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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 1-9158
MAI SYSTEMS CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2554549
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9601 Jeronimo Road
Irvine, California 92618
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 598-6000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.1 par value per share
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's Certificate of Incorporation authorizes the issuance of
24,000,000 shares of $.01 par value Common Stock. As more fully described in
this report, shares of Common Stock were previously distributed by the
registrant to its former creditors pursuant to its Chapter 11 Plan of
Reorganization. At March 31, 2000, the number of issued and outstanding shares
of the Company's Common Stock was 10,842,071 shares. The aggregate market value
of all of the shares of Common Stock held by non-affiliates of the registrant as
of March 31, 2000 was approximately $6,727,498. Directors and officers and ten
percent or greater stockholders are considered affiliates for the purposes of
this calculation but should not necessarily be deemed affiliates for any other
purpose.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's 1993 Annual Report on Form 10-K are incorporated herein
by reference in Part I; portions of registrant's 1999 Annual Report are
incorporated herein by reference in Part II; and portions of registrant's
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held in 2000 are incorporated
herein by reference into Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MAI Systems Corporation provides total information technology solutions
primarily to the hospitality, resort and destination industry and to mid-sized
process manufacturers. The solutions provided by the Company typically include
applications software, computer hardware, peripherals and wide and local area
network design, implementation, installation and support. The software
applications are generally the Company's proprietary software, or software which
is licensed to the Company on an exclusive or non-exclusive basis. The hardware,
peripherals and networking systems are generally third-party products, which the
Company distributes. Directly and through its arrangement with third parties,
the Company provides on-site and off-site service and support to users of its
network and systems hardware.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four, Inc. to
MAI Systems Corporation on November 6, 1990. As used herein, the terms the
"Company" and "MAI" include MAI Systems Corporation and its subsidiaries unless
the context indicates otherwise. The Company commenced operations on January 29,
1985.
DESCRIPTION OF THE BUSINESS
MAI's mission is to put in place long-term information technology systems for
its customers by designing, installing and supporting customer-specific total
information management solutions. Focusing primarily on the hotel, motel and
resort destinations industry and solutions for mid-sized process manufacturers,
it designs, sells, installs and supports information management solutions
featuring complex wide area networks ("WANs") and local area networks ("LANs").
It provides a wide array of products and services to its installed base of
approximately 6,000 customers and continues to make direct sales of certain
products and services which enhance, upgrade and extend the useful life of the
Company's legacy systems.
MAI markets its products and services primarily through a team selling approach,
which utilizes the company's nationwide network of sales offices. The Company
also markets certain products and services through a limited number of
distributors, independent value-added resellers ("VARs"), authorized service
representatives and independent software vendors ("ISVs").
The Company's activities are conducted principally in the United States, Canada,
the United Kingdom, Hong Kong, Singapore and Mexico. The Company also operates
subsidiaries in Puerto Rico and Venezuela and operates offices in the People's
Republic of China and Malaysia. Additionally, the Company sells its products
through indirect channels in the United States and abroad. These independent
channels include VARs, distributors, ISVs and local sales agents.
The Company provides software support services (both procedural and technical
support) to its hospitality and process manufacturing customers from its offices
in the United States, the United Kingdom and Singapore. In some countries the
Company relies on certain foreign distributors of its products to provide
software support services to customers located within the distributors' regions.
The Company provides on-site service and help support desk services to its
legacy system customers in the United States, Canada, Puerto Rico and Venezuela.
In the United States and Canada, the Company and its third-party subcontractors
provide on-site services to the Company's new and legacy system customers.
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PRODUCTS AND SERVICES
In 1999, the Company's revenue was derived from the following product lines:
Percentage of
Total Revenue
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Hospitality 63.3%
Process Manufacturing 14.6%
Gaming 3.0%
Legacy 19.1%
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Total 100.0%
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Products and Services
MAI designs, implements, maintains and supports total information system
solutions utilizing WANs and LANs. In conjunction with these solutions, the
Company's approach is to analyze a customer's information system requirements,
propose a solution and then design, integrate, install and maintain the system.
One of the principal objectives of the Company is to help its customers utilize
their data across their entire enterprise so that information that was once
limited to one area of a business can now be available to other areas where it
can be utilized for new purposes. Once a system is on-line, the Company
typically continues its relationship with the customer by providing
around-the-clock telephonic support and, through its contracts with Olivetti,
on-site field support. The systems designed by the Company utilize the Company's
property management system for hotels, resorts and destinations and enterprise
resource planning ("ERP") applications software for midsize process
manufacturers, which the Company markets with industry-standard hardware and
software products from leading technology vendors including Cisco Systems,
Compaq Computer, Hewlett Packard, IBM, Data General, Larscom, Microsoft and
Novell.
Hospitality - 63.3%
The Company markets three property management systems. Hotel CompuSystem II has
been marketed by the Company since 1990, when the Company acquired Computerized
Lodging Systems ("CLS"). In August 1996 the Company acquired Hotel Information
Systems, Inc. ("HIS") and began marketing its Paragon product line. In October
1996, the Company became the exclusive distributor of the Lodging Touch
International products from Enterprise Hospitality Solutions. Each of the
product lines has features, which make it particularly well suited to a
different segment of the hospitality marketplace.
Hotel CompuSystem II, which targets hotels and resorts in the 300 to 1,000 room
range, runs under UNIX. Hotel CompuSystem II is full-featured and provides
customers with front desk, night audit, housekeeping and numerous other
functions. Additionally, the CLS products interface to more than 250 other
hospitality-related information system products, such as point-of-sale systems,
telephone call monitoring systems and minibar maintenance systems. The ease of
connectivity with third-party products is one of the system's competitive
advantages. Hotel CompuSystem II is installed in over 1,500 sites worldwide.
The Paragon and Paragon Plus property management system, from HIS, is designed
to serve the needs of larger hotels and resorts. Running on IBM AS/400 or System
36 minicomputers, the Paragon product line provides the full range of features
and functionality required by premier properties, such as Disneyland Paris or
Renaissance Hotels International. Paragon is installed in more than 1,000 hotels
and resorts around the world, and is a major presence in the Pacific Rim.
The Lodging Touch ("LTS") products comprise a state-of-the-art suite of products
designed to take full advantage of the versatility of Microsoft's Windows 2000
and Windows NT operating systems. They are the industry's first fully graphical
products to fully utilize the features of the Windows NT operating system and
Microsoft Sequel Server. With the LTS products, MAI has been named a Microsoft
Solutions Partner.
Process Manufacturing - 14.6%
MAI develops and markets CIMPRO and MANBASE, both of which are ERP applications,
used by midsize process manufacturers. The Company's typical customer generally
has annual revenues between $20 million and $500 million. These manufacturers
convert raw materials into finished goods or into products used to manufacture
other goods. Typical users of the Company's ERP product would be manufacturers
who convert raw milk into cheese and other dairy
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products, or pharmaceutical manufacturers who convert raw chemicals into
medicinal products. These process manufacturers have unique requirements in
quality control, regulatory compliance, inventory control and production
planning that require an integrated application and system solution.
CIMPRO, which the Company acquired from Datalogix International, Inc., a
subsidiary of Oracle Corporation, in March 1997, offers a fully integrated
modular system for complete support of process manufacturing planning and
tracking, including inventory, production, supply chain management, costing,
accounting, electronic data interchange ("EDI") and regulatory compliance.
CIMPRO's customer base is a primarily food, chemical and pharmaceutical
manufacturer.
MANBASE, the rights to which the Company reacquired in May 1996, also offers a
fully integrated ERP application for process manufacturers. MANBASE has been
sold primarily to food manufacturers and has many features, which are tailored
for the unique requirements of this industry.
The Company intends to provide continuing support for its MANBASE customers but
will concentrate its sales and development efforts on the CIMPRO product.
Gaming - 3.0%
The Company marketed software products for the gaming industry through its
Gaming Systems International ("GSI") subsidiary. GSI's products provided
management systems for on-line slot accounting, player tracking, cage/pit
administration, table games accounting, employee time and attendance and
numerous other functions. GSI was sold on June 19, 1999.
Legacy - 19.1%
The Company continues to provide principally maintenance services to its
installed base of customers. These products and services are designed to enable
customers to benefit from their investment in the Company's host-based
information systems. The Company's OpenBASIC application environment permits
customers using application software written in the Business BASIC programming
language to continue to use such application software on selected hardware
platforms designed for the UNIX, MS-DOS and Novell environments. Optional
OpenBASIC modules permit developers to enhance their Business BASIC applications
by integrating them with popular UNIX and MS-DOS/Microsoft Windows software.
With its own personnel and through an outsource agreement with Wang Global
Corporation in the United States and with Olivetti Canada Ltd. in Canada, and
directly in Venezuela and Puerto Rico, the Company offers on-site repair and
warranty service and around-the-clock telephonic support to its customers. The
Company also provides a range of customer education, training and consulting
services for its application software packages and hardware and horizontal
software products. These services are offered to the Company's customers as part
of the Company's strategy of supplying the total information solution to its
customers.
MARKETING AND SALES
MAI markets its products and services primarily through a team-selling approach,
which utilizes the Company's nationwide network of sales offices and its Irvine,
California-based account representatives. The Company also markets certain
products and services through limited numbers of VARs, authorized service
representatives and ISVs.
In the United States, the Company's systems are marketed by a direct sales and
marketing organization which included, as of February 29, 2000, 18 sales and
marketing personnel located in the corporate headquarters and five satellite
offices. In addition, the Company markets its systems internationally through
its subsidiaries which operate in Canada, the United Kingdom, Mexico, Hong Kong,
Singapore, Puerto Rico and Venezuela and through various distributors that are
exclusive in their jurisdictions. The Company's international subsidiaries
employed, as of February 29, 2000, 23 sales and marketing personnel who are
engaged in the marketing of MAI products from sales offices in Canada, Mexico,
the United Kingdom, Hong Kong, Singapore, Malaysia, the People's Republic of
China, Venezuela and Puerto Rico. Additionally, the Company also sells its
products through indirect channels both within and outside the United States.
These indirect channels include VARs, distributors, ISVs and local sales agents.
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During 1999, the Company's aggregate revenue was derived from geographic areas
as follows:
Percentage of
Total Revenue
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United States 77.6%
Asia 9.5%
Canada 6.6%
United Kingdom 4.6%
Other Areas 1.7%
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Total 100.0%
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The financial performance of the Company is affected by the fluctuation in value
of the US dollar in relation to the local currencies of the countries in which
the Company does business. In addition, the Company's foreign operations are
subject to the usual risks that may affect such operations, including possible
expropriation or other governmental actions, taxes and political changes.
However, as only 22.4% of the Company's 1999 revenue was generated outside the
United States, even though most of this activity is in Asia which has recently
incurred significant economic and currency disruptions, the risk associated with
these foreign operations in relation to the Company's overall financial
performance is limited.
SUPPORT AND MAINTENANCE
The provision of around-the-clock customer service is a cornerstone of the
Company's business. As of February 29, 2000, the Company had software support
agreements with approximately 1,500 customers. Additionally, it had hardware
maintenance agreements with approximately 1,300 other customers. The Company
employs approximately 38 technicians to provide support for the Company's
applications software products.
Telephonic support, which is primarily to assist licensees of the Company's
applications products, is provided from the Company's response centers located
in Irvine, California, Concord, California, Tarrytown, New York, Singapore and
the United Kingdom. The Company utilizes the latest developments in telephony
and artificial intelligence-enhanced technology to enable its support
technicians to quickly identify and resolve customers' software related
computing problems.
The Company's maintenance services are generally provided pursuant to individual
maintenance contracts with customers, although time and material services are
provided in some areas. Such support and maintenance are of varying duration,
provide prospective cancellation rights and require advance payment of fees to
the Company. Substantially all of the revenue earned by maintenance operations
is invoiced to customers in advance.
PRODUCTION AND PROCUREMENT
In response to market demand for standardized hardware and software products,
all of the Company's current systems offerings utilize open systems
architecture, which means that they will operate on a wide variety of
third-party hardware equipment. At present, the Company has relationships with a
number of suppliers including Microsoft, Cisco Systems, Compaq Computer, Data
General, Hewlett Packard, Seagull Software and IBM and distributors such as
MicroAge and Ingram Micro. Management believes that these relationships have
enabled the Company to reduce product costs, permit earlier availability of new
technology and offer customers products with superior performance at competitive
prices. The Company no longer manufactures proprietary hardware products.
Delay or failure in the delivery of products or components purchased from third
parties could adversely affect shipments by the Company and its ability to
conclude sales. The Company has purchased many products and components from
single sources of supply. Because the Company's current products are industry
standard, or are comprised of industry-standard components, management believes
that alternative sources of supply of similar products would be available to
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the Company in the event of any interruption of delivery of a single source
supplier.
ORDER, SHIPMENT AND BACKLOG
The Company records and enters into backlog a purchase order for equipment and
software when it receives a customer's written order requesting delivery within
six months, and systems configuration and contract provisions are verified.
Orders that are canceled by the customer and orders that are not shipped within
one year are removed from backlog. Orders that are removed from backlog for
non-shipment are restored if they are reinstated by the customer.
Set forth below is certain information concerning orders, shipments and backlog
for 1998 and 1999:
(dollars in millions)
1998 1999
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Orders received (net of cancellations) $38.3 $15.5
Shipments (net of equipment returns) 24.6 23.3
Backlog (at period end) 21.8 14.0
The Company's backlog is not necessarily indicative of future revenues.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the development
of products for the hospitality, resort and destination industry and for
products for midsize process manufacturers. The Company also maintains and
expands OpenBASIC, an operating system that enables users of the Company's
proprietary environment, BusinessBASIC, to run their applications under UNIX.
The Company's use of the OpenBASIC application environment and its system
integration capability permits it to have substantial independence from
individual hardware manufacturers and minimizes the need for hardware research
and development.
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As of February 29, 2000, the Company employed 26 engineers, programmers and
other technical personnel in research and development activities. During 1997,
1998 and 1999, the Company incurred $5,583,000, $4,058,000, and $5,114,000,
respectively, for research and development activities. The Company's research
and development expenditures related primarily to support and enhancement of
existing software products.
CUSTOMERS
The Company's customers in hospitality are generally hotels and resorts with
fifty or more rooms, in gaming were casinos with electronic gaming equipment
such as slot machines, and in process manufacturing are generally midsize
process manufacturers. Legacy comprises a highly diversified group of customers
in various industries who use hardware sold by MAI over the years. During 1998
and 1999, no single customer accounted for ten percent or more of the Company's
revenues.
COMPETITION
Competition is vigorous in all sectors of the worldwide market for
computer-based applications systems, networked solutions and the maintenance and
support of the software and hardware, which comprise those systems. The Company
has numerous competitors (and potential competitors, including the manufacturers
of products which the Company distributes) varying widely in their size,
capabilities, market segment and geographic area, many of which are larger and
have financial resources far greater than the Company.
Within its targeted application markets, the Company has positioned itself to
sell complete solutions featuring WANs and LANs to its customers. Within this
marketplace, competition comes primarily from vendors of competing information
technology in the markets in which the Company competes. There are several
providers of information technology to the hotel, resort and destination
industry against which the Company regularly competes. The primary competitors
are of similar size to the Company, and provide technology that is also similar
to the Company. They also cover essentially the same territory, which is
anywhere in the developed world.
The competition in the enterprise resource planning ("ERP") market is diffuse
and new or different competitors often appear with each sales opportunity. In
the lower end of the market, the Company competes with local VARs and ISVs who
usually resell hardware or networking products of larger equipment
manufacturers. These VARs and ISVs usually sell one or two specialized software
application products targeted for specific industry market segments. Within the
mid-range market, the Company competes with several companies of similar size
and technology. On the high end of the market, the Company competes with
companies that are much larger and have financial resources far greater than the
Company.
Within the gaming industry, the Company competed with manufacturers of gaming
equipment. Some of those competitors were substantially larger than the Company.
In the legacy arena, there is some third-party maintenance organizations
("TPMS") that provide service to users of the Company's hardware products. The
competition is minimal, as outside companies cannot provide complete solutions
to the Company's existing proprietary customer base.
TRADEMARKS, COPYRIGHTS AND LICENSES
The Company is the owner or licensee of certain trademarks, copyrights and other
property rights associated with its businesses, including rights associated with
its proprietary application software. The Company owns or has licensing rights,
generally with terms of three years (although the term of the license to the LTI
software is perpetual), to the principal application software products marketed
by the Company. Such licensing rights are generally renewable. Although there is
some risk that independent vendors who own such products may elect not to renew
their licensing agreements with the Company and enter into exclusive
arrangements with, or elect to install their software on systems sold by
competitors of the Company, such vendors generally tend to continue to support
the Company's marketing efforts so long as the Company's systems provide a good
opportunity for them to market their products.
The Company is party to license agreements with IBM relating to a variety of
patents, with Novell, Inc. relating to UNIX and with a number of other suppliers
of software products. These licenses are terminable at the Company's option and
certain of the licenses require the Company to make royalty payments.
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OpenBASIC and certain other intellectual property formerly owned by the Company
is currently owned by Triple P Management BV ("Triple P"), a corporation
organized under the laws of the Netherlands. MAI holds an exclusive license to
use OpenBASIC and other intellectual property in the western hemisphere and has
a nonexclusive license to use it in certain other parts of the world. The
license is perpetual and royalty-free, but subject to termination under certain
conditions.
EMPLOYEES
As of February 29, 2000, the Company had 310 employees, of whom 192 were
employed in the United States, 13 in Canada, 8 in Mexico, 5 in Puerto Rico, 9 in
the United Kingdom, 58 in Asia (Hong Kong, Singapore and the People's Republic
of China) and 25 in Venezuela. The Company has not experienced any work
stoppages and considers its relationship with its employees to be good.
CHAPTER 11 BANKRUPTCY PROCEEDINGS
The Company filed for Chapter 11 bankruptcy protection on April 12, 1993,
shortly after the Company's banks foreclosed on all of the outstanding capital
stock of certain of the Company's former European subsidiaries in satisfaction
of all amounts due under certain loan agreements. On January 27, 1994, the
Company's Plan of Reorganization became effective. The summary of the material
features of the Plan of Reorganization, contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 under the heading "CHAPTER 11
BANKRUPTCY PROCEEDINGS", is included herein by this reference.
Under the Plan of Reorganization, there was no recovery for holders of the
Company's $0.01 par value old Common Stock, and all classes of Preferred Stock
outstanding prior to the Effective Date. The interests evidenced by these
securities were extinguished by operation of the Plan of Reorganization. The
Company commenced distribution of Common Stock to holders of unsecured claims on
April 14, 1994. Through December 31, 1999, the Company had distributed 6,758,251
shares of Common Stock to its former creditors in settlement of all outstanding
claims, except for tax claims, and the Company does not anticipate that any
further shares will be issued in this matter. The Plan of Reorganization
provided holders of unsecured claims the right to elect a limited cash recovery,
and through December 31, 1999, $74,570 in cash had been distributed pursuant to
such provision.
At December 31, 1999, there is only one material claim to be settled before the
Chapter 11 proceedings can be formally closed, a tax claim with the United
States Internal Revenue Service (the "Service"). The amount of this claim is in
dispute. The Company has reserved $712,000 for settlement of this claim, which
it is anticipated would be payable to the Service in equal monthly installments
over a period of six (6) years from the settlement date.
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RISK FACTORS
The following discussion should be read in conjunction with the audited
consolidated financial statements contained herein. In addition to the factors
set forth herein, there may be other factors, or factors that arise in the
future which may affect the future performance of the Company.
LIMITED HISTORY OF PROFITABILITY
Prior to its bankruptcy filing in 1993, the Company incurred significant
operating losses. The Company was profitable in 1994 and 1995, but then incurred
losses in 1996, 1997, 1998 and 1999. There can be no assurance that the Company
will be able to achieve or maintain profitability or avoid losses on a quarterly
or annual basis in the future.
FLUCTUATIONS IN OPERATING RESULTS
A variety of factors may cause period-to-period fluctuations in the Company's
operating results, including the timing of significant orders, the timing of
product enhancements and new product introductions by the Company, its
technology vendors and its competitors, the pricing of the Company's products
and services, competitive conditions and general economic conditions. Many of
the Company's systems sales involve lengthy sales cycles and installations.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or revenue will be recognized. As a result, the
operating results of the Company may be materially skewed if a single
transaction is completed earlier or later than expected. The Company has
experienced fluctuations in its operating results and expects to continue to
experience such fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Fluctuations in operating
results may also result in volatility in the market price of the Common Stock.
COMPETITION
Competition is vigorous in all sectors of the market for computer-based
solutions and support and maintenance services, which the Company offers. The
Company has numerous competitors in each of its business lines, which vary
widely in their size, capabilities, market segments and geographic areas, many
of which are larger and have financial resources far greater than the Company.
Within its markets, competition comes primarily from vendors of competing
information technology in the markets in which it competes. There are several
providers of information technology to the hotel, resort and destination
industry against which the Company regularly competes. The competition in the
ERP market is diffuse and new or different competitors often appear with each
sales opportunity. The Company also competes against local value added resellers
("VARs") and independent software vendors ("ISVs"), who usually resell hardware
or networking products of larger original equipment manufacturers, which provide
service to users of the Company's hardware products. Many of the Company's
services are also provided by in-house MIS departments.
There can be no assurance that the Company can effectively compete with any or
all of its competitors in any of its business lines.
PRODUCTION AND PROCUREMENT
The networking products and services implemented, maintained and supported by
the Company utilize hardware and software products from technology vendors.
Accordingly, the Company is and will remain dependent on the demand for products
from such vendors. In addition, delay or failure in the delivery of products or
components purchased from third parties could adversely affect shipments by the
Company and its ability to conclude sales. The Company has purchased many
products and components from single sources of supply. Because the Company's
current products are industry standard, management believes that alternative
sources of supply of similar products would be available to the Company in the
event of any interruption of delivery from a single source supplier. However,
there can be no assurances that any such products will be available or be
accepted by the Company's customers.
LIQUIDITY: VOLATILITY OF STOCK PRICE
Historically, trading volume of the Company's Common Stock has been small, and
the market for the Common Stock has been less liquid than that of many other
publicly traded companies. There can be no assurance that a stockholder who
desires to sell shares of Common Stock can sell all of the shares that the
stockholder desires to sell, either at all or at the desired times or prices.
Like the stock of other technology companies, the market price of the Common
Stock has
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been and may continue to be volatile. Factors such as quarterly fluctuations in
the Company's results of operations, trading volume, the announcement of
technological innovations or new products by the Company or its competitors,
general conditions in the computer hardware and software industries, economic
conditions generally, variances between actual results of operations and the
results expected by securities analysts, and the factors mentioned under
"Fluctuations in Operation Results", among other factors, may have significant
impact on the market price of the Common Stock.
RISKS OF CONTRACT SERVICES BUSINESS
The Company is subject to the risks associated with a contract services
business, including dependence on reputation with existing customers, volatility
of workload and dependence on ability to retain qualified technical personnel.
The Company is party to an agreement with Olivetti pursuant to which Olivetti
performs certain field engineering services for the Company. If the quality of
services provided by Olivetti is not perceived as comparable to that previously
provided by the Company, there is a probability that some of the Company's field
service customers will terminate their service agreements.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND MARKETS
The Company expects that the market for hospitality, resort and destination
information management systems and information systems for midsize process
manufacturers will continue to be subject to frequent and rapid changes in
technology and customer preferences. Customers may delay purchases in
anticipation of technological changes. In addition, the Company's ability to
develop and market information management and network systems and other new
products is dependent upon its ability to attract and retain qualified
employees. Any failure by the Company to anticipate or respond adequately to the
changes in technology and customer preferences, or to develop and introduce new
products in a timely fashion, could materially adversely affect the Company's
business and operating results.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is dependent upon its proprietary application software and
its licensing rights to the principal application software products marketed by
it. The Company relies on a combination of contractual rights, copyrights,
trademarks and other property rights to establish or protect its proprietary
rights in its products. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of its
proprietary rights or independent third party development of functionally
equivalent technology. Although the Company does not believe that it is
infringing on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company in the
future or that any attempt to protect its technology will not be challenged.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified personnel in the software industry is intense and
there can be no assurance that the Company will be able to attract and retain a
sufficient number of qualified employees. As the business of the Company grows,
it may become increasingly difficult for it to hire, train and assimilate the
new employees needed. The Company's success depends to a significant degree upon
the continued contributions of its key management, marketing, product
development and operational personnel.
The services of Richard S. Ressler, Chairman of the Board and Director of the
Company, are provided on a non-exclusive basis pursuant to an agreement, which
expires in August 2000. There can be no assurances that Mr. Ressler will
continue with the Company after such date or that the Company will be able to
find a replacement in the event that either the Company or Mr. Ressler
determines not to continue their relationship.
RISK OF FOREIGN OPERATIONS
The financial performance of the Company is affected by the fluctuation in the
value of the US dollar in relation to the local currencies of the countries in
which the Company does business. In addition, the Company's foreign operations
are subject to the usual risks that may affect such operations, including import
and export restrictions, possible expropriation or other governmental actions,
taxes and political changes.
YEAR 2000 COMPLIANCE RISKS
This section is a Year 2000 Readiness Disclosure Statement pursuant to the Year
2000 Information and Readiness Disclosure Act of 1998.
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<PAGE> 11
During 1999, the Company successfully completed its program to achieve Year 2000
Readiness. Before June 30, 1999 the Company completed an evaluation of both its
information technology systems and its non-technology systems, such as equipment
containing microprocessors. At that time the Company determined that all
information technology and non-technology systems in its corporate home office
in Irvine, California and in its branch or subsidiary offices in the United
States and internationally had been modified to address Year 2000 issues. "Year
2000 Ready" meant that the performance or functionality of the Company's
internal systems would not be significantly affected by the dates prior to,
during, and after the Year 2000, to include leap year calculations and specific
day-of-the-week calculations.
The Company established a Year 2000 "task force" which prepared and released its
Year 2000 products readiness report on the Company's "Web Pages"
(www.maisystems.com and www.hotelinfosys.com) and made available to clients a
copy of this report on a per request basis. The Company launched a direct
mail/fax campaign in February 1999 to all of its current maintenance agreement
clients as well as to all identifiable clients that may be utilizing the
Company's products, informing clients that the "Year 2000 Readiness Program" was
available to be viewed at the indicated websites. The mailing also provided
clients the opportunity to request information regarding the "Year 2000
Readiness Program" if they so desired. This mailing was executed using the most
current client database available. This notification went to approximately
18,000 domestic customers as well as being faxed to approximately 4,000
international customers from the Company's international offices.
The Company currently knows of no significant year 2000-related failures
occurring in either its products or its internal systems as a result of the date
change from December 31, 1999 to January 1, 2000. As expected, the Company has
not experienced a material adverse impact on its business, products, results of
operations, or financial condition as a result of the Year 2000 issue. Costs
associated with implementing its Year 2000 compliance plan for its corporate
offices were approximately $300,000. These costs were expensed as incurred and
were comprised primarily of the personnel costs required to review all software
for Year 2000 compliance, the informational mailing and website costs and
outside consulting fees.
The Company will continue to monitor its critical processes, and those of
significant third parties that are critical to the company's operations, for
potential Year 2000-related problems. The Company's present "reasonably likely
worst case scenario" for Year 2000 problems involves potential product liability
claims by substantial customers involving collateral (business interruption)
damages. Although the Company has not experienced any product liability claims
to date regarding Year 2000 compliance, there can be no assurance that errors or
defects, whether associated with Year 2000 functions or otherwise, will not
result in product liability claims against the Company in the future. The
Company's license agreements with customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims;
however, it is possible that such limitation of liability provisions may not be
effective under the laws of certain jurisdictions. Defective products or
releases could result in loss of revenues, increased service and warranty costs
and product liability claims, and could adversely affect the Company's market
penetration and reputation, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
- 11 -
<PAGE> 12
ITEM 2. PROPERTIES
As of February 29, 2000, the principal properties utilized by the Company were
as follows:
<TABLE>
<CAPTION>
Approximate Total
Type of Facility Square Footage Location
---------------- ----------------- --------
<S> <C> <C>
Corporate and Hospitality Headquarters, warehousing,
administration, marketing, sales, development and support 50,210 Irvine, California
Product development, sales and support 8,911 Concord, California
Process Manufacturing headquarters, marketing, sales,
development, and support 16,370 Tarrytown, New York
MAI Canada Ltd. Administration, sales, education,
warehousing, test and repair 6,710 Ontario, Canada
Hotel Information Systems (Ltd) Hong Kong headquarters,
marketing, sales, and support 3,638 Hong Kong
Hotel Information Systems (Ltd) Singapore sales and support 4,527 Singapore
MAI Information Solutions Limited, European Headquarters,
marketing, sales and support 2,201 London
</TABLE>
All of the properties noted above were occupied by the Company pursuant to
leases with various expiration dates. In addition to the premises identified
above, the Company leases offices in three additional locations in the United
States, one additional location in Canada and seven other locations around the
world. Generally such leases are for terms of five years or less, although
several of the leases in the United States are for terms of one year or less.
ITEM 3. LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
At December 31, 1999, there was only one material claim to be settled before the
Company's Chapter 11 proceeding could be formally closed, a tax claim with the
United States Internal Revenue Service (the "Service"). The amount of this claim
is in dispute. The Company has reserved $712,000 for settlement of this claim,
which it is anticipated would be payable to the Service in equal monthly
installments over a period of six (6) years from the settlement date at an
interest rate of 6%.
CSA Private Limited v. MAI Systems Corporation
CSA is an MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. ("HIS") substantially all their assets and certain of
their liabilities (the "HIS Acquisition"). At the time of MAI's acquisition of
HIS in 1996, CSA was a shareholder of HIS and, in connection with the purchase,
MAI agreed to issue to CSA shares of our common stock worth approximately $4.8
million in August 1996, which amount has increased to approximately $6,342,000
as of March 31, 2000, pursuant to the agreement. MAI also granted CSA demand
registration rights with respect to such stock. CSA requested registration of
their shares, but MAI delayed registration based upon its good faith exercise of
its rights under its agreement with CSA. On October 5, 1998, CSA Private Limited
("CSA") filed a lawsuit against MAI in the U.S. District Court for the Central
District of California. Pursuant to a settlement agreement entered into as of
May 13, 1999 MAI agreed by November 1, 1999 to file, or at a minimum to commence
the process to file, a registration statement with the Securities and Exchange
Commission ("SEC") for the purpose of registering CSA's shares. The number of
shares which may be sold by CSA includes: (i) CSA's current ownership of 590,785
shares, and (ii) 6,658,000 additional shares, assuming a stock price of $0.875
per share, which MAI will issue to CSA in order for them to receive net proceeds
of approximately $6,342,000 after deducting any discounts or commissions. MAI
may be required under the settlement agreement to issue and register additional
shares for sale by CSA, in order that they receive net proceeds in the amount
called for by the settlement agreement. MAI has not yet filed the registration
statement called for by the settlement agreement. CSA initiated another lawsuit
in December 1999 in the above-referenced court (a) seeking damages in excess of
$5 million; (b) enforcement of the settlement agreement; and (c) and injunctive
relief through court order to cause MAI to file the S-1 registration statement.
MAI answered the complaint in March 2000 and intends to proceed as expeditiously
as possible to file the required S-1 registration statement utilizing year-end
information contained in this Annual Report on Form 10-K.
- 12 -
<PAGE> 13
Enterprise Hospitality Solutions, Inc. v. MAI Systems Corporation
On November, 30, 1999, Enterprise Hospitality Solutions, Inc. ("EHS") and
Christian Rivadella commenced an action against MAI in the United States
District Court for the Central District of California, alleging that MAI had
failed to pay certain royalties to EHS under the parties' exclusive license
agreement. The Complaint asserts claims for breach of contract, unjust
enrichment, accounting and unfair competition. The Complaint seeks damages,
preliminary and permanent injunctive relief, imposition of a constructive trust,
an order canceling MAI's exclusive right to license the software at issue under
the parties' agreement, and the appointment of a receiver to conduct an audit.
On February 1, 2000, MAI answered the Complaint by denying its material
allegations and asserted a Counterclaim against the plaintiffs. The Counterclaim
asserts claims for breach of the parties exclusive license agreement, breach of
the covenant of good faith and fair dealing, unfair business practices,
interference with contractual relations and declaratory relief, and a
declaration that MAI is not in breach of the parties' license agreement. No
trial date has been set.
Wang Global Corporation v. MAI
On November 25, 1996 MAI executed an outsource agreement with Wang Global
Corporation in the United States and with Olivetti Canada Ltd. in Canada, for
on-site repair and warranty service and telephonic support for the Company's
Legacy customers. On July 26, 1999 Wang filed for arbitration in this matter
involving alleged breach of contract for payments due for maintenance services
provided by Wang. The amounts claimed as due by Wang exceed $3.7 million. MAI's
position is that no additional amounts are due Wang. Settlement of the dispute
is currently being discussed. Absent a settlement, the arbitration will commence
on June 7, 2000.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business.
Management believes the ultimate outcome of these matters will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 13 -
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares are traded on the American Stock Exchange, Inc. under the
AMEX symbol "NOW". Prior to listing on the AMEX, which occurred August 29, 1995,
the Company's shares were traded over-the-counter by various market makers under
the ticker symbol "MAIS". The following table sets forth the high and low sales
prices for the Company's common stock for the indicated periods during 1998 and
1999, as reported by the AMEX. On March 31, 2000, the closing price of our
common stock as reported by the AMEX was $0.875. At March 31, 2000, there were
557 stockholders of record.
We have never paid any dividends and do not anticipate declaring or paying cash
dividends in the foreseeable future. We intend to retain future earnings, if
any, to reinvest in our business. The covenants in our current or future
financing agreements may prohibit or limit our ability to declare or pay cash
dividends.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter $5.13 $1.44
Second Quarter 5.38 3.25
Third Quarter 3.75 1.25
Fourth Quarter 3.75 1.13
Fiscal 1999:
First Quarter $3.25 $2.13
Second Quarter 4.00 1.88
Third Quarter 3.31 1.06
Fourth Quarter 1.25 0.44
Fiscal 2000:
First Quarter Through March 31, 2000 $1.94 $0.75
</TABLE>
On February 3, 1999 the Company issued 201,106 shares of the Company's Common
Stock to its Chairman for cash consideration of $500,000. Such shares were
issued at 90% of the average of the last sales price for Common Stock for the
ten trading days immediately prior to the date of the transaction. The shares
issued are entitled to certain registration rights as provided in a Registration
Rights Agreement between the Company and its Chairman dated September 8, 1997.
ITEM 6. SELECTED FINANCIAL INFORMATION
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Selected Financial Information".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
Company's Annual Report under the heading, "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURS ABOUT MARKET RISK
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.
- 14 -
<PAGE> 15
INTEREST RATE SENSITIVITY
Of the Company's $10.59 million principal amount of indebtedness at December 31,
1999, $4.34 million bears interest at a rate that fluctuates based on changes in
prime rate. A 1% change in the underlying prime rate would result in a $43,000
change in the annual amount of interest payable on such debt. Of the remaining
amount of $6.25 million, $5.25 million bears interest at a fixed rate of 11% and
$1.0 million bears fixed interest rates ranging from 6% to 17.5%
The face amount of the Company's notes receivable totals $4,925,000. Of that
amount, $2.6 million bears interest at a fixed rate of 10%. The remaining
balance consisting of a $2,325,000 note (which has been discounted at the rate
of 10% for financial reporting) is non-interest bearing until October 2002, at
which time interest is payable at the rate of prime plus 1%. A one-percentage
point change in the interest rate of this note would result in a $23,250 annual
change in interest income beginning in October 2002. The impact reduces as the
principal is paid down over the following four years.
FOREIGN CURRENCY RISK
The Company believes that its exposure to currency exchange fluctuation risk is
insignificant because the Company's transactions with international vendors are
generally denominated in US dollars, which is considered to be the functional
currency of the Company and its subsidiary. The currency exchange impact on
intercompany transactions was immaterial in 1999.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Company's Annual Report under the headings, "Consolidated Balance Sheets",
"Consolidated Statements of Operations", "Consolidated Statement of
Stockholders' Equity (Deficiency) and Comprehensive Income (Loss)",
"Consolidated Statements of Cash Flows", "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report".
Schedule II Valuation and Qualifying Accounts is set forth in this Annual Report
on Form 10-K.
All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 15 -
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors may be found in the
section captioned "Election of Directors" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held in 2000. Information required by this Item with
respect to executive officers may be found in the section captioned "Proposal 1
- - Election of Directors, Executive Officers" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held in 2000. Such information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held in 2000. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section captioned
"Security Ownership of Management" appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held in 2000. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned
"Executive Compensation - Employment Contracts and Change of Control
Arrangements; Certain Transactions with Management" appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held in 2000. Such information is
incorporated herein by reference.
- 16 -
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The consolidated financial statements of the Company, the notes
thereto and the Independent Auditors' Report are incorporated
herein by reference to the Company's 1999 Annual Report.
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits:
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<C> <S>
2.1 First Amended Joint Chapter II Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as
confirmed by the United States Bankruptcy Court for the District of
Delaware, on November 13, 1993, filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated January 15, 1994.
2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for
the district of Delaware on January 27, 1994, as filed as Exhibit
2.2 to the Registrant's Current Report on form 8-K dated February 9,
1994.
3.1 Amended and Restated Certificate of Incorporation of MAI Systems
Corporation, filed as Exhibit 3.1 to the Company's 1996 Annual
Report on Form 10-K.
3.2 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation, filed as Exhibit 3.2 to
the Company's 1996 Annual Report on Form 10-K.
3.3 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
Registrant's Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.
3.4 Amendment No. 2 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation, filed as Exhibit 3.4 to
the Company's 1998 Annual Report on Form 10-K.
10.1 Coast Business Credit Loan and Security Agreement, dated April 23,
1998, filed as Exhibit 10.2 to the Company's 1998 Annual Report on
Form 10-K.
10.2 Amendment Number One dated September 30, 1998 to the Loan and
Security Agreement between Coast Business Credit and the Company
dated April 23, 1998.
10.3 Amendment Number Two dated March 2, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.4 Amendment Number Three dated June 16, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.5 Amendment Number Four dated July 28, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998, filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the period ending September 30, 1999.
</TABLE>
- 17 -
<PAGE> 18
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<C> <S>
10.6 Letter Agreement Amendment dated October 1, 1999 to the Loan and
Security Agreement between Coast Business Credit and the Company
dated April 23, 1998.
10.7 Consulting Agreement dated as of August 15, 1994, as amended as of
October 17, 1994, August 16, 1996, August 31, 1997, August 31, 1998
and August 31, 1999 by and between the Company and Orchard Capital
Corporation, relating to the services of Richard S. Ressler,
Chairman of the Board. The original agreement and the October 17,
1994 amendment are incorporated herein by reference to the Company's
1994 Annual Report on Form 10-K. The August 16, 1996 amendment is
incorporated herein by reference to the Company's 1996 Annual Report
on Form 10-K. The August 31,1997 amendment is incorporated herein by
reference to the Company's 1997 Annual Report on Form 10-K. The
August 31, 1998 amendment is incorporated herein by reference to the
Company's 1998 Annual Report on Form 10-K.
10.8 Richard S. Ressler Stock Purchase Letter, dated February 3, 1999,
filed as Exhibit 10.4 to the Company's 1998 Annual Report on Form
10-K.
10.9 Stock Option Agreement between Luke Brown and the Company dated
November 2, 1999.
10.10 Stock Option Agreement between James Dolan and the Company dated
November 2, 1999.
10.11 Stock Option Agreement between W. Brian Kretzmer and the Company
dated August 2, 1999.
10.12 Stock Option Agreement between Sasun Musilyan and the Company
dated August 2, 1999.
10.13 1996 Non-Employee Directors Stock Option Plan, filed as Exhibit 10.5
to the Company's 1998 Annual Report on Form 10-K.
10.14 MAI Systems Corporation Amended 1993 Stock Option Plan, filed as
Exhibit 10.6 to the Company's 1998 Annual Report on Form 10-K.
10.15 Termination/Transition Agreement between Christian Rivadalla d/b/a
Enterprise Hospitality Solutions and Enterprise Hospitality
Solutions, Inc., and the Company dated August 2, 1999, filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
period ending September 30, 1999.
10.16 Exclusive Worldwide Software License Agreement between Christian
Rivadalla d/b/a Enterprise Hospitality Solutions and Enterprise
Hospitality Solutions, Inc., and the Company dated August 20, 1999.
filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the period ending September 30, 1999.
10.17 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, filed
as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for
the period ending September 30, 1999.
10.18 Amendment No. 1 dated February 14, 2000 to 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.
10.19 Amendment No. 2 dated April 13, 2000 to 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.
10.20 Amendment Number Five dated April 13, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.21 Stock option agreement between Sasun Musliyan and the Company
dated January 20, 1999.
13.1 Portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1999, but only to the extent such report is
expressly incorporated by reference into Items 6, 7, 8 and 14(a)(1)
of this report and such report is not otherwise deemed to be filed
as part of this Annual Report on Form 10-K.
21.1 Subsidiaries of MAI Systems Corporation
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule Year Ended 1999
</TABLE>
(b) Reports on Form 8-K during the fourth quarter of 1999
None.
- 18 -
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAI SYSTEMS CORPORATION
By: /s/ Richard S. Ressler
-----------------------------------
Richard S. Ressler
Chairman
Dated: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 14, 2000.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ Richard S. Ressler Chairman, Director
- --------------------------------
Richard S. Ressler
/s/ William B. Kretzmer Chief Executive Officer
- -------------------------------- (Principal Executive Officer)
William B. Kretzmer
/s/ James W. Dolan Chief Financial Officer
- -------------------------------- (Principal Financial and Accounting Officer)
James W. Dolan
/s/ Zohar Loshitzer Director
- --------------------------------
Zohar Loshitzer
/s/ Morton O. Schapiro Director
- --------------------------------
Morton O. Schapiro
</TABLE>
- 19 -
<PAGE> 20
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Charged to Reductions Additions Balances
Beginning Costs and Due to Sale from End of
of Year Expenses of Subsidiary Acquisitions Write-offs Year
--------- ---------- ------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $2,578 $ 6 $ -- $ 646 $(1,247) $1,983
Provision for inventory obsolescence $3,193 $1,174 $ -- $ -- $(2,197) $2,170
====== ====== ====== ===== ======= ======
Year ended December 31, 1998:
Allowance for doubtful accounts $1,983 $1,340 $ -- $ -- $ -- $3,323
Provision for inventory obsolescence $2,170 $ 346 $ -- $ -- $ -- $2,516
====== ====== ====== ===== ======= ======
Year ended December 31, 1999:
Allowance for doubtful accounts $3,323 $2,151 $ (75) $ -- $(1,777) $3,622
Provision for inventory obsolescence $2,516 $ 413 $ (470) $ -- $ (86) $2,373
====== ====== ====== ===== ======= ======
</TABLE>
- 20 -
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<C> <S>
2.1 First Amended Joint Chapter II Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as
confirmed by the United States Bankruptcy Court for the District of
Delaware, on November 13, 1993, filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated January 15, 1994.
2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for
the district of Delaware on January 27, 1994, as filed as Exhibit
2.2 to the Registrant's Current Report on form 8-K dated February 9,
1994.
3.1 Amended and Restated Certificate of Incorporation of MAI Systems
Corporation, filed as Exhibit 3.1 to the Company's 1996 Annual
Report on Form 10-K.
3.2 Amendment No. 1 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation, filed as Exhibit 3.2 to
the Company's 1996 Annual Report on Form 10-K.
3.3 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
Registrant's Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.
3.4 Amendment No. 2 to the Amended and Restated Certificate of
Incorporation of MAI Systems Corporation, filed as Exhibit 3.4 to
the Company's 1998 Annual Report on Form 10-K.
10.1 Coast Business Credit Loan and Security Agreement, dated April 23,
1998, filed as Exhibit 10.2 to the Company's 1998 Annual Report on
Form 10-K.
10.2 Amendment Number One dated September 30, 1998 to the Loan and
Security Agreement between Coast Business Credit and the Company
dated April 23, 1998.
10.3 Amendment Number Two dated March 2, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.4 Amendment Number Three dated June 16, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.5 Amendment Number Four dated July 28, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998, filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the period ending September 30, 1999.
</TABLE>
<PAGE> 22
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<C> <S>
10.6 Letter Agreement Amendment dated October 1, 1999 to the Loan and
Security Agreement between Coast Business Credit and the Company
dated April 23, 1998.
10.7 Consulting Agreement dated as of August 15, 1994, as amended as of
October 17, 1994, August 16, 1996, August 31, 1997, August 31, 1998
and August 31, 1999 by and between the Company and Orchard Capital
Corporation, relating to the services of Richard S. Ressler,
Chairman of the Board. The original agreement and the October 17,
1994 amendment are incorporated herein by reference to the Company's
1994 Annual Report on Form 10-K. The August 16, 1996 amendment is
incorporated herein by reference to the Company's 1996 Annual Report
on Form 10-K. The August 31,1997 amendment is incorporated herein by
reference to the Company's 1997 Annual Report on Form 10-K. The
August 31, 1998 amendment is incorporated herein by reference to the
Company's 1998 Annual Report on Form 10-K.
10.8 Richard S. Ressler Stock Purchase Letter, dated February 3, 1999,
filed as Exhibit 10.4 to the Company's 1998 Annual Report on Form
10-K.
10.9 Stock Option Agreement between Luke Brown and the Company dated
November 2, 1999.
10.10 Stock Option Agreement between James Dolan and the Company dated
November 2, 1999.
10.11 Stock Option Agreement between W. Brian Kretzmer and the Company
dated August 2, 1999.
10.12 Stock Option Agreement between Sasun Musliyan and the Company
dated August 2, 1999.
10.13 1996 Non-Employee Directors Stock Option Plan, filed as Exhibit 10.5
to the Company's 1998 Annual Report on Form 10-K.
10.14 MAI Systems Corporation Amended 1993 Stock Option Plan, filed as
Exhibit 10.6 to the Company's 1998 Annual Report on Form 10-K.
10.15 Termination/Transition Agreement between Christian Rivadalla d/b/a
Enterprise Hospitality Solutions and Enterprise Hospitality
Solutions, Inc., and the Company dated August 2, 1999, filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
period ending September 30, 1999.
10.16 Exclusive Worldwide Software License Agreement between Christian
Rivadalla d/b/a Enterprise Hospitality Solutions and Enterprise
Hospitality Solutions, Inc., and the Company dated August 20, 1999.
filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the period ending September 30, 1999.
10.17 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, filed
as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for
the period ending September 30, 1999.
10.18 Amendment No. 1 dated February 14, 2000 to 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.
10.19 Amendment No. 2 dated April 13, 2000 to 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.
10.20 Amendment Number Five dated April 13, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April
23, 1998.
10.21 Stock option agreement between Sasun Musliyan and the Company
dated January 20, 1999.
13.1 Portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1999, but only to the extent such report is
expressly incorporated by reference into Items 6, 7, 8 and 14(a)(1)
of this report and such report is not otherwise deemed to be filed
as part of this Annual Report on Form 10-K.
21.1 Subsidiaries of MAI Systems Corporation
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule Year Ended 1999
</TABLE>
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NUMBER ONE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT, dated as of
September 30, 1998 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 23, 1998 (as amended from time to time, the "Loan
Agreement"), by and between MAI SYSTEMS CORPORATION, a Delaware corporation
GAMING SYSTEMS INTERNATIONAL, a Nevada corporation, and HOTEL INFORMATION
SYSTEMS, INC, a Delaware corporation ( each a "Borrower" and collectively
"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, Borrower 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. WAIVER OF SECTION 8.1 TO THE SCHEDULE. Section 8.1 of the
Schedule to the Loan Agreement, as the same relates to Borrowers Consolidated
Tangible Net Worth, is hereby waived until December 31, 1998.
Section 2. APPLICATION OF SECTION 10.2 OF THE LOAN AGREEMENT. Section
10.2 of the Loan Agreement, is hereby invoked to increase the rate of interest
that accrues on the Loans from 2.25% to 5.25%. This rate of interest shall be
applied to the Loans until such time as Borrowers are in compliance with the
Consolidated Net Worth covenant as detailed in Section 8.1 of the Schedule to
the Loan Agreement.
Section 3. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. Section 8.1 of the Schedule to the Loan Agreement, is hereby amended
by adding the following language after the second paragraph:
"Beginning September 1, 1998, Borrowers shall show a monthly pre-tax
profit of no less than Two Hundred Thousand Dollars ($200,000)
(excluding severance payments to discharged employees), and from the
period beginning September 1, 1998, and ending December 31, 1998,
Borrowers shall show a pre-tax profit of no less than One Million
Dollars ($1,000,000) (excluding severance payments to discharged
employees)."
1
<PAGE> 2
Section 4. WAIVER FEE. In connection with the waiver detailed above,
Borrowers shall pay Coast a waiver fee (the "Waiver Fee") in the amount of
Twenty-Five Thousand Dollars ($25,000) on or before September 30, 1998.
Section 5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of an executed copy hereof by
Borrowers and the Waiver Fee.
Section 6. 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 7. CONFLICTING TERMS. In the event of a conflict between the
terms and provisions of this Amendment and the farms 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 fore
and effect.
Section 8. 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.
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.
BORROWERS:
MAI SYSTEMS CORPORATION,
a Delaware corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title EVP & COO/CFO
---------------------------------
By
------------------------------------
Title
---------------------------------
2
<PAGE> 3
HOTEL INFORMATION SYSTEMS, INC.,
a Delaware corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title EVP & COO/CFO
---------------------------------
By
------------------------------------
Title
---------------------------------
GAMING SYSTEMS INTERNATIONAL,
a Nevada corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title SECRETARY
---------------------------------
By
------------------------------------
Title
---------------------------------
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title VP
---------------------------------
3
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT, dated as of
March 2, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 23, 1998 (as amended from time to time, the "Loan
Agreement"), by and between MAI SYSTEMS CORPORATION, a Delaware corporation
GAMING SYSTEMS INTERNATIONAL, a Nevada corporation, and HOTEL INFORMATION
SYSTEMS, INC, a Delaware corporation ( each a "Borrower" and collectively
"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, Borrower 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 2 OF THE SCHEDULE TO THE LOAN
AGREEMENT. Section 2 of the Schedule to the Loan Agreement is hereby replaced in
its entirety with the following language:
"Loans in a total amount at any time outstanding not to exceed the
lesser of (i) a total of Five Million Dollars ($5,000,000) (the "Maximum
Dollar Amount"), or (ii) an amount not to exceed 2 times Borrowers'
aggregate monthly collections received by Coast, measured on a trailing
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."
Section 2. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. Section 8.1 of the Schedule to the Loan Agreement, is hereby amended
by adding the following language after the second paragraph:
"Borrowers shall show a monthly pre-tax profit of no less than Two
Hundred Thousand Dollars and a quarterly pre-tax profit of no less than
Seven Hundred Fifty Thousand Dollars ($750,000) (both excluding
severance payments to discharged employees)."
1
<PAGE> 2
Section 3. AMENDMENT TO SECTION 9.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. Section 9.1 of the Schedule to the Loan Agreement, is hereby amended
in its entirety with the following language;
"April 30, 2002, 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 4. AMENDMENT FEE. In connection with this Amendment, Borrowers
shall pay Coast an amendment fee (the "Amendment Fee") in the amount of
Twenty-Five Thousand Dollars ($25,000) on or before February 26, 1999.
Section 5. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of (i) an executed copy hereof
by Borrowers and (ii) the Waiver Fee.
Section 6. 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 7. 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 8. 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
2
<PAGE> 3
one agreement, and any party hereto may execute this Amendment by signing such
counterpart.
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.
BORROWERS:
MAI SYSTEMS CORPORATION,
a Delaware corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title EVP & COO/CFO
---------------------------------
By
------------------------------------
Title
---------------------------------
HOTEL INFORMATION SYSTEMS, INC.,
a Delaware corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title Director
---------------------------------
By
------------------------------------
Title
---------------------------------
GAMING SYSTEMS INTERNATIONAL,
a Nevada corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title Director, Secretary & Treasurer
---------------------------------
3
<PAGE> 4
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title Vice President
---------------------------------
4
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NUMBER THREE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT, dated as of
June 16, 1999 (this "Amendment"), amends that certain Loan and Security
Agreement, dated as of April 23, 1998 (as amended from time to time, the "Loan
Agreement"), by and between MAI SYSTEMS CORPORATION, A Delaware corporation
("MAI") HOTEL INFORMATION SYSTEMS, INC., a Delaware corporation ("Hotel") and
GAMING SYSTEMS INTERNATIONAL, a Nevada corporation ("Gaming") (MAI, Hotel and
Gaming are collectively the "Borrower") 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, Gaming is selling all of its assets for the purchase price of
Four Million Nine Hundred Twenty-Five Thousand Dollars ($4,925,000); and
WHEREAS, MAI and Hotel want to remove Gaming as a Borrower under the
Loan Agreement; and
WHEREAS, Borrower 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. The Loan Agreement between Borrower and Coast, as the same
has been amended from time to time, is hereby amended by deleting Gaming as an
additional Borrower, so that from this date forward, MAI and Hotel shall be
jointly and severally liable on the Obligations. In all instances where the Loan
Documents refer to Borrower, it shall no longer include Gaming but shall be
deemed to refer jointly and severally only to MAI and Hotel.
Section 2. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of (i) an executed copy of this
Amendment executed by Borrower, (ii) an executed copy of Amendment Number One To
Joint and Several Borrower Rider executed by Borrower, (iii) an executed copy of
the Collateral Assignment of Rights Under Purchase Agreement executed by Gaming
and MAI, and the Consent thereto executed the buyers of the assets of Gaming and
(iv) the original duly executed notes in the amount of Four Million Nine Hundred
Twenty-Five Thousand Dollars ($4,925,000) received by Gaming from the sale of
its assets along with endorsement allonges duly executed by Gaming endorsing the
notes over to Coast as Collateral for the Obligations under the Loan Agreement.
1
<PAGE> 2
Section 3. 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 4. 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 5. 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.
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/ [SIGNATURE ILLEGIBLE]
-----------------------------------
President or Vice President
By
-----------------------------------
Secretary or Ass't Secretary
HOTEL INFORMATION SYSTEMS,
a Delaware corporation
By /s/ [SIGNATURE ILLEGIBLE]
-----------------------------------
President or Vice President
By
-----------------------------------
Secretary or Ass't Secretary
2
<PAGE> 3
COAST:
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title Vice President
---------------------------------
AGREED AND ACCEPTED:
GAMING SYSTEMS INTERNATIONAL,
a Nevada corporation
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
Title Vice President
---------------------------------
By
------------------------------------
Title
---------------------------------
3
<PAGE> 1
EXHIBIT 10.6
COAST BUSINESS CREDIT,
a Division of Southern Pacific Bank
12121 Wilshire Boulevard, Suite 1400
Los Angeles, California 90025
Dated as of
October 1, 1999
MAI SYSTEMS CORPORATION
9601 Jeronimo Road
Irvine, California 92618
Attn: W. Brian Kretzmer, CEO and CFO
HOTEL INFORMATION SYSTEMS, INC.
9601 Jeronimo Road
Irvine, California 92618
Attn: W. Brian Kretzmer, CEO and CFO
Re: Events of Default and Limited Forbearance
Dear Mr. Kretzmer
Reference is hereby made to that certain Loan and Security Agreement, dated
as of April 23, 1998, by and between MAI Systems Corporation, a Delaware
corporation, and Hotel Information Systems, Inc., a Delaware corporation
(jointly and severally the "Borrowers") and Coast Business Credit ("Coast"),
(the "Agreement"). Initially capitalized terms used in this letter agreement
which are not otherwise defined shall have the meanings assigned to such terms
in the Agreement.
This letter is to acknowledge that Events of Default have occurred under
the Section 8.1 of the Schedule to the Agreement due to Borrowers failure to:
(i) achieve the minimum monthly profit required for the months of July through
October, 1999; (ii) achieve the minimum quarterly profit required for the
quarter ended September 30, 1999; (iii) maintain the Debt Service Coverage
ratio required for the quarter ended September 30, 1999; (iv) maintain the
minimum Consolidated Net Worth required at September 30, 1999 and October 31,
1999; and (v) pay all sales taxes as they become due.
Coast is willing to forbear from exercising its rights and remedies based
upon the occurrence of the foregoing Events of Default from the date hereof
through and including December 15, 1999, provided that; (a) the Obligations bear
interest at the rate applicable upon the occurrence of an Event of Default
pursuant to Section 10.2 of the Agreement and 3.1 of the Schedule to the
Agreement; (b) commencing October 8, 1999, Borrowers make weekly payments with
respect to the Bridge Loan such that it amortizes at the rate of $25,000 per
week; and (c) Borrowers pay to Coast a monthly fee equal to $10,000 on October
1, 1999, and on November 1, 1999, and continuing thereafter on the first of each
month that any portion of the Bridge Loan remains unpaid.
<PAGE> 2
Mr. Brian Kretzmer
October 1, 1999
Page 2
As stated above, as a result of the forgoing Events of Default and pursuant
to Section 10.2 of the Agreement and Section 3.1 of the Schedule to the
Agreement, the interest rate payable by Borrowers under Section 3.1 of the
Agreement has been increased and the Obligations now bear interest at the
default rate which is equal to the Interest Rate stated in the Agreement plus
3.0% per annum, calculated on the basis of a 360-day year for the actual number
of days elapsed (the "Default Rate"). This Default Rate will remain in effect
until all Events of Defaults have been cured.
In addition, Coast agrees that notwithstanding any provisions of the
Agreement to the contrary, MAI Systems Corporation may grant a junior lien in
favor of the holders of MAI's existing subordinated debt, as contemplated by
and subject to the execution of that certain Acknowledgement and Consent to be
executed by Coast and such subordinated debt holders.
This letter agreement is limited precisely as written and shall not be
deemed to (a) be a waiver or modification of any other term or condition of the
Agreement or any other loan document, (b) prejudice any right or remedy which
Coast may now have or may have in the future under or in connection with the
Agreement or any loan document, or (c) extend the forbearance described above
beyond December 15, 1999. In the event that any of the foregoing Events of
Default have not been cured on or before such date, Coast reserves the right to
enforce any and all rights and remedies it may have under the Agreement based
upon such Events of Default. Furthermore, Coast reserves the right to establish
at any time any reserve which Coast deems necessary in its sole discretion.
Please acknowledge your receipt of this letter agreement and acceptance of
the foregoing terms and conditions by signing and dating the enclosed
counterpart of this letter agreement where indicated below and returning same
to the undersigned immediately.
COAST BUSINESS CREDIT,
a Division of Southern Pacific Bank
By: /s/ [Signature Illegible]
---------------------------
Title: Vice President
------------------------
<PAGE> 3
Mr. Brian Kretzmer
October 1, 1999
Page 3
Acknowledged and Agreed to as of
October 1, 1999
MAI SYSTEMS CORPORATION,
a Delaware corporation
By: /s/ WILLIAM BRIAN KRETZMER
--------------------------
Name: WILLIAM BRIAN KRETZMER
--------------------------
Title: CEO/CFO
--------------------------
HOTEL INFORMATION SYSTEMS, INC.,
a Delaware corporation
By: /s/ WILLIAM BRIAN KRETZMER
--------------------------
Name: WILLIAM BRIAN KRETZMER
--------------------------
Title: CEO/CFO
--------------------------
<PAGE> 1
EXHIBIT 10.7
Amendment No. 5 to Letter Agreement Dated August 15, 1994
This Amendment No. 5 ("Amendment No. 5") to the Letter Agreement dated August
15, 1994 (the "Letter Agreement") amended as of October 17, 1994 ("Amendment No.
1 "), as of August 16, 1996 ("Amendment No. 2"), as of August 31, 1997
("Amendment No. 3"), and as of August 31, 1998 ("Amendment No. 4"), is made as
of the 31st day of August, 1999 by and between Orchard Capital Corporation, a
California corporation, 10960 Wilshire Blvd., Suite 500, Los Angeles, California
90024 ("Consultant") and MAI Systems Corporation, a Delaware corporation, 9600
Jeronimo Road, Irvine, California 92718 ("MAI") with reference to the following
facts:
A. On or about August 15, 1994, the parties entered into the Letter
Agreement pursuant to which Consultant was to provide the services of
its employee, Richard S. Ressler, to MAI, on various terms and
conditions in exchange for certain consideration to be paid by MAI to
Consultant.
B. On or about October 17, 1994, pursuant to Amendment No. 1, certain
terms of the Agreement were amended.
C. On or about August 16, 1996, the term of the Agreement expired but the
Consultant continued to perform services for MAI and, pursuant to
Amendment No. 2, the parties extended the term of the consultancy up
through and including August 31, 1997 and amended certain terms of the
Agreement to be effective during the term extension.
D. On or about August 31, 1997, the term of the Agreement (as extended by
Amendment No. 2) expired but the Consultant continued to perform
services for MAI and, pursuant to Amendment No. 3, the parties extended
the term of the consultancy up through and including August 31, 1998
and amended certain terms of the Agreement to be effective during the
term extension.
E. On or about August 31, 1998, the term of the Agreement (as extended by
Amendment No. 3) expired but the Consultant continued to perform
services for MAI and, pursuant to Amendment No. 4, the parties extended
the term of the consultancy up through and including August 31, 1999
and amended certain terms of the Agreement to be effective during the
term extension.
F. The extended term of the Agreement in Amendment No. 5 is scheduled to
expire and the parties seek to extend the term of the consultancy and
to amend certain terms of the Agreement to be effective during the term
extension.
Now, therefore, in consideration of the mutual benefits to be derived
hereunder, the parties agree as follows:
1.) Extension of Term. The term of the consultancy shall be extended up
through and including August 31, 2000.
2.) Fixed Compensation. During the period of extension, i.e. from September
1, 1999 up through and including August 31, 2000, Consultant shall be
compensated at the monthly rate of Twenty-four Thousand and no/ 100
Dollars ($24,000).
3.) Equity Compensation. MAI shall consider the appropriate equity
compensation for Consultant for services rendered during the term
extension. The parties acknowledge that equity compensation may take
the form of warrants to purchase shares of MAI's Common Stock,
participation in one of its stock option plans, or otherwise. Nothing
herein shall be construed to commit MAI to pay any equity compensation
to Consultant for services during the period of extension.
4.) Confirmation of Other Terms and Conditions. In all other respects the
parties reaffirm and acknowledge all of the terms and conditions set
forth in the Agreement and Amendment Nos. 1, 2, 3 and 4.
In witness whereof, the parties have executed this Amendment No. 5 as of August
31, 1999.
Orchard Capital Corporation MAI Systems Corporation
By: /s/ Richard S. Ressler By: /s/ William Brian Kretzmer
-------------------------------- -------------------------------
Richard S. Ressler W. Brian Kretzmer
President Chief Executive Officer
<PAGE> 1
EXHIBIT 10.9
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to Luke Brown (the "Optionee") an option to purchase a total of 150,000 shares
of Common Stock (the "Shares") of the Company, at the price set forth herein,
and in all respects subject to the terms, conditions, and provisions of this
Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which was
incorporated into and approved as part of the Company's Plan of Reorganization,
approved by the Bankruptcy Court, and which is attached as Exhibit "A" and is
incorporated herein by this reference. Terms defined in the Plan shall have the
same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on November 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
November 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 $.563
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 November 2, 2000 50,000
After November 2, 2001 50,000
After November 2, 2002 50,000
-------------------- -------
150, 000
</TABLE>
(b) METHOD OF EXERCISE. The Optionee shall purchase a
minimum of at least 100 shares per transaction concerning the exercise of the
Option. This Option shall be exercisable by actual receipt by the Company of
written notice provided by the Optionee which shall state the election to
exercise this Option, the number of whole Shares in respect to which this Option
is being exercised, and such other representations and agreements as to the
Optionee's investment intent with respect to such Shares as may be required by
the Company hereunder or pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail, return receipt requested, to the
1
<PAGE> 2
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.
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
2
<PAGE> 3
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: By: /s/ William Brian Kretzmer
-----------------------------------
William Brian Kretzmer
Chief Executive Officer,
Chief Financial Officer
& Secretary
Dated: 12/10/99 By: /s/ [SIGNATURE ILLEGIBLE]
-----------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.10
MAI SYSTEMS CORPORATION
STOCK OPTION AGREEMENT
MAI SYSTEMS CORPORATION, a Delaware corporation (the "Company"), hereby grants
to James W. Dolan (the "Optionee") an option to purchase a total of 50,000
shares of Common Stock (the "Shares") of the Company, at the price set forth
herein, and in all respects subject to the terms, conditions, and provisions of
this Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which
was incorporated into and approved as part of the Company's Plan of
Reorganization, approved by the Bankruptcy Court, and which is attached as
Exhibit "A" and is incorporated herein by this reference. Terms defined in the
Plan shall have the same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is
granted on November 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
November 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 $.563 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 November 2, 2000 16,666
After November 2, 2001 16,667
After November 2, 2002 16,667
--------------- ------
Total 50,000
</TABLE>
(B) METHOD OF EXERCISE. The Optionee shall purchase a
minimum of at least 100 shares per transaction concerning the exercise of the
Option. This Option shall be exercisable by actual receipt by the Company of
written notice provided by the Optionee which shall state the election to
exercise this Option, the number of whole Shares in respect to which this Option
is being exercised, and such other representations and agreements as to the
Optionee's investment intent with respect to such Shares as may be required by
the Company hereunder or pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail, return receipt requested, to the then current President or Chief
Financial Officer of the Company or any other person as may be
1
<PAGE> 2
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 certificates) 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.
6. NONTRANSFERABILITY OF THE OPTION. This Option may not be
sold, ledged, assigned, hypothecated, gifted, transferred or disposed of in any
manner either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent of distribution, and may be exercised during the
lifetime of the Optionee only by such Optionee. Subject to the
2
<PAGE> 3
foregoing and the terms of the Plan, the terms of this Option shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
7. CONTINUATION OF EMPLOYMENT. Neither this Plan nor any Option
granted hereunder shall confer upon any Optionee any right to continue in the
employment of the Company or any of its Subsidiaries or limit in any respect the
right of the Company to discharge the Optionee at any time, with or without
cause and with or without notice.
8. WITHHOLDING TAX LIABILITY. The Optionee understands and
agrees that the company may be required to withhold part or all of the
Optionee's regular compensation to pay any taxes required to be withheld under
federal, state, or local law as a result of the exercise of this Option, and
that if such regular compensation is insufficient, the Company may require the
Optionee, as a condition of exercise of this Option, to pay in cash the amount
of such withholding tax liability.
9. THE PLAN. This Option is subject to, and the Company and the
Optionee expressly agree to be bound by, all of the terms and conditions of the
Plan as it may be amended from time to time in accordance with the terms
thereof, provided that no such amendment shall deprive the Optionee, without his
written consent, of this Option or any rights hereunder. Pursuant to the Plan,
the Committee appointed by the Board of Directors of the Company to administer
the Plan is authorized to adopt rules and regulations not materially
inconsistent with the Plan as it shall deem appropriate and proper. If questions
arise as to the intent, meaning or application of the provisions of this Option
Agreement or of the Plan, such questions shall be decided by Committee in its
sole discretion, and any such decision shall be conclusive and binding on the
Optionee. A copy of the Plan in its present form is available for inspection
during regular business hours by the Optionee of the persons entitled to
exercise this Option at the Company's principal office.
MAI SYSTEMS CORPORATION
Dated: By: /s/ William Brian Kretzmer
--------------------------------
William Brian Kretzmer
Chief Executive Officer,
Chief Financial Officer
& Secretary
Dated: By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.11
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 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:
Date Number of Shares
---- ----------------
After August 2, 2000 75,000
After August 2, 2001 75,000
After August 2, 2002 75,000
-------------- -------
225,000
(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: August 5, 1999 By: /s/ LEWIS H. STANTON
-------------------------------------------
Lewis H. Stanton
Executive Vice President,
Chief Operating and Financial Officer
& Secretary
Dated: August 5, 1999 By: /s/ WILLIAM BRIAN KRETZMER
-------------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.12
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:
Date Number of Shares
---- ----------------
After August 2, 2000 24,166
After August 2, 2001 24,167
After August 2, 2002 24,167
------------------ ------
72,500
(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: August 5, 1999 By: /s/ LEWIS H. STANTON
-------------------------------
Lewis H. Stanton
Chief Financial Officer
Dated: August 12, 1999 By: /s/ [ILLEGIBLE]
-------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NUMBER ONE TO FORBEARANCE AGREEMENT
THIS AMENDMENT NUMBER ONE TO FORBEARANCE AGREEMENT (this
"Amendment") is dated as of February 14, 2000, 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. All capitalized terms not otherwise defined
herein have the meanings assigned in the Forbearance Agreement (as defined
below).
RECITALS
WHEREAS, MAI and Lenders are party to that certain Forbearance
Agreement dated as of October 28, 1999 (the "Forbearance Agreement") which
provides, among other things, that Lenders would not enforce for a certain
period of time certain rights and remedies available to Lenders under the Note
Purchase Agreement and the Notes;
WHEREAS, such forbearance period expired on December 31, 1999;
and
WHEREAS, MAI has requested that Lenders enter into this
Amendment in order to provide MAI with additional time to make the Interest
Payments which, in the absence of this Amendment, would be currently due and
payable;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Amendment, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
AMENDMENT
1. Forbearance Period. Section 2.1 of the Forbearance Agreement
is hereby amended to provide that the Forbearance Period shall continue until
the earlier to occur of (a) the date of the termination of the Forbearance
Period by Lenders or otherwise pursuant to Section 2.2 of the Forbearance
Agreement and (b) May 1, 2000.
2. Covenants. In consideration of Lenders' execution of this
Amendment, MAI agrees to pay, on or before the Forbearance Effective Date,
Lenders' actual attorney's fees not yet paid by MAI related in any way to the
Specified Event of Default and all of Lenders' actual attorney's fees incurred
in the preparation, negotiation and execution of this Amendment (together, the
"Fees").
As additional consideration for the Lenders' agreement to enter
into this Amendment, MAI agrees to pay $12,500 to Lenders on a weekly basis,
beginning as of January 16, 2000, as partial repayment of the Obligations (the
first such payment (the "First Payment") to be made on the date hereof with each
subsequent payment to be made on the first Monday of every week following the
week in which this Amendment is executed, in each case by wire transfer of
immediately available funds to the account designated by Lenders in writing to
MAI.)
<PAGE> 2
The First Payment shall include a payment of $12,500 for each of the weeks of
January 16, 2000, January 23, 2000, January 30, 2000, February 6, 2000 and
February 13, 2000, and shall be in the amount of $62,500 plus the current and
past due Fees in the amount of $10,610.84, for a total of $73,110.84. MAI may
make only such payments until May 1, 2000, and thereafter shall make such
additional payments as are then past due or thereafter become due on the
Obligations until such Obligations have been repaid in full in accordance with
their terms. All such payments shall be applied as specified in the Note
Purchase Agreement and the Notes. 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.
3. Representations and Warranties. MAI hereby represents and
warrants to Lenders that, as of the date of this Amendment:
3.1 All of MAI's representations and warranties contained
in this Amendment, the Forbearance Agreement and the Note Purchase
Agreement are true and correct on and as of the date hereof, as if then
made (other than representations and warranties which expressly related
to an earlier date);
3.2 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.
3.3 The execution and delivery of this Amendment by MAI
and the performance of the transactions contemplated hereby (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, shall constitute the 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.
3.4 If any of the foregoing representations is untrue or
incorrect in any material respect, such untruthfulness or inaccuracy
shall constitute an Event of Default under the Note Purchase Agreement.
4. Effective Date. This Amendment shall become effective as of
the date first written above upon Lender's receipt of (i) a counterpart hereof
executed by MAI and (ii) indefeasible payment of the Fees, but shall occur no
later than February 17, 2000.
5. This Amendment shall be limited solely to the matters
expressly set forth herein and shall not (i) constitute an amendment or waiver
of any term of the Forbearance Agreement other than the provisions thereof which
are specifically and explicitly amended hereby, (ii) constitute an amendment or
waiver of any term or condition of the Note Purchase Agreement, the Notes or the
Security Agreement, (iii) 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, (iv) require Lenders to agree to
a similar transaction on a future occasion or (v) create any rights herein to
another person, entity or other beneficiary or otherwise, except to the extent
specifically provided herein.
2
<PAGE> 3
6. Release.
6.1 MAI acknowledges that Lenders would not enter into
this Amendment 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.
6.2 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.
6.3 The provisions of this section shall survive payment
in full of the Obligations, full performance of all of the terms of this
Amendment, 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.
6.4 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 assignment
or transfer.
7. 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
Amendment, 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
3
<PAGE> 4
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.
8. Sole Benefit of Parties. This Amendment 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 Amendment.
9. 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 Amendment and the Security
Agreement.
10. Counterparts. This Amendment may be executed in any number
of separate counterparts, each of which shall collectively and separately
constitute one agreement.
11. 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.
* * *
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
MAI SYSTEMS CORPORATION
By:
-----------------------------------------
Name:
Title:
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
5
<PAGE> 6
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:
6
<PAGE> 1
EXHIBIT 10.19
AMENDMENT NUMBER TWO TO FORBEARANCE AGREEMENT
THIS AMENDMENT NUMBER TWO TO FORBEARANCE AGREEMENT (this "Amendment")
is dated as of April 13, 2000, 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. All capitalized terms not otherwise defined herein have the
meanings assigned in the Forbearance Agreement (as defined below).
R E C I T A L S
WHEREAS, MAI and Lenders are party to that certain Forbearance
Agreement dated as of October 28, 1999, as amended by an Amendment Number One
dated February 14, 2000 (collectively the "Forbearance Agreement") which
provides, among other things, that Lenders would not enforce for a certain
period of time certain rights and remedies available to Lenders under the Note
Purchase Agreement and the Notes;
WHEREAS, such forbearance period is set to expire on May 1, 2000; and
WHEREAS, MAI has requested that Lenders enter into this Amendment in
order to provide MAI with additional time to make the Interest Payments which,
in the absence of this Amendment, would be in default on or before May 1, 2000;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Amendment, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
A M E N D M E N T
1. Forbearance Period. Section 2.1 of the Forbearance Agreement is
hereby amended to provide that the Forbearance Period shall continue until the
earlier to occur of (a) the date of the termination of the Forbearance Period by
Lenders or otherwise pursuant to Section 2.2 of the Forbearance Agreement of
October 28, 1999 and (b) April 1, 2001.
2. Covenants. In consideration of Lenders' execution of this Amendment,
MAI covenants and agrees:
(a) to pay, on or before the April 21, 2000, Lenders' actual
attorney's fees incurred in the preparation, negotiation and execution of this
Amendment of $1,500 (the "Fees").
(b) to continue to pay $12,500 to Lenders on a weekly basis,
as partial repayment of the Obligations, on the first Monday of every week, in
each case by wire transfer
1
<PAGE> 2
of immediately available funds to the account previously designated by Lenders
in writing to MAI.
(c) after the existing term bridge loan in favor of Coast in
an approximate principal amount as of April 13, 2000 of $1,075,000 (the "Coast
Bridge Loan") is repaid in full, MAI agrees to and shall pay to the Lenders
$25,000 per week on the first Monday of every week until the Obligations have
been brought current in accordance with the original Note Purchase Agreement
dated as of March 3, 1997, without regard to the Forbearance Agreements.
(d) once the Obligations are brought current, MAI shall make
weekly payments of interest on the Obligations at the rate called for in the
Note Purchase Agreement (approximately $11,106 per week), and all scheduled
payments of principal, until such Obligations have been repaid in full in
accordance with their terms; provided, however, that MAI agrees that the
maturity of the Obligations shall restated to March 3, 2003, and that Canyon is
authorized to mark the Notes accordingly.
(e) All such payments shall be applied as specified in the
Note Purchase Agreement and the Notes.
(f) MAI covenants not to increase or reborrow any amounts due
to Coast on the Coast Bridge Loan, to pay down the Coast Bridge Loan as promptly
as possible, and to not permit the amounts owed on the revolving loan facility
in favor of Coast to exceed $3,360,000 at any time. Furthermore, as soon as all
amounts owed to Coast are repaid in full, MAI shall cause the release of the
liens and security interests securing the Coast Bridge Loan and the Coast
revolving facility (collectively the "Coast Loans"), and may not refinance or
replace the Coast Loans with any facility that would be senior or pari-pasu to
the Obligations, or grant any new or additional security interests or liens to
any person on the collateral now securing the Obligations.
(g) If MAI fails to comply with the foregoing covenants, such
failure shall constitute an Event of Default under the Note Purchase Agreement.
3. Representations and Warranties. MAI hereby represents and warrants
to Lenders that, as of the date of this Amendment:
3.1 All of MAI's representations and warranties contained in
this Amendment, the Forbearance Agreement and the Note Purchase
Agreement are true and correct on and as of the date hereof, as if then
made (other than representations and warranties which expressly related
to an earlier date);
3.2 No Default or Event of Default (as such terms are defined
in the Note Purchase Agreement) has occurred or is continuing.
3.3 The execution and delivery of this Amendment by MAI and
the performance of the transactions contemplated hereby (a) are within
MAI's corporate
2
<PAGE> 3
power, (b) have been duly authorized by all necessary or proper
corporate and shareholder action, (c) when duly executed and delivered
by MAI, shall constitute the legal, valid and binding obligation of MAI
enforceable against MAI in accordance with its terms, and (d) have been
consented to by Coast.
3.4 If any of the foregoing representations is untrue
or incorrect in any material respect, such untruthfulness or inaccuracy
shall constitute an Event of Default under the Note Purchase Agreement.
4. Waiver. In connection with this Amendment, and in consideration of
the performance and performance by MAI of all of its agreements herein, Canyon
hereby waives all Events of Defaults existing on the date hereof.
5. Effective Date. This Amendment shall become effective as of the date
first written above upon Lender's receipt of a counterpart hereof executed by
MAI.
6. This Amendment shall be limited solely to the matters expressly set
forth herein and shall not (i) constitute an amendment or waiver of any term of
the Forbearance Agreement other than the provisions thereof which are
specifically and explicitly amended hereby, (ii) constitute an amendment or
waiver of any term or condition of the Note Purchase Agreement, the Notes or the
Security Agreement, (iii) 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, (iv) require Lenders to agree to
a similar transaction on a future occasion or (v) create any rights herein to
another person, entity or other beneficiary or otherwise, except to the extent
specifically provided herein.
7. Release.
7.1 MAI acknowledges that Lenders would not enter into this
Amendment 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.
3
<PAGE> 4
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
Amendment, 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 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 Amendment, 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 Amendment 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 Amendment.
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 Amendment and the Security Agreement.
11. Counterparts. This Amendment 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.
* * *
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
MAI SYSTEMS CORPORATION
By:
-----------------------------------
Name:
Title:
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
5
<PAGE> 6
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:
6
<PAGE> 1
EXHIBIT 10.20
AMENDMENT NUMBER FIVE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT, dated as of
April 13, 2000 (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.
R E C I T A L S
WHEREAS, pursuant to that certain letter agreement dated as of October
1, 1999 (the "Forbearance Letter"), Coast agreed in favor of Borrowers to a
limited forbearance through December 31, 1999 (the "Limited Forbearance Period),
with respect to certain Events of Default (the "Existing Defaults"), subject to
certain terms and conditions, all as defined and set forth in the Forbearance
Letter;
WHEREAS, the Limited Forbearance Period has expired and the Existing
Events of Default continue to exist;
WHEREAS, Borrowers and Coast have decided to amend and restructure the
Loan Agreement as set forth below which will, among other things, waive the
Existing Events of Default; and
NOW, THEREFORE, the parties hereto agree as follows:
A M E N D M E N T
Section 1. The Forbearance Letter requires, among other things, that
Borrowers make amortization payments with respect to the Bridge Loan in the
amount of Twenty-Five Thousand Dollars ($25,000) per week. Notwithstanding the
waiver of the Existing Events of Default, Borrowers and Coast agree that such
amortization payments will be increased to Thirty-Five Thousand Dollars
($35,000) per week until the Bridge Loan is paid in full.
Section 2. The Forbearance Letter requires, among other things, that
Borrowers pay a monthly fee equal to $10,000 on the first of each month so long
as any portion of the Bridge Loan remains unpaid. Upon the effectiveness of this
Amendment, any future payments of such fee will be eliminated.
Section 3. AMENDMENT TO SUBPARAGRAPH (a) OF SECTION 2 OF THE SCHEDULE
TO THE LOAN AGREEMENT. Subparagraph (a) of Section 2 of the Schedule to the
1
<PAGE> 2
Loan Agreement is hereby amended by deleting such Subparagraph in its entirety
and replacing it with the following:
(a) Collection Loans in a total amount at any time outstanding not to
exceed the lesser of (i) $3,360,000 (the "Reducing Collections
Sublimit") or (ii) 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. The amount of Loans available
under subsection (ii) of this paragraph will be referred to as the
"Available Collections Sublimit". The Reducing Collections Sublimit
will be subject to decrease, but not subject to increase, to an amount
equal to the then effective Available Collections Sublimit; and"
Section 4. AMENDMENT TO SECTION 3 OF THE SCHEDULE TO THE LOAN
AGREEMENT. Pursuant to the terms of the Loan Agreement and as set forth in the
Forbearance Letter, the current rates of interest on the Loans and the Bridge
Loan are the default rates of interest of, the Prime Rate plus 5.25% with
respect to the Loans, and the Prime Rate plus 8.00% with respect to the Bridge
Loan. Upon the effectiveness of this Amendment, Borrowers and Coast agree that
such default rates of interest will cease and all Loans including the Bridge
Loan will thereafter accrue interest as follows, pursuant to an amended Section
3.1 of the Schedule to the Loan Agreement:
"A rate equal to the Prime Rate plus 4.50% per annum with respect to
all Loans including the Bridge Loan, calculated on the basis of a 360
day year for the actual number of days elapsed. The interest rate
applicable to all Loans including 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 Loans in any month
be less than 9.00% per annum."
Section 5. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. The second paragraph of Section 8.1 of the Schedule to the Loan
Agreement regarding Borrowers' Consolidated Net Worth is hereby amended by
deleting such paragraph in its entirety and replacing it with the following:
"At all times, commencing with Borrowers' fiscal quarter ending June
30, 2000, Borrowers shall maintain a Consolidated Net Worth in an
amount not less than Borrower's historical Consolidated Net Worth as of
Borrowers' fiscal quarter ending March 31, 2000, as reflected in
Borrower's 10-Q Statement filed with the Securities and Exchange
Commission. Such Consolidated Net Worth requirement will be increased
quarterly, commencing with Borrowers' fiscal quarter ending September
30, 2000, by 80% of Borrowers' consolidated after tax net income, on a
cumulative basis from June 30, 2000, calculated in accordance with
GAAP."
Section 6. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. The third paragraph of Section 8.1 of the Schedule to the Loan
Agreement
2
<PAGE> 3
regarding Borrower's monthly pre-tax profit is hereby deleted in its entirety
and replaced with the following net income requirement:
"Borrowers shall attain minimum fiscal quarter ending net income,
calculated in accordance with GAAP, as follows: (i) One Thousand
Dollars ($1,000) for the fiscal quarter ending June 30, 2000; and (ii)
Two Hundred and Fifty Thousand Dollars ($250,000) for each and every
fiscal quarter thereafter, commencing with the fiscal quarter ending
September 30, 2000."
Section 7. AMENDMENT TO SECTION 8.1 OF THE SCHEDULE TO THE LOAN
AGREEMENT. The fourth paragraph of Section 8.1 of the Schedule to the Loan
Agreement regarding Borrowers' Debt Service Coverage Ratio is hereby amended by
deleting such paragraph in its entirety and replacing it with the following:
"Borrowers' shall maintain a Debt Service Coverage Ratio, measured
quarterly at the end of each fiscal quarter, as follows: (i) 1.05 to
1.00 for the fiscal quarters ending June 30, 2000 and September 30,
2000; and (ii) 1.10 to 1.00 for each and every fiscal quarter
thereafter, commencing with the fiscal quarter ending December 31,
2000."
Section 8. RESTRUCTURE FEE LOAN. In consideration of Coast's entering
into this Amendment, Borrowers shall pay Coast a fee in the amount of Three
Hundred Thousand Dollars ($300,000) (the "Restructure Fee Loan"), which shall be
fully earned upon the effectiveness of this Amendment and charged to Borrower's
loan account; provided, however, such Restructure Loan Fee shall only be counted
against Borrowers' loan availability to the extent that amounts have become due
and payable pursuant to the weekly repayment schedule for the Restructure Loan
Fee as set forth below. The Restructure Fee Loan will be paid pursuant to weekly
amortization payments, each in the amount of Thirty-Five Thousand Dollars
($35,000), commencing on the earlier to occur of: (i) the thirty second (32nd)
week following the effectiveness of this Amendment, or (ii) the week immediately
following the repayment of the Bridge Loan in its entirety, until the
Restructure Fee is paid in full.
Section 9. CONDITION PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the receipt by Coast of a fully executed copy of this
Amendment.
Section 10. 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. Borrowers represent, warrant and agree that in entering into the
Loan Agreement and consenting to this Amendment, they have 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 11. 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.
3
<PAGE> 4
Section 12. 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.
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
------------------------------------------
President or Vice President
By
------------------------------------------
Secretary or Ass't Secretary
HOTEL INFORMATION SYSTEMS, INC,
a Delaware corporation
By
------------------------------------------
President or Vice President
By
------------------------------------------
Secretary or Ass't Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By
------------------------------------------
Title
---------------------------------------
4
<PAGE> 1
EXHIBIT 10.21
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 25,000
shares of Common Stock (the "Shares") of the Company, at the price set forth
herein, and in all respects subject to the terms, conditions, and provisions of
this Agreement and of the Company's 1993 Stock Option Plan (the "Plan") which
was incorporated into and approved as part of the Company's Plan of
Reorganization, approved by the Bankruptcy Court, and which is attached as
Exhibit "A" and is incorporated herein by this reference. Terms defined in the
Plan shall have the same meanings herein.
1. NATURE OF THE OPTION. This Option is intended to be and is a
Nonstatutory Stock Option and is not intended to be an Incentive Stock Option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. THE DATE OF GRANT AND TERM OF THE OPTION. This Option is granted on
January 20, 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 January 20, 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 $2.75 per share,
which price is not less than eighty-five percent (85%) of the Fair Market Value
of a share of Common Stock on the date this Option was granted.
4. EXERCISE OF THE OPTION. This Option shall be exercisable during its
term only in accordance with the terms, conditions, and provisions of the Plan
and this Agreement as follows.
(a) RIGHT TO EXERCISE. This Option shall vest and be
exercisable, cumulatively, as follows:
Date Number of Shares
---- ----------------
After January 20, 2000 8,333
After January 20, 2001 8,333
After January 20, 2002 8,334
---------------- ------
Total 25,000
(b) METHOD OF EXERCISE. The Optionee shall purchase a minimum
of at least 100 shares per transaction concerning the exercise of the Option.
This Option shall be exercisable by actual receipt by the Company of written
notice provided by the Optionee which shall state the election to exercise this
Option, the number of whole Shares in respect to which this Option is being
exercised, and such other representations and agreements as to the Optionee's
investment intent with respect to such Shares as may be required by the Company
hereunder or pursuant to the provisions of the Plan. Such written notice shall
be signed by the
1
<PAGE> 2
Optionee and shall be delivered in person or by certified mail, return receipt
requested, to the then current President or Chief Financial Officer of the
Company or any other person as may be designated by the Company. The written
notice shall be accompanied by payment of the purchase price for the number of
Shares in respect to which this Option shall be exercised. Payment of the
purchase price shall be by check payable to the order of the Company,
outstanding shares of Common Stock duly endorsed to the Company (which shares
shall be valued at their Fair Market Value as of the day preceding the day of
such exercise), or any combination of the foregoing.
Unless otherwise determined by the Board of Directors of the
Company, the Company may arrange for the simultaneous exercise and sale of
Shares through the cooperation of broker-dealers which finance "same day" sales.
The certificate(s) for the Shares as to which the Option
shall be exercised shall be registered in the name of the Optionee and shall be
legended as set forth in the Plan or as required under applicable regulatory,
state or federal law.
(c) FURTHER RESTRICTIONS ON THE EXERCISE OF THE OPTION. This
Option shall not be exercised if the issuance of the Shares upon such exercise
would constitute a violation of any applicable federal or state securities law
or laws or regulations. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation, warranty or
certification to the Company as may be required by any applicable law or
regulation or by the Plan. There shall be no exercise of any fractional shares
concerning the Option.
(d) ADJUSTMENT UPON CHANGE OF CAPITALIZATION. Appropriate
adjustment shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company.
5. TERMINATION OF STATUS AS AN EMPLOYEE. If the Optionee ceases to
serve as an Employee for any reason other than death or for Cause (as defined in
the Plan) and thereby terminates his status as an Employee, the Optionee shall
have the right to exercise this Option at any time within 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: August 5, 1999 By: /s/ LEWIS H. STANTON
-------------------------------------
Lewis H. Stanton
Executive Vice President,
Chief Operating and Financial Officer
& Secretary
Dated: August 12, 1999 By: /s/ [SIG]
-------------------------------------
Optionee
3
<PAGE> 1
EXHIBIT 13.1
THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS
Sections of the Registrant's Annual Report to Stockholders Incorporated by
Reference:
13.1.1 Selected Financial Information
13.1.2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
13.1.3 Independent Auditors' Report
13.1.4 Consolidated Balance Sheets
13.1.5 Consolidated Statements of Operations
13.1.6 Consolidated Statements of Stockholders' Equity (Deficiency) and
Comprehensive Income (Loss)
13.1.7 Consolidated Statements of Cash Flows
13.1.8 Notes to Consolidated Financial Statements
<PAGE> 2
EXHIBIT 13.1.1
SELECTED FINANCIAL INFORMATION
The following table sets forth for the periods indicated selected consolidated
financial data for MAI Systems Corporation. This information should be read in
conjunction with the consolidated financial statements included elsewhere herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SELECTED FINANCIAL DATA
(in thousands except share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $ 66,294 $ 64,164 $ 70,978 $ 62,238 $ 56,346
Operating Income (loss) 9,399 (12,744) (8,675) (1,066) (8,873)
Income (loss) before extraordinary items 8,623 (13,487) (10,172) (2,316) (10,773)
Net income (loss) 10,189 (13,487) (10,172) (2,316) (10,773)
Income (loss) per share - (2):
Basic income (loss) per share:
Income (loss) before
extraordinary item $ 1.26 $ (1.85) $ (1.08) $ (0.23) $ (0.99)
Extraordinary item 0.23 -- -- -- --
-------- -------- -------- -------- --------
$ 1.49 $ (1.85) $ (1.08) $ (0.23) $ (0.99)
======== ======== ======== ======== ========
Diluted income (loss) per share:
Income (loss) before
extraordinary item $ 1.12 $ (1.85) $ (1.08) $ (0.23) $ (0.99)
Extraordinary item .20 -- -- -- --
-------- -------- -------- -------- --------
$ 1.32 $ (1.85) $ (1.08) $ (0.23) $ (0.99)
======== ======== ======== ======== ========
Weighted average common shares used
in determining income (loss) per
share:
Basic 6,820 7,309 9,408 10,587 10,889
======== ======== ======== ======== ========
Diluted 7,724 7,309 9,408 10,587 10,889
======== ======== ======== ======== ========
BALANCE SHEET DATA
Working capital (deficiency) 337 (8,270) (11,696) (8,010) (14,381)
Total Assets 21,033 32,853 34,613 35,757 24,630
Long-term debt 1,021 485 5,230 8,570 8,162
Stockholders' equity (deficiency) 2,472 2,058 (666) (2,366) (12,569)
</TABLE>
- ---------------
(1) No cash dividends have been declared by the Company.
(2) Income (loss) per share is computed using shares of common stock (as
adjusted for the Company's 25% stock split in August 1995) expected to be
issued in accordance with the Plan of Reorganization as discussed in Note
17 to the consolidated financial statements, the weighted average shares of
Common Stock issued outside the Plan of Reorganization, and in 1994 and
1995, the dilutive effect of stock options and warrants outstanding during
the period. The total shares of Common Stock expected to be issued in
accordance with the Plan of Reorganization have been adjusted down to
reflect the resolution of certain claims with creditors during the fourth
quarter of 1996. Income (loss) per share has been restated for all periods
to reflect the resolution of such claims. The Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"), "Earnings Per Share" in 1997 and restated all periods to conform
to the provisions of SFAS No. 128.
2
<PAGE> 3
QUARTERLY DATA (UNAUDITED)
(IN MILLIONS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1998 1998 1998 1998 1999 1999 1999 1999
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 15.2 $ 14.1 $ 14.7 $ 18.2 $16.1 $16.3 $ 11.4 $ 12.5
Gross Profit 7.2 5.3 7.0 10.2 9.1 9.1 2.5 5.9
Operating income (loss) (0.8) (2.4) 0.3 1.8 1.5 1.1 (6.5) (5.0)
Income (loss) before income
taxes (1.1) (2.5) 0.05 1.6 1.2 0.8 (7.5) (5.1)
Net income (loss) (2) (1.1) (2.5) 0.05 1.2 1.2 0.8 (7.5) (5.3)
Income (loss) per share (1):
Basic $(0.11) $(0.24) $ 0.01 $ 0.11 $0.11 $0.07 $(0.68) $(0.49)
Diluted $(0.11) $(0.24) $ -- $ 0.11 $0.11 $0.07 $(0.68) $(0.49)
Weighted average common
shares used in determining
income (loss) per share
(in thousands):
Basic 10,298 10,594 10,731 10,726 10,836 10,907 10,907 10,907
====== ====== ====== ====== ====== ====== ====== ======
Diluted 10,298 10,594 10,852 10,798 10,925 11,019 10,907 10,907
====== ====== ====== ====== ====== ====== ====== ======
Share Prices
High $5.13 $5.38 $3.75 $3.75 $3.25 $4.00 $3.31 $1.25
Low $1.44 $3.25 $1.25 $1.13 $2.13 $1.88 $1.06 $0.44
</TABLE>
- -------------------
(1) Income (loss) per share is computed using shares of common stock expected
to be issued in accordance with the Plan of Reorganization as discussed in
Note 17 to the consolidated financial statements, the weighted average
shares of Common Stock issued outside the Plan of Reorganization, and for
profitable quarters, the dilutive effect of stock options and warrants
outstanding during the period. The total shares of Common Stock expected to
be issued in accordance with the Plan of Reorganization have been adjusted
down to reflect the resolution of certain claims with creditors during the
fourth quarter of 1996. Income (loss) per share has been restated for all
periods to reflect the resolution of such claims. The Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"), "Earnings Per Share" in 1997 and restated all periods to conform
to the provisions of SFAS No. 128.
(2) The fourth quarter of 1999 includes charges of $2.3 relating to a
restructuring plan.
3
<PAGE> 4
EXHIBIT 13.1.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain important factors and risks, including the
rapid change in hardware and software technology, market conditions, competitive
factors, seasonality and other variations in the buying cycles of certain of the
Company's customers, the timing of product announcements, the release of new or
enhanced products, the introduction of competitive products and services by
existing or new competitors, the significant risks associated with the
acquisition of new products, product rights, technologies or businesses, MAI's
ability to retain technical, managerial and other personnel, and the other risks
detailed from time to time in the Company's SEC reports, including reports on
Form 10-K and Form 10-Q, that could cause results to differ materially from
those anticipated by the statements made herein. Therefore, historical results
and percentage relationships will not necessarily be indicative of the operating
results of any future period. See "Risk Factors", in the Company's Annual Report
on Form 10-K for 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, working capital deteriorated from a negative working
capital of $8,010,000 at December 31, 1998 to a negative working capital of
$14,381,000. Excluding unearned revenue (which will not give rise to cash
disbursements to third parties) of $7,773,000, the Company had a working capital
deficiency of $6,608,000 at December 31, 1999, resulting in a current ratio of
0.68 to 1.0. Unearned revenue for 1998 was $10,702,000, and working capital
excluding unearned revenue was $2,692,000, resulting in a current ratio of 1.15
to 1.0. Excluding unearned revenue, the decrease of $9,300,000 was primarily
attributable to decreases in net receivables of $7,303,000, inventories of
$765,000 and prepaids and other assets of $2,137,000 and increases in the
Company's Bridge Loan of $1,450,000 and accrued liabilities of $977,000.
Cash and cash equivalents increased from $2,029,000 at December 31, 1998, to
$2,645,000 at December 31, 1999. Availability under the Company's existing
secured revolving credit facility is based on a calculation using a rolling
average of certain cash collections. At December 31, 1999, approximately
$2,892,000 was available and drawn down under this facility. The facility
expires on April 30, 2002.
Net cash used in investing activities in 1999 totaled $3,844,000, mainly related
to software development costs and capital expenditures.
Net cash provided by financing activities in 1999 totaled $1,264,000, which is
mainly comprised of $500,000 in proceeds from issuance of common stock,
$2,000,000 from proceeds from Bridge Loan, less $860,000 in repayments of
long-term debt and Bridge Loan and $385,000 decrease in the secured revolving
credit facility. The Company was temporarily in default on its revolving credit
facility, Bridge Loan and subordinated debt. On April 13, 2000, the Company
amended the respective loan agreements to waive all previous defaults and to
require weekly principal payments of $35,000 on the Bridge Loan and weekly
interest payments of $12,500 on the subordinated debt until the Bridge Loan is
paid in full, then $25,000 per week on the subordinated debt until all accrued
and unpaid interest on the subordinated debt is paid in full, then $11,000 per
week in interest on the subordinated debt thereafter. Additionally, the Company
will be required to pay Coast a fee of $300,000.
Stockholders' deficiency increased from $2,366,000 at December 31, 1998, to
$12,569,000 at December 31, 1999, primarily as a result of a net loss of
$10,773,000 for the year. The Company has commitments in connection with lease
commitments, which require payments of $1,405,000 in 2000.
Net cash provided by operating activities in 1999 totaled $3,251,000 and mainly
related to non-cash charges during 1999 for depreciation and amortization of
tangible and intangible assets, of $3,685,000, write-down of notes receivable of
$355,000, stock compensation expense of $280,000, write-offs of deferred
financing costs of $574,000 and furniture, fixtures and equipment of $1,900,000
and provisions for doubtful accounts of $2,151,000 and inventory obsolescence of
$413,000. Also contributing to net cash provided by operating activities were
decreases in receivables of $3,638,000 prepaids and other assets of $1,483,000
and other assets of $927,000 and increases in accounts payable and customer
deposits of $375,000 and accrued liabilities of $1,083,000. This was mainly
offset by the net loss of $10,773,000 and a decrease in deferred revenue of
$2,578,000. The Company expects that it will continue to generate cash from its
operating activities.
4
<PAGE> 5
Although the Company has a net stockholders' deficiency of $12,569,000 at
December 31, 1999, the Company believes it will generate sufficient funds from
operations and obtain additional financing, as needed, in 2000 to meet its
operating and capital requirements. The Company's belief is based on the Company
significantly reducing its cost structure through a restructuring effected in
1999 which included reductions in employee headcount and the use of outside
consultants, the closure and reduction of certain facilities, and the
renegotiation , termination or replacement of certain contracts with service
providers. Additionally, the Company has a $14.0 million backlog as of December
31, 1999. The Company expects to generate positive cashflow during 2000 from
shipping out products and services from this backlog as well as new orders.
Also, the Company is currently holding its notes receivable for sale and has a
letter intent for the sale of the notes. If consummated, the amount expected to
be realized upon the sale of these notes is $2,700,000. The Company expects to
sell these notes during 2000 and use the funds to reduce certain current
obligations and other operational purposes.
Lastly, the Company has historically been successful in securing additional
capital, when needed, to meet operating and capital requirements.
As of March 31, 2000, the Company had issued and outstanding 10,842,071 shares
of Common Stock.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1999.
<TABLE>
<CAPTION>
(dollars in thousands)
Percentage of Percentage of
December 31, 1998 Revenue December 31, 1999 Revenue
----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 33,394 53.7% $ 35,639 63.3%
Process Manufacturing 8,638 13.9% 8,243 14.6%
Gaming 2,687 4.3% 1,696 3.0%
Legacy 17,211 27.6% 10,768 19.1%
Other 308 0.5% -- --
Total Revenue 62,238 100.0% 56,346 100.0%
Gross Profit 29,690 47.7% 26,627 47.3%
Selling, general and administrative expenses 23,798 38.2% 25,456 45.2%
Restructuring -- -- 2,288 4.1%
Research and development costs 4,058 6.5% 5,114 9.1%
Amortization of intangibles 2,522 4.1% 2,326 4.1%
Other operating expense 378 0.6% 280 0.5%
Write off of deferred financing costs -- -- 574 1.0%
Equity in net income of unconsolidated
subsidiaries (33) (0.1%) (28) (0.1%)
Interest expense, net 896 1.4% 1,185 2.1%
Provision for income taxes 387 0.6% 169 0.3%
Net income (loss) $ (2,316) (3.7%) $(10,773) (19.1%)
</TABLE>
Revenue for 1999 was $56,346,000 compared to $62,238,000 in 1998 or a 9.5%
decrease. The Company continues to transition from its legacy business to the
sale of enterprise solutions as 80.9% of the Company's 1999 revenue resulted
from its enterprise solutions business as compared to 72.0% in 1998. The
Company's revenue from its sales of enterprise solutions in industries in which
it competes (hospitality, process manufacturing, gaming and other), increased
1.2% compared to the prior year. Hospitality revenue increased 6.7% from
$33,394,000 in 1998 to $35,639,000 in 1999, largely due to increased software
sales. Process Manufacturing decreased only slightly from $8,638,000 in 1998 to
$8,243,000 in 1999. Gaming revenue decreased 36.9% from 1998 to 1999 due to the
sale of its gaming subsidiary in June 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 37.4% year over year, largely due to expected
decreased volume and customers replacing their legacy systems due to Year 2000
compliance.
Gross profit for 1999 decreased to $26,627,000 (47.3%) from $29,690,000 (47.7%)
in 1998. The overall gross margin remained consistent in 1999 to that of 1998
despite a decline in revenue. This was due primarily to increased software
sales, which have higher gross margins.
5
<PAGE> 6
Gross margin on hospitality sales remained consistent in 1999 to that of 1998.
Gross margins on gaming decreased from 68.5% in 1998 to 60.4% in 1999 due to
lower margins on hardware. Gross margins associated with the Company's legacy
business declined consistent with the Company's strategy to focus on providing
software and services to its vertical markets. Gross margin on process
manufacturing sales decreased from 56.2% in 1998 to 51.2% in 1999 mainly due to
decreased margins on software support.
Selling, general and administrative ("SG&A") expenses increased 7.0% from
$23,798,000 in 1998 to $25,456,000 in 1999. The increase is primarily related to
increased payroll and consultancy costs.
The Company incurred restructuring costs of $2,288,000 in 1999 in connection
with a restructuring plan to close or reduce certain facilities and reduce the
work force to the appropriate levels to sufficiently support the Company's
operations. The costs were recorded to recognize severance, benefits and other
related costs for employees to be terminated; accruals for lease commitments and
the write-off of certain furniture, fixtures and equipment. There were no
comparable costs in 1998.
Research and development costs were $4,058,000 in 1998, compared to $5,114,000
in 1999. The increase was primarily due to a decrease in costs capitalized in
1999, and increased outsourcing of certain development efforts.
Amortization of intangibles was $2,522,000 in 1998 and $2,326,000 in 1999. This
represents the amortization of intangible assets resulting from acquisitions of
HIS, CIMPRO and the remaining minority ownership (through the acquisition of
stock options) of Gaming Systems International, ("GSI"). The decrease was mainly
due to the sale of GSI in July 1999.
Net interest expense was $896,000 for 1998 compared to $1,185,000 in 1999. The
increase in 1999 is reflective of higher interest rates associated with the
Company's line of credit as compared to 1998 and interest related to the
Company's Bridge Loan obtained on July 28, 1999.
The income tax provision reflects a tax provision for the Company's foreign
operations. The Company's income tax provisions in 1998 and 1999 results
primarily from profitable foreign operations in those years.
RESULTS OF OPERATIONS
Year Ended December 31,1997 Compared to Year Ended December 31, 1998.
<TABLE>
<CAPTION>
(dollars in thousands)
Percentage of Percentage of
December 31, 1998 Revenue December 31, 1999 Revenue
----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Hospitality $ 32,720 46.1% $ 33,394 53.7%
Process Manufacturing 10,929 15.4% 8,638 13.9%
Gaming 4,594 6.5% 2,687 4.3%
Legacy 20,515 28.9% 17,211 27.6%
Other 2,220 3.1% 308 0.5%
Total Revenue 70,978 100.0% 62,238 100.0%
Gross Profit 27,282 38.5% 29,690 47.7%
Selling, general and administrative
expenses 26,698 37.6% 23,798 38.2%
Restructuring 900 1.3% -- --
Research and development costs 5,583 7.9% 4,058 6.5%
Amortization and impairment
of intangibles 2,331 3.3% 2,522 4.1%
Other operating expense 445 0.6% 378 0.6%
Equity in net losses (income) of
unconsolidated subsidiaries 151 0.2% (33) (0.1%)
Interest expense, net 1,080 1.5% 896 1.4%
Provision for income taxes 266 0.4% 387 0.6%
Net income (loss) $(10,172) (14.3%) $ (2,316) (3.7%)
</TABLE>
6
<PAGE> 7
Revenue for 1998 was $62,238,000 compared to $70,978,000 in 1997 or a 12.3%
decrease. The Company continues to transition from its legacy business to the
sale of enterprise solutions as 72.0% of the Company's 1998 revenue resulted
from its enterprise solutions business as compared to 71.1% in 1997. The
Company's revenue from its sales of enterprise solutions in industries in which
it competes (hospitality, process manufacturing, gaming and other), decreased
10.8% compared to the prior year. Hospitality revenue increased 2.1% from
$32,720,000 in 1997 to $33,394,000 in 1998, largely due to increased software
sales. Gaming revenue decreased 41.5% from 1997 to 1998 due to lower unit sales.
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 16.1%
year over year, largely due to expected decreased volume.
Gross profit for 1998 increased to $29,690,000 (47.7%) from $27,282,000 (38.5%)
in 1997. The increase in overall gross margin for 1998, despite a decline in
overall revenue, is due to the higher margins associated with enterprise
solutions. Enterprise solutions gross profit remained consistent in 1998 to that
of 1997 despite a decline in revenue. This was due primarily to better pricing
in 1998.
Gross margin on hospitality sales remained consistent in 1998 to that of 1997.
Gross margins on gaming went from 47.3% in 1997 to 68.5% in 1998 due to improved
margins on hardware. Gross margins associated with the Company's legacy business
declined consistent with the Company's strategy to focus on providing software
and services to its vertical markets.
Selling, general and administrative ("SG&A") expenses decreased 10.9% from
$26,698,000 in 1997 to $23,798,000 in 1998. The decrease is related to the
implementation of several cost reduction measures.
The Company incurred restructuring costs of $900,000 in 1997 in connection with
a restructuring plan to eliminate operations and related expenses which were not
required to support the Company's operations of software sales and professional
services. The costs were recorded to recognize severance, benefits and other
related costs for employees to be terminated. There were no comparable costs in
1998.
Research and development costs were $5,583,000 in 1997, compared to $4,058,000
in 1998. The decrease was primarily due to an increase in costs capitalized in
1998, as certain of the Company's products had reached technological
feasibility.
Amortization of intangibles was $2,331,000 in 1997 and $2,522,000 in 1998. This
represents the amortization of intangible assets resulting from acquisitions of
HIS, CIMPRO and the remaining minority ownership (through the acquisition of
stock options) of Gaming Systems International.
Other operating expenses in 1997 and 1998 was principally from foreign exchange
losses, and a loss recorded in 1997 on a subsidiary held for sale in Venezuela.
Net interest expense was $1,080,000 for 1997 compared to $896,000 in 1998. The
decrease in 1998 is reflective of lower interest rates associated with the
Company's line of credit as compared to 1997.
The income tax provision reflects a tax provision for the Company's foreign
operations. The Company's income tax provisions in 1997 and 1998 results
primarily from profitable foreign operations in those years.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective 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.
In December 1999, the SEC staff issued Staff Accounting Bulletin No., 101,
"Revenue Recognition in Financial Statements" and in March 2000, the SEC staff
issued Staff Accounting Bulletin No. 101A "Implementation Issues Related to SAB
101." These bulletins summarize certain of the staff's views about applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff is providing this guidance due, in part, to the large
number of revenue recognition issues that registrants encounter. The provisions
of these pronouncements are
7
<PAGE> 8
effective for the Company commencing with the second quarter of 2000. Management
is in the process of analyzing the implications of these bulletins and is
anticipating that further implementation guidance will be forthcoming from the
SEC. Accordingly, there is uncertainty as to the ultimate impact to the Company
in applying these bulletins.
YEAR 2000 COMPLIANCE RISKS
This section is a Year 2000 Readiness Disclosure Statement pursuant to the Year
2000 Information and Readiness Disclosure Act of 1998.
During 1999, the Company successfully completed its program to achieve Year 2000
Readiness. Before June 30, 1999 the Company completed an evaluation of both its
information technology systems and its non-technology systems, such as equipment
containing microprocessors. At that time the Company determined that all
information technology and non-technology systems in its corporate home office
in Irvine, California and in its branch or subsidiary offices in the United
States and internationally had been modified to address Year 2000 issues. "Year
2000 Ready" meant that the performance or functionality of the Company's
internal systems would not be significantly affected by the dates prior to,
during, and after the Year 2000, to include leap year calculations and specific
day-of-the-week calculations.
The Company established a Year 2000 "task force" which prepared and released its
Year 2000 products readiness report on the Company's "Web Pages"
(www.maisystems.com and www.hotelinfosys.com) and made available to clients a
copy of this report on a per request basis. The Company launched a direct
mail/fax campaign in February 1999 to all of its current maintenance agreement
clients as well as to all identifiable clients that may be utilizing the
Company's products, informing clients that the "Year 2000 Readiness Program" was
available to be viewed at the indicated websites. The mailing also provided
clients the opportunity to request information regarding the "Year 2000
Readiness Program" if they so desired. This mailing was executed using the most
current client database available. This notification went to approximately
18,000 domestic customers as well as being faxed to approximately 4,000
international customers from the Company's international offices.
The Company currently knows of no significant year 2000-related failures
occurring in either its products or its internal systems as a result of the date
change from December 31, 1999 to January 1, 2000. As expected, the Company has
not experienced a material adverse impact on its business, products, results of
operations, or financial condition as a result of the Year 2000 issue.
The Company estimates that the costs associated with implementing its Year 2000
compliance plan for its corporate offices was approximately $300,000. These
costs were expensed as incurred and were comprised primarily of the personnel
costs required to review all software for Year 2000 compliance, the
informational mailing and website costs and outside and consulting fees.
The Company will continue to monitor its critical processes, and those of
significant third parties that are critical to the Company's operations, for
potential Year 2000-related problems. The Company's present "reasonably likely
worst case scenario" for Year 2000 problems involves potential product liability
claims by substantial customers involving collateral (business interruption)
damages. Although the Company has not experienced any product liability claims
to date regarding Year 2000 compliance, there can be no assurance that errors or
defects, whether associated with Year 2000 functions or otherwise, will not
result in product liability claims against the Company in the future. The
Company's license agreements with customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims;
however, it is possible that such limitation of liability provisions may not be
effective under the laws of certain jurisdictions. Defective products or
releases could result in loss of revenues, increased service and warranty costs
and product liability claims, and could adversely affect the Company's market
penetration and reputation, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
8
<PAGE> 9
EXHIBIT 13.1.3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MAI Systems Corporation:
We have audited the accompanying consolidated balance sheets of MAI Systems
Corporation and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAI Systems
Corporation and subsidiaries as of December 31, 1998 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Orange County, California
April 13, 2000
9
<PAGE> 10
EXHIBIT 13.1.4
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,029 $ 2,645
Receivables, less allowance for doubtful accounts of
$3,323 in 1998 and $3,622 in 1999 14,492 7,189
Inventories 1,390 625
Notes receivable, less deferred gain of $1,227 -- 2,700
Prepaids and other assets 2,919 782
--------- ---------
Total current assets 20,830 13,941
Furniture, fixtures and equipment, net 3,737 2,609
Intangibles, net 10,185 7,974
Other assets 1,005 106
--------- ---------
Total assets $ 35,757 $ 24,630
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Bridge loan $ -- $ 1,450
Current portion of long-term debt 645 447
Accounts payable 10,160 10,705
Customer deposits 2,587 2,236
Accrued liabilities 4,159 5,136
Income taxes payable 587 575
Unearned revenue 10,702 7,773
--------- ---------
Total current liabilities 28,840 28,322
Line of credit 3,277 2,892
Long-term debt 5,293 5,270
Other liabilities 713 715
--------- ---------
Total liabilities 38,123 37,199
--------- ---------
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 1999, respectively 110 112
Additional paid-in capital 219,780 220,567
Accumulated other comprehensive income 713 494
Accumulated deficit (222,969) (233,742)
--------- ---------
Total stockholders' deficiency (2,366) (12,569)
--------- ---------
Commitments and contingencies
Subsequent event
Total liabilities and stockholders' deficiency $ 35,757 $ 24,630
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
10
<PAGE> 11
EXHIBIT 13.1.5
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Software, networks and professional services:
Software sales $ 7,608 $ 10,845 $ 13,473
Network and computer equipment 12,120 6,979 5,048
Professional services 30,735 27,203 29,513
-------- -------- --------
50,463 45,027 48,034
Legacy revenue 20,515 17,211 8,312
-------- -------- --------
Total revenue 70,978 62,238 56,346
-------- -------- --------
Direct costs:
Software, networks and professional services:
Software sales 1,547 2,871 3,978
Network and computer equipment 8,238 5,599 3,497
Professional services 17,531 13,956 15,860
-------- -------- --------
27,316 22,426 23,335
Legacy costs 16,380 10,122 6,384
-------- -------- --------
Total direct costs 43,696 32,548 29,719
-------- -------- --------
Gross profit 27,282 29,690 26,627
Selling, general and administrative expenses 26,698 23,798 25,456
Restructuring charges 900 -- 2,288
Research and development costs 5,583 4,058 5,114
Amortization of intangibles 2,331 2,522 2,362
Other operating expense 445 378 280
-------- -------- --------
Operating loss (8,675) (1,066) (8,873)
Write off of deferred financing costs -- -- (574)
Equity in net (losses) income of
unconsolidated subsidiaries (151) 33 28
Interest income 101 202 300
Interest expense (1,181) (1,098) (1,485)
-------- -------- --------
Loss before income taxes (9,906) (1,929) (10,604)
Provision for income taxes 266 387 169
-------- -------- --------
Net loss $(10,172) $ (2,316) $(10,773)
======== ======== ========
Loss per share:
Basic loss per share $ (1.08) $ (0.23) $ (0.99)
======== ======== ========
Diluted loss per share $ (1.08) $ (0.23) $ (0.99)
======== ======== ========
Weighted average common shares used
in determining loss per share:
Basic 9,408 10,587 10,889
======== ======== ========
Diluted 9,408 10,587 10,889
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
11
<PAGE> 12
EXHIBIT 13.1.6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stockholders' Total
Common Paid-In Comprehensive Accumulated Equity Comprehensive
Stock Capital Income Deficit (Deficiency) Income (Loss)
------ ---------- ------------- ----------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 88 $ 212,351 $ 100 $(210,481) $ 2,058
Issuance of common stock, net of
stock issuance costs 3 2,300 -- -- 2,303 --
Issuance of common stock for
acquisition of GSI minority
interest -- 104 -- -- 104 --
Issuance of common stock in lieu
of bonus payment 4 1,286 -- -- 1,290 --
Exercise of stock options and
warrants 11 3,072 -- -- 3,083 --
Stock option compensation -- 169 -- -- 169 --
Issuance of warrants in
connection with note payable -- 1,027 -- -- 1,027 --
HIS purchase price reduction (1) (930) -- -- (931) --
Foreign currency translation
gains -- -- 403 -- 403 403
Net loss -- -- -- (10,172) (10,172) (10,172)
----- --------- ----- --------- -------- --------
Balance at December 31, 1997 105 219,379 503 (220,653) (666) $ (9,769)
========
Issuance of common stock for
acquisition of GSI minority
interest 1 -- -- -- 1 --
Issuance of common stock in
connection with acquisition
of HIS 2 -- -- -- 2 --
Issuance of common stock in
lieu of license acquisition fee
payment 1 324 -- -- 325 --
Exercise of stock options and
warrants 1 67 -- -- 68 --
Stock option compensation -- 10 -- -- 10 --
Foreign currency translation
gains -- -- 210 -- 210 210
Net loss -- -- -- (2,316) (2,316) (2,316)
----- --------- ----- --------- -------- --------
Balance at December 31, 1998 110 219,780 713 (222,969) (2,366) $ (2,106)
========
Issuance of common stock 2 498 -- -- 500 --
Exercise of stock options -- 9 -- -- 9 --
Stock option compensation -- 280 -- -- 280 --
Foreign currency translation
losses -- -- (219) -- (219) (219)
Net loss -- -- -- (10,773) (10,773) (10,773)
----- --------- ----- --------- -------- --------
Balance at December 31, 1999 $ 112 $ 220,567 $ 494 $(233,742) $(12,569) $(10,992)
===== ========= ===== ========= ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
12
<PAGE> 13
EXHIBIT 13.1.7
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(10,172) $(2,316) $(10,773)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of intangibles 2,718 2,522 2,362
Depreciation and amortization 1,575 1,538 1,323
Stock option compensation expense 169 10 280
Write-down of notes receivable -- -- 355
Write-off of deferred financing costs -- -- 574
Write-off of furniture, fixtures, and
equipment -- -- 1,900
Equity in net losses (income) of
unconsolidated subsidiaries 151 (33) (28)
Provision for doubtful accounts receivable 6 1,340 2,151
Provision for inventory obsolescence 1,174 346 413
Net loss (gain) from foreign currency 466 233 (222)
Changes in assets and liabilities:
(Increase) decrease in receivables 881 (3,564) 3,638
(Increase) decrease in inventories 309 102 (12)
Decrease (increase) in prepaids and
other assets (199) (984) 1,483
Decrease (increase) in other assets (341) 527 927
(Decrease) increase in accounts payable
and customer deposits 20 1,237 375
(Decrease) increase in accrued
liabilities 1,269 1,355 1,083
(Decrease) increase in income taxes
payable 109 16 (2)
(Decrease) increase in unearned revenue (2,053) (1,265) (2,578)
(Decrease) increase in other liabilities (1,842) 1 2
-------- ------- --------
Net cash provided by (used in) operating
activities (5,760) 1,065 3,251
-------- ------- --------
Cash flows from investing activities:
Capital expenditures (1,157) (920) (2,178)
Purchase of businesses (6,228) -- --
Software development costs (291) (2,040) (1,724)
-------- ------- --------
Net cash used in investing activities (7,676) (2,960) (3,902)
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 2,303 -- 500
Proceeds from issuance of subordinated notes
payable 6,000 -- --
Payments received on notes receivable 237 -- --
Repayments of long-term debt (603) (89) (310)
Receipt of notes receivable (25) -- --
Proceeds from issuance of Bridge Loan -- -- 2,000
Repayments of Bridge Loan -- -- (550)
Net increase (decrease) in line of credit 1,452 1,917 (385)
Proceeds from the exercise of stock options 2,333 68 9
-------- ------- --------
Net cash provided by financing
activities 11,697 1,896 1,264
-------- ------- --------
Effect of exchange rate changes on cash
and cash equivalents (67) (23) 3
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents (1,806) (22) 616
Cash and cash equivalents at beginning of year 3,857 2,051 2,029
-------- ------- --------
Cash and cash equivalents at end of year $ 2,051 $ 2,029 $ 2,645
======== ======= ========
Cash paid during the period for:
Interest $ 1,016 $ 1,093 $ 870
======== ======= ========
Income taxes $ 141 $ 16 $ 226
======== ======= ========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities
(see note 9).
The accompanying notes are an integral part
of these consolidated financial statements.
13
<PAGE> 14
EXHIBIT 13.1.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
- ---------------------------
MAI Systems Corporation (the "Company" or "MAI") designs, sells, installs and
supports total technology solutions featuring complex wide and local area
networks primarily in the hospitality and process manufacturing industries. The
Company also provides a wide array of products and services to its customers who
continue to use its proprietary host-based computer systems, including field
engineering services, new and replacement equipment, operating systems and
software application products. These products and services upgrade, enhance and
integrate these legacy systems with currently available computer technologies.
Directly and through its arrangement with a third party service provider, the
Company provides on-site warranty service, re-manufacturing, and depot service
to third party computer distributors and manufacturers. During 1999, the Company
sold its subsidiary which sold software and services to the gaming industry.
The Company was incorporated under the laws of the State of Delaware on
September 6, 1984. The Company's name was changed from MAI Basic Four, Inc. to
MAI Systems Corporation on November 6, 1990.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements of the Company include the accounts of its
domestic operations and its majority and wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
USE OF ESTIMATES
- ----------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the balance sheets and
revenues and expenses for the periods. Actual results could differ from those
estimates.
REVENUE RECOGNITION
- -------------------
The Company recognizes revenue from sales of hardware, software and professional
services and from arrangements involving multiple elements of each of the above.
Revenue for multiple element arrangements are recorded by allocating revenue to
the various elements based on their respective fair values as evidenced by
vendor specific objective evidence. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. Sales of network and computer
equipment are generally recorded upon shipment. Software revenues are recorded
when application software programs are shipped. Professional services fees for
software development, training and installation are recognized on a
time-apportioned basis over the period in which the services are provided.
CASH EQUIVALENTS
- ----------------
Cash equivalents consist of highly liquid investments, which are readily
convertible into known amounts of cash and have original maturities of three
months or less. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
INVENTORIES
- -----------
Inventories other than replacement parts are valued at the lower of cost or
market using the first-in, first-out ("FIFO") method. Replacement parts used for
hardware maintenance are valued at cost and are amortized to expense over the
period of benefit.
14
<PAGE> 15
FURNITURE, FIXTURES AND EQUIPMENT
- ---------------------------------
Furniture, fixtures and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3 to 5 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or their estimated useful lives.
GOODWILL AND OTHER LONG-LIVED ASSETS
- ------------------------------------
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, and other intangible assets are being amortized on a
straight-line basis over the expected periods to be benefited, generally five to
seven years. Long-lived assets and certain identifiable intangibles to be held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets that
are to be disposed of are reported at the lower of the carrying amount or fair
value less cost to sell, except for assets covered by Accounting Principles
Board ("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
INCOME TAXES
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
STOCK OPTION PLANS
- ------------------
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma net income (loss) per share disclosures considering stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
The functional currency for all foreign subsidiaries is the applicable local
currency except for MAI de Venezuela, S.A. ("Venezuela"), which operated in a
highly inflationary economy and uses the U.S. dollar as its functional currency
in accordance with SFAS No. 52, "Foreign Currency Translation." Accordingly, all
translation gains and losses for foreign subsidiaries, except Venezuela, and
gains and losses on intercompany foreign currency transactions that are of a
long-term nature, are included in accumulated other comprehensive income as a
separate component of stockholders' equity (deficiency).
Net foreign exchange transaction gains (losses) for 1997 and 1998 were
($125,000) and $81,000, respectively. There were no material net foreign gains
(losses) in 1999. These amounts are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
SOFTWARE DEVELOPMENT COSTS
- --------------------------
The Company capitalizes costs related to the development of certain software
products. In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" capitalization of costs
begins when technological feasibility is established and ends when the product
is available for general release to customers.
15
<PAGE> 16
Amortization is computed on an individual product basis and is recognized over
the greater of the remaining economic lives of each product or the ratio that
current gross revenues for a product bear to the total of current and
anticipated revenues for that product, commencing when the products become
available for general release to customers. Software development costs are
generally being amortized over a three-year period. The Company continually
assesses the recoverability of software development costs by comparing the
carrying value of individual products to their net realizable value.
The Company capitalized $291,000, $2,040,000 and $1,724,000 of software
development costs during 1997, 1998 and 1999, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which it is
practicable to estimate fair value. SFAS No. 107 defines fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. As of December 31, 1998 and 1999,
the carrying value of cash and cash equivalents, receivables, Bridge Loan,
accounts payable, accrued liabilities, income taxes payable and other
liabilities approximate fair value due to the short term nature of such
instruments. The carrying value of long-term debt, including the Company's line
of credit, approximates fair value as the related interest rates approximate
rates currently available to the Company.
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 (see Note 19).
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 17.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is effective 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.
In December 1999, the SEC staff issued Staff Accounting Bulletin No., 101,
"Revenue Recognition in Financial Statements" and in March 2000, the SEC staff
issued Staff Accounting Bulletin No. 101A "Implementation Issues Related to SAB
101." These bulletins summarize certain of the staff's views about applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff is providing this guidance due, in part, to the large
number of revenue recognition issues that registrants encounter. The provisions
of these pronouncements are effective for the Company commencing with the second
quarter of 2000. Management is in the process of analyzing the implications of
these bulletins and is anticipating that further implementation guidance will be
forthcoming from the SEC. Accordingly, there is uncertainty as to the ultimate
impact to the Company in applying these bulletins.
16
<PAGE> 17
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
------ ----
(in thousands)
<S> <C> <C>
Finished goods $ 843 $251
Replacement parts 547 374
------ ----
$1,390 $625
====== ====
</TABLE>
The Company has purchased many products and components from single sources of
supply. Because the Company's current products are industry standard, the
Company believes that alternative sources of supply of similar products would be
available to the Company in the event of any interruption of delivery of a
single source supplier. During the fourth quarter of 1997, the Company wrote-off
approximately $1,151,000 of inventory primarily due to excess and obsolete parts
which is reflected in direct costs in the accompanying consolidated statements
of operations.
NOTE 3 - ASSETS HELD FOR SALE
During 1996, the Company entered into negotiations with a third party to sell
100% of the common stock of its Venezuelan subsidiary. As a result, the net
assets of the subsidiary were written down to their net realizable value. During
1998, the remaining net assets of $75,000 of the Venezuelan subsidiary were
written off.
NOTE 4 - FURNITURE, FIXTURES AND EQUIPMENT
The major classes of furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Furniture, fixtures and equipment $ 2,162 $ 2,657
Equipment held for administrative purposes 12,191 6,319
Leasehold improvements 508 345
-------- -------
14,861 9,321
Less: accumulated depreciation and amortization (11,124) (6,712)
-------- -------
$ 3,737 $ 2,609
======== =======
</TABLE>
NOTE 5 - JOINT VENTURES
In July 1996, the Company entered into a joint venture agreement with
Novo-Invest Casino Development for the purpose of marketing and selling the
Company's gaming software in Europe. In accordance with the joint venture
agreement, the Company invested $40,000 cash. This joint venture was organized
under the laws of Austria and was known as Gaming Systems International
Gessellschaft m.b.H. ("GSI Europe"). The Company had a 40% interest in the joint
venture and accounted for this investment using the equity method of accounting.
On June 19, 1999 the Company sold GSI Europe together with its wholly owned
subsidiary Gaming Systems International (GSI) (see Note 6).
The Company is a joint venture partner with Metro Systems Corporation Limited
("MSC") for the purpose of marketing and selling the Company's software in
Thailand. The Company has a 49.9% interest in the joint venture and accounted
for this investment using the equity method of accounting. During 1998 the
investment in MSC, recorded at $76,000, was written off by the Company.
Summarized financial information of the investees has not been provided, as such
combined amounts are not significant.
The Company's investment in GSI Europe is included in other assets in the 1998
accompanying consolidated balance sheet.
17
<PAGE> 18
NOTE 6 - ACQUISITIONS, DIVESTITURE, AGREEMENTS AND FINANCING
HOTEL INFORMATION SYSTEMS, INC.
- -------------------------------
Effective August 9, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Hotel Information Systems, Inc. ("HIS")
pursuant to an asset purchase agreement dated June 30, 1996 (as amended July 10,
1996) for 1,179,000 unregistered shares of Common Stock valued at $10,900,000.
The net assets acquired from HIS are used in the business of software design,
engineering and service relating to hotel information systems. The net assets
also included subsidiaries of HIS in Singapore, Hong Kong, Australia and Mexico.
The acquisition of HIS has been accounted for by the purchase method of
accounting. The total purchase price for HIS was $21,373,000, which included net
liabilities assumed of HIS of $7,873,000 and acquisition costs of approximately
$2,600,000.
During 1996, the Company entered into arbitration proceedings regarding the
purchase price of HIS. The Company placed approximately 1,100,000 shares of
Common Stock issued in connection with the acquisition of HIS in an escrow
account to be released in whole, or in part, upon final resolution of post
closing adjustments.
In November 1997, the purchase price for the acquisition of HIS was reduced by
$931,000 pursuant to arbitration proceedings. As a result, goodwill was reduced
by $931,000 and approximately 100,650 shares 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 $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 December 31,
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 $11.96 per share as of
December 31, 1999). 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. As of
December 31, 1999, the fair market value of the Company's common stock was $0.81
per share, which would result in approximately 7,023,000 additional shares being
issued. See Note 18 for a discussion of related litigation involving the
purchase of HIS.
In connection with the acquisition of HIS, a restructuring plan was implemented
comprising an employee severance program, an employee relocation program and
excess facilities. An amount of $1,360,000 relating to this restructuring plan
was included in the cost of acquiring HIS. During the five-month period ended
December 31, 1996 and the year ended December 31, 1997, approximately $274,000
and $400,000, respectively, of costs were paid. During 1997, approximately
$686,000 of the HIS restructuring reserves were reversed resulting in a
reduction of goodwill. As a result, the HIS restructuring reserves were fully
utilized or reversed during 1997.
GAMING SYSTEMS INTERNATIONAL
- ----------------------------
In May 1996, the Company acquired the remaining 30% minority interest shares of
GSI for 98,462 unregistered shares of Common Stock, which were valued at
$960,000, and issued $1,175,000 of notes payable. The acquisition was accounted
for as a "step acquisition" using the purchase method of accounting. In
connection with the step acquisition of GSI, the Company recorded goodwill of
$1,970,000.
In March 1997, the Company acquired options to purchase 3.5% of GSI common stock
from two individuals in exchange for 14,930 unregistered shares of the Company's
Common Stock valued at $104,500 and notes payable of $104,500. The transaction
resulted in an increase in goodwill of $209,000.
In May 1998, in accordance with the stock purchase agreement and option
cancellation agreements pursuant to which the Company acquired the remaining 30%
minority interest and remaining options in GSI in May 1996 and March 1997,
respectively, the Company issued 45,424 additional shares of Common Stock valued
at par.
On June 19, 1999, the Company sold GSI for an amount in excess of its book
value. The Company received three promissory notes totaling $4,925,000 with face
values of $1,100,000, $1,500,000 and $2,325,000, respectively. Interest 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
18
<PAGE> 19
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.
The promissory notes are currently held for sale and the Company has executed a
letter of intent with a third party to sell the notes at an amount approximately
$355,000 less than the carrying value of such notes. Accordingly, the
promissory notes have been written down to their estimated net realizable value
of $2,700,000 and are classified as current in the accompanying consolidated
balance sheet as of December 31, 1999.
Summarized below is historical financial information about GSI (in thousands):
<TABLE>
<CAPTION>
Year Ended January 1, 1999 -
December 31, 1998 June 19, 1999
----------------- -----------------
<S> <C> <C>
Revenue $2,687 $1,696
Operating loss (income) 1,493 (80)
Total assets at period end 4,028 3,800
</TABLE>
CIMPRO
- ------
On March 6, 1997, the Company acquired substantially all the assets and assumed
certain liabilities of CIMPRO, which develops and markets process manufacturing
software, for $5,900,000 in cash and $328,000 of direct costs related to the
acquisition. To finance the acquisition of CIMPRO, the Company sold 400,000
shares of its Common Stock in a private placement for $6.50 per share and issued
$6,000,000 of 11% subordinated notes payable due in 2004 to an investment fund
managed by Canyon Capital Management LP ("Canyon"). Interest on the subordinated
notes is payable semi-annually commencing September 3, 1997.
Associated with the stock issuance, the Company incurred $300,000 of issuance
costs that are included in additional paid-in capital in the accompanying
consolidated balance sheet as of December 31, 1997.
The acquisition of CIMPRO was accounted for using the purchase method of
accounting. The allocation of the purchase price was as follows:
<TABLE>
<CAPTION>
Allocation of
Purchase Price
--------------
(in thousands)
<S> <C>
Net current liabilities $ (1,061)
Furniture, fixtures and equipment 400
Intangibles 7,475
Long-term liabilities (586)
--------
$ 6,228
========
</TABLE>
Intangible assets are being amortized on a straight-line basis over the expected
periods to be benefited of five to seven years.
ENTERPRISE HOSPITALITY SOLUTIONS
- --------------------------------
Effective October 1, 1996, the Company entered into an exclusive worldwide and
perpetual license agreement with Enterprise Hospitality Solutions ("Licensor")
for substantially all current and future versions of software, derivative works,
enhancements, modifications and improvements relating to the hotel, resort,
hospitality, or gaming industry products of Licensor.
In consideration for the rights and licenses granted to the Company by the
Licensor, a $1,000,000 license acquisition fee was agreed to be paid by the
Company. As of December 31, 1997, the Company had paid $675,000 of the license
acquisition fee and the outstanding balance of $325,000 was classified as
accrued liabilities in the accompanying consolidated balance sheet. During 1998
the remaining balance of $325,000 was paid through the issuance of 110,639
shares of Common Stock.
The $1,000,000 license acquisition fee was capitalized and is being amortized
over a three-year period, which commenced in 1997. As of December 31, 1998, the
unamortized balance of the license acquisition fee was $364,000, and is included
in other assets in the accompanying consolidated balance sheets. The license
acquisition fee was fully amortized in 1999.
Additionally, under the license agreement, the Company shall pay the Licensor
royalties of 20% of net revenues subject to certain minimum royalties commencing
April 1997.
19
<PAGE> 20
Effective September 30, 1999, the Company terminated the license agreement (as
amended) with the Licensor. Pursuant to the termination, the Company guaranteed
the value of the 110,639 shares of Common Stock issued to the Licensor in 1998
such that the Licensor would receive $2.75 per share of Common Stock upon sale.
The Licensor sold all 110,639 shares of Common Stock during 1999 at prices below
$2.75 per share resulting in an additional $177,000 of cash payments by the
Company to the Licensor during 1999.
Effective with the termination of the original license agreement, the Company
entered into a new exclusive worldwide software license agreement ("New
Agreement") with the Licensor to market, distribute, and modify the LodgingTouch
software application. In connection with the New Agreement, the Company was
provided with the source code, object code, specifications and documentation of
the then existing LodgingTouch client server applications and, subsequent to the
termination, has continued the development of the application with its internal
development staff. Any derivative work based upon the licensed software created
by MAI under the New Agreement, and all intellectual property, trade secrets and
other proprietary rights therein and thereto, shall be the sole and exclusive
property of MAI, both during and following the expiration or other termination
of the New Agreement.
Under the New Agreement, the Company shall pay the Licensor a 10% royalty on the
net software price including any derivatives or enhancements to the software
application.
Royalties paid for fiscal years 1997, 1998 and 1999 were approximately $218,000,
$750,000 and $941,000, respectively.
DEFERRED FINANCING COSTS
- ------------------------
During 1998, the Company commenced efforts to raise additional capital. During
the third quarter of fiscal 1999, the Company expensed $574,000 of deferred
financing costs, which were previously capitalized and included in prepaids and
other assets as of December 31, 1998.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Goodwill $ 12,440 $ 10,196
Capitalized software 2,331 4,056
Customer list 925 925
-------- --------
15,696 15,177
Less: accumulated amortization (5,511) (7,269)
-------- --------
Total $ 10,185 $ 7,908
======== ========
</TABLE>
NOTE 8 - LINE OF CREDIT AND BRIDGE LOAN
On July 28, 1999, the Company obtained a Bridge Loan from Coast Business Credit
("Coast") in the amount of $2,000,000. The Bridge Loan bears interest at prime
plus 5% (prime plus 8% when default interest rates apply) and was 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 paid to Coast in connection with the Bridge Loan are included in
prepaids and other assets and are being amortized to interest expense over the
term of the loan. Due to a temporary event of default on the Bridge Loan and the
secured revolving credit facility and pursuant to a forbearance agreement with
Coast, the Company began making weekly principal payments of $25,000 on the
Bridge Loan commencing in September 1999. The unpaid balance of the Bridge Loan
as of December 31, 1999 was $1,450,000. During the default period, the Company
also paid $40,000 in default fees to Coast as of December 31, 1999.
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
20
<PAGE> 21
July 28, 1999 to allow for aggregate borrowings on an interest only basis 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% (prime plus 5.25% when default interest rates
apply) and expires on April 30, 2002. The facility was again amended on April
13, 2000. In accordance with the amendment, the Bridge Loan and the credit
facility will bear interest at prime plus 4.5% and requires $35,000 weekly
principal payments on the Bridge Loan until it is paid in full. Additionally,
the credit facility was amended to allow for aggregate borrowings on an interest
only basis under the credit facility not to exceed $3,360,000. In connection
with the amendment, Coast waived all existing defaults. Additionally, the
Company will pay Coast a fee of $300,000. This fee will be paid by the Company
in weekly installments of $35,000 commencing after the Bridge Loan is paid in
full. The facility contains various restrictions and covenants, including a
minimum consolidated net worth, debt coverage ratio and minimum quarterly
profitability. The Company was in compliance with these covenants as of December
31, 1999.
At December 31, 1998 and 1999, approximately $3,277,000 and $2,892,000,
respectively, was available and drawn down under this facility.
Loan origination fees of approximately $130,000 were incurred in connection with
the line of credit, are classified in prepaids and other current assets and are
being amortized to interest expense over the term of the facility.
NOTE 9 - LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Notes payable $ 4,677 $ 4,722
Obligations under capital leases 740 666
Tax Claims 319 279
Other 202 50
------- -------
5,938 5,717
Less: current installments (645) (447)
------- -------
Noncurrent portion $ 5,293 $ 5,270
======= =======
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Year Ending December 31,
2000 $ 447
2001 223
2002 73
2003 --
2004 4,722
Thereafter 252
------
$5,717
======
</TABLE>
NOTES PAYABLE
- -------------
On March 3, 1997, the Company issued $6,000,000 of 11% subordinated notes
payable due in 2004 to an investment fund managed by Canyon Capital Management
LP ("Canyon") with detachable warrants to purchase 750,000 shares of the
Company's Common Stock at $8 per share. These warrants were exercisable and
callable (by the Company) under certain circumstances at any time within seven
years and the 11% subordinated notes may be used to exercise the warrants. The
Company recorded an original issue discount of $1,027,000 that represents the
fair value of the warrants at the time of issuance. The fair value of the
warrants was recorded as a reduction in the face value of the subordinated notes
and is being amortized to interest expense over the term of the subordinated
notes. The unamortized balance of the original issue discount was $528,000 at
December 31, 1999.
21
<PAGE> 22
In September 1997, the Company reduced the exercise price of 800,000 warrants
(750,000 related to the subordinated debt and 50,000 held by a related party -
see note 18) to $3.04 per share, which approximated fair market value of the
Company's Common Stock. As a result, holders of the warrants exercised such
warrants and acquired 800,000 shares of the Company's Common Stock at $3.04 per
share. Such exercises were paid in cash, except that holders of warrants
relating to the subordinated debt, as allowed under the terms of the debt
agreement, applied $750,000 of the principal amount of the subordinated debt in
payment of a portion of the warrant exercise price. On September 30, 1999, the
Company failed to make the $289,000 semi-annual interest payment due to Canyon
on that date. Accrued interest on the subordinated notes payable is $456,000 as
of December 31, 1999.
The Company and Canyon subsequently entered into a forbearance agreement which
provided that the Company pay Canyon weekly interest payments of $12,500
effective January 1, 2000. In addition, the Company executed a security
agreement which provided Canyon with a lien on all of the Company's tangible and
intangible property, which lien is junior to the lien granted to Coast (see Note
8).
On April 13, 2000, the Company entered into an agreement with Canyon which
waived all existing events of default, accelerated the maturity date to March 3,
2003 and provided for continued weekly interest payments of $12,500 until the
Coast Bridge Loan is paid in full. Upon repayment of the Bridge Loan, the
Company will be required to pay Canyon weekly interest payments of $25,000 until
all interest on the subordinated notes is paid in full. Thereafter, the Company
will pay weekly interest payments of approximately $11,000.
TAX CLAIMS
- ----------
Tax claims include pre-petition unsecured tax claims for income and property
taxes from various taxing authorities. Under the terms of the Plan of
Reorganization (see Note 17), such amounts are to be paid in full in cash in
annual installments over six years with interest at 6%. Upon agreement with the
respective taxing authority, tax claims are classified as debt, otherwise such
claims are classified as other long-term liabilities in the accompanying
consolidated balance sheets at December 31, 1998 and 1999. As of December 31,
1998 and 1999, unsettled tax claims of $712,000 are included in long-term
liabilities.
NOTE 10 - ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
(in thousands)
<S> <C> <C>
Salaries, wages and commissions $1,768 $1,225
Accrued warranty, insurance & sales taxes 677 687
Accrued vacation 647 675
Accrued interest 167 524
Other 900 2,025
------ ------
Total $4,159 $5,136
====== ======
</TABLE>
NOTE 11 - INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1998 1999
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
U.S $(12,492) $(3,458) $(12,147)
Foreign 2,586 1,529 1,543
-------- ------- --------
Total $ (9,906) $(1,929) $(10,604)
======== ======= ========
</TABLE>
22
<PAGE> 23
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
U.S. Federal $ -- $ -- $ --
State -- -- --
Foreign 266 387 169
---- ---- ----
266 387 169
Deferred:
U.S. Federal -- -- --
Foreign -- -- --
---- ---- ----
Total $266 $387 $169
==== ==== ====
</TABLE>
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 20,624 $ 23,097
Property, plant and equipment 1,449 1,509
Restructuring and other reserves 47 124
Inventory reserves 523 121
Allowance for doubtful accounts 1,266 1,278
Capitalized software and intangibles 1,868 809
Accrued expenses 516 410
Other 349 540
-------- --------
26,642 27,888
Less: valuation allowance (26,642) (27,888)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
The Company recorded certain deferred tax assets as of December 31, 1999 that
were previously omitted due to contingencies that were resolved during the year.
However, the Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences where it is not more likely
than not the Company will receive future tax benefits. The net change in the
valuation allowance for the years ended 1998 and 1999 was $2,721,000 and
$1,246,000, respectively.
The portion of the valuation allowance for which subsequently recognized tax
benefits will be applied directly to contributed capital is $213,000.
As of December 31, 1999, the Company has Federal and state net operating losses
(NOL) carryovers of approximately $65,000,000 and $3,700,000 respectively. These
NOL carryovers will expire in the years 2000 through 2018. The Company's
utilization of a portion of its NOL carryovers is subject to various
uncertainties including an annual
23
<PAGE> 24
limitation under Section 382 of the Internal Revenue Code. The amount of this
limitation is not known at this time. The IRS has asserted deficiencies for the
Company's separate federal income tax returns for the years 1988 and 1989. The
Company believes it has meritorious defenses and does not expect that any
liability resulting from those years will result in a material adverse effect on
its results of operations or financial position.
The Company has not provided for U.S. Federal income and foreign withholding
taxes on $568,000 of non-U.S. subsidiaries' undistributed earnings as of
December 31, 1998, because such earnings are intended to be reinvested
indefinitely as defined under APB 23. If these earnings were distributed, the
additional tax liability of the Company would not be material.
The provision (benefit) for income taxes differs from the amount computed by
applying the Federal corporate income tax rate of 34% to income (loss) before
income taxes and extraordinary item as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1998 1999
------ ------ ------
(in percentages)
<S> <C> <C> <C>
Statutory tax rate (34.0%) (34.0%) (34.0%)
Change in valuation allowance 23.5 100.7 11.8
Amortization and write-off of intangibles -- 9.1 6.9
Expiration of state NOLs 10.2 -- --
Effect of foreign operations 6.2 13.9 8.6
Adjustments of NOL carry forwards and deferred
tax assets pursuant to the finalization of the
IRS examination and other analysis -- (78.6) 7.5
Other (3.2) 0.3 0.8
------ ------ ------
Effective tax rate 2.7% 11.4% 1.6%
====== ====== ======
</TABLE>
NOTE 12 - GEOGRAPHIC AREA INFORMATION
Information with respect to the Company's operations by significant geographic
area is set forth below. "United States" includes operations in Puerto Rico.
"Other foreign" includes operations in Mexico, Venezuela, United Kingdom,
Singapore, Malaysia, Hong Kong, and the Netherlands. In connection with the
acquisition of HIS (see Note 6), the Company acquired operations in Singapore,
Hong Kong and Australia.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
United States $ 57,321 $ 49,841 $ 43,729
Asia 6,635 6,501 5,379
Canada 4,862 3,854 3,726
United Kingdom 1,170 1,532 2,567
Other foreign 990 510 945
-------- -------- --------
$ 70,978 $ 62,238 $ 56,346
======== ======== ========
United States revenue from foreign
affiliates $ 1,119 $ 379 $ 271
Operating income (loss):
United States $(11,240) $ (2,325) $(10,362)
Asia 1,284 777 717
Canada 751 651 607
United Kingdom 251 380 348
Other foreign 279 (549) (183)
-------- -------- --------
$ (8,675) $ (1,066) $ (8,873)
======== ======== ========
Identifiable assets:
United States $ 28,466 $ 28,396 $ 18,268
Asia 3,676 3,382 2,455
Canada 1,510 1,658 1,670
United Kingdom 493 2,085 1,817
Other foreign 468 235 420
-------- -------- --------
$ 34,613 $ 35,757 $ 24,630
======== ======== ========
Long-lived assets:
United States $ 14,511 $ 13,379 $ 10,512
Asia $ 198 $ 178 $ 103
Canada $ 244 $ 193 $ 39
Other foreign $ 125 $ 172 $ 33
</TABLE>
24
<PAGE> 25
United States revenue from foreign affiliates consists of net intercompany sales
and services from the United States to the Company's foreign subsidiaries and is
eliminated from consolidated net revenue. Intercompany sales are based on
current selling prices or list prices less discounts. Discounts typically are
influenced by competitive pricing, market conditions and relative foreign
exchange rates.
NOTE 13 - BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires segments to be determined and reported based on
how management measures performance and makes decisions about allocating
resources.
The Company has four reportable segments: Hospitality, Process Manufacturing,
Gaming, and Legacy. The Hospitality segment markets three property management
systems to the hospitality marketplace. The Process Manufacturing segment
markets enterprise resource planning ("ERP") applications software for mid-size
process manufacturers. The Gaming segment markets products for the gaming
industry. The Legacy segment principally provides maintenance services to its
installed base of customers.
The Company evaluates performance of each segment based on operating income for
fiscal years ending December 31, 1997, 1998, and 1999.
As assets were not identified by business segment at December 31, 1997, that
information is not presented below.
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
Process
Hospitality Manufacturing Gaming Legacy Other Total
----------- ------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
1999:
Revenues from:
Hardware $ 3,191 $ 3 $ 1,186 $ 668 $ -- $ 5,048
Software 11,689 1,231 77 476 -- 13,473
Professional Services 20,758 7,009 434 9,624 -- 37,825
Total Revenues 35,639 8,243 1,696 10,768 -- 56,346
Operating Income (loss) (8,798) 253 150 2,717 (3,195) (8,873)
Total Assets 11,851 7,646 -- 2,169 2,964 24,630
<CAPTION>
Process
Hospitality Manufacturing Gaming Legacy Other Total
----------- ------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
1998:
Revenues from:
Hardware $ 5,178 $ 3 $ 1,801 $ 357 $ -- $ 7,339
Software 8,847 1,948 51 53 -- 10,899
Professional Services 19,369 6,687 835 16,801 308 44,000
Total Revenues 33,394 8,638 2,687 17,211 308 62,238
Operating Income (loss) (552) (1,780) (1,493) 4,345 (1,586) (1,066)
Total Assets 15,629 8,930 4,028 6,462 708 35,757
<CAPTION>
Process
Hospitality Manufacturing Gaming Legacy Other Total
----------- ------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
1997:
Revenues from:
Hardware $ 5,410 $ 2,237 $ 3,176 $ 1,228 $ 1,298 $13,349
Software 5,899 1,106 579 221 24 7,829
Professional Services 21,411 7,586 839 19,066 898 49,800
Total Revenues 32,720 10,929 4,594 20,515 2,220 70,978
Operating Income (loss) 652 (3,149) (1,714) 1,998 (6,462) (8,675)
</TABLE>
25
<PAGE> 26
NOTE 14 - STOCKHOLDERS' EQUITY (DEFICIENCY)
STOCK OPTION PLANS
In connection with the Plan of Reorganization (see Note 17), the Company adopted
the MAI Systems Corporation 1993 Stock Option Plan (the "1993 Plan") which
became effective on January 27, 1994. Under the 1993 Plan, 2,000,000 authorized
shares of Common Stock are reserved for issuance of options. Options under the
1993 Plan may be granted at exercise prices determined by the Compensation
Committee of the Board of Directors, provided that the exercise prices shall not
be less than the fair market value of the Common Stock on the date of grant. At
December 31, 1999, 1,401,876 options under the 1993 Plan were exercisable and
the weighted-average exercise price of these options was $3.54.
In July 1995, the Board of Directors adopted the Non-Employee Director's Stock
Option Plan (the "Director's Plan"). Under the Director's Plan, certain
directors who are not employees of the Company or any affiliate of the Company
are eligible to receive stock options. The Director's Plan provides each
non-employee director who is elected or appointed and duly qualified, be granted
automatically an option to purchase 31,250 shares of Common Stock. The option
vests in five equal installments, the first of which occurs on the six-month
anniversary of the non-employee director's election or appointment to the Board,
and thereafter on the date of each successive re-election to another annual
term. The Director's Plan further provides that each non-employee director is
also granted an option to purchase 6,250 shares of Common Stock on the date of
each annual meeting of the Company's stockholders at which the director is
reelected to the Company's Board. These options vest on the date of the annual
meeting of the Company's stockholders held during the fourth calendar year after
the date of grant at which the director is reelected to the Board. The number of
shares of Common Stock reserved for issuance pursuant to the Director's Plan is
250,000 shares. The exercise price shall not be lower than the fair market value
of the Common Stock on the date of grant. As of December 31, 1999, 348,917
options under the Director's Plan were exercisable and the weighted-average
exercise price of these options was $2.62.
At December 31, 1999, there were 170,268 additional shares available for grant
under the stock option plans. The per share weighted-average fair value of stock
options granted during 1997, 1998 and 1999 was $4.52, $2.65, and $2.19
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 1997 and 1998 - risk-free
interest rate of 6.20%, volatility of 70% and an expected life of 5 years; 1999
- - risk-free interest rate of 6.5%, volatility of 80% and an expected life of 5
years.
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no compensation cost using the intrinsic value method has been
recognized for its stock option grants in the financial statements except as
noted below. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income (loss) and net income (loss) per share would have been reduced
(increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1998 1999
-------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss: As reported $(10,172) $(2,316) $(10,773)
Pro forma (11,191) (3,403) (12,201)
Basic loss per share: As reported $ (1.08) $ (0.23) $ (0.99)
Pro forma (1.19) (0.32) (1.12)
Diluted loss per share: As reported $ (1.08) $ (0.23) $ (0.99)
Pro forma (1.19) (0.32) (1.12)
</TABLE>
Pro forma net loss and pro forma net loss per share reflects only options
granted in 1996, 1997, 1998 and 1999. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period of four years.
26
<PAGE> 27
The following is a summary of stock option activity under the Company's stock
option plans:
<TABLE>
<CAPTION>
Number of Weighted-average
shares Exercise price
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996 962,957 $5.36
Granted 518,167 4.52
Exercised (206,777) 1.70
Canceled (249,005) 6.08
--------- -----
Options outstanding at December 31, 1997 1,025,342 $5.45
Granted 245,770 2.64
Exercised (40,666) 1.65
Canceled (205,486) 6.79
--------- -----
Options outstanding at December 31, 1998 1,024,960 $4.76
Granted 862,500 2.19
Exercised (5,413) 1.80
Canceled (128,667) 6.67
--------- -----
Options outstanding at December 31, 1999 1,753,380 $3.35
========= =====
</TABLE>
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options under the Company's stock
option plans were $0.563 - $9.75 and 8.55 years, respectively.
During 1997 and 1998, the Company accelerated the vesting period of certain
stock options granted to certain employees of the Company resulting in a new
measurement date of such options. The exercise prices of the options were below
the fair market value on the date of acceleration. Accordingly, earned
compensation of approximately $169,000 and $10,000 have been recorded for the
difference between the option exercise price and fair market value on the date
of acceleration in 1997 and 1998, respectively.
During 1999, the Company extended the term of certain warrants issued to the
Chairman of the Company resulting in a new measurement date of the warrants.
Accordingly, the Company recorded $280,275 of compensation expense in 1999 (see
Note 18).
PREFERRED STOCK
- ---------------
On May 20, 1997, the Company authorized the issuance of up to 1,000,000 shares
of $0.01 par value preferred stock. The Board of Directors has the authority to
issue the preferred stock, in one or more series, and to fix the rights,
preferences, privileges and restrictions thereof without any further vote by the
holders of Common Stock.
NOTE 15 - EMPLOYEE BENEFITS
SAVINGS PLANS
- -------------
On October 1, 1995, the Company established a Savings and Investment Plan
covering substantially all the Company's domestic employees (the "Domestic
Plan"). The Domestic Plan qualifies under Sections 401(k) and 401(a) of the
27
<PAGE> 28
Internal Revenue Code. Participating employees are allowed to contribute from 1%
to 15% of their annual compensation. During 1997, 1998 and 1999, the Company did
not make contributions to the Domestic Plan.
The Company's Canadian subsidiary offers to its employees a money purchase plan
for benefits accruing in respect of service from August 1, 1985 for
substantially all full-time employees (the "Canadian Plan"). Participating
employees are allowed to contribute between 2% and 6% of their annual
compensation. The Company contributes an amount equal to 50% of the employee
contributions up to a maximum of 2% of annual compensation. Contributions to the
Canadian Plan by the Company were approximately $12,000, $3,500, and $4,700 for
1997, 1998 and 1999, respectively.
DEFINED BENEFIT PLANS
- ---------------------
In April 1992, the Company elected to cease benefit accruals under the defined
benefit plan to current participants. The curtailment had no effect on the
accrued pension cost of the defined benefit plan.
Company contributions under this plan are funded annually. Plan assets are
comprised primarily of guaranteed investment/annuity contracts. Employee
benefits are based on years of service and the employees' compensation during
their employment.
The actuarially computed components of net periodic benefit cost included the
following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Service costs $ 40 $ 40 $ --
Interest costs 113 110 132
Expected return on plan assets (97) (110) (114)
----- ----- -----
Net periodic pension expense $ 56 $ 40 $ 18
===== ===== =====
</TABLE>
The following table sets forth the funded status and amounts recognized in the
Company's consolidated statements of operations:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Change in Benefit Obligation:
Projected Benefit Obligation, beginning of year $ 1,532 $ 1,541 $ 1,976
Service cost 40 40 --
Interest cost 112 110 132
Benefits paid (182) (56) (57)
Actuarial loss/(gain) 39 341 (356)
------- ------- -------
Projected Benefit Obligation, end of year $ 1,541 $ 1,976 $ 1,695
======= ======= =======
Change in Plan Assets:
Plan assets, beginning of year $ 1,244 $ 1,408 $ 1,677
Actual return on plan assets 246 270 127
Employer contribution 100 55 83
Benefits paid (182) (56) (57)
------- ------- -------
Plan assets, end of year $ 1,408 $ 1,677 $ 1,830
======= ======= =======
Funded status $ (133) $ (299) $ 135
Unrecognized (gain)/loss 41 223 (146)
------- ------- -------
Net amount recognized $ (92) $ (76) $ (11)
======= ======= =======
</TABLE>
The weighted average discount rates used in determining the actuarial present
value of the benefit obligations were 6.75% for 1998 and 7.9% for 1999. The
long-term rate of return on assets was 8% in 1998 and 7% in 1999.
28
<PAGE> 29
NOTE 16 - RESTRUCTURING COSTS
Prior to 1994, a restructuring plan was implemented comprising employee
severance programs, excess facilities and lease termination costs. During 1996,
1997 and 1998 approximately $397,000, $119,000 and $37,000, respectively, of
costs and payments have been charged against this balance. During 1996, $244,000
was reversed due to changes in the underlying estimates for excess space and
credited to selling, general and administrative expenses in the accompanying
consolidated statement of operations in 1996. The remaining balance at December
31, 1998 and 1999 of $81,000 and $36,000 respectively, mainly comprised lease
obligations for excess space.
In September 1997, management authorized and committed the Company to a
restructuring plan to eliminate operations and related expenses which were not
required to support the Company's operations of software sales and professional
services. In connection with the restructuring plan, the Company recorded a
restructuring charge of $900,000 to recognize severance, benefits and other
related costs for the employees to be terminated. During 1997, the Company paid
approximately $875,000 of severance and termination benefits. The remaining
balance of $25,000 at December 31, 1998 mainly consists of remaining severance
and termination benefits and was paid in 1999.
During 1999, management authorized and committed the Company to a restructuring
plan to close and reduce certain of its domestic facilities and reduce its
workforce to the appropriate levels sufficient to support the Company's domestic
operations. In connection with these actions, the Company recorded a
restructuring charge of $2,288,000. The restructuring charge consisted of (1)
$1,900,000 relating to the write-off of certain furniture, fixtures and
equipment impaired pursuant to the restructuring, (2) $45,000 of costs
associated with lease obligations relating to exited facilities and, (3)
$343,000 of employee severance and termination benefits associated with 38 of
the terminated employees. The remaining balance of $288,000 as of December 31,
1999 consists of $243,000 of remaining severance and termination benefits and
$45,000 of lease obligations on exited facilities.
NOTE 17 - PLAN OF REORGANIZATION
In connection with the Company's Chapter 11 bankruptcy proceedings in 1993,
shares of Common Stock are currently being distributed by the Company to its
former creditors pursuant to the Plan of Reorganization (the "Plan") as approved
by United States Bankruptcy Court. The Company anticipates that approximately
6,820,338 shares of Common Stock will be issued under the Plan. As of December
31, 1999, 6,758,251 shares had been issued pursuant to the Plan.
Notwithstanding the confirmation and effectiveness of its Plan of Reorganization
pursuant to which the Company emerged from a voluntary proceeding under the
bankruptcy laws, the United States Bankruptcy Court continues to have
jurisdiction, among other things, to resolve disputed pre-petition claims
against the Company, to resolve matters related to the assumptions, assignment
or rejection of executory contracts pursuant to the Plan, and to resolve other
matters that may arise in connection with the implementation of the Plan.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
LEASES
- ------
The Company leases certain facilities and equipment, some of which are in excess
of the Company's current and anticipated needs (and have been included in
accrued liabilities and other long-term liabilities in the balance sheet at
December 31, 1998 and 1999) under both month-to-month and fixed-term agreements.
The aggregate minimum rentals under operating leases with noncancelable terms of
one year or more are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Year Ending December 31,
2000 $1,405
2001 1,116
2002 908
2003 236
2004 54
Thereafter 55
------
$3,774
======
</TABLE>
29
<PAGE> 30
Rental expense was approximately $2,226,000, $2,095,000, and $1,500,000 the
years ended December 31, 1997, 1998, and 1999, respectively.
LEGAL PROCEEDINGS
- -----------------
Chapter 11 Bankruptcy Proceedings
At December 31, 1999, there was only one material claim to be settled before the
Company's Chapter 11 proceeding could be formally closed, a tax claim with the
United States Internal Revenue Service (the "Service"). The amount of this claim
is in dispute. The Company has reserved $712,000 for settlement of this claim,
which it is anticipated would be payable to the Service in equal monthly
installments over a period of six (6) years from the settlement date at an
interest rate of 6%.
CSA Private Limited
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 previous auditors were unwilling to provide. When this impediment
to registration was removed in April, 1998, CSA again demanded registration of
its shares. The Company has 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 had deprived it of
its ability to realize approximately $5,000,000 from sale of the shares to which
it is 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 previous 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 has been 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 by November 1999. Because the Company did not
register the shares with the SEC, CSA initiated another lawsuit in December 1999
seeking (a) seeking damages in excess of $5 million; (b) enforcement of the
settlement agreement; and (c) injunctive relief through court order to cause the
Company to file a S-1 registration statement. The Company answered the complaint
in March 2000 and intends to proceed as expeditiously as possible to file the
required S-1 registration statement utilizing year-end information contained in
this Annual Report on Form 10-K.
Enterprise Hospitality Solutions, Inc.
On November, 30, 1999, Enterprise Hospitality Solutions, Inc. ("EHS") and
Christian Rivadella commenced an action against MAI in the United States
District Court for the Central District of California, alleging that MAI had
failed to pay certain royalties to EHS under the parties' exclusive license
agreement. The Complaint asserts claims for breach of contract, unjust
enrichment, accounting and unfair competition. The Complaint seeks damages,
preliminary and permanent injunctive relief, imposition of a constructive trust,
an order canceling MAI's exclusive right to license the software at issue under
the parties' agreement, and the appointment of a receiver to conduct an audit.
On February 1, 2000, MAI answered the Complaint by denying its material
allegations and asserted a Counterclaim against the plaintiffs. The Counterclaim
asserts claims for breach of the parties exclusive license agreement, breach of
the covenant of good faith and fair dealing, unfair business practices,
interference with contractual relations and declaratory relief, and a
declaration that MAI is not in breach of the parties' license agreement. No
trial date has been set.
30
<PAGE> 31
Wang Global Corporation
On November 25, 1996 the Company executed outsource agreements with Wang Global
Corporation ("Wang") in the United States and with Olivetti Canada Ltd. in
Canada, for on-site repair and warranty service and telephonic support for the
Company's Legacy customers. On July 26, 1999 Wang filed for arbitration in this
matter involving alleged breach of contract for payments due for maintenance
services provided by Wang. Wang claims that the amounts due from the Company
exceed $3.7 million. The Company has accrued $1.8 million as of December 31,
1999 for amounts due to Wang under its interpretation of the two agreements (see
note 10). Settlement of the dispute is currently being discussed. Absent a
settlement, the arbitration will commence on June 7, 2000.
Other Litigation
The Company is also involved in various other legal proceedings that are
incident to its business.
Management believes the ultimate outcome of these matters will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
RELATED PARTY TRANSACTIONS
- --------------------------
Under the terms of a consulting agreement, and subsequent amendments (which
expires on August 31, 2000), between Orchard Capital Corporation ("Orchard") and
the Company, Orchard provides the services of Richard S. Ressler as the
Company's Chairman. Orchard is paid a consulting fee of $24,000 per month. In
addition, Orchard earned a bonus of $1,188,000 payable in cash or freely
transferable Common Stock (at the option of the Company) when the closing
trading price of the shares of the Company's Common Stock for 20 consecutive
trading days ending on or after January 1, 1996 exceeded $4.00 per share. During
the second quarter of 1997, the Company issued 398,510 shares of Common Stock to
Orchard to settle the $1,188,000 bonus in full. In addition to such
compensation, Orchard was granted warrants in 1995 to purchase up to 625,000
shares of Common Stock at a price of $1.90 per share (which were to expire on
August 14, 1999) and in March 1997, was granted additional warrants to purchase
up to 50,000 shares of the Company's Common Stock at a price of $7.50 per share,
the fair market values of Common Stock on the dates of grant. The warrants were
fully exercisable on the dates of the respective grants. In September 1997,
Orchard exercised warrants to purchase 157,895 shares of Common Stock at $1.90
per share and additional warrants to purchase 50,000 shares of the Company's
common stock at $3.04 per share (which warrants had been temporarily re-priced
in order to induce exercises), resulting in $452,000 cash proceeds to the
Company (see Note 9). On August 11, 1999, the term of the remaining warrants to
purchase up to 467,105 shares of Common stock was extended for an additional
two-year period so that they will expire on August 14, 2001. In connection with
extending the term of the warrants, the Company recorded $280,275 of
compensation expense as the fair market value of Common Stock on the date of the
extension exceeded the $1.90 exercise price.
On May 21, 1999, the Company's Chairman was granted 31,250 options to purchase
Common Stock under the Non-Employee Directors' Option Plan at $3.25 per share,
the fair market value of Common Stock on the date of grant. On August 11, 1999,
Orchard was granted 225,000 options under the 1993 Stock Option Plan at a price
of $2.50 per share, the fair market value of Common Stock on the date of grant.
In January 1997, the former Chairman of the Company divested all shares of the
Company's Common Stock.
On February 3, 1999, the Company's Chairman purchased 201,106 shares of the
Company's Common Stock for $500,000, the fair market value of Common Stock on
the date of purchase.
31
<PAGE> 32
NOTE 19 - INCOME (LOSS) PER SHARE
As discussed in Note 1, the Company adopted SFAS No. 128 effective December 31,
1997. The following table illustrates the computation of basic and diluted loss
per share under the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted loss per share - net loss $(10,172) $ (2,316) $(10,773)
======== ======== ========
Denominator:
Denominator for basic loss per share - weighted average number
of common shares outstanding during the period 9,408 10,587 10,889
Incremental common shares attributable to exercise of outstanding
options and warrants -- -- --
-------- -------- --------
Denominator for diluted loss per share 9,408 10,587 10,889
======== ======== ========
Basic loss per share $ (1.08) $ (0.23) $ (0.99)
Diluted loss per share $ (1.08) $ (0.23) $ (0.99)
</TABLE>
The computation of diluted loss per share for the years ended December 31, 1997,
1998 and 1999 excludes the effect of incremental common shares attributable to
the exercise of outstanding common stock options and warrants because their
effect would be antidilutive (See Notes 14 and 17). Additionally, the
computation does not consider the additional shares of Common Stock, which may
be issued in connection with past acquisitions (see Note 6).
32
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAI SYSTEMS CORPORATION
(12/31/99)
The following is a list showing MAI Systems Corporation and each of its
subsidiaries, as of December 31, 1999, indicating each jurisdiction under the
laws of which it was organized:
JURISDICITION OF
NAME: INCORPORATION
----- ----------------
MAI SYSTEMS CORPORATION DELAWARE
Gaming Systems International Nevada
MAI Canada Ltd. Canada
CLS Software International, Inc. California
CLS de Mexico, S.A. de C.V. Mexico
MAI del Caribe, Inc. Delaware
Computerized Lodging Systems B.V. Netherlands
MAI de Venezuela, S.A. Venezuela
Hotel Information Systems Ltd. Hong Kong
Hotel Information Systems, Pte. Limited Singapore
MAI Information Solutions Limited United Kingdom
Boss Solutions Limited Hong Kong
<PAGE> 1
EXHIBIT 23.1
REPORT ON SCHEDULE
AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MAI Systems Corporation
The audits referred to in our report dated April 13, 2000, included the related
financial statement schedule as of December 31, 1998 and 1999, and for each of
the years in the three-year period ended December 31, 1999, included in the
annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
33-92194) on Form S-8, of MAI Systems Corporation of our report dated April 13,
2000, relating to the consolidated balance sheets of MAI Systems Corporation and
subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statement of operations, stockholders' equity (deficiency) and comprehensive
income (loss) and cashflows for each of the years in the three-year period ended
December 31, 1999, and all related schedules, which report appears in the
December 31, 1999 annual report on Form 10-K of MAI Systems Corporation.
/s/ KPMG LLP
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,645
<SECURITIES> 0
<RECEIVABLES> 10,811
<ALLOWANCES> (3,622)
<INVENTORY> 625
<CURRENT-ASSETS> 13,941
<PP&E> 9,321
<DEPRECIATION> (6,712)
<TOTAL-ASSETS> 24,630
<CURRENT-LIABILITIES> 28,322
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> (12,681)
<TOTAL-LIABILITY-AND-EQUITY> 24,630
<SALES> 56,346
<TOTAL-REVENUES> 56,346
<CGS> (29,719)
<TOTAL-COSTS> (29,719)
<OTHER-EXPENSES> 34,954
<LOSS-PROVISION> (2,151)
<INTEREST-EXPENSE> (1,185)
<INCOME-PRETAX> (10,604)
<INCOME-TAX> (169)
<INCOME-CONTINUING> (10,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,773)
<EPS-BASIC> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
