<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NO. 1-9158
------------------------
MAI SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2554549
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
9601 Jeronimo Road
Irvine, California 92618
- --------------------------------------------------------------------------------
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (949) 598-6000
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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
--- ---
As of November 15, 1999, 10,842,071 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAI Systems Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ --------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,029 $ 3,242
Receivables, less allowance for doubtful accounts
of $3,323 in 1998 and $5,088 in 1999 14,492 11,687
Inventories 1,390 684
Prepaids and other assets 2,919 1,672
--------- ---------
Total current assets 20,830 17,285
Furniture, fixtures and equipment, net 3,737 3,956
Intangibles, net 10,185 8,211
Notes receivable, less deferred gain of $1,227,000 -- 3,105
Other assets 1,005 209
--------- ---------
Total assets $ 35,757 $ 32,766
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Line of credit $ -- $ 3,568
Bridge loan -- 1,750
Current portion of long-term debt 859 5,370
Accounts payable 7,289 7,123
Customer deposits 2,587 2,171
Accrued liabilities 7,504 8,624
Income taxes payable 587 576
Unearned revenue 10,702 10,548
--------- ---------
Total current liabilities 29,528 39,730
Line of credit 3,277 --
Long-term debt 5,056 342
Other liabilities 262 279
--------- ---------
Total liabilities 38,123 40,351
--------- ---------
Stockholders' deficiency:
Preferred Stock, par value $0.01 per share; 1,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, par value $0.01 per share; authorized 24,000,000
shares; 10,697,639, and 10,906,658 shares issued and issuable
at December 31, 1998 and September 30, 1999, respectively 110 112
Additional paid-in capital 219,780 220,287
Accumulated other comprehensive income 713 426
Accumulated deficit (222,969) (228,410)
--------- ---------
Total stockholders' deficiency (2,366) (7,585)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficiency $ 35,757 $ 32,766
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 3
MAI Systems Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
1998 1999 1998 1999
-------- -------- -------- --------
(dollars in thousands, (dollars in thousands,
except per share data) except per share data)
<S> <C> <C> <C> <C>
Revenue
Software, networks and professional services:
Software sales $ 2,708 $ 1,740 $ 6,150 $ 10,033
Network and computer equipment 1,850 608 4,841 3,693
Professional services 6,221 6,669 19,714 21,866
-------- -------- -------- --------
10,779 9,017 30,705 35,592
Legacy revenue 3,954 2,398 13,345 8,192
-------- -------- -------- --------
Total revenue 14,733 11,415 44,050 43,784
Direct costs 7,779 8,875 24,662 23,103
-------- -------- -------- --------
Gross profit 6,954 2,540 19,388 20,681
Selling, general and administrative expenses 4,774 6,765 16,996 18,826
Research and development costs 1,245 1,712 3,228 4,119
Amortization of intangibles 610 529 1,925 1,738
Other operating expense (income) 9 13 125 (97)
-------- -------- -------- --------
Operating income (loss) 316 (6,479) (2,886) (3,905)
Equity in net loss of unconsolidated subsidiaries (32) (56) (18) (28)
Write off of deferred financing costs -- (574) -- (574)
Interest income 43 87 146 150
Interest expense (274) (434) (767) (1,084)
-------- -------- -------- --------
Income (loss) before income taxes 53 (7,456) (3,525) (5,441)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) $ 53 $ (7,456) $ (3,525) $ (5,441)
======== ======== ======== ========
Income (loss) per share:
Basic income (loss) per share $ 0.01 (0.68) $ (0.34) $ (0.50)
======== ======== ======== ========
Diluted income (loss) per share $ 0.00 $ (0.68) $ (0.34) $ (0.50)
======== ======== ======== ========
Weighted average common shares used in
determining income (loss) per share:
Basic 10,731 10,907 10,541 10,883
======== ======== ======== ========
Diluted 10,852 10,907 10,541 10,883
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
MAI Systems Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30,
---------------------
1998 1999
-------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (197) $ 1,776
------- -------
Cash flows from investing activities:
Capital expenditures (500) (1,296)
Software development costs (885) (1,345)
------- -------
Net cash used in investing activities (1,385) (2,641)
------- -------
Cash flows from financing activities:
Net increase in line of credit 1,617 291
Proceeds from issuance of common stock, net -- 500
Repayments of term and other long-term debt (89) (185)
Repayments of note payable -- (250)
Proceeds from issuance of note payable -- 2,000
Proceeds from the exercise of stock options 54 9
------- -------
Net cash provided by financing activities 1,582 2,365
------- -------
Effect of exchange rate changes on cash and cash equivalents (24) (287)
------- -------
Net change in cash and cash equivalents (24) 1,213
------- -------
Cash and cash equivalents at beginning of period 2,051 2,029
------- -------
Cash and cash equivalents at end of period $ 2,027 $ 3,242
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
Companies for which this report is filed are MAI Systems Corporation and
its wholly-owned subsidiaries (the "Company"). The information contained
herein is unaudited, but gives effect to all adjustments (which are normal
recurring accruals) necessary, in the opinion of Company management, to
present fairly the condensed consolidated financial statements for the
interim period. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"), and
these financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, which is on file with the SEC.
2. INVENTORIES
Inventories are summarized as follows:
December 31, September 30,
1998 1999
------------ -------------
(dollars in thousands)
Finished goods $ 843 $ 274
Replacement parts 547 410
------ ------
$1,390 $ 684
====== ======
3. PLAN OF REORGANIZATION
In 1993, the Company emerged from a voluntary proceeding under the
bankruptcy protection laws. Notwithstanding the confirmation and
effectiveness of its Plan of Reorganization (the "Plan"), the Bankruptcy
Court continues to have jurisdiction 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.
Shares of common stock may be distributed by the Company to its former
creditors. As of November 11, 1999, 6,758,251 shares of Common Stock had
been issued pursuant to the Plan and were outstanding. The Company
estimates that approximately 6,820,338 shares will have been issued to
creditors at completion of the Plan.
4. BUSINESS ACQUISITION
HOTEL INFORMATION SYSTEMS, INC. ("HIS"):
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.
5
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MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 1999
(Unaudited)
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 price protected 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 approximately $650,000 are presently pending. Resolution of
such claims may result in 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 September 30, 1999, the
final purchase price has not been determined.
The Company will, as needed, pursuant to the asset purchase agreement and
related documents, 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 $11.68 per
share). This adjustment applies to a maximum of 590,785 shares of Common
Stock. In April 1998, in accordance with the purchase agreement and related
documents pursuant to which the Company acquired HIS in August 1996, the
Company issued 246,453 additional shares of Common Stock valued at par. At
September 30, 1999, the fair market value of the Company's Common Stock was
$1.13 per share, which would result in approximately 5,771,917 additional
shares being issued. See Part II "Other Information," Item 1.
5. BUSINESS DIVESTITURE
The Company sold its wholly owned subsidiary Gaming Systems International
("GSI") on June 19, 1999 for an amount in excess of its book value. The
Company received three promissory notes totaling $4,925,000 with face
values $1,100,000, $1,500,000 and $2,325,000, respectively. Interest is
paid monthly at the rate of 10% per annum on both the $1,100,000 and
$1,500,000 notes, with the principal due and payable on June 19, 2001 and
June 19, 2003, respectively. The $1,100,000 promissory note is guaranteed
by a third party. Principal payments and interest, at prime plus 1%,
commence for the $2,325,000 promissory note on October 1, 2002 in 48
monthly installments of approximately $48,000 of principal, plus accrued
interest.
Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 resulting in a combined
carrying value of $4,282,000 for all three promissory notes. The Company is
amortizing the imputed interest over the contractual life of the promissory
notes using the interest method. The gain on sale of $1,227,000 has been
deferred until collection of the proceeds representing the gain can be
assured.
Summarized below is historical financial information about GSI:
From January 1,
Year ended 1999
December 31, through
1998 June 19, 1999
------ -------------
Revenues $2,687 $1,696
Operating loss 1,493 43
Total assets at period end 4,028 3,800
6. COMMON STOCK
On February 3, 1999, the Company's Chairman purchased 201,106 shares of the
Company's Common Stock valued at $500,000.
6
<PAGE> 7
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 1999
(Unaudited)
7. 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 loss per
share amounts for all periods have been presented and restated to conform
to the SFAS No. 128 requirements.
Basic and diluted 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 3, and the weighted
average shares of Common Stock issued outside the Plan of Reorganization.
As of June 30, 1999, 6,758,251 shares had been issued pursuant to the Plan
of Reorganization. All outstanding options and warrants have been excluded
from diluted loss per share for loss periods presented as their effect
would be anti-dilutive.
The following table illustrates the computation of basic and diluted
earnings (loss) per share under the provisions of SFAS 128:
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1999 1998 1999
-------- --------- --------- --------
(dollars in thousands, (dollars in thousands,
except per share data) except per share data)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
(loss) per share - net (loss) income $ 53 $ (7,456) $ (3,525) $ (5,441)
======= ========= ========= ========
Denominator:
Denominator for basic earnings (loss) per
share-weighted average number of
common shares outstanding during
the period 10,731 10,907 10,541 10,883
Incremental common shares attributable
to exercise of outstanding options 121 -- -- --
------- --------- --------- --------
Denominator for diluted earnings (loss)
per share 10,852 10,907 10,541 10,883
======= ========= ========= ========
Basic earnings (loss) per share $ 0.01 $ (0.68) $ (0.34) $ (0.50)
======= ========= ========= ========
Diluted earnings (loss) per share $ 0.00 $ (0.68) $ (0.34) $ (0.50)
======= ========= ========= ========
</TABLE>
8. DEFERRED FINANCING COSTS
During 1998, the Company commenced efforts to raise additional capital.
During the third quarter of fiscal 1999, the Company expensed approximately
$574,000 of deferred financing costs previously capitalized.
7
<PAGE> 8
MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 1999
(Unaudited)
9. COMPREHENSIVE (LOSS) INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Company has presented the information required by SFAS No. 130 as follows:
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1998 1999 1998 1999
-------- ------- ------- -------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Net (loss) income $ 53 $(7,456) $(3,525) $(5,441)
Change in cumulative
translation adjustments 190 (179) 82 (287)
------- ------- ------- -------
Comprehensive loss $ 243 $(7,653) $(3,443) $(5,728)
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive (loss) income in the accompanying
consolidated balance sheets consists of cumulative translation adjustments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for the
Company for transactions entered into after January 1, 2001. This statement
requires that all derivative instruments be recorded on the balance sheet
at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the
type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. The Company is in the process of determining the
impact that the adoption of SFAS No. 133 will have on its results of
operations and financial position.
11. LINE OF CREDIT AND LONG-TERM DEBT
On July 28, 1999, the Company obtained a Bridge Loan from Coast Business
Credit ("Coast") in the amount of $2,000,000. The Bridge Loan bears
interest at prime plus 5% and is payable interest only on a monthly basis
with all accrued and unpaid principal and interest due on the earlier of
June 30, 2000 or the date the Company receives a debt or equity infusion of
at least $10,000,000. Loan origination fees of $75,000 were paid to Coast
in connection with the Bridge Loan and are being amortized to interest
expense over the term of the loan.
In April 1998, the Company negotiated a $5,000,000 secured revolving credit
facility with Coast . The availability of this facility is based on a
calculation using a rolling average of certain cash collections. The
facility was amended on July 28, 1999 to allow for aggregate borrowings
under the credit facility and Bridge Loan not to exceed $6,000,000. The
facility is secured by all assets, including intellectual property, of the
Company and bears interest at prime plus 2.25% to 5.25% and expires on
April 30, 2002. The facility contains various restrictions and covenants,
including a minimum tangible net worth, debt coverage ratio and minimum
monthly and quarterly profitability. The Company was not in compliance with
these covenants as of and for the three month period ended September 30,
1999 and for the one month period ended October 31, 1999. The Company and
Coast entered into a forbearance agreement on October 1, 1999, which
provides that Coast will not exercise its rights and remedies under the
facility in the event of default until December 15, 1999, including the
acceleration of debt payments, provided the Company makes weekly principal
payments of $25,000 with respect to the Bridge Loan commencing October 8,
1999 and pays monthly default fees of $10,000 commencing October 1, 1999,
until the Bridge Loan is repaid in full. The Company is currently in
compliance with the terms of the forbearance agreement.
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MAI Systems Corporation
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 1999
(Unaudited)
In March 1997 the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). In September 1997 this indebtedness was reduced
to $5,250,000 through application of a portion of the proceeds realized
from the exercise of warrants by Canyon. The notes call for semi-annual
interest payments. On September 3, 1999 the Company failed to make the
semi-annual interest payment due on that date in the amount of $ 288,750.
The Company and Canyon have subsequently entered into a forbearance
agreement which provides that Canyon will not exercise any rights it has
under the notes in the event of default, including accelerating the debt
payments, until December 31, 1999. In addition, the Company executed a
Security Agreement which provided Canyon with a lien on all of the
Company's tangible and intangible property, which lien is junior to the
lien granted to the Company's primary lender, Coast Business Credit.
12. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 condensed consolidated
financial statements to conform to the 1999 presentation.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital deteriorated from a working capital deficiency of $8,698,000 at
December 31, 1998 to a working capital deficiency of $22,445,000 at September
30, 1999. Excluding unearned revenue of $10,548,000, the Company's working
capital deficiency at September 30, 1999 would be $11,897,000 or a ratio of
current assets to current liabilities of 0.59 to 1.0. Excluding unearned
revenue, working capital at December 31, 1998 was $2,004,000, with a current
ratio of 1.11 to 1.0. Excluding unearned revenue, the decrease of $13,901,000
was primarily attributable to increases in the Bridge Loan of $1,750,000,
accrued liabilities of $1,122,000, and the classification of its line of credit
of $3,568,000 and its subordinated notes of $4,691,000 as a current liabilities
as of September 30, 1999. The decrease was also attributable to decreases in
receivables of $2,805,000, inventories of $706,000 and prepaid and other assets
of $1,247,000. The decrease was partially offset by an increase in cash of
$1,213,000 and a decrease in accounts payable of $416,000.
Cash was $3,242,000 at September 30, 1999, as compared to $2,029,000 at December
31, 1998. The Company has a secured revolving credit facility which combined
with its Bridge Loan cannot exceed $6,000,000. The computation of the
availability of this facility is based on a calculation using a rolling average
of certain cash collections. At September 30, 1999, approximately $3,568,000 was
available and drawn down under the credit facility. The Company is currently in
default under the terms of its credit facility and subordinated notes. The
Company has entered into forbearance agreements with both lenders, which provide
that the lenders will not exercise their rights and remedies in the event of
default until December 15, 1999 and December 31, 1999, respectively.
Net cash provided by (used in) operating activities were $1,776,000 and
($197,000) for the nine months ended September 30, 1999 and 1998, respectively.
The higher year-to-date losses in 1999 over 1998 were more than offset by the
effects of reduced inventories and prepaids and other assets, increased accrued
liabilities and the add-back of higher non-cash charges for bad debts,
depreciation and amortization and write-off of deferred financing charges.
Net cash used in investing activities for the nine months ended September 30,
1999 was $2,641,000 which was attributable to capitalized software costs of
$1,345,000 and capital expenditures of $1,296,000.
Net cash provided by financing activities for the nine months ended September
30, 1999 was $2,365,000 which was primarily attributable to $500,000 of proceeds
from the issuance of common stock and $1,856,000 of net proceeds from its notes
payable and line of credit.
Stockholders' deficiency increased by $5,219,000 for the nine month period ended
September 30, 1999 principally due to the net loss of $5,441,000 for the period
offset by the issuance of $500,000 of common shares. At September 30, 1999,
there was a stockholders' deficiency of $7,585,000.
The Company has retained an investment banker to assist the Company in
evaluating strategic options, including the sale of certain assets and
refinancing its debt. The Company believes it will continue to have sufficient
cash available to fund its operating and capital requirements for the next
twelve months.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1999
<TABLE>
<CAPTION>
Three months ended Percentage Three months ended Percentage
September 30, 1998 of Revenue September 30, 1999 of Revenue
------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 7,750 52.6% $ 6,985 61.2%
Process Manufacturing 2,530 17.2% 1,898 16.6%
Gaming 499 3.4% -- --
Legacy 3,954 26.8% 2,398 21.0%
Other -- -- 134 1.2%
Total revenue 14,733 100.0% 11,415 100.0%
Gross profit 6,954 47.2% 2,540 22.3%
Selling, general and
administrative expenses 4,774 32.4% 6,765 59.3%
Research and development costs 1,245 8.5% 1,712 15.0%
Amortization of intangibles 610 4.1% 529 4.6%
Other operating expense 9 0.1% 13 0.1%
</TABLE>
10
<PAGE> 11
The quarter-to-quarter decrease in overall revenue of 22.5% was due to decreases
in sales in all of the Company's software solutions and legacy business.
Hospitality revenue decreased 9.9% from $7,750,000 in 1998 to $6,985,000 in 1999
principally due to lower than expected shipments of its LodgingTouch software
during 1999. Process Manufacturing revenue decreased from $2,530,000 in 1998 to
$1,898,000 in 1999, largely due to decreased software sales as a result of
product transitions during 1999. Additional decreases in Process Manufacturing
revenue during 1999 related to declines in sales of network and computer
equipment as a result of erosion in its software and hardware maintenance
contracts. As the Company's gaming subsidiary was sold in June 1999, there was
no gaming revenue in 1999.
Consistent with the Company's strategy to focus on providing software and
services to its vertical markets, the Company's legacy revenue (traditional
hardware contract service revenues and proprietary add-on sales) declined 39.4%
from 1998 to 1999, largely due to the continuing and expected decrease in
customers under contract.
Gross profit decreased from 47.2% in 1998 compared to 22.3% in 1999 due to
decreased revenue primarily associated with delays in certain shipments and
installations of its Lodging Touch product during 1999 combined with higher
levels of fixed costs associated with professional services and support which
was expected to be absorbed by an increasing hospitality revenue stream.
Selling, general and administrative expenses ("SG&A") increased 41.7% from 1998
compared to 1999 to $6,765,000. The increase was primarily related to the
Company expanding its hospitality sales and marketing efforts in the third
quarter of 1999 with increased selling, advertising and promotion expense in
pursuit of hospitality bookings. The increase in SG&A was also due to higher
personnel costs to support an anticipated increasing hospitality revenue stream.
Additionally, the Company increased its allowance for doubtful accounts during
1999 in anticipation of potential write-offs.
Research and development expense increased 37.5% over the comparable period in
1998. This is primarily a result of new and sustaining product development
efforts relating to various projects.
The 13.3% decrease in amortization of intangibles versus the comparable period
of 1998 is related to a write down of intangibles which occurred in the fourth
quarter of 1998 and the sale of the Company's gaming subsidiary in June 1999 and
the resulting elimination of amortization associated with the gaming
subsidiary's intangible assets.
Other operating expense for the three months ended September 30, 1999 was
principally from foreign exchange gains.
Included in non-operating costs for the three months ended September 30, 1999 is
the write off of approximately $574,000 of financing costs previously
capitalized in 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1999
<TABLE>
<CAPTION>
Nine months ended Percentage Nine months ended Percentage
September 30, 1998 of Revenue September 30, 1999 of Revenue
------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Hospitality $22,688 51.5% $27,281 62.3%
Process Manufacturing 6,353 14.4% 6,342 14.5%
Gaming 1,350 3.1% 1,696 3.9%
Legacy 13,345 30.3% 8,192 18.7%
Other 314 0.7% 273 0.6%
Total revenue 44,050 100.0% 43,784 100.0%
Gross profit 19,388 44.0% 20,681 47.2%
Selling, general and
administrative expenses 16,996 38.6% 18,826 43.0%
Research and development costs 3,228 7.3% 4,119 9.4%
Amortization of intangibles 1,925 4.4% 1,738 4.0%
Other operating expense (income) 125 0.3% (97) (0.1%)
</TABLE>
11
<PAGE> 12
The year-to-year decrease in revenue of 0.6% for the nine months ended September
30, 1999 over the comparable period of 1998 was due primarily to the continuing
decline in Legacy revenue offset by the increases in the Hospitality and Gaming
businesses. Hospitality revenue increased 20.2% from $22,688,000 in 1998 to
$27,281,000 in 1999, largely due to increased software sales. Although the
Company's gaming subsidiary was sold in June 1999 and, accordingly, no revenue
was recognized during the three month period ended September 30, 1999, gaming
revenue increased 25.6% from $1,350,000 in 1998 to $1,696,000 in 1999, largely
due to increased hardware sales during the six month period ended June 30, 1999.
Consistent with the Company's strategy to focus on providing software and
services to its vertical markets, the Company's legacy revenue (traditional
hardware contract service revenues and proprietary add-on sales) declined 38.6%
year over year, largely due to the continuing and expected decrease in customers
under contract.
Gross profit increased to 47.2% in 1999 from 44.0% in 1998 due to higher gross
margins from increased software sales offset by higher levels of fixed costs
associated with professional services and support which were expected to be
absorbed by an expected higher hospitality revenue stream.
Selling, general and administrative expenses ("SG&A") increased by 10.8% to
$18,826,000. The increase was primarily related to the Company expanding its
hospitality sales and marketing efforts during 1999 with increased selling,
advertising and promotion expense in pursuit of hospitality bookings. The
increase in SG&A was also due to higher personnel costs to support an
anticipated increasing hospitality revenue stream. Additionally, the Company
increased its allowance for doubtful accounts during 1999 in anticipation of
potential write-offs.
Research and development expense increased 27.6% over the comparable period of
1998. This is primarily as a result of new development efforts relating to
several new projects.
The 9.7% decrease in amortization of intangibles versus the comparable period of
1998 is related to a write down of intangibles which occurred in the fourth
quarter of 1998 and the sale of the Company's gaming subsidiary in June 1999 and
the resulting elimination of amortization associated with the gaming
subsidiaries intangible assets.
Other operating expense (income) for the nine months ended September 30, 1999
was principally from foreign exchange gains.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for the Company
for transactions entered into after January 1, 2001. This statement requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings. The Company is
in the process of determining the impact that the adoption of SFAS No. 133 will
have on its results of operations and financial position.
YEAR 2000 COMPLIANCE RISKS
The information provided below constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
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 has completed an evaluation of both its
information technology systems and its non-technology systems, such as equipment
containing microprocessors. The Company believes that all information technology
and non-technology systems in its corporate home office in Irvine, California
and in its branch or subsidiary offices in the United States and internationally
has been, or by December 31, 1999 will have been, modified to address Year 2000
issues. The Company estimates that the costs associated with implementing its
Year 2000 compliance plan for its corporate offices to be approximately
$300,000.
12
<PAGE> 13
The Company has designed and tested the most current versions of its products to
be Year 2000 ready. The Company has established a Year 2000 "task force" which
prepared and released its Year 2000 products readiness report on the Company's
"Web Pages" (www.maisystems.com and www.hotelinfosys.com) and plans to make
available to clients a copy of this report on a per request basis. The Company
launched a direct mail/fax campaign in February 1999 to all of its current
maintenance agreement clients as well as to all identifiable clients that may be
utilizing the Company's products, informing clients that the "Year 2000
Readiness Program" was available to be viewed at the indicated websites. The
mailing also provided clients the opportunity to request information regarding
the "Year 2000 Readiness Program" if they so desired. This mailing was executed
using the most current client database available. This notification went to
approximately 18,000 domestic customers as well as being faxed to approximately
4,000 international customers from the Company's international offices. The
report breaks down the Company's products into four categories: "product is
ready," "product is scheduled to be tested," "product is not ready (but has some
Year 2000 functionality)," and "product will not be tested (and is not ready)."
At the present time, twenty-three fall in the final category of products that
will not be tested and are not ready. Of those products in the latter category,
many of these are older products that have been replaced by newer versions of
software. Although the Company has been encouraging its 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.
The costs incurred by the Company to date to implement its Year 2000 readiness
plan for its products have not been material to the Company's financial
condition or operations.
The Company also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and is
used in the Company's products to perform key functions. The Company has
undertaken joint compliance review of such software in certain cases where the
product is believed to be material to the Company's financial performance, such
as its "Lodging Touch" product that is licensed from Enterprise Hospitality
Solutions. The Company believes that in such selective cases the licensed
software and any related integrated software product is Year 2000 ready. There
can be no assurance, however, that all third party software presently utilized
by the Company will be free of errors and defects or be Year 2000 compliant.
The Company's present "reasonably likely worst case scenario" for Year 2000
problems involves potential product liability claims by substantial customers
involving collateral (business interruption) damages. Although the Company has
not experienced any product liability claims to date regarding Year 2000
compliance, there can be no assurance that errors or defects, whether associated
with Year 2000 functions or otherwise, will not result in product liability
claims against the Company in the future. The Company's license agreements with
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims; however, it is possible that such
limitation of liability provisions may not be effective under the laws of
certain jurisdictions. Defective products or releases could result in loss of
revenues, increased service and warranty costs and product liability claims, and
could adversely affect the Company's market penetration and reputation, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Since the Company spent a significant amount of time developing its Year 2000
readiness plan and evaluating its products for readiness, it does not believe
that an elaborate Year 2000 contingency plan is necessary. However, it is
reasonable to assume that some problems may be discovered in products the
Company currently believes to be Year 2000 ready. In this case, the Company has
the necessary resources available to address these unexpected problems and
provide the appropriate customers with updated software.
The Company is in the process of compiling information concerning the Year 2000
compliance of its key suppliers through the process of issuing questionnaires
and monitoring responses. In the event that any of the Company's key suppliers
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 includes encouraging and/or requiring Year 2000 compliance by
all key suppliers.
Despite the Company's efforts to become Year 2000 compliant, there is no
assurance that the Year 2000 issue will not pose significant problems. There may
be delays in the Company's remediation efforts, a failure to fully identify all
Year 2000 problems in the systems, equipment or processes of the Company or its
vendors or customers, or unanticipated remediation expenses, all of which could
have material adverse consequences on the Company's financial position and
results of operations.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are
subject to risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements. The
Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates. The Company does not have
derivative financial instruments for hedging, speculative, or trading
purposes.
INTEREST RATE SENSITIVITY
Of the Company's $10.4 million principal amount of indebtedness at
September 30, 1999, $5.4 million bears interest at a rate that
fluctuates based on changes in prime rate. A one-percentage point change
in the underlying prime rate would result in an approximate $54,000
change in the annual amount of interest payable on such debt. The
remaining amount of $5.0 million bears interest at a fixed rate ranging
from 6% to 11%.
The face amount of the Company's notes receivable totals $4,925,000. Of
that amount, $2.6 million bears interest at a fixed rate of 10%. The
remaining $2,325,000 note (which has been discounted at the rate of 10%
for financial reporting) is non-interest bearing until October 2002, at
which time interest is payable at the rate of prime plus 1%. A
one-percentage point change in the interest rate of this note would
result in a $23,250 annual change in interest income beginning in
October 2002. This impact reduces as the principal is paid down over the
following four years.
FOREIGN CURRENCY RISK
The Company believes that its exposure on currency exchange fluctuation
risk is insignificant because the Company's transactions with
international vendors are generally denominated in US dollars, which is
considered to be the functional currency of the Company and its
subsidiaries. The currency exchange impact on intercompany transactions
was immaterial for the quarter ended September 30, 1999.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998, CSA Private Limited ("CSA") filed a lawsuit against
the Company in the U.S. District Court for the Central District of
California. CSA is a shareholder of the Company. At the time of the
Company's purchase of Hotel Information Systems, Inc. ("HIS") in 1996,
CSA was a shareholder of HIS and, in connection with the purchase, the
Company agreed to issue to CSA shares of the Company's common stock
worth approximately $4.8 million (plus accrued interest until such time
as the shares are issued and registered), and also granted CSA certain
demand registration rights with respect to such stock. CSA subsequently
requested registration of its shares and, in October 1996, the Company
filed an S-3 registration statement with the Securities and Exchange
Commission ("SEC") for the purpose of registering these shares. The SEC,
however, required an auditor's consent to the use of the HIS financial
statements in the S-3, which consent HIS's auditors were unwilling to
provide. When this impediment to registration was removed in April 1998,
CSA again demanded registration of its shares. The Company delayed
registration based upon a provision in its agreements with CSA allowing
the Company to defer such registration under certain circumstances
provided that, during the period of such delay, an increased interest
rate is applied in calculating the dollar value of shares of the
Company's common stock to which CSA is ultimately entitled. In its
lawsuit, CSA alleged that the Company's failure to register its shares
deprived it of its ability to realize approximately $5,000,000 from sale
of the shares to which it was entitled and requested (a) money damages
in an amount not less than $5,000,000, (b) injunctive relief directing
the Company to register CSA's shares, and (c) specific performance of
its agreements with the Company.
The initial delay in registration of CSA's shares was the result of the
refusal on the part of HIS's auditors to consent to the inclusion of
HIS's financial statements in the S-3, a factor beyond the Company's
control, and the subsequent delay was the result of the Company's
good-faith exercise of its rights under its agreements with CSA to defer
registration. Accordingly, the Company believed that it was in full
compliance with all of its obligations under its agreements with CSA,
and contested the lawsuit.
On June 4, 1999, the court entered a stipulation and order of dismissal,
dismissing the lawsuit with prejudice. The order was entered as part of
a settlement, which requires the Company to take all necessary steps to
register the CSA shares with the SEC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In March 1997 the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital
Management LP ("Canyon"). In September 1997 this indebtedness was
reduced by $5,250,000 through application of a portion of the proceeds
realized from the exercise of warrants by Canyon. The notes call for
semi-annual interest payments. On September 3, 1999 the Company failed
to make the semi-annual interest payment due on that date in the amount
of $ 288,750. The Company and Canyon have subsequently entered into a
Forbearance Agreement which provides that Canyon will not exercise any
rights it has under the notes in the event of default until December 31,
1999. In addition, the Company executed a Security Agreement which
provided Canyon with a lien on all of the Company's tangible and
intangible property, which lien is junior to the lien granted to the
Company's primary lender, Coast Business Credit.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None.
(b) None.
(c) None.
(d) None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Stock Option Agreement between W. Brian Kretzmer and the
Company dated August 2, 1999.
10.2 Stock Option Agreement between Sasun Musliyan and the
Company dated August 2, 1999.
10.3 Amendment Number Four dated July 28, 1999 to the Loan and
Security Agreement between Coast Business Credit and the
Company dated April 23, 1998.
10.4 Termination/Transition Agreement between Christian
Rivadallia d/b/a Enterprise Hospitality Solutions and
Enterprise Hospitality Solutions, Inc., and the Company
dated August 20, 1999.
10.5 Exclusive Worldwide Software License Agreement between
Christian Rivadallia d/b/a Enterprise Hospitality
Solutions and Enterprise Hospitality Solutions, Inc., and
the Company dated August 20, 1999.
10.6 Security Agreement between MAI Systems Corporation and
CPI Securities, LP, dated October 28, 1999.
10.7 Forebearance Agreement between MAI Systems Corporation
and CPI Securities LP, The Value Realization Fund, L.P.,
The Canyon Value Realization Fund and GRS Partners II
dated October 28, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAI SYSTEMS CORPORATION
(Registrant)
Date: November 15, 1999 /s/ William Brian Kretzmer
------------------------------------
William Brian Kretzmer
Chief Executive Officer and
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.1 Stock Option Agreement between W. Brian Kretzmer and the Company
dated August 2, 1999.
10.2 Stock Option Agreement between Sasun Musliyan and the Company
dated August 2, 1999.
10.3 Amendment Number Four dated July 28, 1999 to the Loan and
Security Agreement between Coast Business Credit and the Company
dated April 23, 1998.
10.4 Termination/Transition Agreement between Christian Rivadallia
d/b/a Enterprise Hospitality Solutions and Enterprise Hospitality
Solutions, Inc., and the Company dated August 20, 1999.
10.5 Exclusive Worldwide Software License Agreement between Christian
Rivadallia d/b/a Enterprise Hospitality Solutions and Enterprise
Hospitality Solutions, Inc., and the Company dated August 20,
1999.
10.6 Security Agreement between MAI Systems Corporation and CPI
Securities, LP, dated October 28, 1999.
10.7 Forebearance Agreement between MAI Systems Corporation and CPI
Securities LP, The Value Realization Fund, L.P., The Canyon Value
Realization Fund and GRS Partners II dated October 28, 1999.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.1
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to W. Brian Kretzmer (the "Optionee") an option to purchase a total of 225,000
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 some 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
August 2, 1999. 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 August 2, 2009. 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 $2.81 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 August 2, 2000 75,000
After August 2, 2001 75,000
After August 2, 2002 75,000
------
225,000
</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
1
<PAGE> 2
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. 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 ninety (90) 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 (1) year 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: 8/5/99 By: /s/ Lewis H. Stanton
-------------------- -----------------------------------------
Lewis H. Stanton
Chief Financial Officer
Dated: 8/5/99 By: /s/ William Brian Kretzmer
-------------------- -----------------------------------------
Optionee
3
<PAGE> 4
ACKNOWLEDGEMENT OF OPTIONEE
The Optionee acknowledges receipt of a copy of the 1993 Stock Option Plan, the
Stock Option Plan General Information Statement, and the supporting documents
(collectively referred to as the "Prospectus") relating thereto, copies of which
are attached hereto, represents that he has read and is familiar with all of the
terms and provisions thereof, and hereby accepts the Option set forth in this
Option Agreement subject to all of the terms, conditions and provisions thereof.
Dated: 8/5/99 /s/ William Brian Kretzmer
-------------------- --------------------------------------------
Signature of Optionee
24 Wakonda
--------------------------------------------
Address
Dove Canyon CA 92679
--------------------------------------------
City State Zip
4
<PAGE> 1
EXHIBIT 10.2
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Sasun Musliyan (the "Optionee") an option to purchase a total of 72,500
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
August 2, 1999. 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 August 2, 2009. 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 $2.81 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 August 2, 2000 24,166
After August 2, 2001 24,167
After August 2, 2002 24,167
------
72,500
</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
1
<PAGE> 2
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. 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 ninety (90) 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 (1) year 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: 8/5/99 By: /s/ L. H. Stanton
-------------------- -----------------------------------------
Lewis H. Stanton
Chief Financial Officer
Dated: August 12, 1999 By: /s/ Illegible Signature
-------------------- -----------------------------------------
Optionee
3
<PAGE> 4
ACKNOWLEDGEMENT OF OPTIONEE
The Optionee acknowledges receipt of a copy of the 1993 Stock Option Plan, the
Stock Option Plan General Information Statement, and the supporting documents
(collectively referred to as the "Prospectus") relating thereto, copies of which
are attached hereto, represents that he has read and is familiar with all of the
terms and provisions thereof, and hereby accepts the Option set forth in this
Option Agreement subject to all of the terms, conditions and provisions thereof.
Dated: August 12, 1999
--------------------
/s/ Illegible Signature
-----------------------------------------
Signature of Optionee
2169 Rodick Road
-----------------------------------------
Address
Markham Ontario L6C 153
-----------------------------------------
City State Zip
Canada
-----------------------------------------
4
<PAGE> 1
Exhibit 10.3
AMENDMENT NUMBER FOUR TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT, dated as of
July 28, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 23, 1998 (as the same has been amended from time to
time, the "Loan Agreement"), among MAI SYSTEMS CORPORATION, a Delaware
corporation ("MAI") and HOTEL INFORMATION SYSTEMS, INC., a Delaware corporation
("Hotel") (MAI and Hotel are each a "Borrower" and collectively the
"Borrowers"), on the one hand, and COAST BUSINESS CREDIT, a division of Southern
Pacific Bank, a California corporation ("Coast"), on the other hand. All
initially capitalized terms used in this Amendment shall have the meanings
ascribed thereto in the Loan Agreement unless specifically defined herein.
RECITALS
WHEREAS, Borrowers and Coast wish to amend the Loan Agreement pursuant
to the terms and provisions set forth in this Amendment; and
NOW, THEREFORE, the parties hereto agree as follows:
AMENDMENT
Section 1. AMENDMENT TO SECTION 1 OF THE LOAN AGREEMENT. Section 1 of
the Loan Agreement is hereby amended by adding the following definition:
"BRIDGE Loan" has the meaning set forth in Section 2 of the Schedule.
"Debt Service Coverage Ratio" means the ratio, in any fiscal quarter,
whose numerator is EBITDA minus cash capital expenditures minus cash
tax expenses, and whose denominator is all principal payments on Debt
plus all interest payments on Debt plus all capital lease payments.
"EBITDA" means, in any fiscal period, Borrowers' consolidated net
income or net loss (other than extraordinary or non-recurring gains of
Borrower for such period), plus (i) the amount of all interest expense,
income tax expense, depreciation expense and amortization expense of
Borrower for such period, on a consolidated basis, and plus or minus
(as the case may be) (ii) any other non-cash charges which have been
added or subtracted, as the case may be, in calculating Borrowers'
consolidated net income for such period."
Section 2. AMENDMENT TO SECTION 2 OF THE SCHEDULE. Section 2 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
1
<PAGE> 2
"Loans in a total amount at any time outstanding not to exceed the lesser of (i)
the sum of (a) and (b) below or (ii) Six Million Dollars ($6,000,000) (the
"Maximum Dollar Amount"):
(a) Loans in a total amount at any time outstanding not to exceed two
(2) times Borrowers' aggregate monthly collections received by Coast,
measured on a trailing twelve (12) month average, arising out of
Receivables generated from Borrowers' software and hardware service and
maintenance contracts, subject to audit, appraisal and a review of such
contracts; and
(b) A Bridge Loan in the amount of Two Million Dollars ($2,000,000)
evidenced by that certain Secured Promissory Note (the "Bridge Loan")
dated as of July 28, 1999, and payable interest only on the first of
each month, with all accrued and unpaid principal and interest due on
the earlier of (i) June 30, 2000, or (ii) the date on which Borrower
receives a debt or equity cash infusion of at least Ten Million Dollars
($10,000,000)."
Section 3. AMENDMENT TO SECTION 3.1 OF THE SCHEDULE. Section 3.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"A rate equal to the Prime Rate plus 2.25% per annum with respect to
all Loans and a rate equal to the Prime Rate plus 5% per annum with
respect to the Bridge Loan, each calculated on the basis of a 360 day
year for the actual number of days elapsed. The interest rate
applicable to the Loans and the Bridge Loan shall be adjusted monthly
as of the first day of each month, and the interest to be charged for
each month shall be based on the highest Prime Rate in effect during
the prior month, but in no event shall the rate of interest charged on
either the Loans or the Bridge Loan in any month be less than 9% per
annum."
Section 4. AMENDMENT TO SECTION 3.2 OF THE SCHEDULE. Section 3.2 of the
Schedule to the Loan agreement is hereby amended by adding the following
language:
"Section 3.2 - Bridge Loan Fee:
Seventy-Five Thousand Dollars ($75,000) fully earned and payable upon
the execution of Amendment Number Four to the Loan and Security
Agreement."
Section 5. AMENDMENT TO SECTION 5.13 OF THE SCHEDULE. Section 5.13 of
the Schedule to the Loan Agreement is hereby amended by adding the following
language:
"8. Warrant to Coast for 33,000 shares of MAI (the "Warrant") in the
form set forth as Exhibit A hereto."
2
<PAGE> 3
Section 6. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE. Section 8.1 of the
Schedule to the Loan Agreement is hereby amended by adding the following
language after the third paragraph:
"Borrower shall maintain a Debt Service Coverage Ratio, measured
quarterly beginning with the fiscal quarter ending September 30, 1999,
of no less then 1.50:1.00."
Section 7. AMENDMENT TO SECTION 9.1 OF THE SCHEDULE. Section 9.1 of the
Schedule to the Loan Agreement is hereby amended by deleting such Section in its
entirety and replacing it with the following:
"April 30, 2003, subject to automatic renewal as provided in Section
9.1 of the Agreement, and early termination as provided in Section 9.2
of the Agreement."
Section 8. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of (i) an executed copy of this
Amendment duly executed by Borrower, (ii) receipt by Coast of the Bridge Loan
Fee, (iii) an executed copy of Amendment Number One to Pledge and Security
Agreement duly executed by Gaming Systems International, and (iv) receipt by
Coast of the Warrant, duly executed by MAI.
Section 9. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby,
embodies the entire agreement and understanding between the parties hereto and
supersedes all prior agreements and understandings relating to the subject
matter hereof. Borrower represents, warrants and agrees that in entering into
the Loan Agreement and consenting to this Amendment, it has not relied on any
representation, promise, understanding or agreement, oral or written, of, by or
with, Coast or any of its agents, employees, or counsel, except the
representations, promises, understandings and agreements specifically contained
in or referred to in the Loan Agreement, as amended hereby.
Section 10. CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the terms and provisions of the Loan
Agreement, the terms of this Amendment shall govern. In all other respects, the
Loan Agreement, as amended and supplemented hereby, shall remain in full force
and effect.
Section 11. MISCELLANEOUS. This Amendment shall be governed by and
construed in accordance with the laws of the State of California. This Amendment
may be executed in any number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this Amendment by
signing such counterpart.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective officers thereunto duly authorized as
of the date first above written.
BORROWER:
MAI SYSTEMS CORPORATION,
a Delaware corporation
By /s/ Lewis H. Stanton
-------------------------------------
By
-------------------------------------
Secretary
HOTEL INFORMATION SYSTEMS, INC,
a Delaware corporation
By /s/ Lewis H. Stanton
-------------------------------------
By
-------------------------------------
Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ John Watkins
-------------------------------------
Title Vice President
----------------------------------
4
<PAGE> 1
EXHIBIT 10.4
TERMINATION/TRANSITION AGREEMENT
The following constitutes a License Termination and Transition Agreement
between Christian Rivadalla d/b/a Enterprise Hospitality Solutions and
Enterprise Hospitality Solutions, Inc., (collectively, "EHS") on the one hand,
and MAI Systems Corporation, and all of its affiliates and subsidiaries
("MAI"), on the other hand, with respect to the Lodging Touch client server
software applications specified herein. This Agreement is being executed
concurrently on this date with an Exclusive Worldwide Software License
Agreement between these same parties. The parties hereby acknowledge and agree
as follows:
1. TERMINATION OF 1996 LICENSE AGREEMENT -- All parties jointly agree
and acknowledge that the October 1996 License Agreement between MAI
Systems Corporation and Christian Rivadalla d/b/a Enterprise
Hospitality Solutions, and all amendments thereto, is hereby
terminated effective as of September 30, 1999.
2. ROYALTIES -- With respect to the royalties due in the 1st, 2nd and
3rd Quarter of 1999, MAI shall pay EHS based upon the "Net
Revenues" formula set forth under Existing License Agreement. If
MAI received any revenues prior to January 1, 1999, for any
properties which have been or will be installed in the 1st, 2nd and
3rd Quarters of 1999, then MAI shall pay EHS a 20% royalty on those
revenues as well.
3. STOCK -- With respect to the 110,638 restricted shares of MAI
common stock previously delivered to Christian Rivadalla, MAI shall
provide a price guarantee at $2.75 per share subject to the
following conditions. Christian Rivadalla shall agree not to sell
more than 40,000 shares per any 30 day period or 2,500 shares per
day. Guaranteed payments to be made monthly within 15 days of Mr.
Rivadalla submitting to MAI transaction records for MAI
verification purposes. If for any reason Rivadalla is unable to
sell all of his shares prior to December 31, 1999, the entire
balance of the price guarantee shall be paid in cash provided that
Rivadalla makes best efforts to sell stock through December 31,
1999. MAI agrees to take all steps necessary to ensure that the
stock is tradeable, under Rule 144 or otherwise.
4. DEVELOPMENT ISSUES -- EHS will inform MAI promptly whether it
intends to complete any existing development projects. If EHS
decides not to complete any projects, it will promptly refund all
prepaid amounts. Christian Rivadalla agrees to perform consulting
services during the transition period, subject to his availability,
at the rate of $1,500.00 per day. Other development or bug fixing
work shall be provided during the transition period as specified in
the April 13, 1999 letter, a copy of which is attached hereto.
<PAGE> 2
5. INVOICES AND ROYALTIES - For the 1st and 2nd quarters of 1999, MAI
agrees to pay all outstanding royalties and invoices, subject to any reasonable
disputes, submitted by EHS prior to August 31, 1999. For the 3rd quarter, all
invoices and royalty payments will be made by October 31, 1999. EHS shall be
entitled to conduct one audit with respect to the transition period.(1)
6. EMPLOYEES - EHS shall provide MAI with a list of employees by September
17, 1999, who MAI will be free to thereafter solicit to work for MAI or any
affiliate company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
effective as of August 20, 1999.
MAI SYSTEMS CORPORATION
By: /s/ W. Brian Kretzmer
-----------------------
W. Brian Kretzmer
Chief Executive Officer
CHRISTIAN RIVADALLA d/b/a ENTERPRISE HOSPITALITY SOLUTIONS
By: /s/ C. Rivadalla
--------------------
Christian Rivadalla
- -----------------
(1) Royalty reports for the 1st, 2nd and 3rd Quarters of 1999 shall include
a listing of payments received at MAI offices, Branch Offices, including
distributors and subdistributors. The report will include a copy of the contract
for each payment listed. With respect to any partial payments and advance
deposits received, MAI shall first apply deposit payments to hardware line items
and then determine what percentage of the total remaining contract price is
comprised of software, and MAI shall pay royalties based upon that percentage.
For example, if 50% of the total contract price is comprised of software, then
MAI shall pay royalties with respect to 50% of the advance deposit or partial
payments received to EHS.
<PAGE> 3
ENTERPRISE HOSPITALITY SOLUTIONS, INC.
By: /s/ C. Rivadalla
-------------------------
Christian Rivadalla
President and Chief Executive Officer
<PAGE> 4
[MAI Systems Corporation Letterhead]
BY FACSIMILE AND FIRST CLASS MAIL
April 13, 1999
Mr. Christian Rivadalla
c/o Enterprise Hospitality Solutions
1255 West Baseline Road, Suite 278
Mesa, AZ 85202
Dear Chris:
By this letter MAI and EHS hereby amend the License Agreement, dated October 1,
1996, ("the License Agreement") between the parties to memorialize our
agreement.
A. EHS Development Services
1. RESALE OF EHS DEVELOPMENT SERVICES. MAI will resell EHS's development
services on a commission basis. MAI will be paid a commission of 12% of the
total professional services billed to the customer. If the services are billed
by MAI, EHS will inform MAI of what the total amount will be for development
services, MAI can then elect to increase it by up to 12%. EHS or MAI will
work directly with the customer to determine the scope of the work, pricing
and delivery. EHS will provide MAI a copy of such specifications and pricing.
EHS or MAI will contract directly with the customer for such development work.
MAI will not be liable for the services EHS performs pursuant to the contract.
MAI's sole role will be to facilitate the finalization of such custom
development contracts. EHS shall retain the ability to continue to directly
market and sell its own development services. Any sales by EHS of its own
development services which are not referred to EHS by MAI shall not be eligible
for the commission set forth above herein. Development performed by EHS not
relating to, or connected with the Licensed Software shall not be subject to a
commission to MAI pursuant to this provision.
2. PROVISION OF DEVELOPMENT SERVICES TO MAI/HIS. Class 1 "material"
defects, defined in the PTR system as "BUG CRITICAL HIGH," will be corrected on
a "best efforts" basis under the warranty provisions of the License Agreement.
The determination that a defect "is BUG CRITICAL HIGH" shall be made pursuant to
the PTR Severity Classification, copy of such classification system is attached
hereto. All non-critical (e.g. Class 2, 3, and 4 bugs), if corrected by EHS,
shall be corrected at rate of $200 per day. This policy shall be reviewed on a
quarterly basis and MAI and EHS agree that if there are Class 2, 3 or 4 bugs
which are increasing MAI's support burden, or MAI's ability to be
<PAGE> 5
Letter to Mr. Christian Rivadalla
04-13-99
Page 2
paid or to sell the Licensed Software, then such agreed-upon bugs shall be
fixed by EHS at no charge.
3. Provision of Customization Services to Third Part Licensees. EHS
proposed that the rate be set for customization services to be provided to
third parties under Section 8.3 of the License Agreement as $600 per person
day. All development work will be performed solely by EHS, MAI or authorized
EHS developers.
B. Agreement on MAI Distribution of Non-Licensed Products
MAI and EHS shall, on a quarterly basis, determine if there are EHS
products that previously MAI has chosen not to sell, install and support
directly but which may now be suitable for sale. Initially, it was agreed that
the Telephone Call Accounting System (TCA) and UMM/Direct Interfaces will be the
first products to fall into this category. The following conditions would apply
to this arrangement; (1) MAI will represent these products for a 20% commission;
(2) MAI will not install or support these products directly or indirectly; (3)
the products will be sold utilizing EHS documentation; (4) the customer is
directly contracting with EHS and EHS will be responsible for all warranty work
and follow-up with the customer; and (5) EHS shall have the right to make sales
of these designated products directly, and no payments shall be made by EHS and
MAI for any sales made by EHS without MAI involvement, so long as such sale is
not made to an MAI customer.
C. Sales Calls Involvement of Christian Rivadalla -- Section 5 of License
Agreement
Section 5 of the License Agreement shall be eliminated completely.
D. Quarterly Royalty Reports and Payments
The License Agreement shall be amended to provide that the Minimum Annual
Royalty Targets, as set forth in the License Agreement, are guaranteed. MAI
shall use commercially reasonable efforts to make four, approximately equal
quarterly payments, the total of such payments shall not be less than the
applicable Minimum Royalty Target as set forth in the License Agreement for the
applicable period. The parties will attempt to determine a mutually acceptable
payment plan in which the minimum quarterly royalty payments are made in
installments throughout each quarter.
The License Agreement shall be amended to provide that MAI is to present to
EHS an estimated quarterly royalty payment plan worksheet ("the Worksheet"),
before the commencement of each quarter. This worksheet shall show in reasonable
detail, and to the best of MAI's knowledge at that point, a schedule of expected
Net Revenues for the forthcoming quarter and pursuant thereto set forth a
monthly payment schedule by which MAI shall make estimated royalty payments to
EHS based thereon. Such estimated monthly payments are to be made within 5
business days after the end of the applicable month. The parties acknowledge
that events may occur during a quarter which render the previously submitted
Worksheet materially inaccurate, and in that eventuality MAI may submit a
revised Worksheet to have effect for the balance of the
<PAGE> 6
Letter to Mr. Christian Rivadalla
04/13/99
Page 3
quarter (including amending the estimated payment to be made for the
immediately preceding month to reflect actual net revenues for such month).
Notwithstanding the preceding paragraph, MAI is required to provide a "Royalty
Report" at the conclusion of the quarter (as set forth in the License
Agreement) and, to the extent the sum of estimated payments previously made
during such quarter is less than shown on the applicable Royalty Report, to
make a final quarterly payment (which itself is subject to adjustment based on
the findings, if any, arising from the review of the quarterly Royalty Report by
EHS). If the end of quarter Royalty Reports and payments are not provided on
the respective due dates under the License Agreement (the 60th day following
the end of the quarter) a financial penalty will be imposed. Such penalty shall
be set at five percent (5%) of the amount of the final quarterly royalty
payment due (i.e. total for the quarter less estimated payments, credits for
prior period overpayments and other items agreed to by the parties). These
penalties will be due and owing regardless of the receipt of formal notice of
default from EHS. To avoid the necessity for EHS to send notice except in the
case where royalty payments or reports are seriously delinquent, EHS will only
be required to notify MAI of an event of default under the License Agreement
where such end of quarter Royalty Reports or payment are 25 calendar days
overdue, and then MAI would have five (5) business days from receipt of notice
to cure the default. This would cover those defaults that MAI believes will be
strictly due to "mechanical" failure, where the mail has failed to arrive or
get to the appropriate party at EHS.
If royalty payments as set forth in MAI's end of quarter Royalty Report
are later adjusted upward MAI agrees to pay Interest at the rate of 7% per
annum, calculated on a daily basis, on any underpayment, calculated from the
date the royalty payment was initially due (the 60th day following the end of
the quarter) under the License Agreement. If no Royalty Report is presented to
EHS on the 60th day following the end of quarter, then MAI shall pay EHS a
penalty of 7% per annum, calculated on a daily basis applied to the number of
days between the 60 day and the date final payment is made on the difference
between the royalty payments made for the quarter and the amount shown on the
final report. Conversely, any overpayment (i.e. the total of quarterly
estimated payments was, in fact, in excess of the total per the end of quarter
Royalty Report) would be applied as a credit, without interest, to future
payments.
E. Notice of Default
Notice of Default shall be sent by certified mail or other recognized
courier which provides for tracking of packages, such as Federal Express, only,
and not by facsimile, to avoid any further issues of transmission and receipt.
Furthermore, the only party authorized to receive Notice would be Mr. Rivadalla
for EHS and to the Chief Financial Officer (currently Mr. Stanton for MAI).
Notice may be given by counsel for the parties, Christian Rivadalla, the Chief
Executive Officer or Chief Financial Officer of MAI, or other executive of
either party as designated by the Chief Executive Officer of that party.
<PAGE> 7
Letter to Mr. Christian Rivadalla
04/13/99
Page 4
F. Tradewinds Account designated EHS named account
MAI hereby agrees to add Tradewinds Hotels to Exhibit B, Section 2, of the
License Agreement.
Sincerely,
/s/ George G. Bayz
George G. Bayz
President
GGB:jc
Agreed on behalf of EHS:
/s/ C. Rivadalla
- ---------------------------------------
Christian Rivadalla
President
EHS
<PAGE> 1
Exhibit 10.5
EXCLUSIVE WORLDWIDE SOFTWARE LICENSE AGREEMENT
The following constitutes an Exclusive Worldwide Software License
Agreement between Christian Rivadalla d/b/a Enterprise Hospitality Solutions
and Enterprise Hospitality Solutions, Inc., (collectively "EHS" or "Licensor")
on the one hand, and MAI Systems Corporation, and all of its affiliates and
subsidiaries("MAI") on the other hand, with respect to the Lodging Touch client
server software applications specified herein. The parties hereby acknowledge
and agree as follows:
1. TERMINATION OF 1996 LICENSE AGREEMENT -- All parties jointly agree
and acknowledge that the October 1996 License Agreement between MAI
Systems Corporation and Christian Rivadalla d/b/a Enterprise
Hospitality Solutions, and all amendments thereto, is hereby
terminated effective as of September 30, 1999.
2. SOURCE CODE -- EHS agrees to provide MAI with a copy of the
existing source code, object code, specifications and documentation
for the existing Lodging Touch client server software applications, as
listed in Exhibit A to this letter, on or before September 30, 1999.
3. EXCLUSIVE WORLDWIDE SOFTWARE LICENSE/USE OF LODGING TOUCH NAME/EHS
NAMED ACCOUNTS -- Effective as of October 1, 1999, MAI shall obtain an
exclusive worldwide license to market, distribute, and modify the
software applications listed in Exhibit A, and all enhancements and
derivative works which are subsequently created by MAI or under MAI's
direction. MAI shall also acquire a non-exclusive license to the use
of the Lodging Touch name and the Lodging Touch trademark with respect
to the software application listed in Exhibit A. EHS agrees that it
will not release any new property management software applications
under the Lodging Touch name. Notwithstanding the foregoing, however,
the foregoing grant of rights to MAI shall be non-exclusive with
respect to the Named Accounts, as listed in Exhibit B hereto. MAI
shall be granted a non-exclusive royalty-free worldwide right to use
the database scheme (EHSBASE) developed by EHS. EHS agrees that it
shall only use its own copy of the source code for the applications as
described in Exhibit A (and any EHS derivative works or enhancements
thereto) to service the Named Accounts listed in Exhibit B. The
parties agree that any derivative works based upon the licensed
software created by MAI under this Agreement, and all intellectual
property, trade secret and other proprietary rights therein and
thereto, shall be the sole and exclusive property to MAI, both during
and following the expiration or other termination of this Agreement.
<PAGE> 2
4. ROYALTIES TO EHS - MAI agrees to pay EHS on or before the last
business day of each month a 10% royalty on the net software price (1) of
all properties that are serialized during the preceding month with respect
to the software applications listed in Exhibit A,(2) including all revenues
generated from all derivative works or enhancements to the software that
are subsequently created by MAI or under MAI's supervision. The
serialization process for these software applications will be conducted
jointly by EHS and MAI. EHS shall retain full audit rights which it may
invoke not more than two times per year. If MAI fails to pay any of the
royalties due for any two (2) consecutive months, then EHS shall be
entitled to give MAI notice of the breach, and MAI shall cure within
fifteen (15) days. In the event that, following such notice by EHS, MAI
fails to cure and fails to pay EHS any portion of the total royalties that
are due for any three (3) consecutive months, then all of MAI's rights
under this Agreement shall immediately terminate, without any further
notice requirements or opportunity to cure(3).
5. JOINT PRESS RELEASE - The parties will draft a joint press release
announcing their new agreement. The press release will not be distributed
unless and until this Agreement is executed by all parties.
6. RELEASE OF ALL OTHER CLAIMS - Except as specified in this Agreement,
the parties will waive all claims they may have against each other as of
the effective date of this Agreement, and each party shall bear its own
costs and attorneys' fees.
7. EHS Warranties
7.1 Ownership. Licensor warrants, represents and agrees with respect
to the licensed software and documentation contained in Exhibit A
and materials provided to MAI by Licensor, that (i) Licensor has
full and sufficient right to grant the rights and/or license
granted to MAI hereunder free of all liens, claims, encumbrances
and other restrictions; and (ii) the licensed software and
documentation (Exhibit A), including all preexisting works used or
incorporated in the licensed software and documentation (Exhibit
A), does not
_____________
(1) The "net software price" is the price for the software as specified in the
contract between MAI and its customer, less (i) any discounts given by MAI,
(ii) returns, and (iii) any federal, state or foreign sales, excise, or other
taxes or tariffs imposed on the licensing, manufacture and/or distribution of
the software (not including taxes on net income).
(2) Notwithstanding the above. The royalty rates payable to EHS with respect
to all software under the Joint Armed Services agreement as reflected in the
Contract Line Item Numbers (CLIN), shall be reduced to 20%.
(3) Either party shall retain all rights to seek damages or injunctive relief
from the other as a result of any breach of this Agreement.
<PAGE> 3
infringe any patent, copyright, trademark or other intellectual
property rights (including trade secrets), privacy, publicity or
similar rights of any third party, nor has any claim (whether or
not embodied in an action, past or present,) of such infringement
been threatened or asserted, and no such claim is pending against
Licensor or, insofar as Licensor is aware, against any third
party. Licensor further warrants that the software listed in
Exhibit A and the related documentation do not incorporate and are
not derived from any third party software or other materials. If
MAI or any successor company files a claim against EHS for breach
of any of the warranties or representations contained in this
paragraph, the prevailing party in that action shall be entitled
to recover reasonable costs, expenses and attorneys' fees. EHS IS
PROVIDING THE SOFTWARE UNDER THIS AGREEMENT "AS-IS". EXCEPT AS
SPECIFICALLY PROVIDED IN THIS AGREEMENT, EHS MAKES NO OTHER
WARRANTIES WITH RESPECT TO THE SOFTWARE, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7.2 No Code Designed to Damage: Licensor represents, warrants and
agrees that to the best of Licensor's knowledge the licensed
software contained in Exhibit A shall not contain any code,
programming instruction or set of instructions that is
intentionally constructed with the ability to damage, interfere
with or otherwise adversely affect computer programs, data files,
or hardware without the consent and intent of the computer user,
including without limitation code such as "viruses," "Trojan
horses," "bombs," "worms," or similar disabling, destructive,
self-replicating or paralyzing programs, or programs that
interfere with use of the Licensed Software by locking out
computer users or require the use of passwords or other mechanisms
that inhibit use, or programs that disable or interfere with use
of the licensed software listed in Exhibit A after the expiration
of a designated period of time. Licensor shall promptly notify MAI
of any Licensor knowledge or suspicion of any such problem that
might affect the licensed software (Exhibit A) or any materials
delivered to MAI by Licensor hereunder.
8. ENTIRE AGREEMENT - This Agreement and the attachments hereto
constitute the entire understanding and agreement between the parties with
respect to the subject matters identified herein, and it supercedes any and
all prior or contemporaneous oral or written communications between the
parties with respect to the subject matter hereof. This Agreement may not
be amended,
<PAGE> 4
modified or altered in any way except by a writing duly signed by an
authorized representative of the parties. The payments to be received
under this Agreement are freely assignable. The duties and obligations
of the parties may be assigned with the written consent of the other
party, which consent will not be unreasonably withheld provided that
MAI may assign this agreement to an affiliate of MAI without obtaining
such consent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
effective as of August 20, 1999.
MAI SYSTEMS CORPORATION
By: /s/ W. Brian Kretzmer
-------------------------------
W. Brian Kretzmer
Chief Executive Officer
CHRISTIAN RIVADALLA d/b/a ENTERPRISE HOSPITALITY SOLUTIONS
By: /s/ Christian Rivadalla
-------------------------------
Christian Rivadalla
ENTERPRISE HOSPITALITY SOLUTIONS, INC.
By: /s/ Christian Rivadalla
-------------------------------
Christian Rivadalla
President and Chief Executive Officer
<PAGE> 5
EXHIBIT A
Lodging Touch Client/Server Software Suite Owned By MAI
Cerebro/Libica -- Hospitality Operations
Central Reservation -- PMWIN Powerbuilder 6.5 code base
Central Information -- PMWIN Powerbuilder 6.5 code base
Property Management -- PMWIN Powerbuilder 6.5 code base
Wholesaler -- PMWIN Powerbuilder 6.5 code base
Catering -- PMWIN Powerbuilder 6.5 code base
Contact Management -- PMWIN Powerbuilder 6.5 code base
Kiosk -- ONETOUCH Powerbuilder 6.5 code base
Cenacolo -- Hospitality Food & Beverage Operations
Point of Sale -- FBWIN Powerbuilder 6.5 code base
Cost and Inventory Control -- MAYOLICA Powerbuilder 6.5 code base
Interfaces -- Hospitality Interfaces
DataMover Plus -- DMPLUS Powerbuilder 6.5 code base
UMM -- UMM Powerbuilder 6.5 code base
UMMIPU -- UMMIPU Powerbuilder 6.5 code base
UMMCRS -- UMMCRS Powerbuilder 6.5 code base
EMLQ -- EMLQ Powerbuilder 6.5 code base
LQCON -- LQCON Powerbuilder 6.5 code base
YM -- Only Specifications available, no code presently written, this is for
the future Talus Interface
<PAGE> 6
EXHIBIT B
EHS NAMED ACCOUNTS
1. Best Western International
2. Sol Melia Hotels
3. Choice Hotels
4. Marriott Hotels
5. Tradewinds
6. Starwood
7. Joint Armed Services
<PAGE> 1
EXHIBIT 10.6
SECURITY AGREEMENT
SECURITY AGREEMENT (the "Security Agreement"), dated as of October 28,
1999 between MAI SYSTEMS CORPORATION, a Delaware corporation ("Grantor"), and
CPI Securities LP, a California limited partnership, in its capacity as Agent
for Lenders.
WITNESSETH:
WHEREAS, pursuant to that certain Note Purchase Agreement dated as of
March 3, 1997, by and among Grantor, as issuer of the Notes, Agent and Lenders
(including all annexes, exhibits and schedules thereto, as from time to time
amended, restated, supplemented or otherwise modified, the "Note Purchase
Agreement"), Lenders have loaned certain sums to Grantor, as evidenced by the
Notes issued by Grantor;
WHEREAS, Grantor has requested that Lenders enter into that certain
Forbearance Agreement by and between Lenders and Grantor dated as of the date
hereof (as from time to time amended, restated, supplemented or otherwise
modified, the "Forbearance Agreement"), pursuant to which Lenders would agree
to forebear in collecting certain interest payments which are currently due and
payable by Grantor to Lenders;
WHEREAS, in order to induce Lenders to enter into the Forbearance
Agreement, Grantor has agreed to grant a continuing Lien on the Collateral (as
hereinafter defined) to secure the Obligations;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINED TERMS. All capitalized terms used but not otherwise defined
herein or in Annex A hereto have the meanings given to them in the Note Purchase
Agreement. All other undefined terms contained in this Security Agreement,
unless the context indicates otherwise, have the meanings provided for by
Article 9 of the Code to the extent the same are used or defined therein.
2. GRANT OF LIEN.
a. To secure the prompt and complete payment, performance and
observance of all of the Obligations, Grantor hereby grants, assigns, conveys,
mortgages, pledges, hypothecates and transfers to Agent, for itself and the
benefit of Lenders, a Lien upon all of its right, title and interest in, to and
under the following property, whether now owned by or owing to, or hereafter
acquired by or arising in favor of, Grantor (including under any trade names,
styles or derivations thereof), and whether owned or consigned by or to, or
leased from or to, Grantor, and regardless of where located (all of which being
hereinafter collectively referred to as
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the "Collateral"):
(i) all Accounts;
(ii) at Chattel Paper;
(iii) all Contracts;
(iv) all Documents;
(v) all Equipment;
(vi) all Fixtures;
(vii) all General Intangibles;
(viii) all goods;
(ix) all Instruments;
(x) all Inventory;
(xi) all Investment Property;
(xii) All Grantor Accounts;
(xiii) all money, cash or cash equivalents of Grantor;
and
(xiv) to the extent not otherwise included, all Proceeds
and products of the foregoing and all accessions to, substitutions and
replacements for, and rents and profits of, each of the foregoing.
b. In addition, to secure the prompt and complete payment, performance
and observance of the Obligations and in order to induce Agent and Lenders as
aforesaid, Grantor hereby grants to Agent, for itself and the benefit of
Lenders, a right of setoff against the property of Grantor held by Agent or any
Lender, consisting of property described above in Section 2(a) now or hereafter
in the possession or custody of or in transit to Agent or any Lender, for any
purpose, including safekeeping, collection or pledge, for the account of
Grantor, or as to which Grantor may have any right or power.
3. AGENT'S AND LENDERS' RIGHTS: LIMITATIONS ON AGENT'S AND LENDERS'
OBLIGATIONS.
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a. It is expressly agreed by Grantor that, anything herein to the
contrary notwithstanding, Grantor shall remain liable under each of its
Contracts and each of its Licenses to observe and perform all the conditions and
obligations to be observed and performed by it thereunder. Neither Agent nor any
Lender shall have any obligation or liability under any Contract or License by
reason of or arising out of this Security Agreement or the granting herein of a
Lien thereon or the receipt by Agent or any Lender of any payment relating to
any Contract or License pursuant hereto. Neither Agent nor any Lender shall be
required or obligated in any manner to perform or fulfill any of the obligations
of Grantor under or pursuant to any Contract or License, or to make any payment,
or to make any inquiry as to the nature or the sufficiency of any payment
received by it or the sufficiency of any performance by any party under any
Contract or License, or to present or file any claims, or to take any action to
collect or enforce any performance or the payment of any amounts which may have
been assigned to it or to which it may be entitled at any time or times.
b. Subject to Coast's rights under the Coast Agreements, Agent may at
any time after a Default or Event of Default shall have occurred and be
continuing, without prior notice to Grantor, notify Account Debtors, parties to
the Contracts and obligors in respect of Instruments and Chattel Paper, that the
Accounts and the right, title and interest of Grantor in and under such
Contracts, Instruments and Chattel Paper have been assigned to Agent, and that
payments shall be made directly to Agent, for itself and the benefit of Lenders.
Upon the request of Agent, Grantor shall so notify Account Debtors, parties to
Contracts and obligors in respect of Instruments and Chattel Paper.
c. Agent may at any time in Agent's own name or in the name of Grantor
communicate with Account Debtors, parties to Contracts, obligors in respect of
Instruments and obligors in respect of Chattel Paper to verify with such
Persons, to Agent's satisfaction, the existence, amount and terms of any such
Accounts, Contracts, Instruments or Chattel Paper. If a Default or Event of
Default shall have occurred and be continuing, Grantor, at its own expense,
shall cause the independent certified public accountants then engaged by Grantor
to prepare and deliver to Agent and each Lender at any time and from time to
time promptly upon Agent's request the following reports with respect to
Grantor: (i) a reconciliation of all Accounts; (ii) an aging of all Accounts;
(iii) trial balances; and (iv) a test verification of such Accounts as Agent may
request. Grantor, at its own expense, shall deliver to Agent the results of each
physical verification, if any, which Grantor may in its discretion have made, or
caused any other Person to have made on its behalf, of all or any portion of its
Inventory.
4. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants
that:
a. Grantor is the sole owner of each item of the Collateral upon which
it purports to grant a Lien hereunder, and has good and marketable title thereto
free and clear of
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any and all Liens other than the Coast Security Interest and Permitted
Encumbrances.
b. No effective security agreement, financing statement, equivalent
security or Lien instrument or continuation statement covering all or any part
of the Collateral is on file or of record in any public office, except such as
may have been filed (i) by Grantor in favor of Agent pursuant to this Security
Agreement or the other Loan Documents, (ii) by Coast pursuant to the Coast
Agreements, and (iii) in connection with any other Permitted Encumbrances.
c. This Security Agreement is effective to create a valid and
continuing Lien on and, upon the filing of the appropriate financing statements
listed on Schedule I hereto, a perfected Lien in favor of Agent, for itself and
the benefit of Lenders, on the Collateral with respect to which a Lien may be
perfected by filing pursuant to the Code. Such Lien is prior to all other Liens,
except the Coast Security Interest and Permitted Encumbrances that would be
prior to Liens in favor of Agent for the benefit of Agent and Lenders as a
matter of law, and is enforceable as such as against any and all creditors of
and purchasers from Grantor (other than purchasers of Inventory in the ordinary
course of business). All action by Grantor necessary or desirable to protect and
perfect such Lien on each item of the Collateral has been duly taken.
d. Schedule II hereto lists all Instruments and Chattel Paper of
Grantor. All action by Grantor necessary or desirable to protect and perfect the
Lien of Agent on each item set forth on Schedule II (including the delivery of
all originals thereof to Agent and the legending of all Chattel Paper as
required by Section 5(b) hereof) has been duly taken. The Lien of Agent, for the
benefit of Agent and Lenders, on the Collateral listed on Schedule II hereto is
prior to all other Liens, except the Coast Security Interest and Permitted
Encumbrances that would be prior to the Liens in favor of Agent as a matter of
law, and is enforceable as such against any and all creditors of and purchasers
from Grantor.
e. Grantor's chief executive office, principal place of business,
corporate offices, all warehouses and premises where Collateral is stored or
located, and the locations of all of its books and records concerning the
Collateral are set forth on Schedule III hereto.
f. With respect to the Accounts (i) they represent bona fide sales of
Inventory or rendering of services to Account Debtors in the ordinary course of
Grantor's business and are not evidenced by a judgment, Instrument or Chattel
Paper; (ii) there are no setoffs, claims or disputes existing or asserted with
respect thereto and Grantor has not made any agreement with any Account Debtor
for any extension of time for the payment thereof, any compromise or settlement
for less than the full amount thereof, any release of any Account Debtor from
liability therefor, or any deduction therefrom except a discount or allowance
allowed by Grantor in the ordinary course of its business and disclosed to
Agent; (iii) to Grantor's knowledge, there are no facts, events or occurrences
which in any way impair the validity or enforceability thereof or could
reasonably be expected to reduce the amount payable thereunder as shown on
Grantor's books and records and any invoices, and statements delivered to Agent
and Lenders with respect
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thereto; (iv) Grantor has not received any notice of proceedings or actions
which are threatened or pending against any Account Debtor which might result in
any adverse change in such Account Debtor's financial condition; and (v) Grantor
has no knowledge that any Account Debtor is unable generally to pay its debts as
they become due, except with respect to those accounts for which an allowance
for doubtful accounts has been established. Further with respect to the Accounts
(x) the amounts shown on all invoices, and statements which may be delivered to
the Agent with respect thereto are actually and absolutely owing to Grantor as
indicated thereon and are not in any way contingent; (y) no payments have been
or shall be made thereon except payments immediately delivered to the Grantor
Accounts or the Agent; and (z) to Grantor's knowledge, all Account Debtors have
the capacity to contract.
g. With respect to any Inventory, (i) such Inventory is located at one
of Grantor's locations set forth on Schedule III hereto, (ii) no Inventory is
now, or shall at any time or times hereafter be stored at any other location
without Agent's prior consent, and if Agent gives such consent, Grantor will
concurrently therewith obtain, bailee, landlord and mortgagee agreements, (iii)
Grantor has good, indefeasible and merchantable title to such Inventory and such
Inventory is not subject to any Lien or security interest or document whatsoever
except for the Lien granted to Agent, for the benefit of Agent and Lenders, and
except for Permitted Encumbrances and the Coast Security Interest, (iv) such
Inventory is of good and merchantable quality, free from any defects, (v) such
Inventory is not subject to any licensing, patent, royalty, trademark, trade
name or copyright agreements with any third parties which would require any
consent of any third party upon sale or disposition of that Inventory or the
payment of any monies to any third party as a precondition of such sale or other
disposition, and (vi) the completion of manufacture, sale or other disposition
of such Inventory by Agent following an Event of Default shall not require the
consent of any Person and shall not constitute a breach or default under any
contract or agreement to which Grantor is a party or to which such property is
subject.
h. Grantor does not have any interest in, or title to, any Patent,
Trademark or Copyright except as set forth in Schedule IV hereto. This Security
Agreement is effective to create a valid and continuing Lien on and, upon filing
of the Copyright Security Agreements with the United States Copyright Office and
filing of the Patent Security Agreements and the Trademark Security Agreements
with the United States Patent and Trademark Office, perfected Liens in favor of
Agent on Grantor's Patents, Trademarks and Copyrights and such perfected Liens
are enforceable as such as against any and all creditors of and purchasers from
Grantor, and such Liens shall be senior to all other Liens (other than the Coast
Security Interest). Upon filing of the Copyright Security Agreements with the
United States Copyright Office and filing of the Patent Security Agreements and
the Trademark Security Agreements with the United States Patent and Trademark
Office and the filing of appropriate financing statements listed on Schedule I
hereto, all action necessary or desirable to protect and perfect Agent's Lien on
Grantor's Patents, Trademarks or Copyrights shall have been duly taken.
i. Grantor does not have any interest in, or title to, any Real Estate
except as set forth in Schedule V hereto.
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j. The Collateral constitutes substantially all of Grantor's real
property, personal property, intellectual property, and other property.
5. COVENANTS. Grantor covenants and agrees with Agent, for the benefit
of Agent and Lenders, that from and after the date of this Security Agreement
and until the Termination Date:
a. Further Assurances; Pledge of Instruments. At any time and from time
to time, upon the written request of Agent and at the sole expense of Grantor,
Grantor shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further actions as Agent may deem
desirable to obtain the full benefits of this Security Agreement and of the
rights and powers herein granted, including (i) using its best efforts to secure
all consents and approvals necessary or appropriate for the assignment to or for
the benefit of Agent of any License or Contract held by Grantor or in which
Grantor has any rights not heretofore assigned, (ii) filing any financing or
continuation statements under the Code with respect to the Liens granted
hereunder or under any other Loan Document, (iii) transferring Collateral to
Agent's possession (for the benefit of Agent and Lenders) if such Collateral
consists of Chattel Paper, Instruments or if a Lien on such Collateral can be
perfected only by possession, or if requested by Agent, and (iv) obtaining, or
using its best efforts to obtain, waivers of Liens, if any exist, from landlords
and mortgagees. Grantor also hereby authorizes Agent, for the benefit of Agent
and Lenders, to file any such financing or continuation statements without the
signature of Grantor to the extent permitted by applicable law. If any amount
payable under or in connection with any of the Collateral is or shall become
evidenced by any Instrument, such Instrument, other than checks and notes
received in the ordinary course of business, shall be duly endorsed in a manner
satisfactory to Agent immediately upon Grantor's receipt thereof.
b. Maintenance of Records. Grantor shall keep and maintain, at its own
cost and expense, satisfactory and complete records of the Collateral, including
a record of any and all payments received and any and all credits granted with
respect to the Collateral and all other dealings with the Collateral. Grantor
shall mark its books and records pertaining to the Collateral to evidence this
Security Agreement and the Liens granted hereby. All Chattel Paper shall be
marked with the following legend: "This writing and the obligations evidenced
or secured hereby are subject to the security interest of CPI Securities LP, as
Agent, for the benefit of Agent and certain Lenders."
c. Covenants Regarding Patent, Trademark and Copyright Collateral.
(i) Grantor shall notify Agent immediately if it knows or has
reason to know that any application or registration relating to any
Patent, Trademark or Copyright (now or hereafter existing) may become
abandoned or dedicated, or of any adverse determination or development
(including the institution of, or any such determination or
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development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court)
regarding Grantor's ownership of any Patent, Trademark or Copyright,
its right to register the same, or to keep and maintain the same.
(ii) In no event shall Grantor, either directly or through any
agent, employee, licensee or designee, file an application for the
registration of any Patent, Trademark or Copyright with the United
States Patent and Trademark Office, the United States Copyright Office
or any similar office or agency without giving Agent prior written
notice thereof, and, upon request of Agent, Grantor shall execute and
deliver any and all Patent Security Agreements, Copyright Security
Agreements or Trademark Security Agreements as Agent may request to
evidence Agent's Lien on such Patent, Trademark or Copyright, and the
General Intangibles of Grantor relating thereto or represented thereby.
(iii) Grantor shall take all actions necessary or requested by
Agent to maintain and pursue each application, to obtain the relevant
registration and to maintain the registration of each of the Patents,
Trademarks and Copyrights (now or hereafter existing), including the
filing of applications for renewal affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation
proceedings.
(iv) In the event that any of the Patent, Trademark or
Copyright Collateral is infringed upon, or misappropriated or diluted
by a third party, Grantor shall notify Agent promptly after Grantor
learns thereof. Grantor shall, unless it shall reasonably determine
that such Patent, Trademark or Copyright Collateral is in no way
material to the conduct of its business or operations, promptly sue for
infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, and shall
take such other actions as Agent shall deem appropriate under the
circumstances to protect such Patent, Trademark or Copyright
Collateral.
d. Indemnification. In any suit, proceeding or action brought by Agent
or any Lender relating to any Account, Chattel Paper, Contract, Document,
General Intangible, Instrument or Investment Property for any sum owing
thereunder or to enforce any provision of any Account, Chattel Paper, Contract,
Document, General Intangible, Instrument or Investment Property, Grantor will
save, indemnify and keep Agent and Lenders harmless from and against all expense
(including actual attorneys' fees and expenses), loss or damage suffered by
reason of any defense, setoff, counterclaim, recoupment or reduction of
liability whatsoever of the obligor thereunder, arising out of a breach by
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor of, such obligor or
its successors from Grantor, except in the case of Agent or any Lender, to the
extent such expense, loss, or damage is attributable solely to the gross
negligence or willful misconduct of Agent or such Lender as finally determined
by a court of competent jurisdiction. All such obligations of
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Grantor shall be and remain enforceable against and only against Grantor and
shall not be enforceable against Agent or any Lender.
e. Compliance with Terms of Accounts, etc. In all material respects,
Grantor will perform and comply with all obligations in respect of its Accounts,
Chattel Paper, Contracts and Licenses and all other agreements to which it is a
party or by which it is bound relating to the Collateral.
f. Limitation on Liens on Collateral. Grantor will not create, permit
or suffer to exist, and will defend the Collateral against, and take such other
action as is necessary to remove, any Lien on the Collateral except Permitted
Encumbrances and the Coast Security Interest, and will defend the right, title
and interest of Agent and Lenders in and to any of Grantor's rights under the
Collateral against the claims and demands of all Persons whomsoever.
g. Limitations on Disposition. Grantor will not sell, lease, transfer
or otherwise dispose of any of the Collateral, or attempt or contract to do so
except in the ordinary course of Grantor's business.
h. Further Identification of Collateral. Grantor will, if so requested
by Agent, furnish to Agent, as often as Agent requests, statements and schedules
further identifying and describing the Collateral and such other reports in
connection with the Collateral as Agent may reasonably request, all in such
detail as Agent may specify.
i. Notices. Grantor will advise Agent promptly, in reasonable detail,
(i) of any Lien (other than Permitted Encumbrances and the Coast Security
Interest) or claim made or asserted against any of the Collateral, and (ii) of
the occurrence of any other event which would have a material adverse effect on
the aggregate value of the Collateral or on the Liens created hereunder or under
any other Loan Document.
j. Insurance. Grantor shall deliver to Agent, in form and substance
satisfactory to Agent, endorsements to (i) all "All Risk" and business
interruption insurance naming Agent, on behalf of itself and Lenders, as loss
payee, and (ii) all general liability and other liability policies naming Agent,
on behalf of itself and Lenders, as additional insured. Grantor irrevocably
makes, constitutes and appoints Agent (and all officers, employees or agents
designated by Agent), so long as any Default or Event of Default shall have
occurred and be continuing, as Grantor's true and lawful agent and
attorney-in-fact for the purpose of making, settling and adjusting claims under
such "All Risk" policies of insurance, endorsing the name of Grantor on any
check or other item of payment for the proceeds of such "All Risk" policies of
insurance and for making all determinations and decisions with respect to such
"All Risk" policies of insurance. Agent shall have no duty to exercise any
rights or powers granted to it pursuant to the foregoing power-of-attorney.
Grantor shall promptly notify Agent of any loss, damage, or destruction to the
Collateral in the amount of $100,000 or more, whether or not covered by
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insurance.
6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. On the Closing Date,
Grantor shall execute and deliver to Agent a power of attorney (the "Power of
Attorney") substantially in the form attached hereto as Exhibit A. The power of
attorney granted pursuant to the Power of Attorney is a power coupled with an
interest and shall be irrevocable until the Termination Date. The powers
conferred on Agent, for the benefit of Agent and Lenders, under the Power of
Attorney are solely to protect Agent's interests (for the benefit of Agent and
Lenders) in the Collateral and shall not impose any duty upon Agent or any
Lender to exercise any such powers. Agent agrees that (a) it shall not exercise
any power or authority granted under the Power of Attorney unless an Event of
Default has occurred and is continuing, and (b) Agent shall account for any
moneys received by Agent in respect of any foreclosure on or disposition of
Collateral pursuant to the Power of Attorney provided that none of Agent nor any
Lender shall have any duty as to any Collateral, and Agent and Lenders shall be
accountable only for amounts they actually receive as a result of the exercise
of such powers. NONE OF AGENT, LENDERS OR THEIR RESPECTIVE AFFILIATES, OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO GRANTOR
FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT
IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION,
NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.
7. REMEDIES; RIGHTS UPON DEFAULT.
a. In addition to all other rights and remedies granted to it under
this Security Agreement, the Note Purchase Agreement, the other Loan Documents
and under any other instrument or agreement securing, evidencing or relating to
any of the Obligations, if any Event of Default shall have occurred and be
continuing, subject to Coast's rights under the Coast Agreements and subject to
the applicable provisions of the Note Purchase Agreement, if any, Agent may
exercise all rights and remedies of a secured party under the Code. Without
limiting the generality of the foregoing, Grantor expressly agrees that in any
such event Agent, without demand of performance or other demand, advertisement
or notice of any kind (except the notice specified below of time and place of
public or private sale) to or upon Grantor or any other Person (all and each of
which demands, advertisements and notices are hereby expressly waived to the
maximum extent permitted by the Code and other applicable law), may forthwith
enter upon the premises of Grantor where any Collateral is located through
self-help, without judicial process, without first obtaining a final judgment or
giving Grantor or any other Person notice and opportunity for a hearing on
Agent's claim or action and may collect, receive, assemble, process, appropriate
and realize upon the Collateral, or any part thereof, and may forthwith sell,
lease, assign, give an option or options to purchase, or sell or otherwise
dispose of and deliver said Collateral (or contract to do so), or any part
thereof, in one or more parcels at a public or private
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sale or sales, at any exchange at such prices as it may deem acceptable, for
cash or on credit or for future delivery without assumption of any credit risk.
Agent or any Lender shall have the right upon any such public sale or sales and,
to the extent permitted by law, upon any such private sale or sales, to purchase
for the benefit of Agent and Lenders, the whole or any part of said Collateral
so sold, free of any right or equity of redemption, which equity of redemption
Grantor hereby releases. Such sales may be adjourned and continued from time to
time with or without notice. Agent shall have the right to conduct such sales on
Grantor's premises or elsewhere and shall have the right to use Grantor's
premises without charge for such time or times as Agent deems necessary or
advisable. Grantor further agrees, at Agent's request, to assemble the
Collateral and make it available to Agent at places which Agent shall select,
whether at Grantor's premises or elsewhere. Until Agent is able to effect a
sale, lease, or other disposition of Collateral, Agent shall have the right to
hold or use Collateral, or any part thereof, to the extent that it deems
appropriate for the purpose of preserving Collateral or its value or for any
other purpose deemed appropriate by Agent. Agent shall have no obligation to
Grantor to maintain or preserve the rights of Grantor as against third parties
with respect to Collateral while Collateral is in the possession of Agent. Agent
may, if it so elects, seek the appointment of a receiver or keeper to take
possession of Collateral and to enforce any of Agent's remedies (for the benefit
of Agent and Lenders), with respect to such appointment without prior notice or
hearing as to such appointment. Agent shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale to the
Obligations, and only after so paying over such net proceeds, and after the
payment by Agent of any other amount required by any provision of law, need
Agent account for the surplus, if any, to Grantor. To the maximum extent
permitted by applicable law, Grantor waives all claims, damages, and demands
against Agent or any Lender arising out of the repossession, retention or sale
of the Collateral except such as arise solely out of the gross negligence or
willful misconduct of Agent or such Lender as finally determined by a court of
competent jurisdiction. Grantor agrees that ten (10) days prior notice by Agent
of the time and place of any public sale or of the time after which a private
sale may take place is reasonable notification of such matters. Grantor shall
remain liable for any deficiency if the proceeds of any sale or disposition of
the Collateral are insufficient to pay all Obligations, including any attorneys'
fees or other expenses incurred by Agent or any Lender to collect such
deficiency.
b. Except as otherwise specifically provided herein, Grantor hereby
waives presentment, demand, protest or any notice (to the maximum extent
permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.
8. GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY. For the purpose of
enabling Agent to exercise rights and remedies under Section 7 hereof
(including, without limiting the terms of Section 7 hereof, in order to take
possession of, hold, preserve, process, assemble, prepare for sale, market for
sale, sell or otherwise dispose of Collateral) at such time as Agent shall be
lawfully entitled to exercise such rights and remedies, Grantor hereby grants to
Agent, for the benefit of Agent and Lenders, an irrevocable, non-exclusive
license
10
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(exercisable without payment of royalty or other compensation to Grantor) to
use, license or sublicense any Intellectual Property now owned or hereafter
acquired by Grantor, and wherever the same may be located, and including in such
license access to all media in which any of the licensed items may be recorded
or stored and to all computer software and programs used for the compilation or
printout thereof.
9. LIMITATION ON AGENT'S AND LENDERS' DUTY IN RESPECT OF COLLATERAL.
Agent and each Lender shall use reasonable care with respect to the Collateral
in its possession or under its control. Neither Agent nor any Lender shall have
any other duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of Agent or such Lender, or any
income thereon or as to the preservation of rights against prior parties or any
other rights pertaining thereto.
10. REINSTATEMENT. This Security Agreement shall remain in full force
and effect and continue to be effective should any petition be filed by or
against Grantor for liquidation or reorganization, should Grantor become
insolvent or make an assignment for the benefit of any creditor or creditors or
should a receiver or trustee be appointed for all or any significant part of
Grantor's assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Obligations, or any
part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.
11. NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other party, or whenever any of the parties desires to give and
serve upon any other party any communication with respect to this Security
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be given in the manner, and
deemed received, as provided for in the Note Purchase Agreement.
12. SEVERABILITY. Whenever possible, each provision of this Security
Agreement shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision of this Security Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Security
Agreement. This Security Agreement is to be read, construed and applied together
with the Note Purchase Agreement and the other Loan Documents which, taken
together, set forth the complete understanding and agreement of Agent, Lenders
and Grantor with respect to the matters referred
11
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to herein and therein.
13. NO WAIVER; CUMULATIVE REMEDIES. Neither Agent nor any Lender shall
by any act, delay, omission or otherwise be deemed to have waived any of its
rights or remedies hereunder, and no waiver shall be valid unless in writing,
signed by Agent and then only to the extent therein set forth. A waiver by Agent
of any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which Agent would otherwise have had on any future
occasion. No failure to exercise nor any delay in exercising on the part of
Agent or any Lender, any right, power or privilege hereunder, shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or future exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
hereunder provided are cumulative and may be exercised singly or concurrently,
and are not exclusive of any rights and remedies provided by law. None of the
terms or provisions of this Security Agreement may be waived, altered, modified
or amended except by an instrument in writing, duly executed by Agent and
Grantor.
14. LIMITATION BY LAW. All rights, remedies and powers provided in this
security Agreement may be exercised only to the extent that the exercise thereof
does not violate any applicable provision of law, and all the provisions of this
Security Agreement are intended to be subject to all applicable mandatory
provisions of law that may be controlling and to be limited to the extent
necessary so that they shall not render this Security Agreement invalid,
unenforceable, in whole or in part, or not entitled to be recorded, registered
or filed under the provisions of any applicable law.
15. TERMINATION OF THIS SECURITY AGREEMENT. Subject to Section 10
hereof, this Security Agreement shall terminate upon the Termination Date.
16. SUCCESSORS AND ASSIGNS. This Security Agreement and all obligations
of Grantor hereunder shall be binding upon the successors and assigns of Grantor
(including any debtor-in-possession on behalf of Grantor) and shall, together
with the rights and remedies of Agent, for the benefit of Agent and Lenders,
hereunder, inure to the benefit of Agent and Lenders, all future holders of any
instrument evidencing any of the Obligations and their respective successors and
assigns. No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument evidencing the
Obligations or any portion thereof or interest therein shall in any manner
affect the Lien granted to Agent, for the benefit of Agent and Lenders,
hereunder. Grantor may not assign, sell, hypothecate or otherwise transfer any
interest in or obligation under this Security Agreement without the prior
written consent of Agent.
17. COUNTERPARTS. This Security Agreement may be executed in any number
of separate counterparts, each of which shall collectively and separately
constitute one and the same agreement.
12
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18. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, THIS SECURITY AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT
STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. GRANTOR HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN LOS ANGELES
COUNTY, CALIFORNIA SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN GRANTOR, AGENT AND LENDERS PERTAINING TO THIS
SECURITY AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING
OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS, PROVIDED, THAT AGENT, LENDERS AND GRANTOR ACKNOWLEDGE THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF LOS
ANGELES COUNTY, CALIFORNIA, AND, PROVIDED, FURTHER, NOTHING IN THIS AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT OR TAKING OTHER
LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER
SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
FAVOR OF AGENT. GRANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND GRANTOR
HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO GRANTOR AT THE ADDRESS SET FORTH IN THE NOTE PURCHASE
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
19. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT DISPUTES
13
<PAGE> 14
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ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG AGENT, LENDERS, AND
GRANTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO.
20. SECTION TITLES. The Section titles contained in this Security
Agreement are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
21. NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Security Agreement. In the event
an ambiguity or question of intent or interpretation arises, this Security
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Security Agreement.
22. ADVICE OF COUNSEL. Each of the parties represents to each other
party hereto that it has discussed this Security Agreement and, specifically,
the provisions of Section 18 and Section 19, with its counsel.
23. BENEFIT OF LENDERS. All Liens granted or contemplated hereby shall
be for the benefit of Agent and Lenders, and all proceeds or payments realized
from Collateral in accordance herewith shall be applied to the Obligations in
accordance with the terms of the Note Purchase Agreement.
24. INTERCREDITOR AGREEMENT. This Security Agreement is subject to the
Intercreditor Agreement. All enforcement, lien and other rights of Agent and
Lenders hereunder are subject to the terms of the Intercreditor Agreement and
may not be exercised unless permitted thereunder. In addition, notwithstanding
any other section of this Agreement to the contrary, if Coast shall have
consented to a sale of Collateral by Grantor which sale would, in the absence of
this provision, constitute a breach hereunder, such sale shall not constitute a
breach of this Agreement provided that the sale of Collateral meets all of the
following conditions: (i) Grantor shall have provided Agent with five (5)
business days' prior written notice declaring its intention to sell Collateral
and describing briefly the terms of the proposed sale and offering Agent the
opportunity to purchase such Collateral, (ii) Grantor effects such Collateral
sale in a commercially reasonable manner and receives consideration in
connection with such sale at least equal to the fair market value of the
Collateral sold (as determined in good faith by Grantor's
14
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board of directors or a committee thereof) payable in cash, provided, however,
that if the consideration to be received by Grantor includes sufficient cash to
fully repay all of Grantor's obligations under the Coast Agreements, and,
additionally, other property, Agent shall act reasonably in granting its consent
to such sale, (iii) upon consummation of the sale of Collateral, Grantor shall
promptly apply all of the proceeds of such sale (net of applicable taxes and
reasonable expenses and fees incurred in connection with such Collateral sale)
to prepay the indebtedness under the Coast Agreements in such a manner as to
effect a permanent reduction in the borrowing availability under the Coast
Agreements until Coast is paid in full and Coast's commitment is terminated, and
(iv) Grantor, promptly after consummating the sale of Collateral and reducing
its indebtedness under the Coast Agreements (pursuant to the previous subsection
of this Section 24), shall provide Agent with an officer's certificate detailing
the Collateral sold, the consideration received in exchange for such Collateral,
and the prepayment of Grantor's indebtedness under the Coast Agreements and
declaring that the borrowing availability under the Coast Agreements has been
reduced permanently by the amount of such prepayment.
[Signature page follows]
15
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IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be executed and delivered by its duly authorized officer as of the
date first set forth above.
MAI SYSTEMS CORPORATION
By: /s/ William Brian Kretzmer
-----------------------------------
Title: CEO / CFO
--------------------------------
CPI SECURITIES LP,
as Agent
By:
-----------------------------------
Title:
--------------------------------
16
<PAGE> 1
EXHIBIT 10.7
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT (this "Agreement") is dated as of October
28,1999, by and between MAI SYSTEMS CORPORATION., a Delaware corporation ("MAI")
on the one hand and CPI SECURITIES LP, a California limited liability company,
THE VALUE REALIZATION FUND, L.P., a Delaware limited partnership, THE CANYON
VALUE REALIZATION FUND (CAYMAN), LTD., a Cayman Islands corporation, and GRS
PARTNERS II (collectively, the "Lenders") on the other hand.
R E C I T A L S
WHEREAS, MAI and Lenders are party to that certain Note Purchase
Agreement dated as of March 3, 1997 (including all annexes, exhibits and
schedules thereto, as from time to time amended, restated, supplemented or
otherwise modified, the "Note Purchase Agreement") pursuant to which MAI has
issued to individual Lenders certain 11% Subordinated Notes due 2004 in the
aggregate principal amount of $6,000,000.00 (the "Notes");
WHEREAS, MAI has failed to make certain interest payments (the
"Interest Payments") as required by the Notes and the Note Purchase Agreement
such that, pursuant to Article IV of the Note Purchase Agreement, an Event of
Default (the "Specified Event of Default") has occurred and is continuing which,
in the absence of this Agreement, would cause the principal and all accrued
interest under the Notes to become automatically and immediately due and
payable;
WHEREAS, MAI has requested that Lenders enter into this Agreement in
order to provide MAI with additional time to make the Interest Payments which,
in the absence of this Agreement, would be currently due and payable; and
WHEREAS, concurrently with the execution of this Agreement and in
consideration of Lenders' agreement to enter into this Agreement, MAI is
entering into a Security Agreement with Lenders (the "Security Agreement")
pursuant to which MAI is granting to Lenders a lien on substantially all of
MAI's assets to secure MAI's obligations under the Notes;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
A G R E E M E N T
1. Incorporation of Recitals; Acknowledgments. The recitals set forth
above by this reference thereto are hereby incorporated into this Agreement.
Without limiting the foregoing, MAI and Lenders hereby acknowledge and agree
that (a) the Specified Event of
<PAGE> 2
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Default has occurred and is continuing under the terms of the Note Purchase
Agreement and (b) absent the effectiveness of this Agreement, Lenders have the
right to immediately enforce payment of all of MAI's obligations under the Notes
and the Note Purchase Agreement (the "Obligations").
2. Agreement to Forbear.
2.1 For the period (the "Forbearance Period") commencing on the
Forbearance Effective Date (as defined in Section 5 below) and ending on
the earlier to occur of (i) the date of the termination of the Forbearance
Period by Lenders or otherwise pursuant to Section 2.2 below and (ii)
December 31, 1999, Lenders hereby agree that they will not exercise those
rights and remedies available to Lenders under the Note Purchase Agreement
and the Notes to accelerate and/or immediately enforce payment in full of
the Obligations or enforce payment of any part of the Obligations in
advance of the date such Obligations shall be due and payable in accordance
with the terms of the Note Purchase Agreement or the Notes.
2.2 Upon the occurrence of any Event of Default under the Note Purchase
Agreement other than the Specified Event of Default, the Forbearance Period
shall immediately terminate without notice or demand of any kind. Upon the
termination or expiration of the Forbearance Period, if at such time the
outstanding amount of the Interest Payments (and interest accrued thereon
at the interest rate designated in the Notes) is not paid in full, Lenders
shall be entitled to exercise all of their rights and remedies under the
Note Purchase Agreement, the Notes, the Security Agreement, and applicable
law, including, without limitation, the right to declare all of the
Obligations to be immediately due and payable and to enforce, pursuant to
the Security Agreement, its liens on, and security interests in, the
Collateral (as defined in the Security Agreement).
3. Covenants. In consideration for Lenders' execution of this
Agreement, MAI agrees (i) to execute the Security Agreement and (ii) to pay, on
or before the Forbearance Effective Date, Lenders' actual attorney's fees
related in any way to the Specified Event of Default (including, without
limitation, those attorney's fees incurred in the preparation, negotiation and
execution of this Agreement and the Security Agreement) (the "Fees"). If MAI
fails to comply with the foregoing covenants, such failure shall constitute an
Event of Default under the Note Purchase Agreement, separate from the Specified
Event of Default.
4. Representations and Warranties. MAI hereby represents and warrants
to Lenders that, as of the Forbearance Effective Date:
4.1 All of MAI's representations and warranties contained in
this Agreement and the Note Purchase Agreement are true and correct on
and as of the Forbearance Effective Date, as if then made (other than
representations and warranties which expressly related to an earlier
date);
<PAGE> 3
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4.2 Except for the Specified Event of Default, no Default or
Event of Default (as such terms are defined in the Note Purchase
Agreement) has occurred or is continuing.
4.3 The execution and delivery of this Agreement and the
Security Agreement by MAI and the performance of the transactions
contemplated thereby, (a) are within MAI's corporate power, (b) have
been duly authorized by all necessary or proper corporate and
shareholder action, (c) when duly executed and delivered by MAI, this
Agreement shall constitute a legal, valid and binding obligation of MAI
enforceable against MAI in accordance with its terms, and (d) have been
consented to by Coast Business Credit, a division of Southern Pacific
Bank.
4.4 If any of the foregoing representations are untrue or
incorrect in any material respect, such untruthfulness or inaccuracy
shall constitute an Event of Default under the Note Purchase Agreement.
5. Effective Date. This Agreement shall become effective as of the date
first written above (the "Forbearance Effective Date") upon Lender's receipt of
(i) counterparts hereof executed by MAI and Lenders, (ii) indefeasible payment
of the Fees, (iii) MAI's execution and delivery of the Security Agreement and
the exhibits and schedules thereto, and (iv) MAI's execution and delivery of all
financing statements and other documents related to or required by the Security
Agreement.
6. Reference to and Effect on the Loan Documents.
6.1 Upon the Forbearance Effective Date, each reference in the
Note Purchase Agreement to "this Agreement", "hereunder", "hereof" or
words of like import, and each reference in the Security Agreement or
the Notes to the Note Purchase Agreement, shall mean and be a reference
to the Note Purchase Agreement as supplemented hereby.
6.2 This Agreement shall be limited solely to the matters
expressly set forth herein and shall not (i) constitute an amendment or
waiver of any term or condition of the Note Purchase Agreement, the
Notes or the Security Agreement, (ii) prejudice any right or rights
which Lenders may now have or may have in the future under or in
connection with the Note Purchase Agreement, the Notes or the Security
Agreement, (iii) require Lenders to agree to a similar transaction on a
future occasion or (iv) create any rights herein to another person,
entity or other beneficiary or otherwise, except to the extent
specifically provided herein.
6.3 Except to the extent specifically provided in Section 2.1
above, the respective provisions of the Note Purchase Agreement and the
Notes shall not be amended, modified, waived, impaired or otherwise
affected hereby, and such documents
<PAGE> 4
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and the Obligations under each of them are hereby confirmed as being in
full force and effect.
7. Release.
7.1 MAI acknowledges that Lenders would not enter into this
Agreement without MAI's assurance that MAI has no claim against any of
Lenders, their parents companies, subsidiaries, affiliates, officers,
directors, shareholders, employees, attorneys, agents, professionals
and servants, or any of their respective predecessors, successors,
heirs and assigns (collectively, the "Lender Parties" and each, a
"Lender Party") MAI, for itself and on behalf of its officers and
directors, and its respective predecessors, successors and assigns
(collectively, the "Releasors") releases each Lender Party from any
known or unknown claims which MAI now has against any Lender Party of
any nature, including any claims that any Releasor, or any Releasor's
successors, counsel and advisors may in the future discover they would
have had now if they had known facts not now known to them, whether
founded in contract, in tort or pursuant to any other theory of
liability, including but not limited to any claims arising out of or
related to the Loan Documents or the transactions contemplated thereby.
MAI, FOR ITSELF AND ON BEHALF OF EACH RELEASOR, WAIVES THE PROVISIONS
OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH STATE:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
7.2 The provisions, waivers and releases set forth in this
section are binding upon each Releasor. The provisions, waivers and
releases of this section shall inure to the benefit of each Lender
Party.
7.3 The provisions of this section shall survive payment in
full of the Obligations, full performance of all of the terms of this
Agreement, the Note Purchase Agreement, the Notes, and the Security
Agreement and/or any action by Lenders to exercise any remedy available
under such documents, applicable law or otherwise.
7.4 MAI warrants and represents that it is the sole and lawful
owner of all right, title and interest in and to all of the claims
released hereby and MAI has not heretofore voluntarily, by operation of
law or otherwise, assigned or transferred or purported to assign or
transfer to any person any such claim or any portion thereof. MAI shall
indemnify and hold harmless each Lender Party from and against any
claim, demand, damage, debt, liability (including payment of reasonable
attorneys' fees and costs actually incurred whether or not litigation
is commenced) based on or arising out of any such
<PAGE> 5
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assignment or transfer.
8. Miscellaneous. The headings herein are for convenience of reference
only and shall not alter or otherwise affect the meaning hereof. No amendment,
modification, termination or waiver of any provision of this Agreement, or any
consent to any departure by MAI therefrom, shall in any event be effective
unless the same shall be in writing and signed by all of the Lenders. Any waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which it was given.
9. Sole Benefit of Parties. This Agreement is solely for the benefit of
the parties hereto and their respective successors and assigns, and no other
person or entity shall have any right, benefit or interest under or because of
the existence of this Agreement.
10. Further Assurances. MAI and Lenders shall execute such documents and
perform such further acts as may be reasonably required or desirable to carry
out the provisions of this Agreement and the Security Agreement.
11. Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement.
12. GOVERNING LAW. THIS AGREEMENT, AND ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE HEREOF, SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THAT STATE AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA.
* * *
<PAGE> 6
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MAI SYSTEMS CORPORATION
By: /s/ William Brian Kretzmer
---------------------------
Name: William Brian Kretzmer
Title: CEO/CFO
GRS PARTNERS II
By: Grosvenor Capital Management, L.P.,
its Administrator
By: GCM, L.L.C.,
its general partner
By: Grosvenor Holdings, L.L.C.
By:
---------------------------
Name:
Title:
THE VALUE REALIZATION FUND, L.P.
By: Canpartners Investments III, L.P.,
its general partner
By: Canyon Capital Advisors LLC,
its general partner
By:
---------------------------
Name:
Title: Managing Director
<PAGE> 7
EXECUTION COPY
THE CANYON VALUE REALIZATION FUND (CAYMAN), LTD.
By: MeesPierson (Cayman) Limited,
its Administrator
By:
---------------------------
Name:
Title:
CPI SECURITIES LP
By: Canpartners Incorporated,
its general partner
By:
---------------------------
Name:
Title:
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