a transfer agent and registrar for all
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement; and
(ix) use its best efforts to list all Registrable Securities
covered by such registration statement on any securities exchange on which any
of the Registrable Securities are then listed.
(b) As a condition of these Registration Rights, the Company may
require the Demanding Holders, at their own expense, to furnish the Company with
such information and undertakings regarding such Holders and the distribution of
such securities as the Company may from time to time reasonably request in
writing, and the Holders, by their execution hereof, agree to provide such
information and make such undertakings as are requested.
(c) The Selling Holders agree (A) that upon receipt of any notice
from the Company of the happening of any event of the kind described in
subdivision (vi) of Section 3(a), the Selling Holders will forthwith discontinue
their disposition of Registrable Securities pursuant to the registration
statement relating to such Registrable Securities until the Selling Holders'
receipt of the copies of the supplemented or amended prospectus contemplated by
subdivision (vi) of Section 3(a) and, if so directed by the Company, will
deliver to the Company all copies, other than permanent file copies, then in the
Selling Holders' possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice and (B) that they will
immediately notify the Company, at any time when a prospectus relating to the
registration of such Registrable Securities is required to be delivered under
the Securities Act, of the happening of any event as a result of which
information previously furnished by the Selling Holders to the Company for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required
-7-
<PAGE> 9
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made.
(d) Notwithstanding anything in this agreement to the contrary,
the Company will not be required to file such a registration statement if it
receives an opinion of counsel in form and substance reasonably satisfactory to
the Selling Holders, or counsel to the Selling Holders, to the effect that the
sale of the Registrable Securities in the manner contemplated by the Selling
Holders may be effected without registration regardless of the identity or
status of the buyer(s) of such Registrable Securities.
4. UNDERWRITTEN OFFERINGS.
(a) UNDERWRITTEN OFFERINGS. If requested by the underwriters for
any underwritten offering by the Selling Holders pursuant to a registration
requested under Section 2(b), the Company will enter into an underwriting
agreement with such underwriters for such offering, such agreement to be in form
and substance reasonably satisfactory to the Company, the Selling Holders and
its underwriters and to contain such representations and warranties by the
Company and such other terms as are customarily contained in agreements of this
type, including, without limitation, indemnities to the effect and to the extent
provided in Section 6. The Selling Holders shall be a party to such underwriting
agreement and may, at their option (reasonably exercised), require that any or
all of the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall also be
made to and for the benefit of the Selling Holders and that any or all of the
conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of the Selling
Holders.
(b) SELECTION OF UNDERWRITERS. If a requested registration
pursuant to Section 2(b) involves an underwritten offering, then the Demanding
Holders may by majority select the underwriter from underwriting firms of
national reputation, provided their selection is reasonably satisfactory to the
Company.
(c) HOLDBACK AGREEMENTS. (i) Each Holder agrees, if so required
by the managing underwriter, not to effect any public sale or distribution of
Registrable Securities or sales of such Registrable Securities pursuant to Rule
144 or Rule 144A under the Securities Act, during the seven days prior to and
the 90 days after any firm commitment underwritten registration pursuant to
Section 2(b) has become effective (except as part of such registration), whether
or not the Holder participates in such registration.
-8-
<PAGE> 10
5. PREPARATION, REASONABLE INVESTIGATION.
In connection with the preparation and filing of each
registration statement under the Securities Act, the Company will give the
Selling Holders, the underwriters, if any, and their respective counsel and
accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the reasonable opinion of the Selling Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
6. INDEMNIFICATION; CONTRIBUTION. If any Registrable Securities are
included in a registration statement under this Agreement:
(a) To the extent permitted by applicable law, the Company shall
indemnify and hold harmless each Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including reasonable attorneys' fees and
disbursements and expenses of investigation, incurred by such party pursuant to
any actual or threatened action, suit, proceeding or investigation, or to which
any of the foregoing Persons may become subject under the Securities Act, the
Exchange Act or other federal or state laws, insofar as such losses, claims,
damages, liabilities and expenses arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"):
(i) Any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein, or any amendments
or supplements thereto;
(ii) The omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; or
(iii) Any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any applicable state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
applicable state securities law; provided, however, that the indemnification
required by this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or expense if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or expense to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished to the Company by the indemnified party
expressly for use in connection with such registration; provided, further, that
the indemnity agreement contained in this
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<PAGE> 11
Section 6 shall not apply to any underwriter to the extent that any such loss is
based on or arises out of an untrue statement or alleged untrue statement of a
material fact, or an omission or alleged omission to state a material fact,
contained in or omitted from any preliminary prospectus if the final prospectus
shall correct such untrue statement or alleged untrue statement, or such
omission or alleged omission, and a copy of the final prospectus has not been
sent or given to such person at or prior to the confirmation of sale to such
person if such underwriter was under an obligation to deliver such final
prospectus and failed to do so. The Company shall also indemnify underwriters,
selling brokers, dealer managers and similar securities industry professionals
participating in the distribution, their officers, directors, agents and
employees and each person who controls such persons (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Selling
Holders.
(b) To the extent permitted by applicable law, each Selling
Holder shall indemnify and hold harmless the Company, each of its directors,
each of its officers who shall have signed the registration statement, each
Person, if any, who controls the Company within the meaning of the Securities
Act, any other Selling Holder, any controlling Person of any such other Selling
Holder and each officer, director, partner, and employee of such other Selling
Holder and such controlling Person, against any and all losses, claims, damages,
liabilities and expenses (joint and several), including reasonable attorneys'
fees and disbursements and expenses of investigation, incurred by such party
pursuant to any actual or threatened action, suit, proceeding or investigation,
or to which any of the foregoing Persons may otherwise become subject under the
Securities Act, the Exchange Act or other federal or state laws, insofar as such
losses, claims, damages, liabilities and expenses arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration; provided, however, that (x) the indemnification required by this
Section 6(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if settlement is effected without the
consent of the relevant Selling Holder of Registrable Securities, which consent
shall not be unreasonably withheld, and (y) in no event shall the amount of any
indemnity under this Section 6(b) exceed the gross proceeds from the applicable
offering received by such Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, suit, proceeding,
investigation or threat thereof made in writing for which such indemnified party
may make a claim under this Section 6, such indemnified party shall deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel at its own expense except as provided
below. The failure to deliver written notice to the indemnifying party within a
reasonable time following the commencement of any such action, if prejudicial to
its ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 but shall not relieve
the indemnifying party of any liability that it may have to any indemnified
party otherwise
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<PAGE> 12
than pursuant to this Section 6. Any fees and expenses incurred by the
indemnified party (including any fees and expenses incurred in connection with
investigating or preparing to defend such action or proceeding) shall be paid to
the indemnified party, as incurred, within sixty (60) days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder, but in such event such amounts shall be refunded). Any such
indemnified party shall have the right to employ separate counsel in any such
action, claim or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be the expenses of such indemnified
party unless (i) the indemnifying party has agreed to pay such fees and expenses
or (ii) the indemnifying party shall have failed to promptly assume the defense
of such action, claim or proceeding or (iii) the named parties to any such
action, claim or proceeding (including any impleaded parties) include both such
indemnified party and the indemnifying party, and such indemnified party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or in addition to those available to
the indemnifying party and that the assertion of such defenses would create a
conflict of interest such that counsel employed by the indemnifying party could
not faithfully represent the indemnified party (in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties, unless
in the reasonable judgment of such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such action, claim or proceeding, in which event the
indemnifying party shall be obligated to pay the reasonable fees and expenses of
such additional counsel or counsels). No indemnifying party shall be liable to
an indemnified party for any settlement of any action, proceeding or claim
without the written consent of the indemnifying party, which consent shall not
be unreasonably withheld.
(d) If the indemnification required by this Section 6 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 6:
(i) The indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any Violation has been committed by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such
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<PAGE> 13
Violation. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 6(a) and Section 6(b),
any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d)(ii) were determined by
pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to in Section 6(d)(i). No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(e) If indemnification is available under this Section 6, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 6 without regard to the relative fault of such
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 6(d).
(f) The obligations of the Company and the Selling Holders of
Registrable Securities under this Section 6 shall survive the completion of any
offering of Registrable Securities pursuant to a registration statement under
this Agreement, and otherwise.
7. COVENANTS OF THE COMPANY. The Company hereby agrees and covenants as
follows:
The Company shall file as and when applicable, on a timely
basis, all reports required to be filed by it under the Exchange Act. If the
Company is not required to file reports pursuant to the Exchange Act, upon the
request of any Holder of Registrable Securities, the Company shall make publicly
available the information specified in subparagraph (c)(2) of Rule 144 of the
Securities Act, and take such further action as may be reasonably required from
time to time and as may be within the reasonable control of the Company, to
enable the Holders to transfer Registrable Securities to a Transferee without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 under the Securities Act or any similar rule or regulation
hereafter adopted by the Commission.
8. MISCELLANEOUS.
8.1 SPECIFIC PERFORMANCE. The parties hereto acknowledge that
there may be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, may be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement.
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<PAGE> 14
8.2 NOTICES. All notices, requests, claims, demands, waivers and
other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given when delivered by hand, if delivered
personally by courier, or three days after being deposited in the mail
(registered or certified mail, postage prepaid, return receipt requested) as
follows:
(a) The Holders at the addresses indicated on the
signature page hereof with a copy to Canyon Capital
Management:
c/o Canyon Partners Incorporated
9665 Wilshire Boulevard
Suite 200
Beverly Hills, CA 90212
(b) Company:
MAI Systems Corporation
9600 Jeronimo Road
Irvine, California 92718
Attention: General Counsel
Telecopy No. (714) 580-2378
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8.3 LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICT OF LAWS.
8.4 ATTORNEYS' FEES. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees (including any fees incurred in any appeal) in
addition to its costs and expenses and any other available remedy.
8.5 HEADINGS. The descriptive headings of the several Sections
and paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
8.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire understanding of the parties with respect to its
subject matter. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter. This
Agreement may be amended and the observance of any term of this Agreement may be
waived
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<PAGE> 15
(either generally or in a particular instance and either retroactively or
prospectively) only by a written instrument duly executed by the Company and the
Holders. Each holder of any Registrable Securities at the time or thereafter
outstanding shall be bound by an amendment or waiver authorized by this Section
8.6, whether or not any such Registrable Securities shall have been marked to
indicate such consent.
8.7 ASSIGNABILITY. This Agreement shall be binding upon and inure
to the benefit of the respective successors and assigns of the parties hereto
provided, however, that the Registration Rights hereunder shall only be
available to the Holders, their Affiliates and to their Transferees.
8.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.9 VALIDITY, DUE AUTHORIZATION. By its execution hereof, the
Company represents and warrants that it has the corporate power to execute,
deliver and perform the terms and provisions of this Agreement and that it has
taken all appropriate and necessary corporate action to authorize the
transactions contemplated hereby and the execution, delivery and performance of
this Agreement.
MAI Systems Corporation
By:
------------------------------
INVESTORS:
The Value Realization Fund, L.P., Address:
a California limited partnership The Value Realization Fund, L.P.
c/o Canyon Partners Incorporated
By: Canpartners Investments III, L.P., 9665 Wilshire Boulevard
a California limited partnership, Suite 200
its general partner Beverly Hills, CA 90212
By: Canyon Capital Management, L.P., 310/247-2700 (O)
a California limited partnership, 310/247-2701 (F)
its general partner
By: Canpartners Incorporated,
a California corporation,
its general partner
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<PAGE> 16
By:
--------------------------------
Name:
Title:
<TABLE>
<S> <C>
Canyon Value Realization Fund (Cayman), Address:
Ltd. Canyon Value Realization Fund (Cayman), Ltd.
c/o MeesPierson (Cayman) Limited
By: MeesPierson (Cayman) Limited, P.O. Box 2003
its Administrator British American Center, Phase 3
Dr. Roy's Drive
Grand Cayman, B.W.I.
By:
--------------------------------- 809/949-7942 (O)
Name: 809/949-8340 (F)
Title:
</TABLE>
<TABLE>
<S> <C>
GRS Partners II Address:
By: Grosvenor Capital Management L.P., GRS Partners II
its Administrator c/o Grosvenor Capital Management, L.P.
333 West Wacker Drive
By: Grosvenor Capital Management, Inc., Suite 1600
its general partner Chicago, Illinois 60606
By: 312/263-7777 (O)
----------------------------------- 312/782-4759 (F)
Name:
Title:
</TABLE>
<TABLE>
<S> <C>
CPI Securities L.P., Address:
a California limited partnership CPI Securities L.P.
c/o Canyon Partners Incorporated
By: Canpartners Incorporated, 9665 Wilshire Boulevard
a California corporation, Suite 200
its general partner Beverly Hills, CA 90212
By: 310/247-2700 (O)
---------------------------------- 310/247-2701 (F)
Name:
Title:
</TABLE>
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<PAGE> 1
EXHIBIT 10.13
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 I
DEFINITIONS
2. DEFINITIONS. Certain terms used herein shall have the meaning below stated,
subject to the provisions of Section 7.1 hereof.
(a) "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 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
<PAGE> 2
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.
ARTICLE IV
PARTICIPATION IN PLAN
4.1 ELIGIBILITY. Options under the Plan may be granted to any key Employee of
the Company
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<PAGE> 3
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.
(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
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<PAGE> 4
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 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
(iv) 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 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
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<PAGE> 5
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 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
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<PAGE> 6
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 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
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<PAGE> 7
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 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
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<PAGE> 8
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.
(b) The applicable Option Agreement may provide that an Optionee may satisfy, in
whole or in
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<PAGE> 9
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:
(i) The substitution or repricing is authorized by a compensation
committee composed entirely of independent directors to fulfill a
legitimate corporate purpose such as retention of a key employee;
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<PAGE> 10
(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.
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<PAGE> 1
EXHIBIT 10.14
MAI SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
METLIFE SECURITY INSURANCE COMPANY OF LOUISIANA
METLIFE DEFINED CONTRIBUTION GROUP PROGRAM
401(k) PLAN ADOPTION AGREEMENT
FOR
MAI 401(k) PLAN
NON-STANDARDIZED 401(k)
FORM 009
NOVEMBER 29, 1994
(C) Copyright 1994, MetLife Security Insurance Company of Louisiana
All rights reserved.
- --------------------------------------------------------------------------------
METLIFE DEFINED CONTRIBUTION GROUP
<PAGE> 2
TABLE OF CONTENTS
Page
----
PART A - GENERAL INFORMATION
A.1 EMPLOYER INFORMATION............................................... 1
A.2 ADOPTION OR AMENDMENT OF PLAN...................................... 2
A.3 PLAN YEAR.......................................................... 3
PART B - ELIGIBILITY, SERVICE AND ENTRY DATES
B.1 ELIGIBILITY........................................................ 4
B.2 SERVICE RULES...................................................... 5
B.3 ENTRY DATES........................................................ 7
PART C - CONTRIBUTIONS
C.1 PARTICIPANT SAVINGS CONTRIBUTIONS.................................. 8
C.2 EMPLOYER MATCHING CONTRIBUTIONS.................................... 10
C.3 EMPLOYER PROFIT SHARING CONTRIBUTIONS.............................. 15
C.4 PLAN COMPENSATION.................................................. 18
C.5 FORFEITURES........................................................ 21
C.6 QUALIFIED MATCHING AND NON-ELECTIVE CONTRIBUTIONS.................. 21
C.7 EMPLOYER SECURITIES................................................ 22
C.8 INVESTMENT DIRECTION............................................... 22
i
<PAGE> 3
PART D - VESTING, LOANS, WITHDRAWALS AND RETIREMENT DATES
D.1 VESTING............................................................ 23
D.2 LOANS.............................................................. 25
D.3 IN-SERVICE WITHDRAWALS............................................. 26
D.4 RETIREMENT DATES................................................... 30
D.5 PLAN DISTRIBUTIONS................................................. 30
PART E - MISCELLANEOUS
E.1 PLAN ADMINISTRATOR................................................. 32
E.2 AMENDMENT PROCEDURES............................................... 32
E.3 ADMINISTRATIVE MATTERS............................................. 33
E.4 TOP-HEAVY STATUS................................................... 33
E.5 PRESENT VALUE...................................................... 33
E.6 RESPONSIBILITIES OF EMPLOYER....................................... 34
E.7 TRUST AGREEMENT.................................................... 34
E.8 IRS OPINION LETTER; OTHER PLANS.................................... 34
PART F - SIGNATURES
F.1 EMPLOYER SIGNATURE................................................. 36
F.2 ADOPTION BY RELATED EMPLOYERS...................................... 36
ii
<PAGE> 4
APPENDIX A
FUNDING VEHICLES
1. Program Funding Vehicles............................................ 1
APPENDIX B
ADMINISTRATIVE MATTERS
(1) Changes in Participants' 401(k) or After-Tax Savings
Contributions Elections............................................. 2
(2) Discontinuance of 401(k) and/or After-Tax Savings Contributions..... 2
(3) Change of Investments............................................... 3
(4) Change in Investment of Future Contributions........................ 4
(5) Payroll Dates....................................................... 5
(6) In-Service Withdrawals.............................................. 5
(7) Withdrawals by Terminated Participants.............................. 6
(8) Automatic Joint And Survivor Annuity................................ 6
(9) Recordkeeping Expenses.............................................. 7
(10) 404(c) Compliance................................................... 7
(11) Employer Status..................................................... 8
(12) Withdrawal Sequence................................................. 8
(13) Prior Plan Contributions............................................ 9
APPENDIX C
EMPLOYER SECURITIES (ADMINISTRATIVE MATTERS)................................. 12
APPENDIX D
PARTICIPANT LOAN PROGRAM..................................................... 14
iii
<PAGE> 5
By signing this Adoption Agreement, the Employer is adopting or amending a
401(k) Plan for the benefit of its eligible employees. The terms of the
Employer's Plan are contained in the METLIFE SECURITY INSURANCE COMPANY OF
LOUISIANA/METLIFE DEFINED CONTRIBUTION GROUP PROGRAM Defined Contribution Basic
Plan Document and in this Adoption Agreement.
The name of this plan is the MAI 401(k) Plan
----------------
(insert name)
PART A - GENERAL INFORMATION
A.1 EMPLOYER INFORMATION
Name of Employer: MAI Systems Corporation
Address: 9601 Jeronimo Road
Irvine, CA 92618
Type of business entity: [ ] Sole Proprietorship [ ] Partnership
[X] Corporation [ ] S Corporation
[ ] Other (specify) ______________
Employer tax identification number: 22-2554549
Last day of Employer's taxable year: December 31
Name and telephone number
of contact person: Christine Young
(714) 598-6440
1
<PAGE> 6
A.2 ADOPTION OR AMENDMENT OF PLAN
By signing this Adoption Agreement the Employer
[ ] adopts a new Plan.
[ ] amends and restates the following Plan which is not an earlier
METLIFE SECURITY INSURANCE COMPANY OF LOUISIANA/METLIFE DEFINED
CONTRIBUTION GROUP PROGRAM Adoption Agreement (INSERT NAME AND
EFFECTIVE DATE OF PRIOR PLAN):
-------------------------------
-------------------------------
[X] amends and restates an earlier METLIFE SECURITY INSURANCE
COMPANY OF LOUISIANA/METLIFE DEFINED CONTRIBUTION GROUP PROGRAM
Adoption Agreement for this 401(k) Plan.
The effective date of this (Check one) [ ] plan or [X] amendment is:
1/1/98 (CANNOT BE EARLIER THAN THE FIRST DAY OF THE PLAN YEAR IN WHICH
THE EMPLOYER SIGNS THIS ADOPTION AGREEMENT, EXCEPT AS PROVIDED IN THE
FOLLOWING SENTENCE).
If this is an amendment of a plan or an amendment and restatement of an
earlier METLIFE SECURITY INSURANCE COMPANY OF LOUISIANA/METLIFE DEFINED
CONTRIBUTION GROUP PROGRAM adoption agreement, and such amendment is
adopted no later than the last day of the Plan Year beginning on or
after January 1, 1994, sections marked by an asterisk (*) will be
effective as of the first day of the Plan year beginning after December
31, 1992.
NOTE: PARTICIPANT SAVINGS CONTRIBUTIONS MAY NOT BEGIN PRIOR TO THE DATE
THIS PLAN IS ADOPTED.
2
<PAGE> 7
A.3 PLAN YEAR
Plan year will mean:
[X] the 12-consecutive month period which coincides with the
limitation year.
[ ] the 12-consecutive month period commencing on
_____________ (Insert date) and each anniversary
thereof.
The limitation year is the calendar year unless another 12-month period
is selected below:
[ ] the limitation year will be from _____________ to
_____________.
3
<PAGE> 8
PART B - ELIGIBILITY, SERVICE AND ENTRY DATES
B.1 ELIGIBILITY
Specify any service and/or age requirements for eligibility below.
WAIVER OF REQUIREMENTS FOR NEW OR AMENDED PLAN.
[ ] Not Applicable.
[X] Each employee employed on the effective date is automatically
eligible to participate. Employees hired after the effective
date are eligible upon satisfying any service and/or age
requirements specified below.
[ ] Each employee employed on the amendment date is automatically
eligible to participate. Employees hired after the amendment
date are eligible upon satisfying any service and/or age
requirements specified below.
*[ ] The service and/or age requirements specified below are waived
in the following enrollment periods conducted during each Plan
Year:
SERVICE.
An employee must fulfill the following service requirement to become a
participant:
Minimum service 6 months. (Not more than 12 months.)
____ days.
IF THE YEAR(S) OF SERVICE SELECTED IS OR INCLUDES A FRACTIONAL YEAR, AN
EMPLOYEE WILL NOT BE REQUIRED TO COMPLETE ANY SPECIFIED NUMBER OF HOURS
OF SERVICE TO RECEIVE CREDIT FOR SUCH FRACTIONAL YEAR.
4
<PAGE> 9
AGE.
An employee must fulfill the following age requirement to become a
participant:
Minimum age N/A. (Not greater than 21.)
CLASS EXCLUSIONS. The following classes of employees are not eligible to
participate (this may include employees of a related employer):
N/A
-----------
-----------
B.2 SERVICE RULES
(a) Select one of the methods of measuring service below.
[ ] ELAPSED TIME METHOD. An employee's service will be determined
using the elapsed time method.
[X] HOURS OF SERVICE METHOD. An employee's service will be
determined by counting hours of service.
The employee must complete 1,000 hours of service during a
computation period to be credited with a year of service.
(INSERT NUMBER; CANNOT EXCEED 1,000.)
Hours of Service. An employee is credited with his actual hours
of service. However, if the Employer checks one of the following
boxes, an employee is credited with the number of hours
specified:
[ ] 10 hours per day
[ ] 45 hours per week
[ ] 95 hours per half month
[X] 190 hours per month
5
<PAGE> 10
(b) COMPUTATION PERIODS.
For eligibility and vesting purposes, computation periods are
used to measure an employee's years of service.
[ ] If checked, these rules apply:
(i) For eligibility purposes, an employee's
computation periods are his first employment
year, the first plan year beginning within his
first employment year, and subsequent plan
years.
(ii) For all other purposes, an employee's
computation periods are plan years.
[X] If checked, computation periods are an employee's
employment years.
(c) PREDECESSOR EMPLOYERS.
Service with predecessor employers will only be treated as
service with the Employer if such predecessor employers are
listed below:
Computerized Lodging Systems, Inc.
Remanco
Hotel Information Systems, but only for Hotel Information System
employees who became MAI employees on August 10, 1996. Hotel
Information Systems, Inc. Liquidating Trust, but only for former
employees who became MAI employees prior to November 11, 1996.
CIMPRO, but only for CIMPRO employees who became MAI employees
on March 7, 1997.
(d) RELATED EMPLOYERS.
Years of service with the entities related to the employer in
the manner described in Code Section 414(b), (c), (m), or (o)
shall include years before such entities were so related only if
such entities are listed below:
Gaming Systems International
6
<PAGE> 11
B.3 ENTRY DATES
[X] If checked, the effective or amendment date of the Plan is also
an entry date.
Indicate the plan's entry dates:
[ ] MONTHLY ENTRY DATES. The first day of each month is an entry
date.
[X] QUARTERLY ENTRY DATES. The first day of each of the first,
fourth, seventh and tenth months of the plan year is an entry
date.
[ ] SEMI-ANNUAL ENTRY DATES. The first day of each of the first and
seventh months of the plan year is an entry date.
ENTRY DATE FOR SAVINGS CONTRIBUTIONS.
An employee may elect to start making savings contributions on any entry
date on or after the date he satisfies any minimum age and service
requirements.
ENTRY DATE FOR EMPLOYER PROFIT SHARING CONTRIBUTIONS.
Each employee will become a participant for purposes of any Employer
profit sharing contributions on the entry date when he first satisfies
any minimum age and service requirements.
OPTION FOR INITIAL ENTRY.
[ ] If checked, the requirement that an employee must wait until the
entry date after his completion of any age or service
requirements is waived for initial entry. Therefore,
- SAVINGS CONTRIBUTIONS. An employee may elect to start
making savings contributions on the date he satisfies
any minimum age and service requirements, or on any
subsequent entry date.
7
<PAGE> 12
- EMPLOYER PROFIT SHARING CONTRIBUTIONS. An employee will
become a participant on the date he satisfies any
minimum age and service requirements.
PART C - CONTRIBUTIONS
C.1 PARTICIPANT SAVINGS CONTRIBUTIONS
TYPES OF PARTICIPANT SAVINGS CONTRIBUTIONS; MINIMUM CONTRIBUTIONS.
[ ] Not Applicable.
Eligible employees may make savings contributions as follows: (IN NO
EVENT MAY THE MINIMUM CONTRIBUTION EXCEED 3% OF PLAN COMPENSATION.)
[X] 401(k) savings contributions with a minimum contribution of 1%
of plan compensation.
[ ] After-tax savings contributions with a minimum contribution of
___% of plan compensation.
[ ] 401(k) savings contributions and after-tax savings
contributions, at the election of the participant, with an
overall minimum contribution not to exceed ___% of plan
compensation.
OPTIONAL PARTICIPANT SAVINGS CONTRIBUTIONS FROM BONUS PAYMENTS.
*A participant may also make [ ] 401(k) savings contributions and/or [ ]
after-tax savings contributions from a bonus payment, subject to the
following limits:
[X] Not Applicable.
[ ] A flat dollar amount not to exceed $___;
[ ] A percentage of the bonus amount not to exceed ___%.
8
<PAGE> 13
[ ] The lesser of $ ___or ___% of the participant's bonus
amount.
[ ] The greater of $ ___or ___% of the participant's bonus
amount.
LIMITATIONS ON AMOUNT OF PARTICIPANT SAVINGS CONTRIBUTIONS.
Except as otherwise required by applicable law, an employee's savings
contributions in a Plan year will be limited to the following
percentages of the employee's Plan Compensation for the year:
[ ] Not Applicable.
[X] 401(k) savings contributions: 15% of Plan Compensation.
*[ ] After-tax savings contributions: ___% of Plan Compensation.
*[ ] Overall limit on 401(k) and after-tax savings contributions:
___% of Plan Compensation.
OPTION TO SUBSTITUTE AFTER-TAX CONTRIBUTIONS FOR 401(K) CONTRIBUTIONS.
[ ] *If checked, any participant whose 401(k) savings contributions
are suspended by the $ 7,000 (as adjusted) limit may elect to
substitute after-tax savings contributions for 401(k) savings
contributions for the remainder of the plan year. (This box may
only be checked if the plan permits both 401(k) savings
contributions and after-tax savings contributions).
9
<PAGE> 14
C.2 EMPLOYER MATCHING CONTRIBUTIONS
[ ] Not Applicable.
[X] The Employer will make matching contributions in accordance with
the following provisions.
AMOUNT.
Check and complete one of the following:
[ ] MATCHING CONTRIBUTION FORMULA. The Employer will make a matching
contribution equal to ___ cents for each one dollar of a
participant's matchable savings contributions. However, the
Employer will not make matching contributions on a participant's
savings contributions above ___% of the participant's plan
compensation to a maximum of $___.
[ ] The Employer will make a matching contribution equal to the
following formula, specified in the blanks below.
Matching Contribution For each one dollar
(insert desired amount of of a Participant's
Employer's matching Savings Contributions
contribution) up to
_______________________(cent) ___________________%
_______________________(cent) ___________________%
_______________________(cent) ___________________%
_______________________(cent) ___________________%
_______________________(cent) ___________________%
10
<PAGE> 15
[ ] The Employer will make a matching contribution equal to the
following formula specified in the blanks below:
Matching Contribution for each For a Participant's
one dollar of the Participant's [ ] Plan Compensation
matchable savings contributions equal to
(insert desired amount of [ ] Contribution
Employer's matching contribution) equal to
--------------------------------- ---------------------
_______________________(cent) $___________________
_______________________(cent) $___________________
_______________________(cent) $___________________
_______________________(cent) $___________________
_______________________(cent) $___________________
DISCRETIONARY SUPPLEMENTARY MATCHING CONTRIBUTIONS.
[ ] If checked, in any Plan year, the Employer in its discretion may
make a supplemental matching contribution in addition to the
matching amount elected ABOVE.
[X] *DISCRETIONARY MATCHING CONTRIBUTION. The Employer may make
matching contributions in an amount determined each Plan year on
behalf of each participant who makes matchable savings
contributions. Discretionary matching contributions will be
allocated in accordance with any one of the methods specified in
the Plan.
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<PAGE> 16
MATCHABLE SAVINGS.
The Employer will make a matching contribution on the following
participant savings contributions: (Check one or both)
[X] 401(k) savings contributions.
[ ] After-tax savings contributions.
*For purposes of determining matchable savings contributions, 401(k)
savings contributions and/or after-tax savings contributions shall
include all such contributions from whatever source collected, except
the following:
[ ] 401(k) savings contributions and/or after-tax savings
contributions derived from payroll deductions.
[ ] 401(k) savings contributions and/or after-tax savings
contributions derived from bonus payments.
[ ] 401(k) savings contributions derived from other arrangements,
including cafeteria plans.
*REGULAR MATCHING CONTRIBUTION PERIODS. With respect to matching
contributions determined under a Matching Contribution formula or that
are Discretionary Matching Contributions, the Employer will make such a
matching contribution for each matching period. The matching period will
be the following:
[X] Plan Year. [ ] Quarterly.
[ ] Pay Period. [ ] Semi-annually.
[ ] Monthly.
DISCRETIONARY SUPPLEMENTARY MATCHING CONTRIBUTION PERIODS. The Employer
will make a discretionary supplementary matching contribution for each
matching period. The matching period will be the following:
[ ] Plan Year. [ ] Quarterly.
[ ] Pay Period. [ ] Semi-annually.
12
<PAGE> 17
[ ] Monthly.
*OPTIONAL EMPLOYMENT REQUIREMENT. A participant must satisfy the
following requirements as of the end of each matching period in order to
be eligible to receive matching contributions that are determined under
a Matching Contribution formula or that are Discretionary Matching
Contributions:
[X] A participant must be employed by the Employer on the last day
of the regular matching contribution period to share in the
allocation of Employer matching contributions for such period.
[ ] A participant must have completed at least ___ hours of service
(cannot exceed 1,000) during the Plan year to share in the
allocation of matching contributions for the Plan year. (CAN
ONLY BE ELECTED IF THE REGULAR MATCHING CONTRIBUTION PERIOD IS
THE PLAN YEAR).
[ ] A participant must be employed by the Employer on the last day
of the Plan year and must have completed at least ___ hours of
service (cannot exceed 1,000) to share in the allocation of
matching contributions for the Plan year. (CAN ONLY BE ELECTED
IF THE REGULAR MATCHING CONTRIBUTION PERIOD IS THE PLAN YEAR).
EXCEPTION. A PARTICIPANT WHOSE EMPLOYMENT WITH THE EMPLOYER ENDS BECAUSE
OF HIS RETIREMENT, DISABILITY, OR DEATH DURING THE REGULAR MATCHING
CONTRIBUTION PERIOD IS NOT REQUIRED TO FULFILL THE FOREGOING EMPLOYMENT
REQUIREMENT TO SHARE IN THE ALLOCATION OF MATCHING CONTRIBUTIONS FOR THE
REGULAR MATCHING CONTRIBUTION PERIOD.
[ ] A participant who was employed at any point during the regular
matching contribution period is entitled to share in the
allocation of matching contributions for the regular matching
contribution period.
13
<PAGE> 18
OPTIONAL EMPLOYMENT REQUIREMENT FOR DISCRETIONARY SUPPLEMENTARY MATCHING
CONTRIBUTIONS.
[ ] A participant must be employed by the Employer on the last day
of the discretionary supplementary matching contribution period
to share in the allocation of discretionary supplementary
matching contributions for such period.
[ ] A participant must have completed at least ________ hours of
service (cannot exceed 1,000) during the Plan year to share in
the allocation of discretionary supplementary matching
contributions for the Plan year. (CAN ONLY BE ELECTED IF THE
DISCRETIONARY SUPPLEMENTARY MATCHING CONTRIBUTION PERIOD IS THE
PLAN YEAR).
[ ] A participant must be employed by the Employer on the last day
of the Plan year and must have completed at least _________
hours of service (cannot exceed 1,000) to share in the
allocation of discretionary supplementary matching contributions
for the Plan year. (CAN ONLY BE ELECTED IF THE DISCRETIONARY
SUPPLEMENTARY MATCHING CONTRIBUTION PERIOD IS THE PLAN YEAR).
EXCEPTION. A PARTICIPANT WHOSE EMPLOYMENT WITH THE EMPLOYER ENDS BECAUSE
OF HIS RETIREMENT, DISABILITY, OR DEATH DURING THE DISCRETIONARY
SUPPLEMENTARY MATCHING CONTRIBUTION PERIOD IS NOT REQUIRED TO FULFILL
THE FOREGOING EMPLOYMENT REQUIREMENT TO SHARE IN THE ALLOCATION OF
DISCRETIONARY SUPPLEMENTARY MATCHING CONTRIBUTIONS FOR THE DISCRETIONARY
SUPPLEMENTARY MATCHING CONTRIBUTION PERIOD.
[ ] A participant who was employed at any point during a
discretionary supplementary matching contribution period is
entitled to share in the allocation of discretionary
supplementary matching contributions for the discretionary
supplementary matching contribution period.
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<PAGE> 19
C.3 EMPLOYER PROFIT SHARING CONTRIBUTIONS
CONTRIBUTION
[X] Not Applicable.
[ ] For each plan year the employer will contribute an amount (if
any) the employer determines either in its discretion or by a
specific formula as elected by filling out the boxes below. Such
employer contributions are called profit-sharing contributions
even though the employer is not required to have current profits
or accumulated earnings to make such a contribution.
[ ] DISCRETIONARY CONTRIBUTION FORMULA. For each plan year
the employer will contribute such amount (if any) as the
employer determines in its discretion.
[ ] PERCENTAGE CONTRIBUTION FORMULA. For each plan year the
employer will contribute % of a participant's plan
compensation.
[ ] *UNIT CONTRIBUTION FORMULA. For each plan year, the
employer will contribute and allocate $ ___ per (CHECK
APPLICABLE BOX) [ ] hour, [ ] week, or [ ] month for
each eligible employee.
[ ] *MINIMUM CONTRIBUTION FORMULA. If the employer makes a
profit-sharing contribution for the plan year, the
employer will contribute and allocate: (CHECK ONE) [ ] a
minimum flat dollar amount of $ ___ ; or [ ] a minimum
percentage of ___% of each participant's plan
compensation for each participant who is entitled to
share in the allocation of profit sharing contributions
for such plan year.
15
<PAGE> 20
CONTRIBUTION PERIOD. The Employer will make a profit-sharing
contribution for each contribution period. The contribution period will
be the following:
[ ] Plan Year.
[ ] Pay Period.
[ ] Monthly.
[ ] Quarterly.
[ ] Semi-annually.
ALLOCATION
Employer profit sharing contributions will be allocated in accordance
with the box checked below.
[ ] NON-INTEGRATED ALLOCATION FORMULA. Employer profit sharing
contributions for a plan year are allocated under the
non-integrated formula described in the plan document.
[ ] INTEGRATED ALLOCATION FORMULA. Employer profit sharing
contributions for a plan year are allocated under the integrated
formula described in the plan document.
16
<PAGE> 21
EMPLOYMENT REQUIREMENT FOR AN ALLOCATION.
[ ] Not Applicable.
[ ] A participant who was employed at any point during the
contribution period is entitled to share in the allocation of
profit sharing contributions for such period.
(Check one or both of the following)
[ ] A participant must be employed by the Employer on the last day
of the contribution period to share in the allocation of profit
sharing contributions for such period.
[ ] A participant must have completed ___ hours of service (cannot
exceed 1,000) with the employer during the plan year to share in
the allocation of profit sharing contributions for such plan
year. (Can only be elected if the contribution period is the
Plan year).
EXCEPTION. A PARTICIPANT WHOSE EMPLOYMENT WITH THE EMPLOYER ENDS BECAUSE
OF HIS RETIREMENT, DISABILITY OR DEATH DURING THE PLAN YEAR IS NOT
REQUIRED TO FULFILL THE FOREGOING EMPLOYMENT REQUIREMENT TO SHARE IN THE
ALLOCATION OF PROFIT SHARING CONTRIBUTIONS FOR SUCH PLAN YEAR.
17
<PAGE> 22
C.4 PLAN COMPENSATION
(a) IN GENERAL. For all purposes, a participant's plan compensation
means all amounts included in the definition of compensation
checked below, which are paid to him by the employer, except as
modified in (b), (c) and/or (d). However, plan compensation may
not exceed $200,000, as adjusted for cost-of-living increases
(for Plan Years beginning after December 31, 1988 and before
January 1, 1994) or $150,000, as adjusted for cost-of-living
increases in accordance with Section 401(a)(17)(B) of the Code
(for Plan Years beginning after December 31, 1993).
[X] Wages, Tips and Other Compensation as reported on Form
W-2.
[ ] Compensation will mean 3401(a) wages.
[ ] Compensation will mean 415 safe harbor compensation.
PARTICIPANT STATUS. Unless checked below, plan compensation
shall be limited to the period in which an employee is eligible
to participate in the plan.
[ ] For purposes of determining a participant's allocation
of the employer profit sharing contribution for the plan
year, plan compensation shall be considered whether or
not an employee is eligible to participate.
[ ] For purposes of applying the ACP/ADP tests, plan
compensation shall be considered whether or not an
employee is eligible to participate.
DETERMINATION PERIOD. Unless checked below, plan compensation
shall be based on compensation paid to the participant during
the plan year.
[ ] Plan compensation shall be based on compensation which
is actually paid to the participant during the calendar
year ending with or within the plan year.
FOR EMPLOYEES WHOSE DATE OF HIRE IS LESS THAN 12 MONTHS BEFORE
THE END OF THE 12-MONTH PERIOD DESIGNATED, PLAN COMPENSATION
WILL BE DETERMINED OVER THE PLAN YEAR.
18
<PAGE> 23
(b) EXCLUSIONS. If checked below, a participant's plan compensation
excludes the following checked items:
NOTE: THE EXCLUSION OF BONUSES, COMMISSIONS, OVERTIME AND/OR
OTHER ITEMS MAY NOT BE PERMITTED IF SUCH EXCLUSION(S) WOULD
RESULT IN USING BY MORE THAN A DE MINIMIS AMOUNT A HIGHER
PERCENTAGE OF TOTAL COMPENSATION FOR HIGHLY COMPENSATED
EMPLOYEES THAN FOR NON-HIGHLY COMPENSATED EMPLOYEES. ALSO, DO
NOT EXCLUDE ANY ITEMS (OTHER THAN A DOLLAR CAP WHICH IS ABOVE
THE SOCIAL SECURITY WAGE BASE IN EFFECT FOR THAT YEAR) IF YOU
ELECTED PROFIT SHARING CONTRIBUTIONS WITH AN INTEGRATED
ALLOCATION FORMULA.
[ ] bonuses
[ ] commissions
[ ] overtime
[ ] compensation in excess of $ _____ for any plan year
(INSERT DESIRED AMOUNT; CANNOT EXCEED $150,000 AS
ADJUSTED FOR COST-OF-LIVING INCREASES.)
[ ] other items (SPECIFY):__________
________________________________
(c) ELECTIVE DEFERRALS. Except for purposes of determining the
amount of a participant's savings contributions and their
related employer matching contributions, plan compensation
[X] shall include
[ ] shall NOT include
employer contributions made pursuant to a salary reduction
agreement or other arrangement which are not includible in gross
income of the employee under Code sections 125, 402(e)(3),
402(h) or 403(b).
19
<PAGE> 24
(d) SAFE HARBOR EXCLUSIONS
[ ] Compensation will be reduced by the following items
(whether or not includable in gross income):
reimbursements or other expense allowances, fringe
benefits (cash and noncash), moving expenses, and,
except for amounts included under (c) above, deferred
compensation and welfare benefits.
[X] Compensation will NOT be reduced by the following items
(whether or not includable in gross income):
reimbursements or other expense allowances, fringe
benefits (cash and noncash), moving expenses, deferred
compensation, and welfare benefits.
NOTE: THE EXCLUSION OF THE ITEMS IN (d) DESCRIBED ABOVE AUTOMATICALLY
SATISFIES THE NONDISCRIMINATORY DEFINITION OF COMPENSATION REQUIREMENT
WITHOUT FURTHER TESTING. IF YOU WANT TO AVOID THE NEED FOR TESTING THE
DEFINITION OF COMPENSATION FOR DISCRIMINATION, YOU MUST CHECK ONE OF THE
DEFINITIONS IN (a), MAKE ONE OF THE SELECTIONS IN (c) AND ONE OF THE
SELECTIONS IN (d). DO NOT SELECT (b) IF YOU DO NOT WANT TO TEST YOUR
DEFINITION OF COMPENSATION FOR DISCRIMINATION!
20
<PAGE> 25
C.5 FORFEITURES
Indicate the method for disposing of forfeitures.
[ ] Not Applicable.
[ ] *EXPENSE REDUCTION. If checked, any forfeitures arising during a
plan year will first be applied to reduce administrative
expenses properly payable by the plan and will then be applied
in accordance with the election made below.
[X] CONTRIBUTION REDUCTION. Any forfeitures occurring during a plan
year will be used first to reduce the amount the employer must
contribute for the matching contribution. Any remaining
forfeitures will be allocated as an additional employer profit
sharing contribution, if the employer elected such contributions
in C.3 above. If the employer did not elect profit sharing
contributions, any remaining forfeitures will be allocated as a
non-integrated profit sharing contribution.
[ ] REALLOCATION. Any forfeitures occurring during a plan year will
be allocated as an additional employer profit sharing
contribution, if the employer elected such contributions in C.3
above. If the employer did not elect profit sharing
contributions, any forfeitures occurring during a plan year will
be allocated as a non-integrated profit sharing contribution.
C.6 QUALIFIED MATCHING AND NON-ELECTIVE CONTRIBUTIONS
Qualified Matching Contributions will be taken into account as Elective
Deferrals for purposes of calculating the Actual Deferral Percentages to
the lower paid group to the extent needed to satisfy the ADP test.
Qualified Non-elective Contributions will be taken into account as
Elective Deferrals for purposes of calculating the Actual Deferral
Percentages to the lower paid group to the extent needed to satisfy the
ADP test and/or will be taken into account as employer matching
contributions for purposes of calculating the Actual Contribution
Percentages to the lower paid group to the extent needed to satisfy the
ACP test.
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<PAGE> 26
C.7 EMPLOYER SECURITIES.
[X] Not Applicable.
[ ] The employer will permit investment in qualifying employer
securities up to ___% of Plan assets.
*C.8 INVESTMENT DIRECTION
Unless checked below, participants will exercise investment direction
over 100% of the assets in all of the accounts under the plan.
[ ] The employer will exercise investment direction over the
following accounts: (INDICATE PERCENTAGE AND ACCOUNT)
---------------------------
---------------------------
22
<PAGE> 27
PART D - VESTING, LOANS, WITHDRAWALS AND RETIREMENT DATES
D.1 VESTING
100% VESTING IN SAVINGS CONTRIBUTIONS.
Participants are 100% vested at all times in their savings contributions
account (401(k) savings contributions and/or after-tax savings
contributions).
VESTING IN EMPLOYER MATCHING CONTRIBUTIONS.
Participants are vested in employer matching contributions (if any) on
their behalf in accordance with Option _3_ below.
(INSERT 1, 2, OR 3; IF LEFT BLANK, OPTION 1 - FULL VESTING WILL APPLY).
VESTING IN EMPLOYER PROFIT SHARING CONTRIBUTIONS.
Participants are vested in employer profit sharing contributions (if
any) on their behalf in accordance with Option N/A below.
(INSERT 1, 2, OR 3; IF LEFT BLANK, OPTION 1 - FULL VESTING WILL APPLY).
If different vesting options are chosen for Employer matching
contributions and Employer profit sharing contributions, then one of the
options must be Option 1.
23
<PAGE> 28
VESTING OPTIONS.
The following vesting options are available:
OPTION 1 - FULL VESTING. Participants are 100% vested at all
times.
OPTION 2 - CLIFF VESTING. Participants are 100% vested after
completing N/A years of service (Insert number; cannot be
greater than 5). For top-heavy plan years, 3 year cliff vesting
applies if more favorable than the elected schedule.
OPTION 3 - GRADED VESTING. Participants are vested in accordance
with the following vesting schedule. (A participant's vested
percentage is the percentage in column (2) or the percentage in
column (3), whichever is greater. Spaces left blank are treated
as zeros). For top-heavy plan years, the schedule in column (3),
accelerated by one year, applies if more favorable than the
elected schedule.
<TABLE>
<CAPTION>
(1) (2) (3)
Minimum
Years Vested Required
of Service Percentage Percentage
---------- ---------- ----------
<S> <C> <C> <C>
Less than 1 0% 0%
At least 1 33% 0%
At least 2 66% 0%
At least 3 100% 20%
At least 4 100% 40%
At least 5 100% 60%
At least 6 100% 80%
At least 7 100% 100%
</TABLE>
24
<PAGE> 29
YEARS OF SERVICE EXCLUDED IN DETERMINING VESTED PERCENTAGES.
[X] Not Applicable.
(CHECK ONE, BOTH, OR NONE.)
[ ] Years completed before the effective date of this plan (or a
predecessor plan).
[ ] Years completed before the participant's ____ birthday (insert
birthday not greater than 18th).
D.2 LOANS
[ ] Loans to participants from the plan are NOT permitted.
[X] Loans to participants from the plan are permitted.
*[ ] Employees who have made rollover contributions to the
Plan but have not yet satisfied the Plan's eligibility
requirements may take loans from their rollover
contributions accounts.
[X] Employees who have made rollover contributions to the
Plan but have not yet satisfied the Plan's eligibility
requirements may not take loans from their rollover
contributions accounts.
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<PAGE> 30
D.3 IN-SERVICE WITHDRAWALS
The following provisions will govern the availability of in-service
withdrawals from a participant's accounts. See Article 12 of the plan
document for additional details, including definitions and limitations.
(a) 401(k) SAVINGS CONTRIBUTIONS.
[ ] *A participant may NOT make in-service withdrawals of
401(k) savings contributions.
[X] A participant may make an in-service withdrawal of
401(k) savings contributions for a financial hardship.
ANY SUCH WITHDRAWAL IS SUBJECT TO A 12-MONTH SUSPENSION
OF 401(k) CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS (IF
APPLICABLE).
[X] The suspension of 401(k) savings contributions
and after-tax savings contributions will NOT
apply to withdrawals made after a participant
attains age 59 1/2.
[ ] The suspension of 401(k) savings contributions
and after-tax savings contributions applies to
withdrawals made after a participant attains age
59 1/2.
26
<PAGE> 31
(b) AFTER-TAX SAVINGS CONTRIBUTIONS. - NOT APPLICABLE
[ ] *A participant may NOT make withdrawals from after-tax
savings contributions.
[ ] A participant may make withdrawals from after-tax
savings contributions for any reason.
[ ] If checked, a participant who makes withdrawals
of after-tax savings contributions may not make
401(k) savings contributions and after-tax
savings contributions for a period of ______
months (INSERT NUMBER, CANNOT EXCEED 12).
*[X] The suspension of 401(k) savings
contributions and after-tax savings
contributions will NOT apply to
withdrawals made after a participant
attains age 59 1/2.
*[ ] The suspension of 401(k) savings
contributions and after-tax savings
contributions applies to withdrawals
made after a participant attains age 59
1/2.
27
<PAGE> 32
(c) EMPLOYER MATCHING CONTRIBUTIONS.
[ ] A participant may NOT make withdrawals from employer
matching contributions.
[X] A participant may make withdrawals from employer
matching contributions for a FINANCIAL HARDSHIP ONLY.
[ ] A participant may make withdrawals from employer
matching contributions for ANY REASON.
[ ] A participant who makes withdrawals from employer
matching contributions may not make 401(k) savings
contributions and after-tax savings contributions for a
period of ___ months (insert number, cannot exceed 12).
*[X] The suspension of 401(k) savings contributions
and after-tax savings contributions will not
apply to withdrawals made after a participant
attains age 59 1/2.
*[ ] The suspension of 401(k) savings contributions
and after-tax savings contributions applies to
withdrawals made after a participant attains age
59 1/2.
(d) EMPLOYER PROFIT SHARING CONTRIBUTIONS. - NOT APPLICABLE
[ ] A participant may NOT make withdrawals from employer
profit sharing contributions.
[ ] A participant may make withdrawals from employer profit
sharing contributions for FINANCIAL HARDSHIP only.
[ ] A participant may make withdrawals from employer profit
sharing contributions for ANY REASON.
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<PAGE> 33
(e) ROLLOVER CONTRIBUTIONS.
[ ] *A participant may NOT make withdrawals from rollover
contributions.
[X] *A participant may make withdrawals from rollover
contributions for any reason.
*[ ] Employees who have made rollover contributions
to the Plan but have not yet satisfied the
Plan's eligibility requirements may make
withdrawals from their rollover contributions
accounts.
*[X] Employees who have made rollover contributions
to the Plan but have not yet satisfied the
Plan's eligibility requirements may NOT make
withdrawals from their rollover contributions
accounts.
(f) WITHDRAWALS ON AND AFTER AGE 59 1/2 FOR ANY REASON.
*[ ] Withdrawals will continue only for the same reasons as
indicated in subsections (a), (b), (c), (d), or (e).
[X] Notwithstanding subsections (a) [X], (b) [ ], (c) [X],
(d) [ ], and/or (e) [ ], upon attaining age 59 1/2,
participants may make withdrawals from their accounts
FOR ANY REASON (up to the vested percentage of each such
account).
29
<PAGE> 34
D.4 RETIREMENT DATES
NORMAL RETIREMENT.
A participant will be fully vested and may retire upon reaching age 65
(CANNOT EXCEED 65).
DISABILITY RETIREMENT.
A participant will be fully vested and may retire before normal
retirement upon becoming disabled.
EARLY RETIREMENT.
[X] Not Allowed.
[ ] A participant will be fully vested and may retire prior to
normal retirement upon reaching age ___ or, if later, completing
___ years of service.
D.5 PLAN DISTRIBUTIONS
*CASH-OUT OF ACCOUNT BALANCE. If a Participant's total account balance
does not exceed $ 3,500, then upon termination of employment, retirement
following normal or early retirement date, or the occurrence of a
disability retirement, the Employer
[X] Will distribute the Participant's account balance as soon as
practicable in the form of a single sum.
[ ] Will delay distribution of the Participant's account balance
until the Participant requests (or is required to begin to
receive) a distribution under the Plan.
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<PAGE> 35
*CONDITIONS ON DISTRIBUTIONS PAYABLE TO HIGHLY COMPENSATED EMPLOYEES.
[X] No Restriction.
[ ] No distribution in the form of a single sum may be made
following termination of employment prior to early or normal
retirement date with respect to a participant who is or was a
highly compensated employee, unless such participant executes a
covenant not to compete in a form acceptable to the employer.
THIS BOX MAY NOT BE CHECKED UNLESS THIS PLAN IS NEWLY ADOPTED
OR, IF AN AMENDED PLAN, THE DISTRIBUTION OF ACCOUNT BALANCES IN
THE FORM OF A SINGLE SUM UPON TERMINATION OF EMPLOYMENT BEFORE
NORMAL OR EARLY RETIREMENT AGE WAS NOT PERMITTED.
WITHDRAWALS TO TERMINATING PARTICIPANTS.
[X] Not Allowed.
[ ] Any participant who has terminated employment with the employer
and has not attained the plan's Required Beginning Date may make
withdrawals of all or any portion of his vested account balance.
*DISTRIBUTIONS TO MISSING PERSONS. If the Plan Administrator is unable
to locate any person to whom an account balance under this plan is
required to be distributed under the plan or by law, the plan
administrator shall dispose of such person's account balance as follows:
[X] The plan administrator shall deposit such person's vested
account balance into a federally-insured interest-bearing bank
account for the benefit of such person.
[ ] Such person's account balance shall be forfeited in accordance
with Section C.5 Forfeitures of this adoption agreement, subject
to reinstatement if such person files a claim for benefits, the
plan is required to commence distribution to such person
pursuant to Section 401(a)(9) of the Code or upon the
termination of the plan.
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<PAGE> 36
PART E - MISCELLANEOUS
E.1 PLAN ADMINISTRATOR
The employer is the legal plan administrator under ERISA. Specify one or
more officers, partners or employees of the employer to perform the
functions of the plan administrator.
George Bayz
---------------------------- -------------------------------
Signature
Lewis Stanton
---------------------------- -------------------------------
Signature
Christine Young
---------------------------- -------------------------------
Signature
Catherine Grasso
---------------------------- -------------------------------
Signature
Each person selected should submit a specimen signature above (add
additional specimen signatures, if necessary). Any such appointment may
be changed by written notice.
E.2 AMENDMENT PROCEDURES
Unless otherwise provided below, the Employer may amend this Plan by
having a person authorized by its Board of Directors complete a new
adoption agreement following formal action of the Board of Directors. If
another method of amending the plan is desired, please complete the
following:
1. The following person(s) is (are) authorized to amend the Plan:
----------------------------------------------------------------
----------------------------------------------------------------
2. The Plan may be amended in accordance with the following procedure:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
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<PAGE> 37
E.3 ADMINISTRATIVE MATTERSError! Bookmark not defined.
The plan administrator may establish rules governing such matters as the
timing and frequency of changes in participants' 401(k) savings
contributions or after-tax savings contributions elections, changes in
participants' investment elections, loans or in-service withdrawals by
participants, and the like, by so specifying in an appendix to this
adoption agreement.
E.4 TOP-HEAVY STATUS
Unless one of the optional top-heavy testing rules is elected below, the
top-heavy tests are applied each year to determine whether the plan is
top-heavy. If the plan is top-heavy, the requirements for top-heavy
plans apply for that year (SEE ARTICLE 14 OF THE PLAN DOCUMENT), and
there may be a requirement for minimum contributions on behalf of
certain participants in addition to employer matching and/or profit
sharing contributions. If the plan is not top-heavy for a plan year, the
requirements do not apply for that year.
[ ] ASSUMED TOP-HEAVY. If checked, the plan is treated as if it is
always top-heavy and the requirements for top-heavy plans apply
each plan year.
[ ] ONCE TOP-HEAVY, ALWAYS TOP-HEAVY. If checked, the top-heavy
tests are applied to determine whether the plan is top-heavy for
a plan year. If the plan is not top-heavy, the requirements for
top-heavy plans do not apply. If the plan is top-heavy, the
requirements for top-heavy plans apply for that year and for all
subsequent plan years whether or not the plan is actually
top-heavy under the top-heavy tests; no further testing is
needed.
E.5 PRESENT VALUE
For purposes of establishing present value to compute the TOP HEAVY
RATIO, any benefit shall be discounted only for mortality and interest
under the value set forth in Section 14.2(h) of the plan unless based on
the following:
Interest Rate: ________________________%
Mortality Table: ________________________
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<PAGE> 38
E.6 RESPONSIBILITIES OF EMPLOYER
THE EMPLOYER UNDERSTANDS AND AGREES THAT, BY ESTABLISHING THIS PLAN, IT
IS THE "PLAN ADMINISTRATOR" AND IT WILL BE ASSUMING CERTAIN DUTIES AND
RESPONSIBILITIES UNDER TAX AND OTHER LAWS AS EMPLOYER MAINTAINING THE
PLAN AND AS PLAN ADMINISTRATOR FOR WHICH NEITHER THE TRUSTEE NOR THE
SPONSOR WILL BE RESPONSIBLE.
THE EMPLOYER WARRANTS THAT IT HAS OBTAINED LEGAL AND TAX ADVICE TO THE
EXTENT THE EMPLOYER DEEMS NECESSARY BEFORE SIGNING THIS ADOPTION
AGREEMENT.
E.7 TRUST AGREEMENT
By signing this adoption agreement, the employer establishes a trust to
carry out the purposes of the plan. The terms of the trust, which is to
be signed separately, are contained in the METLIFE SECURITY INSURANCE
COMPANY OF LOUISIANA/METLIFE DEFINED CONTRIBUTION GROUP PROGRAM trust
agreement which is incorporated by reference into this adoption
agreement.
E.8 IRS OPINION LETTER; OTHER PLANS
THE EMPLOYER MAY NOT RELY ON THE OPINION LETTER ISSUED BY THE NATIONAL
OFFICE TO SHOW THAT THIS NON-STANDARDIZED PROTOTYPE PLAN IS QUALIFIED
UNDER CODE SECTION 401. TO OBTAIN ASSURANCE OF PLAN QUALIFICATION, THE
EMPLOYER MUST FILE AN APPLICATION WITH THE APPROPRIATE IRS KEY DISTRICT
FOR A DETERMINATION THAT THIS PLAN IS QUALIFIED.
If the employer adopts or maintains any other plan including a welfare
benefit fund, as defined in Code Section 419(e) which provides
post-retirement medical benefits allocated to separate accounts for key
employees, as defined in Code Section 419(d)(3) or an individual medical
account, as defined in Code Section 415(e)(2) under which amounts are
treated as annual additions with respect to any participant in this
plan, the interaction of the plans may require special provisions to
coordinate limits on contributions and benefits and top-heavy minimum
contributions and benefits.
34
<PAGE> 39
A. If the participant is covered under another qualified defined
contribution plan maintained by the employer, other than a
master or prototype plan, provide the method under which the
plans will limit total annual additions to the maximum
permissible amount, and will properly reduce any excess amounts,
in a manner that precludes employer discretion.
[ ] the provisions of section 13.3 through 13.6 of Article
13 will apply as if the other plan were a master or
prototype plan.
[ ] Other (specify):
-----------------
-----------------
-----------------
B. If the participant is or has ever been a participant in a
defined benefit plan maintained by the employer, provide the
method you will use to satisfy Code Section 415(e). Such
language must preclude employer discretion.
The defined benefit plan benefit shall be reduced first, in
accordance with
section 11.02 of the defined benefit plan.
THIS ADOPTION AGREEMENT MAY BE USED ONLY IN CONJUNCTION WITH BASIC PLAN DOCUMENT
NO. 01.
35
<PAGE> 40
F.1 EMPLOYER SIGNATURE
Name of employer MAI Systems Corporation
----------------------------
Signed
---------------------------------------
Print name and title
-------------------------
Date
-------------
F.2 ADOPTION BY RELATED EMPLOYERS
A requirement for continuing IRS qualification of this plan is that all
employees of employers related to the employer must be eligible for
participation unless such employees are excluded as a class under
Section B.1 of this adoption agreement. For this purpose, employers are
considered related if they are part of a controlled group (within the
meaning of Code Section 414(b) or (c)) or affiliated service group
(within the meaning of Code Section 414(m)) with the employer, or are
aggregated with the employer in accordance with regulations under Code
Section 414(o).
By signing the adoption agreement, the employer represents that all such
related employers listed below have adopted the plan (add additional
signature pages if necessary). If other employers become related
employers, the employer understands that they must also adopt the plan,
unless the plan is amended specifically to exclude employees of such
employers.
The following employer adopts the plan:
Name of related employer Gaming Systems International
Employer identification number
------------
Signed
--------------------------------------------------
Print name and title
------------------------------------
Date
---------
36
<PAGE> 41
The identifying number for the METLIFE SECURITY INSURANCE COMPANY OF LOUISIANA
Defined Contribution Basic Plan document is 01 and for this adoption agreement
is 009. The sponsor of the prototype plan is METLIFE SECURITY INSURANCE COMPANY
OF LOUISIANA, 72 EAGLE ROCK AVENUE, EAST HANOVER, NEW JERSEY 10010, (201)
515-1579. The sponsor will notify you if the sponsor amends or discontinues this
prototype plan.
THE EMPLOYER SHOULD INSURE THAT THIS ADOPTION AGREEMENT HAS BEEN FILLED OUT
COMPLETELY AND
37
<PAGE> 42
APPENDIX A
FUNDING VEHICLES
1. PROGRAM FUNDING VEHICLES
[X] METLIFE GUARANTEED FIXED INCOME ACCOUNT
[X] METLIFE STOCK MARKET INDEX GUARANTEE ACCOUNT
[X] METLIFE-STATE STREET RESEARCH CAPITAL APPRECIATION FUND
[X] STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
38
<PAGE> 43
APPENDIX B
ADMINISTRATIVE MATTERS
(1) CHANGES IN PARTICIPANTS' 401(k) OR AFTER-TAX SAVINGS CONTRIBUTIONS
ELECTIONS
Subject to the Plan's limitations and restrictions on the amount of
401(k) and/or after-tax savings contributions by a participant, a
participant may commence, increase, decrease or resume after a
discontinuance, his 401(k) and/or after-tax savings contributions, by
filing the appropriate form with the Plan Administrator. Any such change
will be effective as follows: (CHOOSE ONE)
[ ] As of the first day of the first payroll period which is at
least ___ days (INSERT PERIOD, FOR EXAMPLE 30 DAYS) after the
participant files his change form.
[X] As of the first day of the first payroll period coinciding with
or next following the first day of each CALENDAR QUARTER (Insert
month, plan year quarter, plan year, etc.) which is at least 30
days (INSERT PERIOD, FOR EXAMPLE 30 DAYS) after the participant
files his change form.
[ ] Other (Describe)________________________
The maximum number of such changes by a participant is as follows:
[ ] No Limits
[X] 4 (Insert number, for example 1) per PLAN YEAR (Insert period).
(2) DISCONTINUANCE OF 401(k) AND/OR AFTER-TAX SAVINGS CONTRIBUTIONS
A participant who is making 401(k) and/or after-tax savings
contributions may discontinue them by filing the appropriate form with
the Plan Administrator. Any such discontinuance will be effective as of
the first day of the first payroll period which is at least 30 days
(INSERT PERIOD, FOR EXAMPLE 30 DAYS) after the participant files his
discontinuance form.
39
<PAGE> 44
(3) CHANGE OF INVESTMENTS
A participant may change the investment of amounts already in his Plan
accounts by filing the appropriate form with the Plan Administrator or,
if permitted under the Employer's Plan, by using a telephone. PROCESSING
OF ONE CHANGE MUST BE COMPLETED BEFORE A PARTICIPANT MAY MAKE ANOTHER
CHANGE. Any such change will be processed as follows: (CHOOSE ONE)
(a) [X] Daily, using the Benephone service and being connected
with a MetLife Representative.
[X] Automated transfers through Benephone. (ONLY
AVAILABLE IF YOUR PLAN CAN ACCESS SAME DAY
TRADING):
(b) [ ] As soon as reasonably practicable after the participant
files his change form, provided that the participant
must file the change form at least ___ days (INSERT
PERIOD, FOR EXAMPLE 30 DAYS) beforehand.
(c) [ ] As soon as reasonably practicable after the first day of
the ___ (Insert period, for example month, quarter,
year) which is at least ___ days (Insert period, for
example 30 days) after the participant files his change
form.
The maximum number of such changes by a participant is as
follows:
[ ] No Limits
[ ] ___ (INSERT NUMBER, FOR EXAMPLE 1) per _____ (INSERT
PERIOD: EITHER MONTH, CALENDAR QUARTER OR CALENDAR HALF)
PLEASE NOTE FOR SAME DAY TRADING: TRANSFERS WILL BE TRADED AT THE NET
ASSET VALUE OR UNIT VALUE AT THE CLOSE OF BUSINESS OF THE CURRENT
BUSINESS DAY ONLY IF INSTRUCTIONS ARE BOTH RECEIVED AND PROCESSED BY
4:00 P.M. EASTERN TIME.
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<PAGE> 45
(4) CHANGE IN INVESTMENT OF FUTURE CONTRIBUTIONS
A participant may change the investment of future contributions to his
accounts by filing the appropriate form with the Plan Administrator, or,
if permitted under the Employer's Plan, by using a telephone. PROCESSING
OF ONE CHANGE MUST BE COMPLETED BEFORE A PARTICIPANT MAY MAKE ANOTHER
CHANGE. Any such change will be processed as follows:
(a) [X] Daily, using the Benephone system and being connected to
a MetLife Representative.
[X] Automated through Benephone. (ONLY AVAILABLE IF
YOUR PLAN CAN ACCESS SAME DAY TRADING).
CHANGE WILL ONLY AFFECT CONTRIBUTIONS TAKEN FROM PAY PERIODS ON OR AFTER
THE DATE OF CHANGE.
(b) [ ] As soon as reasonably practicable after the participant
files his change form, provided that the participant
must file the change form at least ___ days (Insert
period, for example 30 days) beforehand.
(c) [ ] As soon as reasonably practicable after the first day of
the ___ (INSERT PERIOD, FOR EXAMPLE MONTH, QUARTER,
YEAR) which is at least ___ days (INSERT PERIOD, FOR
EXAMPLE 30 DAYS) after the participant files his change
form.
The maximum number of such changes by a participant is as
follows:
[ ] No Limits. (Must be elected if "Automated through
Benephone".)
[ ] ___ (Insert number, for example 1) per ___ (Insert
period: either month, calendar quarter or calendar
half).
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<PAGE> 46
(5) PAYROLL DATES
[ ] Not Applicable
[X] The date of the first payroll under MDCG is OCTOBER 6, 1995
[X] The first payroll tape or diskette will be received at MetLife
on 10/13/95 (Insert approximate date) for the payroll period(s)
ending as of 10/6/95 (Insert date).
(6) IN-SERVICE WITHDRAWALS
If in-service withdrawals are provided for in Section D.3 of this
Adoption Agreement, a participant may request an in-service withdrawal
from his Plan accounts by filing the required documents with the Plan
Administrator. Any such in-service withdrawals are subject to the
limitations and restrictions specified by the Plan (including
limitations on the maximum in-service withdrawal balance and approval by
the Plan Administrator in the case of hardship withdrawals). Payment of
an in-service withdrawal will be processed as follows: (CHOOSE ONE)
[X] As soon as reasonably practicable after the participant files
his in-service withdrawal request documents, provided that the
participant must file such documents at least 30 days (Insert
period, for example 30 days) beforehand.
[ ] As soon as reasonably practicable after the first day of the
_____ (Insert period, for example month, quarter, year) which is
at least ___ days (Insert period, for example 30 days) after the
participant files his in-service withdrawal request documents.
The maximum number of in-service withdrawals by a participant is as
follows:
[ ] No Limits
[X] 2 (Insert number, for example 1) per PLAN YEAR (Insert period).
The minimum amount of an in-service withdrawal will be the lesser of:
(a) $ 1,000 ; or
42
<PAGE> 47
(b) in the case of an in-service withdrawal for financial hardship,
the amount necessary to meet the hardship.
The maximum amount of an in-service withdrawal will be the lesser of:
(a) in the case of an in-service withdrawal for financial hardship,
the amount necessary to meet the hardship,
(b) $ _____ (Indicate dollar restriction on total vested account
balance AND/OR any particular contribution type).
(c) _____ % (Indicate percentage of the total vested account balance
AND/OR any restrictions on withdrawing a particular contribution
type).
(7) WITHDRAWALS BY TERMINATED PARTICIPANTS
[X] Not Applicable.
[ ] Participants who have separated from service and have left all
or a portion of their account balance in the Plan will be
allowed to take unscheduled withdrawals from their accounts. The
number of such withdrawals will be limited to:
[ ] No Limits.
[ ] _____ (Insert number) per ___ (Insert period).
(8) AUTOMATIC JOINT AND SURVIVOR ANNUITY
[ ] The automatic form of distribution for married participants is
the Joint & Survivor Annuity unless otherwise elected by the
participant, with spousal consent. (THIS BOX MUST BE CHECKED IF
PLAN PREVIOUSLY PROVIDED THE JOINT & SURVIVOR ANNUITY
AUTOMATICALLY, FOR MARRIED PARTICIPANTS).
[X] Not Applicable; the automatic form of distribution is a lump sum
payout unless otherwise elected by the participant.
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<PAGE> 48
(9) RECORDKEEPING EXPENSES
[X] To be paid directly by the Employer.
[ ] To be deducted from participants' account balances in the
following manner:
[ ] FLAT DOLLAR AMOUNT. Expenses will be deducted from each
participant's account prorata across all contributions
types and investment funds. The flat dollar amount will
be calculated by dividing the total expense amount by
the total number of participant records in the Plan at
the time the allocation is made. (Approximations may be
used).
[ ] RATIO METHOD. Expenses will be deducted from each
participant's account prorata across all contribution
types and investment funds in the ratio that each
participant's account balance bears to all participant's
account balances in the Plan at the time the allocation
is made.
The expense allocation will be processed: (Choose one)
[ ] Quarterly
[ ] Semi-Annual
[ ] Annual
[ ] Other (Describe) _____________________________
___________________________________
(10) 404(c) COMPLIANCE
[ ] The Employer DOES NOT WISH to seek ERISA Section 404(c)
compliance.
[X] The Employer WISHES to comply with ERISA Section 404(c) as of
10/1/95 (Insert date, not earlier then current date).
[ ] The Employer had previously complied with ERISA Section 404(c)
as of ________ (Insert date) and wishes to continue compliance
under the MetLife Defined Contribution Group program.
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<PAGE> 49
(11) EMPLOYER STATUS
[ ] Employer IS NOT a part of a controlled group and/or affiliated
service group as defined in Code Section 414(b), (c), (m) or
(o).
[X] Employer IS part of a controlled group and/or affiliated service
group as defined in Code Section 414(b), (c), (m) or (o).
[X] All members of the controlled group and/or affiliated
service group are included under this Plan.
(12) WITHDRAWAL SEQUENCE
Under the MetLife Defined Contribution Group program in-service
withdrawals are normally taken from contribution types in order of
"easiest access" to "most difficult access", while loan withdrawals are
made in the reverse order.
An example of the sequence of contribution types for an in-service
withdrawal might be: Supplemental After-Tax, Basic After Tax, Rollover,
Employer Profit Sharing, Employer Match, Supplemental Pre-Tax, Basic
Pre-Tax.
For loans the withdrawal sequence might be: Basic Pre-Tax, Supplemental
Pre-Tax, Employer Match, Employer Profit Sharing, Rollover, After-Tax
Basic, After-Tax Supplemental.
THE ORDER IS DETERMINED BY THE EMPLOYER AND APPLIED TO ALL PARTICIPANTS'
ACCOUNTS. PLEASE DISCUSS THE WITHDRAWAL SEQUENCES TO BE USED FOR YOUR
PLAN WITH YOUR METLIFE PENSION ADMINISTRATOR.
45
<PAGE> 50
(13) PRIOR PLAN CONTRIBUTIONS (Prior to 10/1/95 (Insert date))
[ ] Not Applicable.
[X] Employer and/or employee contributions were permitted prior to
the effective date of this amendment. Therefore, complete the
following for each contribution type. ERISA ANTI-CUTBACK
REGULATIONS PROHIBIT CHANGING THE PROVISIONS OF PRIOR
CONTRIBUTIONS IF THE CHANGES APPLY MORE RESTRICTIVE CONDITIONS
TO SUCH PRIOR CONTRIBUTIONS.
(a) 401(K) SAVINGS CONTRIBUTIONS.
[ ] Not Applicable. [X] Will continue. [ ] Will not continue.
[X] Will be subject to all the same provisions of this
Adoption Agreement.
[ ] Will not be subject to the same provisions of this
Adoption Agreement. Instead, (Specify differences,
particularly for in-service withdrawals, loans and
vesting)________________
_________________________________________
(b) AFTER-TAX CONTRIBUTIONS.
[ ] Not Applicable. [ ] Will continue. [X] Will not continue.
[ ] Will be subject to all the same provisions of this
Adoption Agreement.
[X] Will not be subject to the same provisions of this
Adoption Agreement. Instead, (Specify differences,
particularly for in-service withdrawals, loans, vesting)
A PARTICIPANT MAY MAKE WITHDRAWALS FROM THEIR AFTER-TAX
CONTRIBUTION ACCOUNT FOR ANY REASON, WITH NO MINIMUM
AMOUNT OF WITHDRAWAL.
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<PAGE> 51
(c) EMPLOYER MATCHING CONTRIBUTIONS.
[X] Not Applicable. [ ] Will continue. [ ] Will not continue.
[ ] Will be subject to all the same provisions of this
Adoption Agreement.
[ ] Will not be subject to the same provisions of this
Adoption Agreement. Instead, (Specify differences,
particularly for in-service withdrawals, loans, vesting)
_________________ ________________________
(d) EMPLOYER PROFIT SHARING CONTRIBUTIONS.
[X] Not Applicable. [ ] Will continue. [ ] Will not continue.
[ ] Will be subject to all the same provisions of this
Adoption Agreement.
[ ] Will not be subject to the same provisions of this
Adoption Agreement. Instead, (Specify differences,
particularly for in-service withdrawals, loans, vesting)
_________________ ________________________
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<PAGE> 52
(e) INVESTMENT OF PRIOR PLAN ASSETS.
[ ] All into the Short Term Fixed Income Account until the
conversion is completed. As of the conversion,
participants' existing account balances will be invested
in accordance with the investment elections chosen by
participants for their future contributions and in
effect at the time of the conversion.
[X] Into the "same type" of investment funds offered under
the Plan prior to the effective date of this Adoption
Agreement. The Plan Administrator has determined the
"same investment types" to be:
From: To:
FIXED INCOME ACCOUNT FIXED INCOME ACCOUNT
INDEX FUND INDEX FUND
CAPITAL APPRECIATION FUND CAPITAL APPRECIATION FUND
[ ] Other (Specify)_____________________________
____________________________________________
____________________________________________
(f) EFFECTIVE DATES.
Original Plan Effective Date: 1991
Effective Date of changeover to MetLife Defined
Contribution Group program: 1991
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<PAGE> 53
APPENDIX C
EMPLOYER SECURITIES
(ADMINISTRATIVE MATTERS)
1. [X] Plan DOES NOT PROVIDE for an Employer Company Stock Option (If
checked do not complete the rest of this Appendix).
2. [ ] Plan PROVIDES for an Employer Company Stock Option.
(a) THE TRUSTEE FOR THE COMPANY STOCK FUND IS:
____________________________________________
____________________________________________
(b) COMPANY STOCK IS VALUED:
[ ] Daily [ ] Semi Annual
[ ] Monthly [ ] Annual
[ ] Quarterly [ ] Other
(c) INVESTMENT OF COMPANY STOCK: (Choose ALL that apply)
[ ] Employer matching contributions must be
initially deposited to the Company Stock Option.
Thereafter, participants:
[ ] may [ ] may not
transfer such contributions to other funding
option.
[ ] Employer profit sharing contributions must be
initially deposited to the Company Stock Option.
Thereafter, participants:
[ ] may [ ] may not
transfer such contributions to other funding options.
[ ] Employees MAY direct the investment of 401(k) and/or
after tax contributions and/or rollover accounts into
the Company Stock Option.
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<PAGE> 54
[ ] Employees MAY NOT direct the investment of
401(k) and/or after-tax contributions an/or
rollover accounts into the Company Stock Option.
[ ] All contribution types may be directed to the
Company Stock Option, at the participant's
election.
(d) DISTRIBUTIONS FROM THE COMPANY STOCK OPTION
[ ] All distributions may be made in cash or in
kind, at the participant's option.
[ ] All distributions will only be made in cash.
[ ] In-service withdrawals and/or loans will only be
made in cash.
[ ] Distributions upon separation of service will be
made in cash or in kind, at the participant's
option.
[ ] No in-service withdrawals and/or loans my be
made from the Company Stock Option.
(e) COMPANY STOCK IS:
[ ] Privately held
[ ] Publicly held and listed on the: _______________
(Insert name(s) of stock exchange(s) and
symbol(s)).
(f) DIVIDENDS:
[ ] Not Applicable.
[ ] Yes, where dividends are: (Choose one)
[ ] Reinvested in cash.
[ ] Reinvested in shares.
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<PAGE> 55
APPENDIX D
PARTICIPANT LOAN PROGRAM
The MAI 401(k) PLAN permits loans to be made to all parties-in-interest. If
loans are permitted under Section D.2 of the Adoption Agreement, a participant
may request a loan from his Plan accounts by submitting the required form(s) to
the Plan Administrator. However, before any loan is made, Section 12.5 of the
Plan requires that a written loan program be established which sets forth the
rules and guidelines for making Participant loans. This document shall serve as
the required written loan program. In addition, the Plan Administrator may use
this document to serve as, or supplement, any required notice of the loan
program to parties-in-interest. The provisions of this loan program are to be
effective as of 10/1/95.
1. The Plan Administrator is authorized to administer the Participant loan
program. All applications for loans shall be made by a Participant to
the Plan Administrator on forms which the Plan Administrator will make
available for such purpose.
Loans are available only to active participants and if elected in D.2 of
the Adoption Agreement, to employees who have made rollover
contributions to the Plan but have not yet satisfied the Plan
eligibility requirements.
2. All loan applications shall be considered by the Plan Administrator
within a reasonable time after the Participant makes formal application.
The Participant may also be required to provide such supporting
information deemed necessary by the Plan Administrator.
Payment of a loan will be processed as follows: (Choose one)
[X] As soon as reasonably practicable after the participant
files his loan request documents, provided that the
participant must file such documents at least 30 days
(Insert period, for example 30 days) beforehand.
[ ] As soon as reasonably practicable after the first day of
the _____ (Insert period: either month, quarter, year,
etc.) which is at least ___ days (Insert period, for
example 30 days) after the participant files his loan
request documents.
51
<PAGE> 56
3. The Plan Administrator shall determine whether a Participant qualifies
for a loan, applying such criteria as a commercial lender of funds would
apply in like circumstances with respect to the Participant. Such
criteria shall include, but need not be limited to, the creditworthiness
of the Participant and his general ability to repay the loan, the period
of time such Participant has been employed by the Employer, whether
adequate security has been provided for the loan, and whether the
Participant agrees, as a condition for receiving the loan, to make
repayments through direct, after-tax payroll deductions.
Loans will be approved provided: (Choose one)
[ ] If there are any conditions you wish to impose you must let
potential applicants know what they are; for example, the person
has not gone bankrupt in the past or if they are in arrears on
any current commercial loan.
___________________________________
___________________________________
[X] No limitations
Loans shall be granted: (Choose one)
[ ] Only in the event of a Participant's hardship or for the purpose
of enabling a Participant to meet certain specified financial
situations. For this purpose, a loan shall be authorized in the
event of: significant health expenses or loss of income
resulting from a prolonged illness, disability or death of the
Participant or a member of his immediate family; establishing
the principal residence of the Participant; or payment for a
college education (including graduate studies) for the
Participant or his dependents. The Plan Administrator shall
determine whether a Participant qualifies for a loan under this
paragraph.
[X] For any reason considered valid by commercial lenders in the
geographic locale where the Participant resides and/or at the
location of the plant employing the Participant.
4. With regard to any loan made pursuant to this program, the following
additional rule(s) and limitation(s) shall apply, in addition to such
other requirements set forth in the Plan and this program:
(a) The maximum number of loan requests by a participant is 1
(Insert number, for example 1) per plan year (Insert period, for
example "plan year").
52
<PAGE> 57
(b) The maximum number of loans to a participant that may be
outstanding at any one time is: (Total cannot exceed 3)
[X] 1 personal and/or home loans
[ ] ___ personal loans and ___ home loans
(c) The maximum term for a personal loan will be five years. If a
participant requests a loan for the acquisition of a principal
residence of the participant, then, at the participant's
election, the maximum repayment period may be up to 30. (Not
more than 30 years.)
(d) The minimum amount of each loan is $ 1,000. (Not more than
$1,000.)
(e) The maximum amount of a loan cannot exceed the lesser of 50% of
the participant's vested accrued account or $50,000 less the
highest outstanding total loan balances during the previous 12
month period, or a lower maximum of: (Insert any other
restrictions, for example: the amount of the loan cannot exceed
50% of the participant's vested Employer Contribution Account.)
__________________________________________
__________________________________________
(f) All loans made pursuant to this program shall be considered a
directed investment from the account(s) of the Participant
maintained under the Plan. Principal and interest will be
amortized over the duration of the loan. All payments of
principal and interest made by the Participant shall be credited
only to the account(s) of such Participant.
(g) Loans may only be prepaid in full. Also, no loan may be prepaid
prior to the date on which the twelfth monthly payment has been
made. However, if the term of the loan is for a period of twelve
months or less the loan may be prepaid in full at any time.
(h) Loan amounts will be withdrawn from a participant's account
first by contribution type (based on the withdrawal sequence for
loans elected by the Employer) and then pro rata across all
funding options in which the applicable contribution type is
invested. However, if the SDA account is a funding option
offered under the Plan then the pro rata withdrawal across
funding options will exclude withdrawal of the applicable
contribution type from the SDA account. If the loan amount
requested cannot be met by withdrawals from the contribution
types invested in the other
53
<PAGE> 58
funding options, withdrawal will then be made from the SDA
account in order by contribution type.
(i) Loan repayments of principal and interest will be reinvested in
accordance with the investment instructions then in effect for
new contributions being made on behalf of the participant at
that time. If loan repayments are being made for a participant
who is not making new contributions, such loan repayments will
be invested in accordance with the last investment instructions
in effect prior to the participant's cessation of new
contributions. Repayments will be deposited to contribution
types in the reverse order from which the loan was withdrawn.
5. Any loan granted or renewed under this program shall bear a reasonable
rate of interest. In determining such rate of interest, the Plan shall
require a rate of return commensurate with the prevailing interest rate
charged on similar commercial loans under like circumstances by persons
in the business of lending money. Such prevailing interest rate standard
shall permit the Plan Administrator to consider factors pertaining to
the opportunity for gain and risk of loss that a professional lender
would consider on a similar arms-length transaction. In establishing the
rate of interest, the Plan Administrator shall conduct a reasonable and
prudent inquiry with professional lenders in the same geographic locale
where the Participant resides and/or at the location of the plant
employing the Participant to determine such prevailing interest rate for
loans under like circumstances, or may elect to use the rate of interest
established by the Trustee.
The interest rate for the lifetime of the loan will be set as of the
first day of each calendar quarter (Insert period, for example month,
calendar quarter, etc.), and will be based on the Prime Rate set by
United States Trust Company of New York (Insert name of commercial
lender) plus N/A % (Insert percentage).
6. The Plan shall require that adequate security be provided by the
Participant before a loan is granted. For this purpose, the Plan shall
consider a Participant's interest under the Plan to be adequate
security, subject to such limitations as are imposed by Section 12.5(c)
and (d) of the Plan. It shall be the policy of the Plan not to make
loans which require security other than the Participant's vested
interest in the Plan.
7. A default shall occur upon the failure of a Participant to pay, after 90
days, the interest and principal due for the 90 day period. In such
event, the outstanding balance of the loan shall be immediately due and
payable and will become taxable to the participant to the extent that
the outstanding amount consists of tax deferred monies. However, since
the Participant's account balance is the security for the defaulted
loan, the Plan Administrator shall defer enforcement of its security
interest until a distributable event occurs. If default of a loan has
not occurred prior to termination of employment for any reason, then the
Plan
54
<PAGE> 59
Administrator's election below will determine whether or not the loan is
immediately due and payable upon such termination of employment.
[X] If an active participant has an outstanding loan balance and
leaves employment for any reason, then such outstanding loan
balance is immediately due and payable within 30 days of such
separation from service. (Participants should be advised to seek
counsel concerning the tax implications.)
[ ] If an active participant has an outstanding loan balance and
leaves employment for any reason then such outstanding loan
balance may continue to be repaid according to the same
repayment schedule in effect prior to separation of service, as
long as the terminated participant leaves all or a portion of
his account balance in the Plan. (IF THIS OPTION IS CHOSEN, THE
PLAN ADMINISTRATOR MUST AGREE THAT LOAN REPAYMENTS MAY ONLY BE
SUBMITTED TO METLIFE THROUGH EMPLOYER GENERATED INPUT. WE WILL
NOT ACCEPT CHECKS FROM INDIVIDUAL PARTICIPANTS OR FORMER
PARTICIPANTS).
8. The MetLife Defined Contribution Group program may charge a loan
application fee of $50 at the time a loan is requested. Such fee is
charged to the Plan Administrator. The Plan Administrator may, at his
discretion, charge this loan fee back to the participant. However, in
doing so the Plan Administrator assumes the responsibility of collecting
payment from individual participants, cashing such checks and wiring the
payment (or sending a Company check) to MetLife at the time the Plan is
billed. METLIFE WILL NOT ACCEPT INDIVIDUAL PARTICIPANT CHECKS AS PAYMENT
FOR LOAN APPLICATION FEES.
Adopted this _____ day of ____________________, 19___. This loan program may be
amended from time to time by a writing signed by all parties hereto.
- ---------------------------------------------
Employer Name and Signature
- ---------------------------------------------
Plan Administrator Name and Signature
55
<PAGE> 1
EXHIBIT 13.1 THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS
Sections of the Registrant's Annual Report to Stockholders Incorporated by
Reference:
13.1.1 Selected Financial Information
13.l.2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
13.1.3 Independent Auditors' Report
13.1.4 Consolidated Balance Sheets
13.1.5 Consolidated Statements of Operations
13.1.6 Consolidated Statements of Stockholders' Equity (Deficiency)
13.1.7 Consolidated Statements of Cash Flows
13.1.8 Notes to Consolidated Financial Statements
EXHIBIT 13.1.1 SELECTED FINANCIAL INFORMATION
The following table sets forth for the periods indicated selected consolidated
financial data for MAI Systems Corporation. This information should be read in
conjunction with the consolidated financial statements included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands except per share data)
STATEMENT OF OPERATIONS DATA (1)
<S> <C> <C> <C> <C> <C>
Revenue $ 115,291 $ 66,095 $ 66,294 $ 64,164 $ 70,978
Operating Income (loss) 34,993 1,741 9,399 (12,744) (8,675)
Income (loss) before extraordinary items 28,177 3,628 8,623 (13,487) (10,172)
Net income (loss) 145,489 4,544 10,189 (13,487) (10,172)
Income (loss) per share - restated (2):
Basic income (loss) per share:
Income (loss) before extraordinary item $ 4.13 $ 0.53 $ 1.26 $ (1.85) $(1.08)
Extraordinary item 21.33 0.67 0.23 -- --
--------- --------- --------- --------- ------
$ 25.46 $ 1.20 $ 1.49 $ (1.85) $(1.08)
========= ========= ========= ========= ======
Diluted income (loss) per share:
Income (loss) before extraordinary item $ 4.13 $ 0.53 $ 1.12 $ (1.85) $(1.08)
Extraordinary item 21.33 0.67 0.20 -- --
--------- --------- --------- --------- ------
$ 25.46 $ 1.20 $ 1.32 $ (1.85) $(1.08)
========= ========= ========= ========= ======
Weighted average common shares used in
determining income (loss) per share -
restated
Basic 7,356 7,356 6,820 7,309 9,408
========= ========= ========= ========= ======
Diluted 7,356 7,356 7,724 7,309 9,408
========= ========= ========= ========= ======
BALANCE SHEET DATA
Working capital (deficiency) (5,744) (4,974) 337 (8,270) (11,696)
Total Assets 21,784 16,016 21,033 32,853 34,614
Long-term debt 3,853 1,742 1,021 485 5,230
Stockholders' equity (deficiency) (19,787) (7,542) 2,472 2,058 (665)
</TABLE>
(1) No cash dividends have been declared by the Company.
(2) 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 in 1993, 1994 and 1995, the
dilutive effect of stock options and warrants 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. The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 128 ("SFAS No. 128"), "Earnings Per Share" in 1997 and restated all periods
to conform to the provisions of SFAS No. 128.
-17-
<PAGE> 2
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1997
----------------------------------------- ---------------------------------------
(dollars in millions, (dollars in millions,
except share data) except 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 $ 16.6 $ 17.8 $ 15.0 $ 14.7 $ 18.1 $ 17.7 $ 18.4 $ 16.8
Gross Profit 3.7 6.2 6.3 5.1 7.1 8.0 6.2 6.0
Operating income (loss) (24.2) .3 9.6 1.6 (3.8) (2.0) (1.8) (1.1)
Income (loss) before
income taxes (25.0) .2 9.5 1.8 (4.3) (2.3) (2.1) (1.2)
Net income (loss)(3) (25.2) .4 9.5 1.8 (4.6) (2.3) (2.1) (1.2)
Income (loss) per share -- restated(2):
Basic $ (3.06) $ 0.05 $ 1.39 $ 0.26 $(0.47) $ (0.24) $ (0.23) $ (0.14)
Diluted $ (3.06) $ 0.04 $ 1.13 $ 0.24 $(0.47) $ (0.24) $ (0.23) $ (0.14)
Weighted average common shares used
in determining income (loss) per
share -- restated:
Basic 8,224 7,309 6,868 6,835 10,285 9,559 9,187 8,595
===== ====== ===== ===== ====== ===== ===== =====
Diluted 8,224 10,025 8,418 7,328 10,285 9,559 9,187 8,595
===== ====== ===== ===== ====== ===== ===== =====
Share Prices(1)
High $ 8.81 $ 9.50 $ 10.63 $ 7.88 $ 4.13 $ 4.88 $ 6.13 $ 8.00
Low $ 5.50 $ 6.75 $ 5.63 $ 6.13 $ 2.50 $ 2.94 $ 3.75 $ 6.00
</TABLE>
(1) Prior to August 23, 1995, prices reflect interdealers' prices in the over
the counter market.
(2) 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
for profitable quarters, the dilutive effect of stock options and warrants
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. The Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"), "Earnings Per Share" in 1997 and restated all periods to conform
to the provisions of SFAS No. 128.
(3) The fourth quarter of 1996 includes charges of $556,000 relating to the
write-down of the net assets of a subsidiary held for sale, $14,279,000
relating to the impairment of goodwill, $2,534,000 relating to acquired
in-process technology and $940,000 relating to severance costs and excess
facilities. The fourth quarter of 1997 includes charges of $1,151,000
relating to the write off excess and obsolete inventory.
-18-
<PAGE> 3
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, competitive
factors, seasonality and other variations 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, the significant risks associated with the
acquisition of new products, product rights, technologies or businesses, MAI's
ability to retain technical, managerial and other 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 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, working capital decreased from a negative working capital
of $8,270,000 at December 31, 1996 to a negative working capital of $11,696,000.
Excluding unearned revenue (which will not give rise to cash disbursements) of
$11,967,000, the Company has working capital of $271,000 at December 31, 1997.
Unearned revenue for 1996 was $11,010,000, and working capital excluding
unearned revenue was $2,740,000, resulting in a current ratio of 1.15 to 1.0.
Excluding unearned revenue, the decrease of $2,469,000 was attributable to a
decrease in cash and cash equivalents of $1,806,000, a decrease in accounts
receivable of $881,000, and inventory of $309, an increase in accounts payable
and accruals of $1,289,000, and a net increase in line of credit current portion
of long term debt of $740,000.
Cash and cash equivalents decreased from $3,857,000 at December 31, 1996,
compared to $2,051,000 at December 31, 1997. Availability under the Company's
existing $4,000,000 secured revolving credit facility, which expires in May
1998, based on a calculation reflecting the age and nature of certain accounts
receivable, at December 31, 1997, was approximately $1,500,000. Balances drawn
down at December 31, 1997 were $1,452,000.
Net cash used in investing activities in 1997 totaled $7,676,000, mainly related
to the purchase of CIMPRO and capital expenditures.
-19-
<PAGE> 4
Net cash provided by financing activities in 1997 totaled $11,697,000, which is
comprised of $6,000,000 of 11% subordinated notes associated with the
acquisition of CIMPRO, $2,603,000 in issuance of Common Stock, $2,033,000 in the
exercising of stock options and warrants, $1,452,000 in short-term borrowings,
and $237,000 received from notes receivable. The financing outflows mainly
consisted of $603,000 in repayments of long-term debt.
Stockholders' equity decreased from $2,058,000 at December 31, 1996, to negative
$666,000 at December 31, 1997, primarily reflecting a net loss of $10,172,000
for the year and the issuance of shares relating primarily to the conversion of
stock warrants issued in connection with the purchase of CIMPRO. The Company
has commitments in connection with minimum guaranteed royalties on certain
software products over the next three years of $1,000,000, $1,500,000 and
$2,500,000 in 1998, 1999 and 2000, respectively.
Although the Company had a net use of cash from operations in 1997 and has a net
stockholders' deficiency of $666,000 at December 31, 1997, the Company believes
it will generate sufficient funds from operations and obtain additional
financing, as needed, in 1998 to meet its operating and capital requirements.
Additionally, the Company expects it will renew its line of credit with a new
lender during the second quarter of 1998.
As of March 31, 1998, the Company had issued and outstanding 10,298,539 shares
of Common Stock.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997.
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1996 Revenue December 31, 1997 Revenue
----------------- ------------- ----------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 17,531 27.4% $ 32,720 46.1%
Process Manufacturing 2,957 4.6% 10,929 15.4%
Gaming 2,317 3.6% 4,594 6.5%
Legacy 38,529 60.0% 20,515 28.9%
Other 2,830 4.4% 2,220 3.1%
Total Revenue 64,164 100.0% 70,978 100.0%
Gross profit 21,234 33.1% 27,282 38.5%
Selling, general and
administrative expenses 21,622 33.7% 26,698 37.6%
Restructuring (Reversals) (244) (0.4%) 900 1.3%
Research and development costs 3,117 4.9% 5,583 7.9%
Amortization and impairment
of intangibles 14,776 23.0% 2,331 3.3%
Acquired in-process technology 2,534 3.9% -- --
Other operating (income) expense (7,827) (12.2%) 445 0.6
Loss on subsidiaries held for sale 556 0.9% -- --
Equity in net losses of
unconsolidated subsidiaries 26 -- 151 0.2%
Interest expense, net 102 0.2% 1,080 1.5%
Provision for income taxes 59 0.19% 266 0.4%
Net income (loss) $(13,487) (21.0%) $(10,172) (14.3%)
</TABLE>
Revenue for 1997 was $70,978,000 compared to $64,164,000 in 1996 or a 10.6%
increase. The Company continues to transition from its legacy business to the
sale of enterprise solutions as 71.1% of the Company's 1997 revenue resulted
from its enterprise solutions business as compared to 40.0% in 1996. The
Company's revenue from its sales of enterprise solutions in industries in which
it competes (hospitality, process manufacturing, gaming and other), increased
96.8% compared to the prior year. Hospitality revenue increased 86.6% from
$17,531,000 in 1996 to $32,720,000 in 1997. Gaming revenue increased 98.3% from
1996 to 1997. The growth in enterprise solutions was partially offset by the
decrease in the Company's legacy revenue (traditional hardware contract service
revenues and proprietary add-on sales) which declined 38.8% year over year.
Gross profit for 1997 increased to $27,282,000 (38.5%) from $21,234,000 (33.1%)
in 1996. The increase in overall gross margin from 33.1% to 38.5% is due to the
higher margins associated with enterprise solutions. Enterprise solutions gross
margin increased from 32.8% in 1996 to 54.1% in 1997 due primarily to better
pricing in 1997.
Gross margin on hospitality sales increased from 38.2% in 1996 to 51.6% in 1997
due to better pricing strategy in 1997. Gross margins on gaming went from 2.4%
in 1996 to 47.3% in 1997 due to improved margins on hardware. Gross margins
associated with the Company's legacy business declined from 33.3%
-20-
<PAGE> 5
in 1996 to 20.2% in 1997 due to the Company's outsourcing agreement with
Olivetti North America, Inc. and Olivetti Canada Ltd. which commenced in
December 1996. The Company believes increased sales of enterprise solutions
will continue to offset the declining legacy base.
Selling, general and administrative ("SG&A") expenses increased 23.5% from
$21,622,000 in 1996 to $26,698,000 in 1997. The increase of $5,076,000 is
principally attributable to increased marketing efforts internationally and a
larger sales force. These expenses are related to a more aggressive sales
strategy aimed at securing contracts with multi site customers. The Company
anticipates the investment in sales and marketing made in 1997 will contribute
to improved solution sales growth in 1998.
The Company incurred restructuring costs of $900,000 in 1997 in connection with
a restructuring plan to eliminate operations and related expenses which were not
required to support the Company's operations of software sales and professional
services. The costs were recorded to recognize severance, benefits and other
related costs for employees to be terminated. Comparable costs for 1996 were a
reversal of $244,000 for estimated restructuring costs for a prior year.
Research and development costs were $3,117,000 in 1996, compared to $5,583,000
in 1997. The increase is attributable to increased development activity in both
the Company's hospitality and process manufacturing products.
The Company 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. 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.
Amortization of intangibles was $2,331,000 in 1997, which represents the
amortization of intangible assets resulting from acquisitions of HIS, CIMPRO and
the remaining minority ownership (through the acquisition of stock options) of
Gaming Systems International.
Other operating income for 1996 is comprised principally of a favorable
settlement of $7,434,000 net of legal costs and reserves with respect to the
Company's litigation concerning the 1992 failed sale of the Company's then
European subsidiaries. The Company included in its non-operating results a "loss
on subsidiary held for sale" associated with its Venezuela subsidiary of
$556,000 in 1996. The amount recorded in 1997 represents "loss on subsidiaries
held for sale" associated with its subsidiaries in Venezuela and Puerto Rico.
Net interest expense was $102,000 for 1996 compared to $1,080,000 in 1997. The
increase in 1997 is reflective of generally lower cash levels during the course
of the year and $6,000,000 of indebtedness incurred associated with the
acquisition of CIMPRO in March 1997.
The income tax provision reflects a tax provision for the Company's domestic and
foreign operations. The Company's income tax provision in 1996 and 1997, despite
losses before income taxes, results primarily from the recognition of impaired
goodwill which is not deductible for tax purposes in 1996, and profitable
foreign operations in 1997.
-21-
<PAGE> 6
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
<TABLE>
<CAPTION>
Percentage of Percentage of
December 31, 1995 Revenue December 31, 1996 Revenue
----------------- ------- ----------------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 8,450 12.7% $ 17,531 27.4%
Process Manufacturing 6,682 10.1% 2,957 4.6%
Gaming 9,391 14.2% 2,317 3.6%
Legacy 41,781 63.0% 38,529 60.0%
Other -- -- 2,830 4.4%
Total Revenue 66,294 100.0% 64,164 100.0%
Gross profit 25,045 37.8% 21,234 33.1%
Selling, general and
administrative expenses 14,070 21.3% 21,622 33.7%
Restructuring (reversals) (1,088) (1.6%) (244) (0.4%)
Research and development costs 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) expense (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
industries in which it competes (hospitality, process manufacturing, gaming and
other), increased 4.69% from 1995 to 1996. Hospitality revenue increased 107.7%
from $8,450,000 in 1995 to $17,531,000 in 1996 due to the acquisition of Hotel
Information Systems and the distribution rights of Lodging Touch. Revenue from
process manufacturing increased 11.5% from 1996 to 1997. Excluding gaming
revenue, sale of enterprise solutions increased by 54.4%. However, that growth
was more than offset by a decrease in the Company's legacy revenue which
declined 7.8% year over year (traditional hardware contract service revenues and
proprietary add-on sales).
Gross profit for 1996 was $21,234,000 (33.1%) which was down from $25,045,000
(37.8%) in 1995. The decline in overall gross margin from 37.8% to 33.1% was due
to declining margins in gaming and legacy. Gross margins in gaming decreased
from 47.1% to 2.4% due to increased competition on hardware. Gross margins in
hospitality increased from 35.1% in 1995 to 38.2%. Gross margins associated with
the Company's legacy business decreased slightly from 35.1% in 1995 to 33.3% in
1996. Legacy gross profit, however, declined from $14,676,000 to $11,992,000 due
to declining revenue as the product mix in the hardware maintenance base changed
and the Company's older proprietary product customers installed new solutions no
longer offered by the Company. In recognition of those trends and the need for
improved service coverage for its new businesses, the Company entered into an
outsourcing agreement with Olivetti North America, Inc. and Olivetti Canada Ltd.
in December 1996.
Selling, general and administrative expenses increased 53.7% from $14,070,000 in
1995 to $21,622,000 in 1996. The increase of $7,552,000 reflected the company's
significant investment in expending and rebuilding its sales and marketing
organization with the addition of 77 new personnel; increased advertising and
promotion expense of $400,00; increased travel and entertainment in pursuit of
bookings of approximately $600,00; $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.
Restructuring reversals represent changes in underlying estimates for excess
space that were credited to selling, general and administrative expenses that
relate to restructuring plans for prior years. The credit of $244,000 in 1996
relates to a restructuring plan prior to 1994, and the amount recorded in 1995
of $1,088,000 relates to a restructuring plan in 1994.
Research and Development costs were $2,667,000 in 1995 compared to $3,117,000 in
1996. Research costs increased
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<PAGE> 7
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.
The Company 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 discontinuance of product lines
resulting from the subsequent acquisition of software. In-process technology
charged to operations was due to certain acquired technology which was
determined to have no future alternative use or value other than in products
not yet developed for commercial release.
Other operating income for 1996 is comprised principally of a favorable
settlement of $7,434,000 net of legal costs and reserves with respect to the
Company's litigation concerning the 1992 failed sale of the Company's then
European subsidiaries. The Company included in its non-operating results a "loss
on subsidiary held for sale" associated with its Venezuela subsidiary of
$556,000 in 1996.
Interest expense was $228,000 for 1995 compared to $102,000 in 1996. The
decrease in 1996 is reflective of generally higher cash balances during the
course of the year.
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 in
1995.
The extraordinary item in 1995 relates to the favorable settlement of certain
tax liabilities pursuant to the Company's bankruptcy proceedings and, as such,
has been classified as an extraordinary item.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130 and
131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or income (loss) per share data as currently reported.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined. SOP
97-2 is effective for software transactions entered into by the Company in
fiscal 1998 and subsequent periods.
As a result of certain issues raised in applying SOP 97-2, in March 1998, the
AICPA issued a Statement of Position ("SOP") which will delay for one year the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.
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<PAGE> 8
EXHIBIT 13.1.3 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, 1996 and 1997 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,
1997. 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, 1996 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Orange County, California
April 10, 1998
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<PAGE> 9
EXHIBIT 13.1.4 CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
---- ----
(in thousands except share data)
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $282 in 1996 $ 3,857 $ 2,051
Receivables, less allowance for doubtful accounts
of $2,578 in 1996 and $1,983 in 1997 11,407 12,268
Inventories 3,321 1,838
Prepaids and other assets 1,938 1,935
--------- ---------
Total current assets 20,523 18,092
Furniture, fixtures and equipment, net 4,065 4,355
Intangibles, net 6,804 10,723
Other assets 1,461 1,443
--------- ---------
Total assets $ 32,853 $ 34,613
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Line of credit $ -- $ 1,452
Current portion of long-term debt 1,394 682
Accounts payable 6,852 6,863
Customer deposits 1,763 1,776
Accrued liabilities 7,312 6,477
Income taxes payable 462 571
Unearned revenue 11,010 11,967
--------- ---------
Total current liabilities 28,793 29,788
Long-term debt 485 5,230
Other liabilities 1,517 261
--------- ---------
Total liabilities 30,795 35,279
--------- ---------
Stockholders' equity (deficiency):
Preferred Stock, par value $0.01 per share; 1,000,000
shares authorized, none issued and outstanding -- --
Common Stock, par value $0.01 per share; authorized
25,000,000 shares; 8,292,935 shares and 10,298,539
issued and issuable at December 31, 1996 and 1997, respectively 88 105
Additional paid-in capital 212,351 219,379
Cumulative translation adjustment 100 503
Accumulated deficit (210,481) (220,653)
--------- ---------
Total stockholders' equity (deficiency) 2,058 (666)
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity (deficiency) $ 32,853 $ 34,613
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<PAGE> 10
EXHIBIT 13.1.5 CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
(in thousands, except per share data)
Revenue: 1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Software, networks and professional services:
Software sales $ 2,803 $ 5,092 7,608
Network and computer equipment 10,473 6,563 12,120
Professional services 11,236 13,980 30,735
------- -------- --------
24,512 25,635 50,463
Legacy revenue 41,782 38,529 20,515
------- -------- --------
Total revenue 66,294 64,164 70,978
------- -------- --------
Direct costs:
Software, networks and professional services:
Software sales 250 1,374 1,547
Network and computer equipment 4,957 6,531 8,238
Professional services 8,936 9,318 17,531
------- -------- --------
14,143 17,223 27,316
Legacy costs 27,106 25,707 16,380
------- -------- --------
Total direct costs 41,249 42,930 43,696
------- -------- --------
Gross profit 25,045 21,234 27,282
Selling, general and administrative expenses 14,070 21,622 26,698
Restructuring charges (reversals) (1,088) (244) 900
Research and development costs 2,667 3,117 5,583
Amortization and impairment of intangibles -- 14,776 2,331
Acquired in-process technology -- 2,534 --
Other operating (income) expense (3) (7,827) 445
------- -------- --------
Operating income (loss) 9,399 (12,744) (8,675)
Loss on subsidiaries held for sale -- (556) --
Equity in net losses of unconsolidated subsidiaries -- (26) (151)
Interest income 120 243 101
Interest expense (348) (345) (1,181)
Minority interest in consolidated subsidiary (165) -- --
------- -------- --------
Income (loss) before income taxes and extraordinary item 9,006 (13,428) (9,906)
Provision for income taxes 383 59 266
------- -------- --------
Income (loss) before extraordinary item 8,623 (13,487) (10,172)
Extraordinary item 1,566 -- --
------- -------- --------
Net income (loss) $10,189 $(13,487) $(10,172)
======= ======== ========
Income (loss) per share - restated:
Basic income (loss) per share:
Income (loss) before extraordinary item $ 1.26 $ (1.85) $ (1.08)
Extraordinary item .23 -- --
------- -------- --------
$ 1.49 $ (1.85) $ (1.08)
======= ======== ========
Diluted income (loss) per share:
Income (loss) before extraordinary item $ 1.12 $ (1.85) $ (1.08)
Extraordinary item .20 -- --
------- -------- --------
$ 1.32 $ (1.85) $ (1.08)
======= ======== ========
Weighted average common shares
used in determining income (loss) per share - restated
Basic 6,820 7,309 9,408
======= ======== ========
Diluted 7,724 7,309 9,408
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 11
EXHIBIT 13.1.6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Total
Additional Cumulative Stockholders'
Common Paid-In Translation Accumulated Equity
Stock Capital Adjustment Deficit (Deficiency)
--------- ---------- ------------ ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 59 $ 199,366 $ 201 $(207,168) $ (7,542)
Reclassification of deferred gain on
foreclosure 15 (2) -- (15) (2)
Foreign currency gains -- -- (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
Issuance of common stock, net 3 2,300 -- -- 2,303
of stock issuance costs
Issuance of common stock for
acquisition of GSI minority interest -- 104 -- -- 104
Issuance of common stock in lieu
of bonus payment 4 1,286 -- -- 1,290
Exercise of stock options and warrants 11 3,072 -- -- 3,083
Stock option compensation -- 169 -- -- 169
Issuance of warrants in
connection with note payable -- 1,027 -- -- 1,027
HIS purchase price reduction (1) (930) -- -- (931)
Foreign currency translation gains -- -- 403 -- 403
Net loss -- -- -- (10,172) (10,172)
--------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 105 $ 219,379 $ 503 $(220,653) $ (666)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 12
EXHIBIT 13.1.7 CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(in thousands)
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,189 $ (13,487) $ (10,172)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Acquired in-process technology -- 2,534 --
Amortization and impairment of intangibles -- 14,776 2,718
Loss on subsidiary held for sale -- 556 --
Depreciation and amortization 1,175 1,296 1,575
Stock option compensation expense -- 177 169
Write-off of software development costs -- 736 --
Equity in net losses of unconsolidated subsidiaries -- 26 151
Provision for doubtful accounts receivable 613 603 6
Provision for inventory obsolescence 734 490 1,174
Net loss (gain) from foreign currency (258) 125 466
Extraordinary gain (1,566) -- --
Minority interest in consolidated subsidiary 165 -- --
Gain on sale of assets (346) -- --
Changes in assets and liabilities:
(Increase) decrease in receivables (1,750) (2,123) 881
(Increase) decrease in inventories (2,092) (621) 309
Decrease (increase) in prepaids and other assets 30 319 (199)
Decrease (increase) in other assets -- 187 (341)
(Decrease) increase in accounts payable
and customer deposits (110) 2,213 20
(Decrease) increase in accrued liabilities (1,848) (3,477) 1,269
(Decrease) increase in income taxes payable 225 56 109
(Decrease) increase in unearned revenue 585 (613) (2,053)
Increase (decrease) in deferred income taxes 72 (132) --
Decrease in other liabilities (1,290) (33) (1,842)
--------- -------- ---------
Net cash provided by operating activities
before reorganization items 4,528 3,608 (5,760)
Payments for reorganization items (153) -- --
---------- --------- ---------
Net cash provided by (used in) operating activities 4,375 3,608 (5,760)
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,029) (1,105) (1,157)
Proceeds from sale of furniture, fixtures and equipment 515 -- --
Purchase of CIMPRO -- -- (6,228)
Net cash acquired from the purchase of HIS -- 219 --
Software development costs -- (736) (291)
---------- --------- ---------
Net cash used in investing activities (1,514) (1,622) (7,676)
---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(in thousands)
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ -- $ -- $ 2,303
Proceeds from issuance of subordinated
notes payable -- -- 6,000
Payments received on notes receivable -- 174 237
Repayments of long-term debt (1,077) (1,913) (603)
Receipt of notes receivable (805) (500) (25)
Net increase in line of credit -- -- 1,452
Proceeds from the exercise of stock options
and warrants -- 77 2,333
--------- ---------- -----------
Net cash (used in) provided by financing activities (1,882) (2,162) 11,697
--------- ---------- -----------
Effect of exchange rate changes on cash and cash equivalents (44) (53) (67)
--------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 935 (229) (1,806)
Cash and cash equivalents at beginning of year $ 3,151 $ 4,086 $ 3,857
--------- ---------- ------------
Cash and cash equivalents at end of year $ 4,086 $ 3,857 $ 2,051
========= ========== ===========
Cash paid during the period for:
Interest $ 171 $ 350 $ 1,016
========= ========== ===========
Income taxes $ 25 $ 5 $ 141
========= ========== ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities (see Notes
6, 9 and 17).
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
<PAGE> 14
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 technology solutions featuring complex wide and local area
networks primarily in the hospitality, process manufacturing 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, re-manufacturing, 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 network and computer equipment are generally recorded when the hardware
is shipped. Software revenue is primarily recorded when the application software
programs are installed. Hardware and software professional 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 statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
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.
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<PAGE> 15
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 AND OTHER LONG-LIVED ASSETS
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, and other intangible assets are being amortized on a
straight-line basis over the expected periods to be benefited, generally five to
seven years. Long-lived assets and certain identifiable intangibles to be held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the 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 undiscounted 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 exceeds the fair value of the assets. Assets that
are to be disposed of are reported at the lower of the carrying amount or fair
value less cost to sell, except for assets covered by Accounting Principles
Board ("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." In 1996, the Company identified certain impairment losses with
regards to goodwill (See Notes 6 and 7) and, accordingly, wrote down the related
assets based on their fair market value.
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 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 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 considering
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.
FOREIGN CURRENCY TRANSLATION
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 and uses the U.S. dollar as its functional currency
in accordance with SFAS No. 52, "Foreign Currency Translation." Accordingly, all
translation gains and losses for foreign subsidiaries, except Venezuela, 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 (deficiency).
-31-
<PAGE> 16
Net foreign exchange transaction losses for 1995, 1996 and 1997 were $155,000,
$107,000 and $125,000, 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
begins when technological feasibility is established and ends 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.
In 1995 and 1996, all software development costs (consisting of the cost to
purchase software and to develop software internally) were expensed, as part of
research and development costs, as any amounts capitalizable in accordance with
SFAS No. 86 were immaterial. The Company capitalized $291,000 of software
development costs during 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
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, 1996 and 1997,
the carrying value of cash and 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.
INCOME (LOSS) PER SHARE OF COMMON STOCK
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". This statement replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All income (loss) per share amounts
for all periods have been presented and restated to conform to the SFAS No. 128
requirements (see Note 19).
Basic and diluted income (loss) per share is computed using shares of common
stock issued to date and 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, in 1995
for the dilutive calculation, the dilutive effect of stock options and warrants
outstanding. As of December 31, 1997, 6,755,751 shares had been issued pursuant
to the Plan of Reorganization.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation.
-32-
<PAGE> 17
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130 and
131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or loss per share data as currently reported.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined. SOP
97-2 is effective for software transactions entered into by the Company in
fiscal 1998 and subsequent periods.
As a result of certain issues raised in applying SOP 97-2, in March 1998, the
AICPA issued a Statement of Position ("SOP") which will delay for one year the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
(in thousands)
1996 1997
<S> <C> <C>
Finished goods $ 2,277 $ 1,068
Replacement parts 1,044 770
------- --------
$ 3,321 $ 1,838
======= ========
</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. During the fourth quarter of 1997, the Company wrote-off
approximately $1,151,000 of inventory primarily due to excess and obsolete parts
which is reflected in direct costs in the accompanying consolidated statements
of operations.
NOTE 3 - ASSETS HELD FOR SALE
During 1996, the Company entered into negotiations with a third party to sell
100% of the common stock of its Venezuelan and Puerto Rican subsidiaries for
approximately $275,000. As a result, the net assets of the subsidiaries were
written down to their net realizable value resulting in a 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 as of December 31, 1996 and 1997, as the sale is
currently expected to be completed during the second quarter of 1998.
-33-
<PAGE> 18
NOTE 4 - FURNITURE, FIXTURES AND EQUIPMENT
The major classes of furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
------------
(in thousands)
1996 1997
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 2,006 $ 2,676
Equipment held for administrative purposes 10,356 11,279
Leasehold improvements 497 457
--------- ---------
12,859 14,412
Less: accumulated depreciation and amortization (8,794) (10,057)
--------- ---------
$ 4,065 $ 4,355
========= =========
</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 unregistered 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 included subsidiaries of HIS in Singapore, Hong Kong, Australia and Mexico.
The acquisition of HIS has been accounted for by the purchase method of
accounting. The total purchase price for HIS was $21,373,000, which included net
liabilities assumed of HIS of $7,873,000 and acquisition costs of approximately
$2,600,000.
A preliminary allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
Allocation of Amortization
Purchase Price (Useful Life)
-------------- -------------
(in thousands)
<S> <C> <C>
Goodwill $ 17,914 7 years
Customer list 925 7 years
In-process technology charged to operations
during the fourth quarter of 1996 2,534 N/A
----------
$ 21,373
==========
</TABLE>
Included in the net liabilities assumed in connection with the acquisition of
HIS was $2,185,000 of debt. In 1996, 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.
-34-
<PAGE> 19
During 1996, the Company entered into arbitration proceedings regarding the
purchase price of HIS. The Company placed approximately 1,100,000 shares of
Common Stock issued in connection with the acquisition of HIS in an escrow
account to be released in whole, or in part, upon final resolution of post
closing adjustments.
In November 1997, the purchase price for the acquisition of HIS was reduced by
$931,000 pursuant to arbitration proceedings. As a result, goodwill was reduced
$931,000 and approximately 100,650 shares will be released from the escrow
account and returned to the Company. In addition, further claims relating to
legal costs and certain disbursements currently estimated at $1,141,000 are
presently pending. Resolution of such claims may result in a further reduction
in the purchase price and a corresponding release of additional escrow shares to
the Company. The amount and number of shares will be determined based on the
final resolution of such claims. Accordingly, as of December 31, 1997, the final
purchase price has not been determined.
The Company will, as needed, pursuant to the asset purchase agreement, issue
additional shares of Common Stock in order that the recipients ultimately
receive shares worth a fair value of $9.25 per share (subject to increase in
such amount to approximately $10.00 per share by year end 1997). This adjustment
applies to a maximum of 810,004 shares of Common Stock. As of December 31, 1997,
the fair market value of the Company's common stock was $2.50 per share which
would result in approximately 2,430,000 additional shares issued.
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 and the year ended December 31, 1997, approximately $274,000
and $400,000, respectively, of costs were paid. During 1997, approximately
$686,000 of the HIS restructuring reserves were reversed resulting in a
reduction of goodwill. As a result, the HIS restructuring reserves were fully
utilized or reversed during 1997. Included in accrued liabilities in the
accompanying consolidated balance sheet at December 31, 1996 is approximately
$1,086,000 of HIS restructuring reserves.
GAMING SYSTEMS INTERNATIONAL
In May 1996, the Company acquired the remaining 30% minority interest shares of
GSI for 98,462 unregistered 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 step 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 unregistered shares of the Company's
Common Stock valued at $104,500 and notes payable of $104,500. The transaction
resulted in an increase in goodwill of $209,000.
The Company will, as needed, pursuant to the agreements to acquire the 30%
minority interest shares and options, issue additional shares of Common Stock in
order that the recipients ultimately receive shares worth a fair market value of
$9.75 and $7.50 per share, respectively, but the total number of additional
shares issued under these provisions will not exceed 45,424 shares. As of
December 31, 1997, the fair market value of the Company's Common Stock was $2.50
per share, which would result in the maximum number of additional shares
(45,424) being issued. The Company is expecting to settle the number of
additional shares to be issued during 1998.
CIMPRO
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 and $328,000 of direct costs related to the
acquisition. 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"). Interest on the subordinated
notes is payable semi-annually commencing September 3, 1997.
Associated with the stock issuance, the Company incurred $300,000 of issuance
costs which are included in additional paid-in capital in the accompanying
consolidated balance sheet as of December 31, 1997.
-35-
<PAGE> 20
The acquisition of CIMPRO has been accounted for using the purchase method of
accounting. The allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
Allocation of
Purchase Price
(in thousands)
--------------
<S> <C>
Net current liabilities $ (1,061)
Furniture, fixtures and equipment 400
Intangibles 7,475
Long-term liabilities (586)
--------
$ 6,228
========
</TABLE>
Intangible assets are being amortized on a straight-line basis over the expected
periods to be benefited of five to seven years.
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 intangible
assets of $530,000. The Company recorded an impairment charge of $492,000 to
intangible assets in the fourth quarter of 1996. The impairment of the
intangible assets was determined based upon projected discounted future cash
flows.
ENTERPRISE HOSPITALITY SOLUTIONS
Effective October 1, 1996, the Company entered into an exclusive and perpetual
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 the
Licensor, the Company shall pay a $1,000,000 license acquisition fee. As of
December 31, 1996 and 1997, the Company had paid $125,000 and $675,000,
respectively, of the license acquisition fee. As of December 31, 1996 and 1997,
$475,000 and $325,000, respectively, were classified as accrued liabilities in
the accompanying consolidated balance sheets. As of December 31, 1996, $400,000
was included in other long-term liabilities, in the accompanying consolidated
1996 balance sheet (see Note 10). The $1,000,000 license acquisition fee was
capitalized and is being amortized over a three-year period which commenced in
1997. As of December 31, 1996 and 1997, the unamortized balance of the license
acquisition fee was $1,000,000 and $727,000, respectively, and is included in
other assets in the accompanying consolidated balance sheets.
Additionally, under the license agreement, the Company shall pay the Licensor
royalties of 20% of net revenues subject to certain minimum royalties commencing
April 1997. Minimum annual royalties payable to the Licensor for the three
successive twelve-month periods subsequent to December 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)
1996 1997
-------- ---------
<S> <C> <C>
Goodwill $6,397 $ 12,337
Capitalized Software -- 291
Customer list 925 925
-------- ---------
7,322 13,553
Less: accumulated amortization (518) (2,830)
-------- ---------
Total $ 6,804 $ 10,723
======== =========
</TABLE>
-36-
<PAGE> 21
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.
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 1998. At December 31, 1997, the
available balance was approximately $50,000. As of December 31, 1997, the
outstanding balance under the facility was $1,452,000. There were no amounts
drawn under this facility as of December 31, 1996.
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,
1997.
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)
1996 1997
--------- ----------
<S> <C> <C>
Notes payable $ 1,240 $ 4,670
Obligations under capital leases 185 493
Tax claims 266 281
Other 188 468
--------- ----------
1,879 5,912
Less: current installments (1,394) (682)
--------- ----------
Noncurrent portion $ 485 $ 5,230
========= ==========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
(in thousands)
<S> <C>
1998 $ 682
1999 540
2000 112
2001 79
2002 30
Thereafter 4,469
--------
$ 5,912
========
</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 first GSI Note required monthly payments of $51,500
and matured on February 28, 1997 at which time all remaining principal and
accrued interest were paid in full. The second GSI Note requires monthly
payments of $40,000 (commencing April 1, 1997) and matures on May 31, 1998, at
which time all remaining principal and accrued interest are due.
-37-
<PAGE> 22
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 was compounded monthly at prime plus 1%.
The CLS Note was guaranteed by BGLS (the Company's former parent). The remaining
balance of the CLS note was paid in full during 1997.
On March 3, 1997, the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital Management
LP ("Canyon") with detachable warrants to purchase 750,000 shares of the
Company's Common Stock at $8 per share. These warrants were 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
Company recorded an original issue discount of $1,027,000 which represents the
fair value of the warrants at the time of issuance. The fair value of the
warrants was recorded as a reduction in the face value of the subordinated notes
and is being amortized to interest expense over the term of the subordinated
notes. The unamortized balance of the original issue discount was $781,000 at
December 31, 1997.
In September 1997, the Company reduced the exercise price of 800,000 warrants
(750,000 related to the subordinated debt and 50,000 held by a related party -
see Note 18) to $3.04 per share, which approximated fair market value of the
Company's Common Stock. As a result, holders of the warrants exercised such
warrants and acquired 800,000 shares of the Company's Common Stock at $3.04 per
share. Such exercises were paid in cash, except that holders of warrants
relating to the subordinated debt, as allowed under the terms of the debt
agreement, applied $750,000 of the principal amount of the subordinated debt in
payment of a portion of the warrant exercise price.
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, 1996 and 1997.
Currently, the Company is disputing tax claims of $758,000 of the remaining tax
claims of approximately $970,000.
During 1995, certain of these claims were settled and paid and others were
expunged by the Bankruptcy Court. The favorable settlement of these claims of
$1,566,000 is classified as an extraordinary gain in the accompanying
consolidated statements of operations.
NOTE 10 - ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
(in thousands)
1996 1997
------- --------
<S> <C> <C>
Salaries, wages and commissions $ 1,767 $ 1,422
Accrued bonus to related party 1,188 --
Accrued warranty, insurance & sales taxes -- 1,180
Accrued vacation 1,190 698
Field service outsourcing accrual 1,818 1,838
Other 1,349 1,339
------- --------
Total $ 7,312 $ 6,477
======= ========
</TABLE>
-38-
<PAGE> 23
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 comprised of $434,000 of termination benefits to involuntarily
terminated employees and $506,000 associated with vacating certain business
premises relating to its Canadian operations.
As of December 31, 1996, $658,000 was classified as accrued liabilities 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 at December 31, 1997 and 1996 include disputed tax
claims which are payable in 1998 and beyond (see Note 9). Also included in other
long-term liabilities at December 31, 1996 is $400,000 due under a license
agreement (see Note 6).
NOTE 11 - INCOME TAXES
The components of income (loss) before income taxes and extraordinary item are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(in thousands)
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
U.S. $ 7,952 $(12,452) $ (12,492)
Foreign 1,054 (976) 2,586
-------- -------- ---------
Total $ 9,006 $(13,428) $ (9,906)
======== ======== =========
</TABLE>
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(in thousands)
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal $ 331 $ 129 $ --
State 27 39 --
Foreign (47) 23 266
--------- -------- ---------
311 191 266
Deferred:
U.S. Federal -- -- --
Foreign 72 (132) --
-------- --------- ---------
72 (132) --
Total $ 383 $ 59 $ 266
======== ======== =========
</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)
1996 1997
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,064 $ 15,214
Property, plant and equipment 1,200 1,201
Restructuring and other reserves 667 247
Inventory reserves 714 432
Allowance for doubtful accounts 992 1,178
Capitalized software and intangibles 5,473 3,868
</TABLE>
-39-
<PAGE> 24
<TABLE>
<S> <C> <C>
Accrued expenses 1,486 417
Other 1,001 1,364
--------- ---------
21,597 23,921
Less: valuation allowance (21,597) (23,921)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
The Company recorded certain deferred tax assets as of December 31, 1997 that
were previously omitted due to contingencies that were resolved during the year.
However, the Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences where it is not more likely
than not the Company will receive future tax benefits. The net change in the
valuation allowance for the year ended 1997 was $2,324,000.
The portion of the valuation allowance for which subsequently recognized tax
benefits will be applied directly to contributed capital is $209,000.
The Company has Federal and state net operating losses (NOL) carryovers of
approximately $40,800,000 and $11,900,000 respectively. These NOL carryovers
will expire in the years 1998 through 2012. The Company's utilization of a
portion of its NOL carryovers is subject to an annual limitation under Section
382 of the Internal Revenue code. The amount of this limitation is not known at
this time. Furthermore, the tax returns of BGLS Group, the Company's former
parent company, for certain years in which the Company was included, are
currently under examination by the Internal Revenue Service. The outcome of that
examination has not yet been determined. Accordingly, the Company's net
operating loss carryovers may be significantly limited; however, the Company
does not believe that it will ultimately have a material effect on the financial
statements. In addition, the Company has foreign net operating loss carryovers
of $1,400,000 which will expire in the years 1998 through 2004.
The Company has not provided for U.S. Federal income and foreign withholding
taxes on $2.5 million of non-U.S. subsidiaries' undistributed earnings as of
December 31, 1997, because such earnings are intended to be reinvested
indefinitely as defined under APB 23. If these earnings were distributed, the
additional tax liability of the company would not be material
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 item as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
(in percentages)
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory tax rate 34.0% (34.0)% (34.0)%
Change in valuation allowance - -- -- 23.5
Write-off of intangibles -- 44.4 --
Deferred tax assets realized but previously
reserved including utilization of net
operating losses (29.4) (12.7) --
Expiration of state NOLs -- -- 10.2
Effect of foreign operations (4.0) 1.5 6.2
Other 3.7 1.2 (3.2)
------ ----- ----
Effective tax rate 4.3% 0.4% 2.7%
===== ===== ===
</TABLE>
NOTE 12 - GEOGRAPHIC AREA AND SEGMENT 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, Venezuela, United Kingdom, Singapore, Malaysia, Hong Kong, and the
Netherlands. 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)
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
United States $ 56,410 $ 54,898 $ 57,321
</TABLE>
-40-
<PAGE> 25
<TABLE>
<S> <C> <C> <C>
Asia -- -- 6,635
Canada 7,482 5,931 4,862
Other foreign 2,402 3,335 2,160
-------- -------- --------
$ 66,294 $ 64,164 $ 70,978
-------- -------- --------
United States revenue from
foreign affiliates $ 898 $ 665 $ 1,119
United States export sales $ 163 $ 73 $ --
-------- -------- --------
Operating income (loss):
United States (including export sales) $ 8,377 $(12,285) $(11,240)
Asia -- -- 1,284
Canada 1,712 589 751
Other foreign (690) (1,048) 530
-------- -------- --------
$ 9,399 $(12,744) $ (8,675)
-------- -------- --------
Identifiable assets:
United States $ 17,436 $ 26,308 $ 28,466
Asia -- -- 3,676
Canada 2,167 1,414 1,510
Other foreign 1,430 5,131 961
-------- -------- --------
$ 21,033 $ 32,853 $ 34,613
======== ======== ========
</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.
-41-
<PAGE> 26
Following are revenues by the Company's lines of business for the years ended
December 31, 1997, 1996 and 1995 (in thousands).
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
1997:
Process
Hospitality Manufacturing Gaming Legacy Other Total
----------- ------------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Hardware $ 5,410 $ 2,237 $ 3,176 $ 1,228 $ 1,298 $ 13,349
Software 5,899 1,106 579 221 24 7,829
Professional
Services 21,411 7,586 839 19,066 898 49,800
-------- -------- -------- -------- -------- --------
$ 32,720 $ 10,929 $ 4,594 $ 20,515 $ 2,220 $ 70,978
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996:
Process
Hospitality Manufacturing Gaming Legacy Other Total
----------- ------------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Hardware $ 3,895 $ 139 $ 1,142 $ 7,394 $ 1,387 $ 13,957
Software 3,619 830 570 451 73 5,543
Professional
Services 10,017 1,988 605 30,684 1,370 44,664
-------- -------- -------- -------- -------- --------
$ 17,531 $ 2,957 $ 2,317 $ 38,529 $ 2,830 $ 64,164
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995:
Process
Hospitality Manufacturing Gaming Legacy Total
----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Hardware $ 1,622 $ 1,088 $ 7,764 $ 7,608 $ 18,082
Software 1,065 429 1,308 1,442 4,244
Professional
Services 5,752 5,166 319 32,731 43,968
-------- -------- -------- -------- --------
$ 8,439 $ 6,683 $ 9,391 $ 41,781 $ 66,294
======== ======== ======== ======== ========
</TABLE>
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIENCY)
STOCK OPTION 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, 1,250,000 authorized
shares of Common Stock are reserved for issuance of options. 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, 1997, 238,468 options under the 1993 Plan were exercisable and the
weighted-average exercise price of these options was $5.04
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, 1997, 37,500 options under the Director's Plan were exercisable and
the weighted-average exercise price of these options was $7.80.
At December 31, 1997, there were 224,658 additional shares available for grant
under the stock option plans. The per share weighted-average fair value of stock
options granted during 1995, 1996 and 1997 was $2.56, $4.90 and $4.52,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 1995 and 1996 - risk-free
interest rate of 6.20%, volatility of 65% and an expected life of 5 years; 1997
- -risk-free interest rate of 6.20%, volatility of 70% 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 using the intrinsic value method has been
recognized for its stock option grants in the financial statements, except as
noted below. 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:
-42-
<PAGE> 27
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
(in thousands except per share data)
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss): As reported $ 10,189 $ (13,487) $ (10,172)
Pro forma 9,971 (14,210) (11,191)
Basic income As reported $ 1.49 $ (1.85) $ (1.08)
(loss) per share: Pro forma 1.46 (1.94) (1.19)
Diluted income (loss) per share As reported $ 1.32 $ (1.85) (1.08)
Pro forma 1.29 (1.94) (1.19)
</TABLE>
Pro forma net income (loss) and pro forma net income (loss) per share reflects
only options granted in 1995, 1996 and 1997. 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, 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
Granted 518,167 4.52
Exercised (206,777) 1.70
Canceled (249,005) 6.08
---------
Options outstanding at December 31, 1997 1,025,342 $ 5.45
=========
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options under the Company's stock
option plans were $1.65- $10.125 and 8.67 years, respectively.
During 1996 and 1997, 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 and $169,000 has been recorded for the
difference between the option exercise price and fair market value on the date
of acceleration in 1996 and 1997, respectively.
PREFERRED STOCK
On May 20, 1997, the Company authorized the issuance of up to 1,000,000 shares
of $0.01 par value preferred stock. The Board of Directors has the authority to
issue the preferred stock, in one or more series, and to fix the rights,
preferences, privileges and restrictions thereof without any further vote by the
holders of Common Stock.
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
-43-
<PAGE> 28
Company were approximately $18,000. During 1996 and 1997, the Company did not
make contributions to the Domestic Plan.
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 $32,000, $31,000 and $12,000 for
1995, 1996 and 1997, respectively.
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:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
(in thousands)
1995 1996 1997
<S> <C> <C> <C>
Service costs-benefits earned
during the year $ 40 $ 40 $ 40
Interest cost on projected benefit 98 109 113
Actual loss (return) on assets for
the period (213) (145) (246)
Amortization and deferral, net 132 64 149
-------- ------- --------
Net periodic pension expense $ 57 $ 68 $ 56
======== ======= ========
</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,
------------------------
(in thousands)
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 1,532 $ 1,542
-------- --------
Accumulated benefit obligation 1,532 1,542
-------- --------
Projected benefit obligation for service
rendered to date 1,532 1,542
Plan assets at fair value 1,244 1,408
-------- --------
Projected benefit obligation in excess of
plan assets 288 134
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (150) (42)
-------- --------
Accrued pension cost $ 138 $ 92
======== ========
</TABLE>
-44-
<PAGE> 29
The actuarial assumptions used are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
(percentages)
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate 7.25% 7.75% 7.25%
Expected long-term rate of return on assets 8.0% 8.0% 7.75%
------ ------- -------
</TABLE>
NOTE 15 - RESTRUCTURING COSTS
Prior to 1994, a restructuring plan was implemented comprising employee
severance programs, excess facilities and lease termination costs. During 1995,
1996 and 1997, approximately $464,000, $397,000 and $119,000, 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 and 1997 of $237,000 and $118,000, respectively, mainly comprised lease
obligations for excess space.
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 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.
In September 1997, management authorized and committed the Company to a
restructuring plan to eliminate operations and related expenses which were not
required to support the Company's operations of software sales and professional
services. In connection with the restructuring plan, the Company recorded a
restructuring charge of $900,000 to recognize severance, benefits and other
related costs for the employees to be terminated. During 1997, the Company paid
approximately $875,000 of severance and termination benefits. The remaining
balance of $25,000 at December 31, 1997 mainly consists of remaining severance
and termination benefits and is expected to be paid in 1998.
NOTE 16 - PLAN OF REORGANIZATION
In connection with the Company's Chapter 11 bankruptcy proceedings in 1993,
shares of Common Stock are currently being distributed by the Company to its
former creditors pursuant to the Plan of Reorganization (the "Plan") as approved
by United States Bankruptcy Court. The Company anticipates that approximately
6,820,338 shares of Common Stock will be issued. As of December 31, 1997,
6,755,751 shares had been issued pursuant to the Plan.
Notwithstanding the confirmation and effectiveness of its Plan of Reorganization
pursuant to which the Company emerged from a voluntary proceeding under the
bankruptcy laws, the United States Bankruptcy Court continues to have
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.
-45-
<PAGE> 30
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, 1996 and 1997) (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>
1998 $2,155
1999 1,675
2000 1,418
2001 1,001
2002 957
Thereafter 185
-------
$7,391
=======
</TABLE>
Rental expense was approximately $1,467,000, $1,961,000, and $2,226,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
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, 1997. 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 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 1995,
the settlements (net of expenses) were approximately $3,000. 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 (amended as of
August 16, 1996 and August 31, 1997), between Orchard Capital Corp. ("Orchard")
and the Company, Orchard provides the services of Richard S. Ressler as the
Company's Chairman. Orchard was paid a consulting fee of $20,000 per month
through August 15, 1996 and $24,000 per month thereafter. 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
-46-
<PAGE> 31
(adjusted for the 25% stock split - see Note 1). The $1,188,000 is included in
selling, general and administrative expenses in the 1995 accompanying
consolidated statements of operations and as part of accrued liabilities in the
accompanying balance sheet at December 31, 1996 (see Note 10). During the second
quarter of 1997, the Company issued 398,510 shares of Common Stock to Orchard to
settle the $1,188,000 bonus in full. In addition to such compensation, Orchard
was granted warrants in 1995 (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 and
in March 1997, was granted additional warrants to purchase up to 50,000 shares
of the Company's Common Stock at a price of $7.50 per share, the fair market
values of Common Stock on the dates of grant. The warrants were fully
exercisable on the dates of the respective grants. In September 1997, Orchard
exercised warrants to purchase 157,895 shares of Common Stock at $1.90 per share
and additional warrants to purchase 50,000 shares of the Company's common stock
at $3.04 per share (which warrants had been temporarily re-priced in order to
induce exercises), resulting in $452,000 cash proceeds to the Company (see Note
9). The consulting agreement expires August 31, 1998. Mr. Ressler is the
principal stockholder of Orchard.
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 was recognized
ratably over the succeeding 12-month period. In January 1997, the 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 19 - INCOME (LOSS) PER SHARE
As discussed in Note 1, the Company adopted SFAS No. 128 effective December 31,
1997. The following table illustrates the computation of basic and diluted loss
per share under the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income (loss) per share - net income (loss) $ 10,189 $(13,487) $(10,172)
======== ======== ========
Denominator:
Denominator for basic income (loss) per share - weighted average number
of common shares outstanding during the period 6,820 7,309 9,408
Incremental common shares attributable to exercise of outstanding
options and warrants 904 -- --
-------- -------- --------
Denominator for diluted income (loss) per share: 7,724 7,309 9,408
Basic income (loss) per share $ 1.49 $ (1.85) $ (1.08)
Diluted income (loss) per share $ 1.32 $ (1.85) $ (1.08)
</TABLE>
The computation of diluted loss per share for the years ended December 31, 1996
and 1997 excludes the effect of incremental common shares attributable to the
exercise of outstanding common stock options and warrants because their effect
would be antidilutive (See Notes 13 and 17). Additionally, the computation does
not consider the additional shares of Common Stock which may be issued in
connection with past acquisitions (see Note 6).
-47-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAI SYSTEMS CORPORATION
(12/31/97)
The following is a list showing MAI Systems Corporation and each of its
subsidiaries, as of December 31, 1997, 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: JURISDICITION 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 Systems B.V. Netherlands
MAI de Venezuela, S.A. Venezuela
Hotel Information Systems Ltd. Hong Kong
Hotel Information Systems, Pte. Limited Singapore
MAI Information Solutions Limited United Kingdom
Boss Solutions Limited Hong Kong
</TABLE>
-48-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MAI Systems Corporation
The audits referred to in our report dated April 10, 1998, included the related
financial statement schedule as of December 31, 1997, and for each of the years
in the three-year period ended December 31, 1997, 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
April 14, 1998
-49-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,051
<SECURITIES> 0
<RECEIVABLES> 14,251
<ALLOWANCES> (1,983)
<INVENTORY> 1,838
<CURRENT-ASSETS> 18,092
<PP&E> 14,412
<DEPRECIATION> (10,057)
<TOTAL-ASSETS> 34,613
<CURRENT-LIABILITIES> 29,788
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> (771)
<TOTAL-LIABILITY-AND-EQUITY> 34,613
<SALES> 70,978
<TOTAL-REVENUES> 70,978
<CGS> 43,696
<TOTAL-COSTS> 43,696
<OTHER-EXPENSES> 35,957
<LOSS-PROVISION> 595
<INTEREST-EXPENSE> (1,181)
<INCOME-PRETAX> (9,906)
<INCOME-TAX> (266)
<INCOME-CONTINUING> (10,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,172)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) MAI
SYSTEMS CORPORATION'S CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED
BALANCE SHEETS FOR 1995 INCORPORATED BY REFERENCE INTO ITS 1995 ANNUAL REPORT ON
FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) DOCUMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1,000
<CASH> 4,086
<SECURITIES> 0
<RECEIVABLES> 7,662
<ALLOWANCES> 1,092
<INVENTORY> 3,769
<CURRENT-ASSETS> 16,430
<PP&E> 13,189
<DEPRECIATION> (9,423)
<TOTAL-ASSETS> 21,033
<CURRENT-LIABILITIES> 16,093
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,033
<SALES> 66,294
<TOTAL-REVENUES> 66,294
<CGS> 0
<TOTAL-COSTS> 41,249
<OTHER-EXPENSES> 15,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 9,006
<INCOME-TAX> 383
<INCOME-CONTINUING> 8,623
<DISCONTINUED> 0
<EXTRAORDINARY> 1,566
<CHANGES> 0
<NET-INCOME> 10,189
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.32
</TABLE>
