-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyA9hTf/zwLkrGvvHkaAzqLduKQVwk0BYNhoGGOm7wf1WfYeAbj3WFtGTex0OmKl gkfSy18/Mz70nJ3khIq/WQ== 0000892569-99-000726.txt : 19990326 0000892569-99-000726.hdr.sgml : 19990326 ACCESSION NUMBER: 0000892569-99-000726 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAI SYSTEMS CORP CENTRAL INDEX KEY: 0000760436 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 222554549 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09158 FILM NUMBER: 99572037 BUSINESS ADDRESS: STREET 1: 9600 JERONIMO RD CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7145800700 MAIL ADDRESS: STREET 1: 9600 JERONIMO RD CITY: IRVINE STATE: CA ZIP: 92717 FORMER COMPANY: FORMER CONFORMED NAME: MAI BASIC FOUR INC DATE OF NAME CHANGE: 19901205 FORMER COMPANY: FORMER CONFORMED NAME: BSIC SUBSIDIARY INC DATE OF NAME CHANGE: 19850106 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED DECEMBER 31, 1998 1 ================================================================================ 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, 1998 COMMISSION FILE NO. 1-9158 ---------- MAI SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2554549 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9601 Jeronimo Road Irvine, California 92618 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 598-6000 ---------- Securities registered pursuant to Section 12(b) of the Act: Common Stock $0.1 par value per share ---------- 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 are currently being distributed by the registrant to its former creditors pursuant to its Chapter 11 Plan of Reorganization. At February 28, 1999, the number of issued and outstanding shares of the Company's Common Stock was 10,837,908 shares. The aggregate market value of all of the shares of Common Stock held by non-affiliates of the registrant as of February 28, 1999 was approximately $21,504,000. Directors and officers and ten percent or greater stockholders are considered affiliates for the purposes of this calculation but should not necessarily be deemed affiliates for any other purpose. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No | | ---------- DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's 1993 Annual Report on Form 10-K are incorporated herein by reference in Part I; portions of registrant's 1998 Annual Report are incorporated herein by reference in Part II; and portions of registrant's definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999 are incorporated herein by reference into Part III. ================================================================================ 2 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 partnerships with its customers by designing, installing and supporting customer-specific total information management solutions. Focusing primarily on the hotel, motel and resort destinations industry and solutions for mid-sized process manufacturers, it designs, sells, installs and supports information management solutions featuring complex wide area networks ("WANs") and local area networks ("LANs"). It provides a wide array of products and services to its installed base of approximately 6,000 customers and continues to make direct sales of certain products and services which enhance, upgrade and extend the useful life of the Company's legacy systems. MAI markets its products and services primarily through a team selling approach, which utilizes the Company's nationwide network of sales offices. The Company also markets certain products and services through a limited number of distributors, independent value-added resellers ("VARs"), authorized service representatives and independent software vendors ("ISVs"). The Company's activities are conducted principally in the United States, Canada, the United Kingdom, Hong Kong, Singapore and Mexico. The Company also operates subsidiaries in Puerto Rico and Venezuela and operates offices in the People's Republic of China and Malaysia. Additionally, the Company sells its products through indirect channels in the United States and abroad. These independent channels include VARs, distributors, ISVs and local sales agents. The Company provides software support services (both procedural and technical support) to its hospitality, process manufacturing and gaming systems customers from its offices in the United States, the United Kingdom and Singapore. In some countries the Company relies on certain foreign distributors of its products to provide software support services to customers located within the distributors' regions. The Company provides on-site service and help support desk services to its legacy system customers in the United States, Canada, Puerto Rico and Venezuela. In the United States and Canada, the Company and its third-party subcontractors provide on-site services to the Company's new and legacy system customers. PRODUCTS AND SERVICES In 1998, the Company's revenue was derived from the following product lines:
Percentage of Total Revenue ------------- Hospitality 53.7% Process Manufacturing 13.9% Gaming 4.3% Legacy 27.6% Other 0.5% ----- Total 100.0% =====
-2- 3 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 - 53.7% The Company markets three property management systems. Hotel CompuSystem II has been marketed by the Company since 1990, when the Company acquired Computerized Lodging Systems ("CLS"). In August 1996 the Company acquired Hotel Information Systems, Inc. ("HIS") and began marketing its Paragon product line. In October 1996, the Company became the exclusive distributor of the Lodging Touch International products from Enterprise Hospitality Solutions. Each of the product lines has features which make it particularly well-suited to a different segment of the hospitality marketplace. Hotel CompuSystem II, which targets hotels and resorts in the 300 to 1,000 room range, runs under UNIX. Hotel CompuSystem II is full-featured and provides customers with front desk, night audit, housekeeping and numerous other functions. Additionally, the CLS products interface to more than 250 other hospitality-related information system products, such as point-of-sale systems, telephone call monitoring systems and minibar maintenance systems. The ease of connectivity with third-party products is one of the system's competitive advantages. Hotel CompuSystem II is installed in over 1,500 sites worldwide. The Paragon property management system, from HIS, is designed to serve the needs of larger hotels and resorts. Running on IBM AS/400 or System 36 minicomputers, the Paragon product line provides the full range of features and functionality required by premier properties, such as Disneyland Paris or Renaissance Hotels International. Paragon is installed in more than 1,000 hotels and resorts around the world, and is a major presence in the Pacific Rim. The Lodging Touch International ("LTI") products comprise a state-of-the-art suite of products designed to take full advantage of the versatility of Microsoft's Windows 95 and Windows NT operating systems. They are the industry's first fully graphical products to fully utilize the features of the Windows NT operating system and Microsoft Sequel Server. With the LTI products, MAI has been named a Microsoft Solutions Partner. Process Manufacturing - 13.9% MAI develops and markets MANBASE and CIMPRO, both of which are ERP applications, used by midsize process manufacturers. The Company's typical customer generally has annual revenues between $20 million and $500 million. These manufacturers convert raw materials into finished goods or into products used to manufacture other goods. Typical users of the Company's ERP product would be manufacturers who convert raw milk into cheese and other dairy products, or pharmaceutical manufacturers who convert raw chemicals into medicinal products. These process manufacturers have unique requirements in quality control, regulatory compliance, inventory control and production planning that require an integrated application and system solution. CIMPRO, which the Company acquired from Datalogix International, Inc., a subsidiary of Oracle Corporation, in March 1997, offers a fully integrated modular system for complete support of process manufacturing planning and tracking, including inventory, production, supply chain management, costing, accounting, electronic data interchange ("EDI") and regulatory compliance. CIMPRO's customer base is primarily food, chemical and pharmaceutical manufacturers. -3- 4 MANBASE, the rights to which the Company reacquired in May 1996, also offers a fully integrated ERP application for process manufacturers. MANBASE has been sold primarily to food manufacturers and has many features which are tailored for the unique requirements of this industry. The Company intends to provide continuing support for its MANBASE customers but will concentrate its sales efforts on the CIMPRO product. Gaming - 4.3% The Company markets the Gaming Systems International ("GSI") products for the gaming industry. GSI's on-line slot accounting and player tracking product is comprised of a proprietary circuit board which is installed inside electronic slot machines, and database software which gathers and maintains data collected by the circuit boards. The Company utilizes Novell-based LANs to link the slot machines. The GSI system monitors the activity in the individual gaming machines in real time, providing information on the activity of each machine, the amount of money in the machine, whether or not the machine is operating properly and alerting the casino management if the machine has been tampered with. The software modules include stand-alone player tracking, cage/pit management, table games accounting, slot maintenance, employee time and attendance, and numerous other functions. Legacy - 27.6% The Company continues to provide principally maintenance services to its installed base of customers. These products and services are designed to enable customers to benefit from their investment in the Company's host-based information systems. The Company's OpenBASIC application environment permits customers using application software written in the Business BASIC programming language to continue to use such application software on selected hardware platforms designed for the UNIX, MS-DOS and Novell environments. Optional OpenBASIC modules permit developers to enhance their Business BASIC applications by integrating them with popular UNIX and MS-DOS/Microsoft Windows software. With its own personnel and through an outsource agreement with Olivetti North America, Inc. in the United States and with Olivetti Canada Ltd. in Canada, and directly in Venezuela and Puerto Rico, the Company offers on-site repair and warranty service and around-the-clock telephonic support to its customers. The Company also provides a range of customer education, training and consulting services for its application software packages and hardware and horizontal software products. These services are offered to the Company's customers as part of the Company's strategy of supplying the total information solution to its customers. Other - 0.5% During 1997, the Company closed down a business it had entered in 1996, in which the Company provided customers outside its core markets with integration and implementation services. These customers utilized the Company's professional services, consulting, network and system products and/or partner products, to re-host their legacy application to modern client/server technology. These customers did not use the Company's hospitality or process manufacturing applications, but had an in-house or third party application. The Company no longer conducts that business, but it continues to have revenue from contracts which commenced in 1996 and 1997. MARKETING AND SALES MAI markets its products and services primarily through a team-selling approach, which utilizes the Company's nationwide network of sales offices and its Irvine, California-based account representatives. The Company also markets certain products and services through limited numbers of VARs, authorized service representatives and ISVs. In the United States, the Company's systems are marketed by a direct sales and marketing organization which included, as of February 28, 1999, 38 sales and marketing personnel located in the corporate headquarters and five satellite offices. In addition, the Company markets its systems internationally through its subsidiaries which operate in Canada, the United Kingdom, Mexico, Hong Kong, Singapore, Puerto Rico and Venezuela and through various distributors that are exclusive in their jurisdictions. The Company's international subsidiaries employed, as of February 28, 1999, 25 sales and marketing personnel who are engaged in the marketing of MAI products from sales offices in Canada, Mexico, the United Kingdom, the Netherlands, Hong Kong, Singapore, Malaysia, the People's Republic of China and Venezuela. -4- 5 Additionally, the Company also sells its products through indirect channels both within and outside the United States. These indirect channels include VARs, distributors, ISVs and local sales agents. During 1998, the Company's aggregate revenue was derived from geographic areas as follows:
Percentage of Total Revenues -------------- United States 80.1% Asia 10.4% Canada 6.2% Other Areas 3.3% ----- Total 100.0% =====
The financial performance of the Company is affected by the fluctuation in value of the US dollar in relation to the local currencies of the countries in which the Company does business. In addition, the Company's foreign operations are subject to the usual risks that may affect such operations, including possible expropriation or other governmental actions, taxes and political changes. However, as only 19.9% of the Company's 1998 revenues were 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 28, 1999, the Company had software support agreements with approximately 1,900 customers. Additionally, it had hardware maintenance agreements with approximately 2,700 other customers. The Company employs approximately 63 technicians to provide support for the Company's applications software products. Telephonic support, which is primarily to assist licensees of the Company's applications products, is provided from the Company's response centers located in Irvine, California, Dallas, Texas, Tarrytown, New York, Singapore and the United Kingdom. The Company utilizes the latest developments in telephony and artificial intelligence-enhanced technology to enable its support technicians to quickly identify and resolve customers' software related computing problems. The Company's maintenance services are generally provided pursuant to individual maintenance contracts with customers, although time and material services are provided in some areas. Such support and maintenance are of varying duration, provide annual cancellation rights and require advance payment of fees to the Company. Substantially all of the revenue earned by maintenance operations is invoiced to customers in advance. PRODUCTION AND PROCUREMENT In response to market demand for standardized hardware and software products, all of the Company's current systems offerings utilize open systems architecture, which means that they will operate on a wide variety of third-party hardware equipment. At present, the Company has relationships with a number of suppliers including Cisco Systems, Compaq Computer, Data General, Hewlett Packard and IBM and distributors such as MicroAge and Ingram Micro. Management believes that these relationships have enabled the Company to reduce product costs, permit earlier availability of new technology and offer customers products with superior performance at competitive prices. The Company no longer manufactures proprietary hardware products. Delay or failure in the delivery of products or components purchased from third parties could adversely affect shipments by the Company and its ability to conclude sales. The Company has purchased many products and components from single sources of supply. Because the Company's current products are industry standard, or are comprised of industry-standard components, management believes that alternative sources of supply of similar products would be available to the Company in the event of any interruption of delivery of a single source supplier. -5- 6 ORDER, SHIPMENT AND BACKLOG The Company records and enters into backlog a purchase order for equipment and software when it receives a customer's written order requesting delivery within six months, and systems configuration and contract provisions are verified. Orders that are canceled by the customer and orders that are not shipped within one year are removed from backlog. Orders that are removed from backlog for non-shipment are restored if they are reinstated by the customer. Set forth below is certain information concerning orders, shipments and backlog for 1997 and 1998:
(dollars in millions) 1997 1998 ---- ---- Orders received (net of cancellations) $ 22.4 $ 38.3 Shipments (net of equipment returns) 30.0 24.6 Backlog (at period end) 8.1 21.8
The Company's backlog is not necessarily indicative of future revenues. In the second half of 1997, the Company began directing a large portion of the hardware component of its systems sales to its strategic partners. RESEARCH AND DEVELOPMENT The Company's research and development activities are focused on the development of products for the hospitality, resort and destination industry and for products for midsize process manufacturers. The Company also maintains and expands OpenBASIC, an operating system which enables users of the Company's proprietary environment, BusinessBASIC, to run their applications under UNIX. The Company's use of the OpenBASIC application environment and its system integration capability permits it to have substantial independence from individual hardware manufacturers and minimizes the need for hardware research and development. As of February 28, 1999, the Company employed 31 engineers, programmers and other technical personnel in research and development activities. During 1996, 1997 and 1998, the Company incurred $3,117,000, $5,583,000 and $4,058,000 respectively, for research and development activities. The Company's research and development expenditures related primarily to support and enhancement of existing software products. CUSTOMERS The Company's customers in hospitality are generally hotels and resorts with fifty or more rooms, in gaming are casinos with electronic gaming equipment such as slot machines, and in process manufacturing are generally midsize process manufacturers. Legacy comprises a highly diversified group of customers in various industries who use hardware sold by MAI over the years. During 1997 and 1998, 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. -6- 7 The competition in the ERP market is diffuse and new or different competitors often appear with each sales opportunity. In the lower end of the market, the Company competes with local VARs and ISVs who usually resell hardware or networking products of larger equipment manufacturers. These VARs and ISVs usually sell one or two specialized software application products targeted for specific industry market segments. Within the mid-range market, the Company competes with several companies of similar size and technology. On the high end of the market, the Company competes with companies that are much larger and have financial resources far greater than the Company. Within the gaming industry, the Company competes with manufacturers of gaming equipment. Some of those competitors are substantially larger than the Company. In the legacy arena, there are some third-party maintenance organizations ("TPMS") who provide service to users of the Company's hardware products. The competition is minimal, as outside companies cannot provide complete solutions to the Company's existing proprietary customer base. TRADEMARKS, COPYRIGHTS AND LICENSES The Company is the owner or licensee of certain trademarks, copyrights and other property rights associated with its businesses, including rights associated with its proprietary application software. The Company owns or has licensing rights, generally with terms of three years (although the term of the license to the LTI software is perpetual), to the principal application software products marketed by the Company. Such licensing rights are generally renewable. Although there is some risk that independent vendors who own such products may elect not to renew their licensing agreements with the Company and enter into exclusive arrangements with, or elect to install their software on systems sold by competitors of the Company, such vendors generally tend to continue to support the Company's marketing efforts so long as the Company's systems provide a good opportunity for them to market their products. The Company is party to license agreements with IBM relating to a variety of patents, with Novell, Inc. relating to UNIX and with a number of other suppliers of software products. These licenses are terminable at the Company's option and certain of the licenses require the Company to make royalty payments. OpenBASIC and certain other intellectual property formerly owned by the Company is currently owned by Triple P Management BV ("Triple P"), a corporation organized under the laws of the Netherlands, which acquired the rights from Application Systems, Inc., a Delaware corporation controlled by the Company's former bank lenders (the "Banks"), which held the stock of certain of the Company's former European subsidiaries, originally acquired by the Banks in connection with the foreclosure described under "Chapter 11 Bankruptcy Proceedings". MAI retained an exclusive license to use OpenBASIC and other intellectual property in the western hemisphere and has a nonexclusive license to use it in certain other parts of the world. The license is perpetual and royalty-free, but subject to termination under certain conditions. EMPLOYEES As of February 28, 1999, the Company had 394 employees, of whom 263 were employed in the United States, 16 in Canada, 10 in Mexico, 9 in Puerto Rico, 12 in the United Kingdom, 57 in Asia (Hong Kong, Singapore and the People's Republic of China) and 27 in Venezuela. The Company has not experienced any work stoppages and considers its relationship with its employees to be good. CHAPTER 11 BANRUPTCY PROCEEDINGS Prior to its Chapter 11 bankruptcy proceedings, the Company had followed certain business strategies that eventually led to its defaulting on its and its Canadian subsidiary's US and Canadian Credit Agreements (the "Credit Agreements"). Thereafter, shortly before the Company filed for bankruptcy protection on April 12, 1993, the Company's banks, parties to the Credit Agreements, foreclosed on all of the outstanding capital stock of certain of the Company's former European subsidiaries (the "Foreclosure") in satisfaction of all amounts due under the Credit Agreements, which, at such date amounted to approximately $84,500,000. -7- 8 The business strategies of the Company that led to the Foreclosure reflected the nature of the information technology industry as it existed at that time. Historically, organizations relied upon proprietary, host-based computing systems to implement software applications, accounting and financial functions. The Company, like others in the industry, manufactured and serviced its own host-based information systems. However, with the declining costs of the personal computer and developments in the design and implementation of WANs and LANs, the information technology industry shifted away from centralized, host-based information systems to a system of workstations or personal computers sharing data and networked resources over WANs and LANs. This occurred when the Company had become highly leveraged due to the leveraged acquisition of a computer maintenance business that the Company had previously owned. Eventually, the Company and its subsidiary were in default under its Credit Agreements, which indebtedness matured on November 16, 1992. EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS On November 18, 1993, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") entered an order confirming the Company's Plan of Reorganization. The Company had been operating under Chapter 11 protection since April 12, 1993. The order was not appealed and became final and non-appealable on November 29, 1993. On January 27, 1994, the Bankruptcy Court entered an order which fixed January 27, 1994 as the effective date (the "Effective Date") of the Plan of Reorganization. The summary of the material features of the Plan of Reorganization, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1993 under the heading "CHAPTER 11 BANKRUPTCY PROCEEDINGS", is included herein by this reference. The Plan of Reorganization provided for, among other things, (i) the satisfaction of substantially all of the unsecured (non-priority) indebtedness of MAI, Brooke Acquisition Corporation and CLS Software, Inc., the Company's wholly-owned subsidiaries which were parties to the bankruptcy proceeding (all of which are collectively referred to as the "Debtors"), through the issuance of the Company's Common Stock and (ii) the cancellation of existing equity interests in the Debtors. The Plan of Reorganization also provided for the substantive consolidation and merger of the Debtors and the corresponding extinguishment of intercompany liabilities and contracts among the Debtors. At December 31, 1998, the aggregate amount of tax claims had been reduced to approximately $600,000 and the Company continues to dispute certain tax claims. The Company commenced distribution of Common Stock to holders of unsecured claims on April 14, 1994. The Common Stock is issued pursuant to section 1145 of the Bankruptcy Code, which contains an exemption from registration under the Securities Act of 1933, as amended. Through December 31, 1998, the Company had distributed 6,755,751 shares of Common Stock to its former creditors and the Company estimated that an approximate additional 65,000 shares will be issued in settlement of other creditor claims. The Plan of Reorganization provided holders of unsecured claims the right to elect a limited cash recovery, and through December 31, 1998, $74,570 in cash had been distributed pursuant to such provision. Under the Plan of Reorganization, there is no recovery for holders of the Company's $0.01 par value old Common Stock, and all classes of Preferred Stock outstanding prior to the Effective Date. The interests evidenced by these securities were extinguished by operation of the Plan of Reorganization on the Effective Date. Pursuant to the terms of the Plan of Reorganization, the Company filed an Amended Certificate of Incorporation pursuant to which new shares of Common Stock were authorized for issuance. Such shares are being issued to holders of allowed unsecured claims as described above and will also be issued to optionees under the Company's stock option plans. -8- 9 FACTORS THAT MAY AFFECT FUTURE RESULTS The following discussion should be read in conjunction with the audited consolidated financial statements contained herein. In addition to the factors set forth herein, there may be other factors, or factors which arise in the future which may affect the future performance of the Company. COMPETITION Competition is vigorous in all sectors of the market for computer-based solutions and support and maintenance services which the Company offers. The Company has numerous competitors in each of its business lines, which vary widely in their size, capabilities, market segments and geographic areas, many of which are larger and have financial resources far greater than the Company. Within its markets, competition comes primarily from vendors of competing information technology in the markets in which it competes. There are several providers of information technology to the hotel, resort and destination industry against which the Company regularly competes. The competition in the ERP market is diffuse and new or different competitors often appear with each sales opportunity. The Company also competes against local VARs and ISVs, who usually resell hardware or networking products of larger original equipment manufacturers, ISOs, which provide service to end users of the Company's software products, and TPMs, which provide service to users of the Company's hardware products. Many of the Company's services are also provided by in-house MIS departments. There can be no assurance that the Company can effectively compete with any or all of its competitors in any of its business lines. PRODUCTION AND PROCUREMENT The networking products and services implemented, maintained and supported by the Company utilize hardware and software products from technology vendors. Accordingly, the Company is and will remain dependent on the demand for products from such vendors. In addition, delay or failure in the delivery of products or components purchased from third parties could adversely affect shipments by the Company and its ability to conclude sales. The Company has purchased many products and components from single sources of supply. Because the Company's current products are industry standard, management believes that alternative sources of supply of similar products would be available to the Company in the event of any interruption of delivery from a single source supplier. However, there can be no assurances that any such products will be available or be accepted by the Company's customers. LIMITED HISTORY OF PROFITABILITY Prior to the bankruptcy the Company incurred significant operating losses. The Company was profitable in 1994 and 1995, but then incurred significant losses in 1996 and 1997, and a smaller loss in 1998. 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. -9- 10 LIQUIDITY: VOLATILITY OF STOCK PRICE Historically, trading volume of the Company's Common Stock has been small, and the market for the Common Stock has been less liquid than that of many other publicly traded companies. In August 1995 the Company's Common Stock became listed on the AMEX under the symbol "NOW". Nevertheless, there can be no assurance that a stockholder who desires to sell shares of Common Stock can sell all of the shares that the stockholder desires to sell, either at all or at the desired times or prices. Like the stock of other technology companies, the market price of the Common Stock has been and may continue to be volatile. Factors such as quarterly fluctuations in the Company's results of operations, trading volume, the announcement of technological innovations or new products by the Company or its competitors, general conditions in the computer hardware and software industries, economic conditions generally, variances between actual results of operations and the results expected by securities analysts, and the factors mentioned under "Fluctuations in Operation Results", among other factors, may have significant impact on the market price of the Common Stock. RISKS OF CONTRACT SERVICES BUSINESS The Company is subject to the risks associated with a contract services business, including dependence on reputation with existing customers, volatility of workload and dependence on ability to retain qualified technical personnel. The Company is party to an agreement with Olivetti pursuant to which Olivetti performs certain field engineering services for the Company. If the quality of services provided by Olivetti is not perceived as comparable to that previously provided by the Company, there is a probability that some of the Company's field service customers will terminate their service agreements. 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 1999. 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. -10- 11 RISK OF FOREIGN OPERATIONS The financial performance of the Company is affected by the fluctuation in the value of the US dollar in relation to the local currencies of the countries in which the Company does business. In addition, the Company's foreign operations are subject to the usual risks that may affect such operations, including import and export restrictions, possible expropriation or other governmental actions, taxes and political changes. YEAR 2000 COMPLIANCE RISKS The Year 2000 compliance issue arises from the fact that a significant percentage of the software utilized by United States businesses relies on two-digit date codes to perform computations and decision-making functions. Commencing on January 1, 2000, these computer programs may fail from an inability to interpret date codes properly, misinterpreting "00" as the year 1900 rather than 2000. The Company has completed an evaluation of both its information technology systems and its non-technology systems, such as equipment containing microprocessors. The Company believes that all information technology and non-technology systems in its corporate home office in Irvine, California and in its branch or subsidiary offices in the United States and internationally have been, or by March 31, 1999 will have been, modified to address Year 2000 issues. The Company estimates that the costs associated with implementing its Year 2000 compliance plan for its corporate offices to be approximately $50,000. The Company has designed and tested the most current versions of its products to be Year 2000 ready. The Company has established a Year 2000 "task force" which prepared and released its Year 2000 products readiness report on the Company's "Web Pages" (www.maisystems.com and www.hotelinfosys.com) and plans to make available to clients a copy of this report on a per request basis. The Company launched a direct mail/fax campaign in February 1999 to all of its current maintenance agreement clients as well as to all identifiable clients that may be utilizing the Company's products, informing clients that the "Year 2000 Readiness Program" was available to be viewed at the indicated websites. The mailing also provided clients the opportunity to request information regarding the "Year 2000 Readiness Program" if they so desired. This mailing was executed using the most current client database available. This notification went to approximately 18,000 domestic customers as well as being faxed to approximately 4,000 international customers from the Company's international offices. The report breaks down the Company's products into four categories: "product is ready," "product is scheduled to be tested," "product is not ready (but has some Year 2000 functionality)," and "product will not be tested (and is not ready)." At the present time, of the eighty-nine products listed in the Company's Year 2000 readiness report, twenty-four remain to be tested, and thirty-six fall in the final category of products that will not be tested or ready. Of those products in the latter category, many of these are older products that have been replaced by newer versions of software. The Company is continuing to work on making some of its older software Year 2000 ready. The software still under modification is not required to be upgraded before the end of 1999. Nonetheless, the Company believes that all modifications will be complete and ready for distribution to its customers by the end of June, 1999. Although the Company has been encouraging its customers to upgrade to current product versions, no assurance can be given that all of them will do so in a timely manner, if at all. The Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and is used in the Company's products to perform key functions. The Company has undertaken joint compliance review of such software in certain cases where the product is believed to be material to the Company's financial performance, such as its "Lodging Touch" product that is licensed from Enterprise Hospitality Solutions. The Company believes that in such selective cases the licensed software and any related integrated software product is Year 2000 compliant. There can be no assurance, however, that all third party software presently utilized by the Company will be free of errors and defects or be Year 2000 compliant. -11- 12 The Company's present "reasonably likely worst case scenario" for Year 2000 problems involves potential product liability claims by substantial customers involving collateral (business interruption) damages. Although the Company has not experienced any product liability claims to date regarding Year 2000 compliance, there can be no assurance that errors or defects, whether associated with Year 2000 functions or otherwise, will not result in product liability claims against the Company in the future. The Company's license agreements with customers typically contain provisions designed to limit the Company's exposure to potential product liability claims; however, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Defective products or releases could result in loss of revenues, increased service and warranty costs and product liability claims, and could adversely affect the Company's market penetration and reputation, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Since the Company spent a significant amount of time developing its Year 2000 readiness plan and evaluating its products for readiness, it does not believe that an elaborate Year 2000 contingency plan is necessary. However, it is reasonable to assume that some problems may be discovered in products the Company currently believes to be Year 2000 ready. In this case, the Company has the necessary resources available to address these expected problems and provide the appropriate customers with updated software. The Company is in the process of compiling information concerning the Year 2000 compliance of its key suppliers through the process of issuing questionnaires and monitoring responses. In the event that any of the Company's key suppliers do not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected. The Company's Year 2000 compliance plan includes encouraging and/or requiring Year 2000 compliance by all key suppliers. Despite the Company's efforts to become Year 2000 compliant, there is no assurance that the Year 2000 issue will not pose significant problems. There may be delays in the Company's remediation efforts, a failure to fully identify all Year 2000 problems in the systems, equipment or processes of the Company or its vendors or customers, or unanticipated remediation expenses, all of which could have material adverse consequences on the Company's financial position and results of operations. -12- 13 ITEM 2. PROPERTIES As of February 28, 1999, the principal properties utilized by the Company were as follows:
Approximate Total Square Type of Facility Footage Location ---------------- ------------ -------- 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 Gaming Systems International headquarters, marketing, sales, development, support and warehousing 16,913 Las Vegas, Nevada 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 3,000 London
All of the properties noted above were occupied by the Company pursuant to leases with various expiration dates. In addition to the premises identified above, the Company leases offices in three additional locations in the United States, one additional location in Canada and seven other locations around the world. Generally such leases are for terms of five years or less, although several of the leases in the United States are for terms of one year or less. ITEM 3. LEGAL PROCEEDINGS The Company has filed and will continue to file objections to claims asserted in its Chapter 11 bankruptcy proceedings. The majority of these claims would, if upheld, give rise to allowed unsecured claims entitling respective claimants to distributions of new Common Stock. A number of filed objections in respect of secured claims, priority claims, tax claims, convenience claims and cure claims are still outstanding at December 31, 1998. To the extent the Company's objections to such claims are not sustained, the Company will be obligated to pay such claims in a lump sum in the case of convenience claims and administrative claims, and in the case of secured claims, priority claims, tax claims and cure claims, on a deferred basis over six to seven years, depending on the type of claim, at an interest rate of 6% in accordance with the Plan of Reorganization. The Company does not believe the outcome of these objections will be material. 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 alleges that the Company's failure to register its shares has deprived it of its ability to realize approximately $5,000,000 from sale of the shares to which it is entitled and requests (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 believes that it is in full compliance with all of its obligations under its agreements with CSA, and is contesting the lawsuit. The parties are currently conducting settlement negotiations. -13- 14 The Company is also involved in various other legal proceedings which are incident to its business. Management believes the ultimate outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -14- 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's shares are traded on the American Stock Exchange, Inc. under the AMEX symbol "NOW". Prior to listing on the AMEX, which occurred August 29, 1995, the Company's shares were traded over-the-counter by various market makers under the ticker symbol "MAIS". The Company's Common Stock was originally issued pursuant to an order of the Bankruptcy Court dated January 27, 1994. All previously outstanding equity interests were canceled. Until April 10, 1993, the principal market for the Company's previously outstanding common stock (the "Old Common Stock") was the New York Stock Exchange, where the common stock was traded under the ticker symbol "MCO". Thereafter, until November 18, 1993, the Company's Old Common Stock was traded over-the-counter by various market makers. No cash dividends have been paid to date on the Common Stock. At February 28, 1999, there were 590 stockholders of record.
Period High Low ------ ---- --- Fiscal 1997: First Quarter............................... $8.00 $6.00 Second Quarter.............................. $6.13 $3.75 Third Quarter............................... $4.88 $2.94 Fourth Quarter.............................. $4.13 $2.50 Fiscal 1998: First Quarter............................... $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 Through February 28, 1999 .... $3.25 $2.13
On April 24, 1998, the Company issued 246,453 shares of the Company's Common Stock to a former shareholder of Hotel Information Systems, Inc. ("HIS") in satisfaction of the Company's obligations to issue additional shares, in addition to the 118,569 shares of Common Stock originally issued to such shareholder, under the asset purchase agreement and related documents pursuant to which the Company acquired the assets of HIS in August, 1996. Such additional shares were issued, in accordance with the asset purchase agreement and related documents, in order that such shareholder would receive, in the aggregate, shares with a fair value equal to $10.04 multiplied by 118,569 (the number of originally issued shares). (The Company still has outstanding similar obligations to other former shareholders of HIS under the asset purchase agreement and related documents, which obligations have yet to be settled). On May 12, 1998, the Company issued 45,424 shares of the Company's Common Stock to a former shareholder and two former optionholders in Gaming Systems International ("GSI") in full satisfaction of the Company's obligations to issue additional shares, in addition to the 113,392 shares of Common Stock originally issued to such shareholder and optionholders, under 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. On or about July 30, 1998, the Company issued 110,638 shares of the Company's Common Stock to Christian Rivadalla d/b/a Enterprise Hospitality Solutions ("EHS") in satisfaction of the Company's obligations to EHS pursuant to the License Agreement, dated as of October 1, 1996 (the "License Agreement"), between the Company and EHS. The issuance was made to EHS in lieu of a payment in the amount of $325,000 then due to EHS under the License Agreement. -15- 16 The foregoing issuances were made in transactions exempt under Section 4(2) under the Securities Act of 1933, as transactions not involving any public offering. The shares issued were legended and appropriate investment representations were obtained from the purchasers. 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 DISCLOSURES ABOUT MARKET RISK MARKET RISK DISCLOSURES The following discussion about the Company's market risk disclosures contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not have derivative financial instruments for hedging, speculative, or trading purposes. INTEREST RATE SENSITIVITY Of the Company's $8.53 million principal amount of indebtedness at December 31, 1998, $3.28 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 $33,000 change in the annual amount of interest payable on such debt. The remaining amount of $5.25 million bears interest at a fixed rate of 11%. FOREIGN CURRENCY RISK The Company believes that its exposure on currency exchange fluctuation risk is insignificant because the Company's transactions with international vendors are generally denominated in US dollars, which is considered to be the functional currency of the Company and its subsidiary. The currency exchange impact on intercompany transactions was immaterial in 1998. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the Company's Annual Report under the headings, "Consolidated Balance Sheets", "Consolidated Statements of Operations", Consolidated Statement of Stockholders' Equity (Deficiency)", "Consolidated Statements of Cash Flows", "Notes to Consolidated Financial Statements" and "Independent Auditors' Report". Schedule II Valuation and Qualifying Accounts is set forth in this Annual Report on Form 10-K. All other schedules and financial statements are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -16- 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item with respect to Directors may be found in the section captioned "Election of Directors" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999. Information required by this Item with respect to executive officers may be found in the section captioned "Proposal 1--Election of Directors, --Executive Officers" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item may be found in the section captioned "Executive Compensation" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this Item may be found in the section captioned "Security Ownership of Management" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this Item may be found in the section captioned "Executive Compensation--Employment Contracts and Change of Control Arrangements; --Certain Transactions with Management" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 21, 1999. Such information is incorporated herein by reference. -17- 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficiency) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedule The consolidated financial statements of the Company, the notes thereto and the Independent Auditors' Report are incorporated herein by reference to the Company's 1998 Annual Report. Schedule II Valuation and Qualifying Accounts 3. Exhibits:
Number Exhibit - ------ ------- 2.1 First Amended Joint Chapter II Plan of Reorganization of MAI Systems Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as confirmed by the United States Bankruptcy Court for the District of Delaware, on November 13, 1993, filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated January 15, 1994. 2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing Effective Date, as entered by the United States Bankruptcy Court for the district of Delaware on January 27, 1994, as filed as Exhibit 2.2 to the Registrant's Current Report on form 9-K dated February 9, 1994. 3.1 Amended and Restated Certificate of Incorporation of MAI Systems Corporation, as filed as Exhibit 3.1 to the Company's 1996 Annual Report on Form 10-K. 3.2 Amendment No. 1 to the Amended and Restated Certificate of Incorporation of MAI Systems Corporation as filed as Exhibit 3.2 to the Company's 1996 Annual Report on Form 10-K. 3.3 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the Registrant's Registration Statement on Form 8-A/A filed with the Securities and Exchange Commission on February 24, 1994. 3.4 Amendment No. 2 to the Amended and Restated Certificate of Incorporation of MAI Systems Corporation. 10.1 Stock Option Agreement between Luke Brown and the Company dated November 11, 1998. 10.2 Coast Business Credit Loan and Security Agreement, dated April 23, 1998. 10.3 Consulting Agreement dated as of August 15, 1994, as amended as of October 17, 1994, August 16, 1996, August 31, 1997 and August 31, 1998 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.
-18- 19 10.4 Richard S. Ressler Stock Purchase Letter, dated February 3, 1999. 10.5 1996 Non-Employee Directors Stock Option Plan. 10.6 MAI Systems Corporation Amended 1993 Stock Option Plan 13.1 Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1998, 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 1998
(b) Reports on Form 8-K during the fourth quarter of 1998 None. -19- 20 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: March 24, 1999 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 March 24, 1999.
Signatures Title ---------- ----- /s/ Richard S. Ressler Chairman, Director - ------------------------------------ Richard S. Ressler /s/ George G. Bayz President and Chief Executive - ------------------------------------ Officer, Director George G. Bayz /s/ Zohar Loshitzer Director - ------------------------------------ Zohar Loshitzer /s/ Morton O. Schapiro Director - ------------------------------------ Morton O. Schapiro /s/ Lewis H. Stanton Executive Vice President and - ------------------------------------ Chief Operating and Financial Officer Lewis H. Stanton (Chief Accounting Officer)
-20- 21 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1997 and 1998 (dollars in thousands)
BALANCE CHARGED TO CHARGED TO ADDITIONS BALANCES BEGINNING COSTS AND OTHER FROM END OF OF YEAR EXPENSES ACCOUNTS ACQUISITIONS WRITE-OFFS YEAR --------- ---------- ---------- ------------ ---------- -------- Year ended December 31, 1996 Allowance for doubtful accounts $ 1,092 $ 603 $ -- $ 1,138 $ (255) $2,578 Provision for inventory obsolescence $15,136 $ 490 $ -- $ -- $(12,433) $3,193 ======= ====== ========= =========== ======== ====== Year ended December 31, 1997 Allowance for doubtful accounts $ 2,578 $ 6 $ -- $ 646 $ (1,247) $1,983 Provision for inventory obsolescence $ 3,193 $1,174 $ -- $ -- $ (2,197) $2,170 ======= ====== ========= =========== ======== ====== Year ended December 31, 1998 Allowance for doubtful accounts $ 1,983 $1,340 $ -- $ -- $ -- $3,323 Provision for inventory obsolescence $ 2,170 $ 346 $ -- $ -- $ -- $2,516 ======= ====== ========= =========== ======== ======
-21- 22 EXHIBIT INDEX
Number Exhibit - ------ ------- 2.1 First Amended Joint Chapter II Plan of Reorganization of MAI Systems Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as confirmed by the United States Bankruptcy Court for the District of Delaware, on November 13, 1993, filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated January 15, 1994. 2.2 Consent Order Modifying Confirmed Plan of Reorganization and Fixing Effective Date, as entered by the United States Bankruptcy Court for the district of Delaware on January 27, 1994, as filed as Exhibit 2.2 to the Registrant's Current Report on form 9-K dated February 9, 1994. 3.1 Amended and Restated Certificate of Incorporation of MAI Systems Corporation, as filed as Exhibit 3.1 to the Company's 1996 Annual Report on Form 10-K. 3.2 Amendment No. 1 to the Amended and Restated Certificate of Incorporation of MAI Systems Corporation as filed as Exhibit 3.2 to the Company's 1996 Annual Report on Form 10-K. 3.3 By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the Registrant's Registration Statement on Form 8-A/A filed with the Securities and Exchange Commission on February 24, 1994. 3.4 Amendment No. 2 to the Amended and Restated Certificate of Incorporation of MAI Systems Corporation. 10.1 Stock Option Agreement between Luke Brown and the Company dated November 11, 1998. 10.2 Coast Business Credit Loan and Security Agreement, dated April 23, 1998. 10.3 Consulting Agreement dated as of August 15, 1994, as amended as of October 17, 1994, August 16, 1996, August 31, 1997 and August 31, 1998 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. 10.4 Richard S. Ressler Stock Purchase Letter, dated February 3, 1999. 10.5 1996 Non-Employee Directors Stock Option Plan. 10.6 MAI Systems Corporation Amended 1993 Stock Option Plan 13.1 Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1998, 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 1998
EX-3.4 2 AMENDMENT NO. 2 TO THE AMENDED & RESTATED CERT. 1 EXHIBIT 3.4 Amendment No 2 to the Amended and Restated Certificate of Incorporation Pursuant to Sections 245 and 303 of the General Corporation Law of the State of Delaware By and on behalf of MAI Systems Corporation MAI Systems Corporation, a Delaware corporation organized and existing under and by virtue of the laws of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: 1. The Board of Directors of the Corporation duly adopted a resolution setting forth and declaring advisable the amendment of Articles FOURTH and FIFTH of the Corporation's Certificate of Incorporation so that, as amended, said Articles shall read in their entirety as follows: FOURTH: In accordance with the provisions of Section 303 of the General Corporation Law of the State of Delaware, the authorized capital stock of all classes of the Corporation shall consist of 25,000,000 shares at a par value of $0.01 per share. FIFTH: The shares of capital stock which the Corporation shall have authority to issue shall be divided into 1,000,000 shares of Preferred Stock, at a par value of $0.01 each, and 24,000,000 shares of Common Stock, at a par value of $0.01 each. Shares of Preferred Stock may be issued in one or more series from time to time by the Board of Directors, and the Board of Directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of Preferred Stock, including without limitation the following: (a) the distinctive serial designation of such series which shall distinguish it from other series; (b) the number of shares included in such series; (c) the dividend rate (or method of determining such rate) payable to the holders of the shares of such series, any conditions upon which such dividends shall be paid and the date or dates upon which such dividends shall be payable; (d) whether dividends on the shares of such series shall be cumulative and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of such series shall be cumulative; (e) the amount or amounts which shall be payable out of the assets of the Corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution or winding up the Corporation, and the relative rights of priority, if any, of payment of the shares of such series; (f) the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series may be redeemed, in whole or in part, at the option of the Corporation or at the option of the holder or holders thereof or upon the happening of a specified event or events; 2 (g) the obligation, if any, of the Corporation to purchase or redeem shares of such series pursuant to a sinking fund or otherwise and the price of prices at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be redeemed or purchased in whole of in part, pursuant to such obligation; (h) whether or not the shares of such series shall be convertible or exchangeable, at any time or times at the option of the holder or holders thereof or at the option of the Corporation or upon the happening of a specified event or events, into shares of any other class or classes or any other series of the same of any other class or classes of stock of the Corporation, and the price or prices or rate or rates of exchange or conversion and any adjustments applicable thereto; and (i) whether or not the holders of the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if so the terms of such voting rights. The number of authorized shares of any class or series of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon, irrespective of the provisions of Section 242(b)(2) of the General Law of the State of Delaware or any corresponding provision hereafter enacted. 2. The foregoing amendment has been duly adopted by the favorable vote of the holders of a majority of the outstanding stock entitled to vote thereon in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, MAI systems Corporation has caused this certificate to be signed by Lewis H. Stanton, its Secretary, on the 20th of May, 1997. MAI Systems Corporation By: --------------------------------- Name: Lewis H. Stanton Title: Secretary EX-10.1 3 STOCK OPTION AGREEMENT 1 EXHIBIT 10.1 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 56,250 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 11, 1998. 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 11, 2008. 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 $2.875 per share, which price is not less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the date this Option was granted. 4. EXERCISE OF THE OPTION. This Option shall be exercisable during its term only in accordance with the terms, conditions, and provisions of the Plan and this Agreement as follows. (a) RIGHT TO EXERCISE. This Option shall vest and be exercisable, cumulatively, as follows:
Date Number of Shares ---- ---------------- After November 11, 1999 18,750 After November 11, 2000 18,750 After November 11, 2001 18,750 ----------------- ------ Total 56,250
(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 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 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: By: -------------------------------- Lewis H. Stanton Executive Vice President, Chief Operating and Financial Officer & Secretary Dated: By: -------------------------------- Optionee 3 4 ACKNOWLEDGEMENT OF OPTIONEE The Optionee acknowledges receipt of a copy of the 1993 Stock Option Plan, the Stock Option Plan General Information Statement, and the supporting documents (collectively referred to as the "Prospectus") relating thereto, dated as of June 2, 1995, copies of which are attached hereto, represents that he has read and is familiar with all of the terms and provisions thereof, and hereby accepts the Option set forth in this Option Agreement subject to all of the terms, conditions and provisions thereof. Dated: ------------------- ------------------------------------ Signature of Optionee ------------------------------------ Address ------------------------------------ City State Zip 4 EX-10.2 4 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.2 - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT by and among MAI SYSTEMS CORPORATION, a Delaware corporation, GAMING SYSTEMS INTERNATIONAL, a Nevada corporation, HOTEL INFORMATION SYSTEMS, INC., a Delaware corporation, and COAST BUSINESS CREDIT, a division of Southern Pacific Bank Dated as of April 23, 1998 - -------------------------------------------------------------------------------- 2 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Account Debtor . . . . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Borrower's Address . . . . . . . . . . . . . . . . . . . . . . . 1 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Change of Control . . . . . . . . . . . . . . . . . . . . . . . 1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Coast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . 2 Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Deposit Account. . . . . . . . . . . . . . . . . . . . . . . . . 2 Dollars or $ . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Early Termination Fee. . . . . . . . . . . . . . . . . . . . . . 2 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . 2 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 General Intangibles. . . . . . . . . . . . . . . . . . . . . . . 2 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Intercreditor and Subordination Agreement. . . . . . . . . . . . 2 Licensed Software . . . . . . . . . . . . . . . . . . . . . . . 3 Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . 3 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 MAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Material Adverse Effect . . . . . . . . . . . . . . . . . . . . 3 Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . 3 Maximum Dollar Amount . . . . . . . . . . . . . . . . . . . . . 3 Minimum Monthly Interest . . . . . . . . . . . . . . . . . . . . 3 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . . 3 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Renewal Date . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Renewal Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Solvent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Year 2000 Problem . . . . . . . . . . . . . . . . . . . . . . . 4 Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . 5 5.1 Status of Accounts at Closing. . . . . . . . . . . . . . . . . . 5 5.2 Minimum Availability . . . . . . . . . . . . . . . . . . . . . . 5 5.3 Landlord Waivers . . . . . . . . . . . . . . . . . . . . . . . . 5 5.4 Warehouse Waivers. . . . . . . . . . . . . . . . . . . . . . . . 5 5.5 Executed Agreements. . . . . . . . . . . . . . . . . . . . . . . 5 5.6 Opinion of Borrowers' Counsel. . . . . . . . . . . . . . . . . . 6 5.7 Priority of Coast's Liens. . . . . . . . . . . . . . . . . . . . 6 5.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.9 Borrowers' Existence . . . . . . . . . . . . . . . . . . . . . . 6 5.10 Organizational Documents . . . . . . . . . . . . . . . . . . . . 6 5.11 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . 6 5.12 Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.14 Audited Financial Statements . . . . . . . . . . . . . . . . . . 6 5.15 Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . 6 5.16 Year 2000 Problem Assessment Certificate . . . . . . . . . . . . 6 5.17 Due Diligence. . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.18 Other Documents and Agreements . . . . . . . . . . . . . . . . . 7 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWERS . . . . . 7 6.1 Existence and Authority. . . . . . . . . . . . . . . . . . . . . 7 6.2 Name; Trade Names and Styles . . . . . . . . . . . . . . . . . . 7 6.3 Place of Business; Location of Collateral. . . . . . . . . . . . 7 6.4 Title to Collateral; Permitted Liens . . . . . . . . . . . . . . 7 6.5 Maintenance of Collateral. . . . . . . . . . . . . . . . . . . . 8 6.6 Books and Records. . . . . . . . . . . . . . . . . . . . . . . . 8 6.7 Financial Condition, Statements and Reports. . . . . . . . . . . 8 6.8 Tax Returns and Payments; Pension Contributions. . . . . . . . . 8 6.9 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . 8 6.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.11 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . 8 6.12 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . 8 7. RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.1 Representations Relating to Receivables. . . . . . . . . . . . . 9
i 3 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- 7.2 Representations Relating to Documents and Legal Compliance . . . 9 7.3 Schedules and Documents relating to Receivables. . . . . . . . . 9 7.4 Collection of Receivables. . . . . . . . . . . . . . . . . . . . 9 7.5 Remittance of Proceeds . . . . . . . . . . . . . . . . . . . . . 9 7.6 Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.7 Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.8 Verification . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.9 No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8. ADDITIONAL DUTIES OF THE BORROWER. . . . . . . . . . . . . . . . . . . 10 8.1 Financial and Other Covenants. . . . . . . . . . . . . . . . . . 10 8.2 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.3 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.4 Access to Collateral, Books and Records. . . . . . . . . . . . . 10 8.5 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . 11 8.6 Litigation Cooperation . . . . . . . . . . . . . . . . . . . . . 11 8.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 12 9. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.1 Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.2 Early Termination. . . . . . . . . . . . . . . . . . . . . . . . 12 9.3 Payment of Obligations . . . . . . . . . . . . . . . . . . . . . 12 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . 12 10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 12 10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.3 Standards for Determining Commercial Reasonableness. . . . . . . 14 10.4 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 15 10.5 Application of Proceeds. . . . . . . . . . . . . . . . . . . . . 16 10.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . 16 11. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.1 Interest Computation . . . . . . . . . . . . . . . . . . . . . . 16 11.2 Application of Payments. . . . . . . . . . . . . . . . . . . . . 17 11.3 Charges to Accounts. . . . . . . . . . . . . . . . . . . . . . . 17 11.4 Monthly Accountings. . . . . . . . . . . . . . . . . . . . . . . 17 11.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 11.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 17 11.7 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 11.8 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 11.9 No Liability for Ordinary Negligence . . . . . . . . . . . . . . 17 11.10 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 11.11 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . 18 11.12 Attorneys Fees, Costs and Charges. . . . . . . . . . . . . . . . 18 11.13 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . 18 11.14 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 11.15 Paragraph Headings; Construction . . . . . . . . . . . . . . . . 18 11.16 Governing Law; Jurisdiction; Venue . . . . . . . . . . . . . . . 18 11.17 Mutual Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . 19
ii 4 COAST LOAN AND SECURITY AGREEMENT BORROWERS: MAI SYSTEMS CORPORATION, GAMING SYSTEMS INTERNATIONAL, A DELAWARE CORPORATION A NEVADA CORPORATION 9601 JERONIMO ROAD 2900 EAST PATRICK LANE IRVINE, CA 92618 SUITE #7 LAS VEGAS, NV 89120 HOTEL INFORMATION SYSTEMS, INC., A DELAWARE CORPORATION 9601 JERONIMO ROAD IRVINE, CA 92618 DATE: AS OF APRIL 23, 1998 THIS LOAN AND SECURITY AGREEMENT is entered into on the above date among COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025, and the borrowers named above (jointly and severally, the "Borrowers"), each of whose chief executive office is located at the address indicated above ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 1 below.) 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable or General Intangible. "Affiliate" means, with respect to any Person, a relative, partner, shareholder holding 5% or more of the capital stock (or any warrants or options to purchase 5% or more of the capital stock) of such Person, director or officer of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Audit" means to inspect, audit and copy Borrowers' books and records and the Collateral. "Borrowers" has the meaning set forth in the introduction to this Agreement (each, a "Borrower"). "Borrower's Address" has the meaning set forth in the introduction to this Agreement. "Business Day" means a day on which Coast is open for business. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) (other than the current holders of the ownership interests in any Borrower) becomes the "beneficial owner" (as defined in Rule l3d-3 under the Securities Exchange Act of 1934), directly or indirectly, as a result of any single transaction, of more than twenty-five percent (25%) of the total voting power of all classes of 1 5 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- stock or other ownership interests then outstanding of any Borrower normally entitled to vote in the election of directors or analogous governing body. "Closing Date" date of the initial funding under this Agreement. "Coast" has the meaning set forth in the introduction to this Agreement. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 4 hereof. "Consolidated Net Worth" means consolidated owner's equity, plus the amount of the Junior Debt outstanding, calculated in accordance with GAAP. "Credit Limit" means the maximum amount of Loans that Coast may make to Borrowers pursuant to the terms shown on the Schedule. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "Dollars or $" means United States dollars. "Early Termination Fee" means the amount set forth on the Schedule that Borrowers must pay Coast if this Agreement is terminated by Borrowers or Coast pursuant to Section 9.2 hereof. "Equipment" means all of each Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in such Borrower's operations or owned by such Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 10.1 of this Agreement. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all general intangibles of each Borrower, whether now owned or hereafter created or acquired by such Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of each Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to each Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of each Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in such Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Intercreditor and Subordination Agreement" means that certain Intercreditor and Subordination Agreement, 2 6 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- dated as of even date herewith, among the Value Realization Fund, L.P., Canyon Value Realization Fund (Cayman), Ltd., GRS Partners II and CPI Securities L.P., on the one hand, and Coast, on the other hand. "Investment Property" has the meaning set forth in Section 9115 of the Code as in effect as of the date hereof. "Junior Debt" has the meaning given to such term in the Intercreditor and Subordination Agreement. "Licensed Software" means all software in which a Borrower's interest is that of a licensee. "Loan Documents" means this Agreement, the agreements and documents listed on Section 5 of the Schedule, and any other agreement, instrument or document executed in connection herewith or therewith. "Loans" has the meaning set forth in Section 2 hereof. "MAI" means MAI Systems Corporation, a Delaware corporation. "Material Adverse Effect" means a material adverse effect on (i) the business, assets, condition (financial or otherwise) or results of operations of Borrowers and their subsidiaries taken as a whole, or of any guarantor of any of the Obligations, (ii) the ability of Borrowers or any guarantor of any of the Obligations to perform their obligations under this Agreement and the Loan Documents to which they are a party (including, without limitation, repayment of the Obligations as they come due) or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "Maturity Date" means the date that this Agreement shall cease to be effective, as set forth on the Schedule, subject to the provisions of Section 9.1 and 9.2 hereof. "Maximum Dollar Amount" has the meaning set forth in Section 2 of the Schedule. "Minimum Monthly Interest" has the meaning set forth in Section 3 of the Schedule. "Notes" has the meaning given to such term in the Intercreditor and Subordination Agreement. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrowers to Coast, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in any Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrowers under this Agreement or under any other present or future instrument or agreement between any Borrower and Coast. "Permitted Liens" means the following: (a) purchase money security interests in specific items of Equipment; (b) leases of specific items of Equipment; (c) liens for taxes not yet payable or which are being contested in good faith by appropriate proceedings and adequate reserves have been set aside with respect thereto as required by GAAP and, by reason of nonpayment, no material property is subject to a material risk of loss or forfeiture, or would reasonably be likely to result in a Material Adverse Effect; (d) additional security interests and liens consented to in writing by Coast, which consent shall not be unreasonably withheld; (e) security interests being terminated substantially concurrently with this Agreement; (f) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent or which are being contested in good 3 7 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- faith by appropriate proceedings and adequate reserves have been set aside with respect thereto as required by GAAP and, by reason of nonpayment, no material property is subject to a material risk of loss or forfeiture, or would reasonably be likely to result in a Material Adverse Effect; (g) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (a) or (b) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (h) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (d) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrowers agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the applicable month, as the base rate on corporate loans at large U.S. money center commercial banks. "Receivables" means all of each Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to such Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by such Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Renewal Date" shall mean the Maturity Date if this Agreement is renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that this Agreement is renewed pursuant to Section 9.1 hereof. "Renewal Fee" means the fee that Borrower must pay Coast upon renewal of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the Schedule. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Year 2000 Problem" means the risk that computer systems, software and applications used by a Person may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any dates after December 31, 1999. 4 8 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- "Other Terms." All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. CREDIT FACILITY. Coast will make loans to Borrowers (the "Loans"), jointly and severally, in amounts and in percentages to be determined by Coast in its good faith, commercially reasonable discretion, up to the Credit Limit, provided no Default or Event of Default has occurred and is continuing; provided, however, Coast may reserve against Borrowers' availability hereunder the amount of each semi-annual payment of interest owing on the Notes. Coast may create additional reserves against or reduce its advance rates without declaring a Default or an Event of Default (i) until such time as Coast is satisfied that all federal, state and local tax claims against each Borrower have been discharged, or (ii) if it determines that there has occurred a Material Adverse Effect. 3. INTEREST AND FEES. 3.1 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Coast's discretion, be charged to Borrowers' loan account when payable, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrowers shall pay Coast Minimum Monthly Interest during the term of this Agreement with respect to the Receivable Loans and the Inventory Loans in the amount set forth on the Schedule. 3.2 FEES. Borrowers shall pay Coast the fees shown on the Schedule, which are in addition to all interest and other sums payable to Coast and are deemed fully earned and are nonrefundable. 4. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, each Borrower hereby grants to Coast a security interest in all of such Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, Investment Property, and General Intangibles, including, without limitation, all of such Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral") 5. CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the reasonable discretion of Coast, at or prior to the first advance of funds hereunder, of each, every and all of the following conditions: 5.1 STATUS OF ACCOUNTS AT CLOSING. After giving effect to the initial Loan, no accounts payable shall be due and unpaid 120 days past its due date except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided. 5.2 MINIMUM AVAILABILITY. Borrowers shall have minimum availability immediately following the initial funding in the amount set forth on the Schedule. 5.3 LANDLORD WAIVERS. Coast shall have received duly executed landlord waivers and access agreements in form and substance satisfactory to Coast, in Coast's reasonable discretion, and, when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all leased locations where any Borrower maintains any inventory or equipment. 5.4 WAREHOUSE WAIVERS. Warehouse waivers in form and substance satisfactory to Coast, in Coast's reasonable discretion, and when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all warehouse locations where Borrowers maintain any inventory or equipment. 5.5 EXECUTED AGREEMENTS. Coast shall have received this Agreement and the Loan Documents duly executed and in form and substance satisfactory to Coast in its reasonable discretion. 5 9 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 5.6 OPINION OF BORROWERS' COUNSEL. Coast shall have received an opinion of Borrowers' counsel, in form and substance satisfactory to Coast in its reasonable discretion. 5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of "of record" searches satisfactory to Coast in its reasonable discretion, reflecting its Uniform Commercial Code filings against Borrowers indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens. 5.8 INSURANCE. Coast shall have received copies of the insurance binders or certificates evidencing Borrowers' compliance with Section 8.2 hereof, including lender's loss payee endorsements. 5.9 BORROWERS' EXISTENCE. Coast shall have received copies of each Borrower's articles or certificate of incorporation and all amendments thereto, and a Certificate of Good Standing, each certified by the Secretary of State of the state of such Borrower's organization, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for each Borrower from the Secretary of State of each state wherein the failure to be so qualified could have a Material Adverse Effect. 5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of each Borrower's By-laws and all amendments thereto, and Coast shall have received copies of the resolutions of the boards of directors of each Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of such Borrower to execute the same on behalf of such Borrower, in each case certified by the Secretary or other acceptable officer of such Borrower as of the Closing Date. 5.11 INTELLECTUAL PROPERTY. Coast shall have received evidence satisfactory to Coast that all of Borrowers' copyrights which are used in the operation of Borrowers' businesses in any material respect have been registered with the United States Copyright Office, and all of Borrowers' patents and trademarks which are used in the operation of Borrowers' businesses in any material respect have been filed with the United States Patent and Trademark Office. 5.12 SUBORDINATION. All Junior Debt shall be subordinated with standstill provisions on principal and interest payments in accordance with the terms of the Intercreditor and Subordination Agreement, which shall provide, among other things, that MAI may: (1) make regularly scheduled semi-annual payments of interest due on the Notes at the rate of eleven percent (11%) per annum, and (2) on or after March 3, 2004, make the payment of the principal balance owing on the Notes; provided, however, that on the date of the proposed payment on the Notes, (x) all payments then due and payable on the Obligations have first been paid in full, (y) no Default or Event of Default has occurred and is continuing, and (z) no Default or Event of Default will result therefrom. 5.13 TAXES. Coast shall have received evidence from Borrowers that Borrowers have complied with all tax withholding and Internal Revenue Service regulations, in form and substance satisfactory to Coast in its reasonable discretion, and that all applicable taxes are paid current. 5.14 AUDITED FINANCIAL STATEMENTS. Coast shall have received Borrowers' audited consolidated financial statements for fiscal year ended December 31, 1997, and Coast shall be satisfied with same. 5.15 MINIMUM CONSOLIDATED NET WORTH. Borrowers shall have a Consolidated Net Worth of not less than $2,250,000. 5.16 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have received a certificate from the relevant officer of each Borrower to the effect that (i) such Borrower has no knowledge, with respect to any of such Borrower's customers, that would cause such Borrower to reasonably believe that the Year 2000 Problem will cause a Material Adverse Effect and (ii) that as the result of a comprehensive assessment undertaken by such Borrower of such Borrower's computer systems, software and applications and after due inquiry made to such Borrower's material suppliers and vendors, such Borrower knows of no facts that would cause such Borrower to reasonably believe that the Year 2000 Problem will cause a Material Adverse Effect. 5.17 DUE DILIGENCE. Coast shall have completed its due diligence with respect to Borrowers (including without limitation, review of Borrowers' maintenance support 6 10 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- arrangement with Olivetti North America, Inc.), and Coast shall be satisfied with same. 5.18 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other agreements, instruments and documents as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's reasonable discretion, and in form for filing in the appropriate filing office, including, but not limited to, those documents listed in Section 5 of the Schedule. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWERS. In order to induce Coast to enter into this Agreement and to make Loans, each Borrower represents and warrants to Coast as follows, and each Borrower covenants that the following representations will continue to be true, and that each Borrower will at all times comply with all of the following covenants: 6.1 EXISTENCE AND AUTHORITY. Each Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by each Borrower of this Agreement, and all other documents contemplated hereby (a) have been duly and validly authorized, (b) are enforceable against such Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (c) do not violate such Borrower's articles or certificate of incorporation, or by-laws, or any law or any material agreement or instrument which is binding upon such Borrower or its property, and (d) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon such Borrower or its property. 6.2 NAME; TRADE NAMES AND STYLES. The name of each Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of each Borrower and all of such Borrower's present and prior trade names. Each Borrower shall give Coast thirty (30) days' prior written notice before changing its name or doing business under any other name, Each Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. Each Borrower's Address set forth in the heading to this Agreement is such Borrower's chief executive office. In addition, each Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Each Borrower will give Coast at least thirty (30) days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than such Borrower's Address or one of the locations set forth on the Schedule. 6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Each Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for (i) items of Equipment which are leased by each Borrower and (ii) the Licensed Software. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and each Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. No Borrower is or will become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair any Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), each Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form reasonably acceptable to Coast, such waivers and subordinations as Coast shall specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Each Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 7 11 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 6.5 MAINTENANCE OF COLLATERAL. Each Borrower will maintain the Collateral in good working condition, and no Borrower will use the Collateral for any unlawful purpose. Borrowers will immediately advise Coast in writing of any material loss or damage to the Collateral. 6.6 BOOKS AND RECORDS. Each Borrower has maintained and will maintain at such Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with GAAP (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect the financial condition of Borrowers, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Each Borrower is now and will continue to be Solvent. 6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Each Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and each Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by such Borrower. Each Borrower may, however, defer payment of any contested taxes, provided that such Borrower (i) in good faith contests such Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, no Borrower is aware of any claims or adjustments proposed for any of such Borrower's prior tax years which could result in additional taxes becoming due and payable by such Borrower. Each Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their term, and no Borrower has or will withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of such Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Each Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by such Borrower. 6.9 COMPLIANCE WITH LAW. Each Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to such Borrower, including, but not limited to, the Fair Labor Standards Act, and those relating to such Borrower's ownership of real or personal property, the conduct and licensing of such Borrower's business, and environmental matters. 6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of each Borrower's knowledge) threatened by or against or affecting such Borrower in any court or before any governmental agency (or any basis therefor known to such Borrower) which may result, either separately or in the aggregate, in a Material Adverse Effect. Borrowers will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against any Borrower involving an amount set forth on the Schedule. 6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. No Borrower is purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 6.12 YEAR 2000 COMPLIANCE. Each Borrower has no knowledge, with respect to any of such Borrower's customers, that would cause such Borrower to reasonably believe that the Year 2000 problem will cause a Material Adverse Effect and, further that as the result of a comprehensive review and assessment undertaken by each Borrower of such Borrower's computer systems, software and applications and after due inquiry made of such Borrower's material suppliers and vendors, each Borrower represents and warrants that such Borrower knows of no fact or circumstance which would reasonably be likely to cause the Year 2000 Problem to result in a Material Adverse Effect. 8 12 7. RECEIVABLES. 7. 1 REPRESENTATIONS RELATING TO RECEIVABLES. Each Borrower represents and warrants to Coast as follows: Each Receivable with respect to which Loans are requested by Borrowers shall, on the date each Loan is requested and made, represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery and acceptance of goods or the rendition of services in the ordinary course of the applicable Borrower's business. 7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Each Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of each Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrowers shall deliver to Coast via facsimile, unless otherwise directed by Coast, at such locations and at such intervals as Coast may reasonably request, transaction reports and loan requests, schedules of Receivables, and schedules of collections, all on Coast's standard forms; provided, however, that Borrowers' failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of each Borrower's Receivables, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 10:30 A.M. Los Angeles, California time, will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrowers shall, if requested by Coast, furnish Coast with copies (or, at Coast's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and each Borrower warrants the genuineness of all of the foregoing. Each Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall reasonably request. In addition, each Borrower shall deliver to Coast the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, upon receipt thereof and in the same form as received, with all necessary endorsements, all of which shall be with recourse. Each Borrower shall also provide Coast with copies of all credit memos as and when reasonably requested by Coast. 7.4 COLLECTION OF RECEIVABLES. Borrowers shall have the right to collect all Receivables, unless and until an Event of Default has occurred and is continuing. Borrowers shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrowers shall deliver all such payments and proceeds to Coast within one (1) Business Day after receipt by the applicable Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that a proceeds of Collateral be deposited by the applicable Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a lockbox or blocked account agreement in such form as Coast may specify. Coast or its designee may, at any time, notify Account Debtors that Coast has been granted a security interest in the Receivables. 7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered to Coast within one (1) Business Day after receipt by the applicable Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Each Borrower agrees that it will not commingle proceeds of Collateral with any of such Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 7.6 DISPUTES. Each Borrower shall notify Coast promptly of all disputes or claims relating to Receivables. No Borrower shall forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except any 9 13 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Borrower may do so, provided that: (a) such Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Coast on the regular reports provided to Coast; (b) no Default or Event of Default has occurred and is continuing; and (c) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast may, at any time after the occurrence and during the continuance of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Coast considers advisable in its reasonable credit judgment and, in all cases, Coast shall credit Borrowers' Loan account with only the net amounts received by Coast in payment of any Receivables. 7.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to any Borrower in the ordinary course of its business, such Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, each Borrower shall (a) hold the returned Inventory in trust for Coast, (b) segregate all returned Inventory from all of such Borrower's other property, (c) conspicuously label the returned Inventory as subject to Coast's security interest, and (d) immediately notify Coast of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Coast's request deliver such returned Inventory to Coast. 7.8 VERIFICATION. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of the applicable Borrower or Coast or such other name as Coast may choose. 7.9 NO LIABILITY. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of any Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Coast from liability for its own gross negligence or willful misconduct. 8. ADDITIONAL DUTIES OF THE BORROWER. 8.1 FINANCIAL AND OTHER COVENANTS. Borrowers shall at all times comply with the financial and other covenants set forth in the Schedule. 8.2 INSURANCE. Borrowers shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrowers shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. ALL liability insurance policies of each Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of each Borrower shall name Coast as a loss payee thereon and each Borrower shall cause a lender's loss payee endorsement to be issued in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Coast shall release to Borrowers insurance proceeds with respect to Equipment totaling less than the amount set forth in Section 8 of the Schedule, which shall be utilized by Borrowers for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrowers fail to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at Borrowers' expense. Borrowers shall promptly deliver to Coast copies of all reports made to insurance companies. 8.3 REPORTS. Borrowers, at their expense, shall provide Coast with the written reports set forth in Section 8 of the Schedule, and such other written reports with respect to Borrowers (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not less frequently than quarterly and 10 14 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- on one (1) Business Day's notice, Coast, or its agents, shall have the right to perform Audits. Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The Audits shall be at Borrowers' expense and the charge for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same), plus reasonable out-of-pocket expenses. Borrowers will not enter into any agreement with any accounting firm, service bureau or third party to store Borrowers' books or records at any location other than each Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same rights with respect to access to books and records and related rights as Coast has under this Loan Agreement. Borrowers shall also take all necessary steps to assure that such accounting and software, systems and applications, and those of its accounting firm, service bureau or any other third party vendor or supplier, will, on a timely basis, adequately and completely address the Year 2000 Problem in all material respects. 8.5 NEGATIVE COVENANTS. No Borrower shall, without Coast's prior written consent, which consent shall not be unreasonably withheld, do any of the following: (a) merge or consolidate with another entity, except in a transaction in which (i) the owners of the applicable Borrower hold at least fifty percent (50%) of the ownership interest in the surviving entity immediately after such merger or consolidation, and (ii) the applicable Borrower is the surviving entity; (b) acquire any assets, except (i) in the ordinary course of business, or (ii) in a transaction or a series of transactions not involving the payment of an aggregate amount among Borrowers in excess of $100,000 per fiscal year; (c) enter into any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of such Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (e) store any Inventory or other Collateral with any warehouseman or other third party; (f) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (g) make any loans of any money or other assets, except (i) advances to customers or suppliers in the ordinary course of business, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers and directors for the purpose of purchasing equity securities of the applicable Borrower; (h) incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; (i) guarantee or otherwise become liable with respect to the obligations of another party or entity; (j) pay or declare any such dividends or distributions on the ownership interests in such Borrower (except for dividends or distributions payable solely in stock form of ownership interests in such Borrower); (k) make any change in such Borrower's capital structure which would have a Material Adverse Effect; (l) enter into any transaction, including the purchase, sale, exchange of property or rendering of any service, or lending or investing any funds or assets, with, to or into, any Affiliate; or (m) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default is continuing or would occur as a result of such transaction. 8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to any Borrower, such Borrower shall, without expense to Coast, make available such Borrower and its officers, employees and agents and 11 15 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- such Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 8.7 FURTHER ASSURANCES. Each Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 9. TERM. 9.1 MATURITY DATE. This Agreement shall continue in effect until the Maturity Date; provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than sixty (60) days prior to the Maturity Date or the next Renewal Date, that such party elects to terminate this Agreement effective on the Maturity Date or such next Renewal Date. If this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the Renewal Date and thereafter shall bear interest at a rate equal to the rate applicable to the Loans. 9.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrowers, effective three (3) Business Days after written notice of termination is given to Coast; or (b) by Coast at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrowers or by Coast under this Section 9.2, Borrowers shall pay to Coast an Early Termination Fee in the amount shown in Section 3 of the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the rate applicable to the Loans. 9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrowers shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrowers of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly deliver to Borrowers termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrowers shall give Coast immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Coast by any Borrower or any of any Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading and results in a Material Adverse Effect; or (b) Borrowers shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrowers shall fail to deliver the proceeds of Collateral to Coast as provided in Section 7.5 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 8.4 above, or shall breach any negative covenant set forth in Section 8.5 above; or (e) Borrowers shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or 12 16 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- (f) Borrowers shall fail to perform any other non-monetary Obligation, which failure is not cured within ten (10) Business Days after the date due; or (g) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within thirty (30) days after the occurrence of the same; or (h) Any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) any Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or (j) Dissolution, termination of existence, or insolvency of any Borrower or any guarantor of any of the Obligations; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by any Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) the commencement of any proceeding against any Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is (i) not timely controverted, or (ii) not cured by the dismissal thereof within sixty (60) days after the date commenced; or (l) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to Coast to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (n) any Borrower or any guarantor of any of the Obligations makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations (including without limitation, the Junior Debt), other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) Except as permitted under Section 8.5(a), any Borrower shall suffer or experience any Change of Control without Coast's prior written consent, which consent shall be in the discretion of Coast in the exercise of its reasonable business judgment; or (p) any Borrower shall generally not pay its debts as they become due, or any Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) there shall be any Material Adverse Effect. Coast may cease making any Loans or extending any credit hereunder during any of the above cure periods. 10.2 REMEDIES. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by each Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrowers under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose 13 17 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- each Borrower hereby authorizes Coast without judicial process to enter onto any of such Borrower's premises without interference to search for, take possession of, keep, store or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Coast seek to take possession of any of the Collateral by Court process, each Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrowers to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrowers, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use each Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Coast is hereby granted a license or other right to use, without charge, each Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and each Borrower's rights under all licenses and all franchise agreements shall inure to Coast's benefit; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on each Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve any Borrower of any liability such Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, each Borrower irrevocably authorizes Coast to endorse or sign such Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to such Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; and (h) Demand and receive possession of any of each Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast (including attorneys' fees and expenses incurred in connection with bankruptcy) with respect to the foregoing shall be due from the Borrowers to Coast on demand. Coast may charge the same to Borrowers' loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Loans. Without limiting any of Coast's rights and remedies, after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent (3%) per annum. 10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrowers and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: 14 18 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- (a) Notice of the sale is given to Borrowers at least seven (7) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven (7) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the Collateral in terms sufficient for a potential buyer to identify the type of Collateral generally; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m. local time; (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrowers any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 10.4 POWER OF ATTORNEY. Each Borrower hereby grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to such Borrower, and at such Borrower's expense, to do any or all of the following, in such Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of such Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of such Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) After the occurrence and during the continuation of an Event of Default, execute on behalf of such Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) Execute on behalf of such Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of such Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) After the occurrence and during the continuation of an Event of Default, pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) After the occurrence and during the continuation of an Event of Default, grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of such Borrower's taxes or to secure the release of any liens therefor, or both, if deemed necessary by Coast in order to prevent a Material Adverse Effect to Coast's rights and remedies with respect to any Collateral; (i) After the occurrence and during the continuation of an Event of Default, settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, such Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and 15 19 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- (k) Take any action or pay any sum required of such Borrower pursuant to this Agreement and any other present or future agreements if deemed necessary by Coast in order to prevent a Material Adverse Effect to Coast's rights and remedies with respect to any Collateral. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast (including attorneys' fees and expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrowers' loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrowers. Borrowers shall pay, indemnify, defend, and hold Coast and each of its officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrowers shall have no obligation to any Indemnified Person hereunder with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrowers or other persons legally entitled thereto; Borrowers shall remain liable to Coast for any deficiency. If, Coast, in the exercise of its reasonable business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in the exercise of its reasonable business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. 10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Coast shall have all the other rights and remedies accorded a secured party in equity, under the Code, and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast and Borrowers, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been indefeasibly paid and performed. 11. GENERAL PROVISIONS. 11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations three (3) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 10:30 AM Los Angeles, California time, on any day shall be deemed received on the next Business Day. Coast shall be entitled to charge Borrowers' account for such three (3) Business Days of "clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on all checks, wire transfers and other items received by Coast, regardless of whether such three (3) Business Days of "clearance" or "float" actually occur, and shall be deemed to be the equivalent of charging 16 20 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- three (3) Business Days of interest on such collections. This across-the-board three (3) Business Day clearance or float charge on all collections is acknowledged by the parties to constitute an integral aspect of the pricing of Coast's financing of Borrowers. Coast shall not, however, be required to credit Borrowers' account for the amount of any item of payment which is unsatisfactory to Coast in its sole discretion, and Coast may charge Borrowers' loan account for the amount of any item of payment which is returned to Coast unpaid. 11.2 APPLICATION OF PAYMENTS. Subject to Sections 7.5 and 10.5 hereof, all payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrowers pay monetary Obligations in cash to Coast, or charge them to Borrowers' Loan account, in which event they will bear interest from the date due to the date paid at the same rate applicable to the Loans. 11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrowers monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrowers and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrowers notify Coast in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. 11.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, facsimile or certified mail return receipt requested, addressed to Coast or Borrowers at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices to Borrowers shall be directed to the attention of Borrowers' Chief Financial Officers. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, faxed (at time of confirmation of transmission), or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 11.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 11.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement among Borrowers and Coast and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 11.8 WAIVERS. The failure of Coast at any time or times to require Borrowers to strictly comply with any of the provisions of this Agreement or any other present or future agreement between any Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any Default shall not waive or affect any other Default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by any Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrowers. Each Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred 17 21 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- or suffered by any Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for its own gross negligence or willful misconduct. 11.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrowers and a duly authorized officer of Coast. 11.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrowers of each and every obligation under this Agreement. 11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrowers shall reimburse Coast for all reasonable attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy) and all filing, recording, search, title insurance, appraisal, audit, and other costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any attorneys' fees and costs (including attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrowers; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrowers' books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrowers. If either Coast or any Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy), including (but not limited to) attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrowers shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorneys' fees, costs and charges (including attorneys' fees and expenses incurred pursuant to bankruptcy) and other fees, costs and charges to which Coast may be entitled pursuant to this Agreement may be charged by Coast to Borrowers' loan account and shall thereafter bear interest at the same rate as the Loans. 11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrowers and Coast; provided, however, that Borrowers may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrowers from their liability for the Obligations. Coast may assign its rights and delegate its duties hereunder without the consent of Borrowers. Coast reserves the right to syndicate all or a portion of the transaction created herein or sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Coast's rights and benefits hereunder. In connection with any such syndication, assignment or participation, Coast may disclose all documents and information which Coast now or hereafter may have relating to Borrowers or any Borrower's business. To the extent that Coast assigns its rights and obligations hereunder to a third Person, Coast thereafter shall be released from such assigned obligations to Borrowers. 11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 11.15 PARAGRAPH HEADINGS, CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrowers and Coast acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrowers under any rule of construction or otherwise. 11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all 18 22 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- rights and obligations of Coast and Borrowers shall be governed by the internal laws of the State of California, without regard to its conflicts of law principles. As a material part of the consideration to Coast to enter into this Agreement, each Borrower (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (b) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights such Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 11.17 MUTUAL WAIVER OF JURY TRIAL. EACH BORROWER AND COAST HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND ANY BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR ANY BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR ANY BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. [Remainder of Page Intentionally Left Blank] 19 23 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- BORROWERS: MAI SYSTEMS CORPORATION, GAMING SYSTEMS INTERNATIONAL, a Delaware corporation a Nevada corporation By [SIG] By ------------------------------- -------------------------------------- President or Vice President President or Vice President By By [SIG] ------------------------------- -------------------------------------- Secretary or Ass't Secretary Secretary or Ass't Secretary HOTEL INFORMATION SYSTEMS, INC., a Delaware corporation By [SIG] ------------------------------- President or Vice President By [SIG] ------------------------------- Secretary or Ass't Secretary COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Bank By [SIG] ------------------------------- Title: Vice President ---------------------------- 20 24 COAST SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWERS: MAI SYSTEMS CORPORATION, GAMING SYSTEMS INTERNATIONAL, A DELAWARE CORPORATION A NEVADA CORPORATION 9601 JERONIMO ROAD 2900 EAST PATRICK LANE IRVINE, CA 92618 SUITE #7 LAS VEGAS, NV 89120 HOTEL INFORMATION SYSTEMS, INC., A DELAWARE CORPORATION, 9601 JERONIMO ROAD IRVINE, CA 92618 DATE: AS OF APRIL 23, 1998 This Schedule forms an integral part of the Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Bank, and the above-borrower of even date. ================================================================================ SECTION 2 - CREDIT FACILITIES SECTION 2 - CREDIT LIMIT: 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 9 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 3 - INTEREST AND FEES SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 2.25% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly as 21 25 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 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 any Loans in any month be less than 9% per annum. SECTION 3.1 - MINIMUM MONTHLY INTEREST: Interest which would be due hereunder based on daily Loans outstanding equal to 40% of the Maximum Dollar Amount. SECTION 3.2 - LOAN FEE: $100,000, payable concurrently herewith, plus an additional Fifty Thousand Dollars ($50,000), such amount being fully earned on the Closing Date and payable in two installments of Twenty-Five Thousand Dollars ($25,000) each, the first such installment due on the first anniversary of the Closing Date, and the second such installment due on the second anniversary of the Closing Date. SECTION 3.2 - FACILITY FEE: $2,500 per quarter, payable in advance, on the Closing Date (pro-rated for any partial quarter at the beginning of the term of this Agreement) and on the first day of each July, October, January and April thereafter during the term of this Agreement and any renewal term. SECTION 9.1 - RENEWAL FEE: 0.5 % of the Maximum Dollar Amount. SECTION 9.2 - EARLY TERMINATION FEE: An amount equal to the greater of (i) an amount equal to all interest due and payable during the six (6) months immediately preceding the effective date of termination, or (ii) an amount equal to the average monthly interest due and payable hereunder based on the greater of the six (6) month monthly interest immediately preceding the effective date of termination, or if the effective date of termination is less than six (6) months from the Closing Date, an amount equal to the average monthly interest due hereunder multiplied by the number of full or partial months from the effective date of termination to the Maturity Date, or (iii) an amount equal to the average monthly interest accrued during the six (6) months immediately preceding the effective date of termination, multiplied by the number of full or partial months from the effective date of termination to the Maturity Date. ================================================================================ SECTION 5 - CONDITIONS PRECEDENT SECTION 5.2 - MINIMUM AVAILABILITY: $300,000 22 26 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- SECTION 5.13 - OTHER DOCUMENTS AND AGREEMENTS: 1. Joint and Several Borrower Rider; 2. UCC-1 financing statements, fixture filings and termination statements; 3. Security Agreements (including those covering copyrights, patents and trademarks); 4. Intercreditor and Subordination Agreement; 5. Lockbox Agreement; 6. Collateral Assignment of Maintenance and License Contracts; and 7. Collateral Assignment of License Agreement. ================================================================================ SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 6.2 - PRIOR NAMES OF BORROWER: See Exhibit 6.2. SECTION 6.2 - PRIOR TRADE NAMES OF BORROWER: See Exhibit 6.2. SECTION 6.2 - EXISTING TRADE NAMES OF BORROWER: HIS (for Hotel Information Systems, Inc.). See Exhibit 6.2. SECTION 6.3 - OTHER LOCATIONS AND ADDRESSES: See Exhibit 6.3. SECTION 6.10 - MATERIAL ADVERSE LITIGATION: To be provided by Borrower. SECTION 6.10 - FUTURE CLAIMS AND LITIGATION: Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of Fifty Thousand Dollars ($50,000) or more, or involving One Hundred Thousand Dollars ($100,000) or more in the aggregate. ================================================================================ SECTION 8 - ADDITIONAL DUTIES OF BORROWER SECTION 8.1 - OTHER PROVISIONS: Borrowers shall maintain availability at times following the initial funding of not less than $150,000 until such time as Borrowers have demonstrated to the satisfaction of Coast that they have achieved a consolidated after tax quarterly net income of not less than $150,000, calculated in accordance with GAAP. 23 27 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Borrowers shall maintain at all times a Consolidated Net Worth of not less than the sum of $2,250,000 plus 100% of Borrowers' consolidated after tax net income, on a cumulative basis from the Closing Date, calculated in accordance with GAAP. SECTION 8.2 - INSURANCE: Subject to the limitations set forth in Section 8.2 of the Agreement, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than Fifty Thousand Dollars ($50,000). SECTION 8.3 - REPORTING: Borrower shall provide Coast with the following: 1. Monthly Receivable agings, aged by invoice date, within ten (10) days after the end of each month. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within ten (10) days after the end of each month. 3. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory reports as are reasonably requested by Coast, all within ten (10) days after the end of each month. 4. Monthly internally prepared financial statements, as soon as available, and in any event within thirty (30) days after the end of each month. 5. Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower. 6. Quarterly customer lists, including customer name, address, and phone number. 7. Annual financial statements, as soon as available, and in any event within ninety (90) days following the end of Borrowers' fiscal year, containing the unqualified opinion of, and certified by, an independent certified public accountant acceptable to Coast. 8. Breakdown or listing of all customer deposits/prepayments on a periodic basis as Coast shall require. 24 28 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- SECTION 9 - TERM SECTION 9.1 - MATURITY DATE: April 23, 2001, 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. 25 EX-10.3 5 AMENDMENT NO.4 TO LTR AGREEMENT DATED AUG 15, 1994 1 EXHIBIT 10.3 Amendment No. 4 to Letter Agreement Dated August 15, 1994 This Amendment No. 4 ("Amendment No. 3") 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") and August 31, 1997 ("Amendment No. 3"), is made as of the 31st day of August, 1998 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. The extended term of the Agreement in Amendment No. 3 has expired but Consultant has continued to perform services for MAI and the parties seek to extend the term of the consultancy and to amend certain terms of the Agreement to be effective during the term extension. Now, therefore, in consideration of the mutual benefits to be derived hereunder, the parties agree as follows: 1. Extension of Term. The term of the consultancy shall be extended up through and including August 31, 1999. 2. Fixed Compensation. During the period of extension, i.e. from September 1, 1998 up through and including August 31, 1999, 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, and 3. In witness whereof, the parties have executed this Amendment No. 4 as of the day and year first written above. Orchard Capital Corporation MAI Systems Corporation By: By: ----------------------------------- -------------------------------- Richard S. Ressler George G. Bayz President President EX-10.4 6 PURCHASE OF COMMON STOCK OF MAI SYSTEM CORPORATION 1 EXHIBIT 10.4 February 3, 1999 Richard S. Ressler C/o Orchard Capital Corporation 10960 Wilshire Blvd., Suite 500 Los Angeles, California 90024 Re: Purchase of Common Stock of MAI Systems Corporation (the "Company") Dear Richard: This will confirm the terms pursuant to which you have agreed to purchase 201,106 newly issued shares of the Company's par value $.01 per share common stock (the "Common Stock") for $500,000.00. On or about the date hereof, you will contribute $500,000 to the Company by wire transfer to the following account: Wells Fargo Bank N.A. 420 Montgomery Street P.O. Box 63450 San Francisco, California BIC/ABA: WFBIUS6S Account #: 4311789861 Account Name: MAI Systems Conc Sink In consideration for such contribution, the Company will promptly issue to you 201,106 shares of its Common Stock. You hereby represent as follows: 1. The Common Stock to be acquired by you is being acquired by you for your own account, for investment purposes, and with no intention of disposing of such Common Stock or any part thereof. No other person will have any direct or indirect beneficial interest in or to the Common Stock. 2. You understand that the Common Stock has not been and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any State securities laws in reliance, in part, on you representations, warranties, and agreements herein. You further understand the Common Stock is a "restricted security" under the Securities Act in that the Common Stock will be acquired from the Company in 2 a transaction not involving a public offering, and that the Common Stock may not be reoffered, resold, pledged or hypothecated, except pursuant to an applicable exemption under the Securities Act and applicable State securities laws, and that otherwise the Common Stock must be held indefinitely. 3. You are an "accredited investor" as defined in Rule 501(a) under the Securities Act and, by reason of your business and financial experience, you have such knowledge and experience that you are able to evaluate the merits and risks of the proposed investment in the Company, including a complete loss of such investment. 4. You have been afforded the opportunity to review financial and other information, and to ask questions and receive answers, concerning the proposed investment in the Company. 5. You represent, warrant, and agree that, except to the extent set forth in that certain Registration Rights Agreement, dated as September 7, 1997, between you and the Company, the Company is under no obligation to register or qualify the Common Stock under the Securities Act or under any State securities law, or to assist you in complying with any exemption from registration and qualification. Sincerely yours, MAI SYSTEMS CORPORATION By: -------------------------------- Lewis H. Stanton Executive Vice President, Chief Operating and Financial Officer ACCEPTED AND AGREED: - ----------------------------------- RICHARD S. RESSLER Dated: February 3, 1999 2 EX-10.5 7 NON-EMPLOYMENT DIRECTORS' OPTION PLAN 1 EXHIBIT 10.5 MAI SYSTEMS CORPORATION NON-EMPLOYEE DIRECTORS' OPTION PLAN 1. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" shall mean the Board of Directors of the Company. (b) "COMMON STOCK" shall mean the Common Stock, $0.01 par value, of the Company. (c) "COMPANY" shall mean MAI Systems Corporation, a Delaware corporation. (d) "DIRECTOR" shall mean a person serving on the Board as of the date of the adoption of this Plan by the Board or who is thereafter elected by the stockholders of the Company or appointed to serve as a member of the Board. (e) "ELIGIBLE DIRECTOR" shall mean a Director who is eligible to be granted an Option pursuant to and in accordance with the Plan, as set forth in Section 5 of the Plan. (f) "EXERCISE PRICE" shall mean the price per Share at which an Option may be exercised. (g) "PURCHASE PRICE" shall mean the Exercise Price times the number of whole Shares with respect to which an Option is exercised. (h) "OPTION" shall mean any option granted pursuant to the plan. (i) "OPTION CERTIFICATE" shall mean a written certificate evidencing an Option, substantially in the form attached hereto as Exhibit A. (j) "OPTIONHOLDER" shall mean a Director who has been granted an Option. (k) "PLAN" shall mean this Non-Employee Directors' Option Plan. (l) "SHARE" or "SHARES" shall mean shares of Common Stock, as adjusted in accordance with Section 12 of the Plan. 2. PURPOSES OF THE PLAN. The purposes of the Plan are to attract and retain the best available candidates for the Board, to provide additional equity incentive to members of the Board and to promote the success of the Company's business. 2 3. STOCK SUBJECT TO PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be issued upon exercise of Options under the Plan is Two Hundred Fifty Thousand (250,000) Shares. The number of Shares subject to Options outstanding under the Plan at any time may not exceed the number of Shares remaining available for issuance under the Plan. The Shares subject to Options may be authorized, but unissued, or reacquired Shares. If any outstanding Option expires unexercised or is terminated, the Shares subject to such Option shall be returned to the Plan and shall become available for issuance upon exercise of other Options issued under the Plan. In addition, if, pursuant to Section 8(e) of the Plan, an Option is deemed to expire or terminate in whole or part, then, to the extent provided in Section 8(e), the Shares subject to such Option shall be returned to the Plan and shall become available for issuance upon exercise of other Options issued under the Plan. 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board of Directors of the Company. The Board shall have the authority, in its absolute discretion, to make all determinations deemed necessary or advisable for the administration of the Plan; provided, however, that the Board shall have no discretion to determine the selection of Directors to whom Options will be granted, the frequency of Option grants, the number of Shares subject to an Option (except in accordance with Section 7 hereof), and the terms and provisions of Options. All decisions of the Board shall be final. 5. ELIGIBILITY. Any person who on or after the effective date (as determined in accordance with Section 13 hereof) of the Plan is or becomes a Director and who is (i) not an employee of the Company; (ii) not an officer of the Company; or (iii) is not the owner, directly or indirectly, of five percent (5%) or more of the issued and outstanding Common Stock shall be an Eligible Director. 6. INITIAL GRANTS OF OPTION. Each person who is or becomes an Eligible Director during the term of the Plan shall automatically be granted on the date he first becomes an Eligible Director during the term of the Plan an Option to purchase Thirty-One Thousand Two Hundred and Fifty (31,250) Shares, subject to adjustment in accordance with the provisions of Section 12 hereof. Except as specifically provided in this Section 6 and in Section 7(a), no Option shall be granted under the Plan to an Eligible Director. 7. ADDITIONAL GRANTS OF OPTIONS. (a) An Eligible Director shall also be granted an Option under the Plan to purchase Six Thousand Two Hundred and Fifty (6,250) Shares (subject to adjustment in accordance with the provisions of Section 12 hereof) on the date of each successive annual meeting of the Company's stockholders held after calendar 1995 at which such Eligible Director is reelected to the Company's Board. (b) If the total number of Shares which would otherwise be subject to Options to be granted under Section 7(a) on a scheduled grant date exceeds the number of Shares then available under the Plan (after deduction for all Shares for which Options have been exercised or are then outstanding), the Shares remaining available for grant subject to Options shall be 2 3 (c) allocated pro rata among those Eligible Directors who have not previously received an Option under Section 7(a) of the Plan. 8. TERMS AND CONDITIONS OF OPTION. Each Option granted pursuant to this Plan shall be evidenced by an Option Certificate, which Option Certificate shall comply with and be subject to the following terms and conditions: (a) Number of Shares. Each Option Certificate shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with the provisions of Section 12 hereof. (b) Exercise Price. Each Option Certificate shall state the Exercise Price. The Exercise Price shall be one hundred percent (100%) of the fair market value of the Common Stock on the date of the grant, which shall be the average of the closing bid and asked prices of the Common Stock on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") System), or, in the event the Common Stock is listed on national securities exchange or on the NASDAQ National market System, the fair market value per Share shall be the closing price on such Option, as reported in The Wall Street Journal. (c) Medium and Time of Payment. The Purchase price for any Shares purchased upon exercise of an Option shall be payable in full and shall be paid by cash or check. The Purchase Price may also be paid (i) by delivery of Shares already owned by, and in the possession of, the Optionholder, or (ii) if specifically permitted in the Option being exercised, when and as permitted therein, by a notice instructing the Company to withhold from those Shares that otherwise would be issuable upon the exercise of the Option a number of Shares having a fair market value equal to the Purchase Price of the Shares being purchased, or any combination thereof. Shares of Common Stock used to satisfy the Purchase Price of an Option shall be valued at their fair market value determined (in accordance with Section 8(b) as of the close of business on the date the Option is exercised, or if such date is not a business day, on the business day immediately preceding the date of exercise. (d) Term of Option. Subject to Section 8(e) hereof, the term of each Option shall be ten (10) years, but no option shall be exercisable for more than one (1) year following the date an optionee ceases to be a director of the Company. (e) Vesting. Each Option granted under Section 6 of the Plan shall vest and be exercisable cumulatively to the extent of twenty percent (20%) of the Shares subject thereto six months from the date of grant of the Option and on the date of each successive annual meeting of stockholders at which the Eligible Director is reelected to the Board (other than any such meeting held in the same calendar year in which the Option is granted). Each Option granted under Section 7(a) of the Plan shall vest and be exercisable to the extent of all of the Shares issuable 3 4 upon exercise of such Option 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 Optionholder is reelected to the Board. Notwithstanding the foregoing, if an Optionholder shall cease to be a director of the Company for any reason or no reason ("Termination"), whether such Termination is permanent or temporary, then after the effective date of such Termination and through the end of the term of such Optionholder's Option, such Optionholder may exercise such Option to purchase only the number of Shares that such Optionholder would have been entitled to purchase on the effective date of such Termination, and such Option shall be deemed to be an Option to purchase only the number of Shares that such Optionholder would have been entitled to purchase on the effective date of such Termination. To the extent that such Optionholder shall not be entitled to exercise the Option as to any or all of the Shares subject to such Option, the Option for such Shares as to which the Option shall not be exercisable shall be deemed to expire on such effective date and the Shares as to which the Option shall no longer be exercisable shall be returned to the Plan and shall become available for issuance under the Plan. (f) Withholding Taxes. In the event the Company determines that it is required to withhold state or federal income tax, FICA or other tax as a result of the exercise of an Option, it may require the Optionholder to make arrangements satisfactory to the Company to enable it to satisfy such requirements as a condition to the exercise of the Option. Whenever an Optionholder is required to pay to the Company, or to have deducted from any fees payable by the Company to such Optionholder, an amount necessary to satisfy the Company's withholding obligations in connection with the exercise any Option, such Optionholder shall be entitled, subject to such rules as the Board may adopt, to satisfy such withholding obligation, in whole or in part, by tendering to the Company or directing the Company to withhold Shares acquired upon exercise of such Option, and/or tendering to the Company or other Shares owned by such Optionholder, having a fair market value equal to the amount required to be withheld. 9. NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, in whole or in part, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionholder only by such Optionholder. 10. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, the Securities Exchange Act of 1934, (the "Exchange Act"), applicable state securities laws, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 4 5 11. RESERVATION OF SHARES. The Company, during the term of this Plan, and subject to obtaining stockholder approval to the Plan as provided in Section 15 hereof, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 12. ADJUSTMENTS FOR STOCK SPLITS, ETC. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the Exercise Price covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or Purchase Price of Shares subject to an Option. In the event of the proposed dissolution or liquidation of the Company, or in the event of a proposed sale of all or substantially all of the stock or assets of the Company, or the merger, consolidation or reorganization of the Company with or into another corporation, the Board shall (i) make provision for the assumption of all outstanding Options by the successor corporation or (ii) declare that any Option shall terminate as of a date fixed by the Board which is at least thirty (30) days after notice thereof is given to Optionholders and shall give each Optionholder the right to exercise his Option as to all of the Shares covered by each outstanding Option, including Shares as to which any Option would not otherwise be exercisable. 13. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective immediately upon the earlier of its adoption by the Board of its approval by the stockholders or the Company in accordance with Section 15 hereof and shall continue in effect for ten (10) years unless sooner terminated by the Board. Except as otherwise provided in Section 12 and Section 15 hereof, the termination or expiration of the Plan shall have no effect on any outstanding Options. 14. AMENDMENT OF THE PLAN. Provisions of the Plan concerning eligibility for participation and the amount, price and timing of awards may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, and the rules thereunder. All amendments or modifications to the Plan shall require approval of the holders of a majority of the outstanding Shares present, or represented, and entitled to vote at a meeting of the Company's stockholders. Any such amendment of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended, unless otherwise mutually agreed between the Optionholder and the Board, which agreement must be in writing and signed by the Optionholder and the Company. 5 6 15. STOCKHOLDER APPROVAL. Continuance of the Plan and the effectiveness of any Option granted under the Plan shall be subject to stockholder approval of the Plan no later than at the first annual meeting of stockholders held subsequent to adoption of the Plan by the Board. If stockholder approval of the Plan is obtained at a duly held stockholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. If, at the time the Plan is presented for stockholder approval, the Company has registered any class of equity security registered pursuant to Section 12 of the Exchange Act, such stockholder approval shall be solicited in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. 16. CHANGE IN CONTROL. In the event of a "Change in Control" (as hereinafter defined), all Options outstanding shall be deemed fully vested notwithstanding the provisions of Section 8(e) and thereafter each Optionholder will have a period of ninety (90) days following the date such Optionholder ceases to be a Director (but not later than ninety (90) days after the stated term of the Option) in which to exercise in full such Optionholder's outstanding Options. For purposes of this Section, "Change in Control" shall be deemed to have occurred if (a) any "person" or group of "persons" (as the terms "person" and "group" are used in Section 13(d) and 14(d) of the Exchange Act and the rules thereunder) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the then outstanding securities of the Company (whether by purchase or acquisition of such securities or by agreement to act in concert with respect to the voting of such securities or otherwise); or (b) a majority of the Board of Directors of the Company shall be comprised of persons who were not elected to such offices as part of the "Company nominated slate" of directors (i.e., the slate of nominees proposed by the Board of Directors in office immediately prior to the election). 6 7 EXHIBIT A OPTION CERTIFICATE THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Option to Purchase ______________ Shares of Common Stock INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE MAI SYSTEMS CORPORATION Void after _____________________________, 19__ THIS CERTIFICATE evidences the right of ______________________________ (the "Holder"), for value received, to purchase ____________________ shares of Common Stock, $.01 par value (the "Shares"), of MAI Systems Corporation, a Delaware corporation (the "Company"), at a price of $_______________ per Share (the "Exercise Price") and subject in all respects to the terms, definitions and provisions of the MAI Systems Non-Employee Directors' Option Plan (the "Plan") which is incorporated herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meaning when used herein. 1. Term of Option. The Option may be exercised only during the period commencing on ___________________________, 19__ through the close of business on ______________________, 19__, but not later than one year after the Holder ceases to be a director of the Company (the "Option Term"), and may be exercised only in accordance with the Plan and the terms and conditions hereinafter set forth. 8 2. Exercise of Options. The Option shall be exercisable as follows: (a) Right to Exercise. From time to time during the Option Term, the Holder shall have the right to exercise the Option to purchase the maximum number of the Shares specified in the following table:
Aggregate Maximum No. of Shares Portion of Option Term for Which Options are Exercisable ---------------------- --------------------------------- _____ through _____ _____less any Shares purchased upon previous exercise of the Option _____ through _____ _____less any Shares purchased upon previous exercise of the Option _____ through _____ _____less any Shares purchased upon previous exercise of the Option _____ through _____ _____less any Shares purchased upon previous exercise of the Option _____ through _____ _____less any Shares purchased upon previous exercise of the Option
Notwithstanding the foregoing, if the Holder shall cease to be a director of the Company for any reason or no reason ("Termination"), whether such Termination is permanent or temporary, then after the effective date of such Termination and through the end of the Option Term, or one year after Holder has ceased to be a director of the Company, whichever occurs first, the Holder may exercise the Option to purchase only such number of Shares that the Holder would have been entitled to purchase on the effective date of such Termination in accordance with the foregoing table. To the extent that the Holder shall not have been entitled to exercise any portion of the Option on the effective date of such Termination, such portion shall be deemed to have expired unexercised on such effective date. (b) Method of Exercise; Payment; Issuance of New Option; Transfer and Exchange. The Option may be exercised by the Holder, in whole or in part, by the surrender of this Certificate, properly endorsed, at the principal office of the Company, by the payment to the Company by cash or check of the then applicable Purchase Price. In the event of any exercise of the Option, certificates for the Shares so purchased shall be delivered to the Holder within a reasonable time after the Option shall have been so exercised and, unless the Option has expired, a new Certificate representing the right to purchase the number of Shares, if any, with respect to which the Option shall not then have been exercised shall also be issued to the Holder within such time. All such new certificates shall be dated the date hereof and shall be identical with this Certificate except as to the number of Shares issuable pursuant thereto. 2 9 (c) Restrictions on Exercise. The Option may be exercised only if the issuance and delivery of the Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, the Securities Exchange Act of 1934, applicable state securities laws or the rules and regulations of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of the Option, the Company may require the Holder to make such representations and warranties to the Company as may be required by applicable law or regulation. 3. Stock Fully Paid, Reservation of Shares. The Company covenants and agrees that all Shares will, upon issuance and payment in accordance herewith, be fully paid, validly issued and nonassessable. The Company further covenants and agrees that during the Option Term, subject to obtaining stockholder approval of the Plan, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the Option, at least the maximum number of Shares as are issuable upon the exercise of the Option. 4. No Change in Certificate. The form of this Certificate need not be changed because of any adjustment in the Exercise Price or in the number of Shares purchasable on exercise of the Option. The Exercise Price or the number of Shares shall be considered to have been so changed as of the close of business on the date of adjustment. 5. Fractional Shares. No fractional Shares will be issued in connection with any exercise of the Option but, in lieu of such fractional Shares, the Company shall make a cash payment therefor upon the basis of the fair market value of the Shares. 6. Nontransferability of Options. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, in whole or in part, either voluntarily or involuntarily by operation of law, other than by will or the laws of descent or distribution, and may be exercised during the lifetime of the Holder only by the Holder. 7. No Rights as Stockholder. The Holder, as such, shall not be entitled to vote or receive dividends or be considered a stockholder of the Company for any purpose, nor shall anything in this Certificate be construed to confer on such holder, as such, give or withhold consent to any corporate action, to receive notice of meetings of stockholders, to receive dividends or subscription rights or otherwise. 8. Withholding Tax Liability. Upon exercise of the Option, the Company and the Holder may incur liability for applicable state and federal income tax withholding tax on the difference, if any, between the aggregate Purchase Price and the then fair market value of the Shares acquired upon such exercise. The Holder understands and agrees that the Company may be required to withhold part or all of the Holder's director fees or other compensation paid by the Company to pay the withholding tax and that if such fees or compensation is insufficient the Company may require the Holder, as a condition to any exercise of the Option, to pay in cash the amount of such withholding liability. 3 10 9. Acknowledgment of Receipt of Plan. The Holder hereby acknowledges receipt of the Plan. 10. Adjustments for Stock Splits, Etc.. Subject to any required action by the stockholders of the Company, the number of Shares and the Exercise Price shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares or the Exercise Price. In the event of the proposed dissolution or liquidation of the Company, or in the event of a proposed sale of all or substantially all of the stock or assets of the Company, or the merger, consolidation or reorganization of the Company with or into another corporation, the Option will terminate upon the effectiveness of such action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board. 4 EX-10.6 8 1993 STOCK OPTION PLAN 1 EXHIBIT 10.6 MAI SYSTEMS CORPORATION 1993 STOCK OPTION PLAN ARTICLE I PURPOSES 1.1. PURPOSE OF PLAN. The purpose of the MAI Systems Corporation 1993 Stock Option Plan (the "Plan") are to advance the interests of MAI Systems Corporation (the "Company") and its shareholders by providing significant incentives to selected officers and key employees of the Company who contribute and are expected to contribute to the success of the Company, and to enhance the interest of such officers and employees in the Company's success and progress by providing them with an opportunity to become shareholders of the Company. Further, the Plan is designed to enhance the Company's ability to attract and retain qualified employees necessary for the success and progress of the Company. ARTICLE DEFINITIONS 2.1. DEFINITIONS. Certain terms used herein shall have the meaning below stated, subject to the provisions of Section 7.1 hereof. (a) "Board" or "Board of Directors" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means the Compensation Committee of the Board of Directors or such other committee of the Board as shall be appointed by the Board to administer the Plan pursuant to Article VII hereof. (d) "Common Stock" means, subject to the provisions of Section 9.3, the authorized common stock of the Company, par value $.01 per share. (e) "Company" means MAI Systems Corporation. (f) "Effective Date" means the date on which the Company's plan of reorganization is confirmed by the Bankruptcy Court. (g) "Employee" means an officer or other common law employee of the Company or a Subsidiary, including a member of the Board who is also a common law employee. (h) "Fair Market Value" means, in respect of a share of Common Stock on any date, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the last reported sales price regular way on the day preceding such date on which a reported sale occurred, in either case on the New York Stock Exchange or, if at the time the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock 2 is listed or admitted to trading or, if at the time the Common Stock is not listed or admitted to trading on any national securities exchange, in the National Association of Securities Dealers Automated Quotations National Market System or, if at the time the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose or, if the Common Stock is not traded over-the-counter, as determined by the Committee using any reasonable valuation method. (i) "Incentive Stock Option" means an Option to purchase Common Stock, granted by the Company to an Employee pursuant to Section 5.1 hereof, which meets the requirements of Section 422 of the Code. (j) "Nonstatutory Stock Option" means and Option to purchase Common Stock, granted by the Company to an Employee pursuant to Section 5.1 hereof, which does not meet the requirements of Section 422 of the Code or which provides, as of the time the Option is granted, that it will not be treated as an Incentive Stock Option. (k) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. (l) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms of an Option Granted under the Plan. (m) "Optionee" means an Employee to whom an Option has been granted under the Plan. (n) "Plan" means the MAI Systems Corporation 1993 Stock Option Plan, as set forth herein and as from time to time amended. (o) "Subsidiary" means a subsidiary of the Company within the meaning of Section 424(f) of the Code. ARTICLE III EFFECTIVE DATE OF THE PLAN; RESERVATION OF SHARES 3.1. EFFECTIVE DATE. The Plan shall become effective as of the Effective Date. 3.2. SHARES RESERVED UNDER PLAN. The aggregate number of shares of Common Stock which may be issued upon the exercise of Options granted under the Plan shall not exceed 1,500,000 of the authorized shares of Common Stock on the Effective Date, all or any part of which may be issued pursuant to Incentive Stock Options or Nonstatutory Stock Options or any combination thereof. Shares of Common Stock issued upon the exercise of Options granted under the Plan may consist of either authorized but unissued shares or shares which have been issued and which shall have been reacquired by the Company. The total number of shares authorized under the Plan shall be subject to increase or decrease in order to give effect to the provisions of Section 9.3 and to give effect to any amendment adopted pursuant to Article VIII. If any Option granted under the Plan shall expire, terminate or be cancelled for any reason without 2 3 having been exercised in full, the number of shares as to which such Option was not exercised shall again be available for purposes of the Plan. The Company shall at all times while the Plan is in effect reserve such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. ARTICLE IV PARTICIPATION IN PLAN 4.1. ELIGIBILITY. Options under the Plan may be granted to any key Employee of the Company or a Subsidiary who performs services for the Company or a Subsidiary that the Committee deems to be of special importance to the growth and success of the Company. The Committee shall determine those Employees to whom Options shall be granted, the type of Option to be granted to each such person, and, subject to Sections 3.2 hereof, the number of shares of Common Stock subject to each such Option. 4.2. PARTICIPATION NOT GUARANTEE OF EMPLOYMENT OR RETENTION. Nothing in this Plan or in any Option Agreement shall in any manner be construed to limit in any way the right of the Company or any Subsidiary to terminate an Employee's employment at any time, without regard to the effect of such termination on any rights such Employee would otherwise have under this Plan, or give any right to an Employee to remain employed by the Company or a Subsidiary thereof in any particular position or at any particular rate of compensation. ARTICLE V GRANT AND EXERCISE OF OPTIONS 5.1. GRANT OF OPTIONS. The Committee may from time to time in its discretion grant Incentive Stock Options and/or Nonstatutory Stock Options to Employees at any time after the Effective Date. All Options under the Plan shall be granted within ten (10) years from the date the Plan is adopted by the Board or the date the Plan is approved by the stockholders of the Company, whichever is earlier. 5.2. OPTION AGREEMENTS. Each Option granted under the Plan shall be evidenced by an Option Agreement between the Company and the Optionee in such form as the Committee shall approve and containing such provisions and conditions not inconsistent with the provisions of the Plan as the Committee shall determine. 5.3. OPTION TERMS. Options granted under the Plan shall be subject to the following requirements: (a) Option Price. The exercise price of each Incentive Stock Option shall not be less than the higher of the par value or 100% of the Fair Market Value of the shares of Common Stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option shall be the amount determined by the Committee as set forth in the applicable Option Agreement, provided that such amount shall not be less than the higher of the par value or 85% of the Fair Market Value of the shares of Common Stock subject to the Option on the date the Option is granted. The exercise price of an Option may be subject to adjustment pursuant to Section 9.3 hereof. 3 4 (b) Term of Option. The term during which an Option is exercisable shall be that period determined by the Committee as set forth in the applicable Option Agreement, provided that no Option shall have a term that exceeds a period of 10 years from the date of its grant. (c) Nontransferability of Option. No Option granted under the Plan shall be transferable by the Optionee otherwise than by will or the laws of descent and distribution, and each such Option shall be exercisable during the Optionee's lifetime only by him. No transfer of an Option by an Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Committee may determine necessary to establish the validity of the transfer. (d) Exercise of Option. Unless the Option Agreement pursuant to which an Option is granted provides otherwise, each Option shall become exercisable, on a cumulative basis, with respect to 20% of the aggregate number of the shares of Common Stock covered thereby on the first anniversary of the date of grant and with respect to an additional 20% of the shares of Common Stock covered thereby on each of the next four succeeding anniversaries of the date of grant. Any portion of an Option which has become exercisable shall remain exercisable until it is exercised in full or terminates pursuant to the terms of the Plan or the Option Agreement pursuant to which it is granted. (e) Acceleration of Exercise on Change of Control. Notwithstanding the provisions of paragraph (d) of this Section or any other restrictions limiting the number of shares of Common Stock as to which an Option may be exercised, each Option shall become immediately exercisable in full upon and simultaneously with any "Change of Control" of the Company. For purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any employee benefit plan sponsored by the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; 4 5 (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (A) assets for which the price or consideration upon sale or disposition equals or exceeds fifty percent (50%) or more of the book value of the total assets of the Company; (B) assets for which the price or consideration upon sale or disposition equals or exceeds fifty percent (50%) or more of the fair market value of the Company (which for purposes of this subsection (iv) shall be the number of shares of voting securities outstanding on the date on which the change of control of the Company is deemed to occur multiplied by the Fair Market Value of said securities; or (C) assets that generated fifty percent (50%) or more of the Company's reported net sales or net income in either of the two (2) taxable years ended prior to the date on which the change of control of the Company is deemed to occur. Notwithstanding the foregoing provisions of this Section 5.3(e), as long as Brooke Group, Ltd. (BGL) and/or any affiliate thereof shall own stock of the Company representing 50% or more of the combined voting power for the election of directors, (x) the beneficial ownership of such stock by BGL and/or any affiliate, and (y) any acquisition of additional voting stock by BGL and/or any affiliate shall not constitute a Change of Control. (f) Incentive Stock Options Granted to Ten Percent Shareholders. No Incentive Stock Options shall be granted to any Employee who owns, directly or indirectly within the mean of Section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary, unless at the time the Incentive Stock Option is granted, the exercise price of the Incentive Stock Option is at least 110% of the Fair Market Value of the Common Stock subject to such Incentive Stock Option and such Incentive Stock Option, by its terms, is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted. (g) Limitation on Incentive Stock Options. To the extent that the aggregate Fair Market Value of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such Options shall be treated as Nonstatutory Options. For this purpose, Options shall be taken into account in the order in which they were granted and the Fair Market Value of the Common Stock shall be determined as of the time the Option with respect to such Common Stock is granted. 5 6 5.4. PAYMENT OF EXERCISE PRICE AND DELIVERY OF SHARES. (a) Notice and Payment for Shares. Each Option shall be exercised by delivery of a written notice to the Company in such form as the Committee shall approve stating the number of the whole shares of Common Stock as to which the Option is being exercised and accompanied by payment therefor. No Option shall be deemed exercised in the event that payment therefor is not received and shares of Common Stock shall not be issued upon the exercise of an Option unless the exercise price is paid in full. Payment for shares of Common Stock purchased upon the exercise of an Option shall be made by (i) cash, (ii) certified check payable to the order of the Company, (iii) outstanding shares of Common Stock duly endorsed to the Company (which shares of Common Stock shall be valued at their Fair Market Value as of the day preceding the date of such exercise), (iv) any combination of the foregoing, or (v) such other method of payment as may be provided in the applicable Option Agreement. (b) Rights of Optionee in Stock. Neither any Optionee nor the legal representatives, heirs, legatees or distributees of any Optionee, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock issuable upon exercise of an Option granted hereunder unless and until such shares are issued to him or them and such person or persons have received a certificate or certificates therefor. Upon the issuance and receipt of such certificate or certificates, such Optionee or the legal representatives, heirs, legatees or distributees of such Optionee shall have absolute ownership of the shares of Common Stock evidenced thereby, including the right to vote such shares, to the same extent as any other owner of shares of Common Stock, and to receive dividends thereon, subject, however, to the terms, conditions and restrictions of this Plan. ARTICLE VI TERMINATION AND DEATH 6.1. TERMINATION OTHER THAN BY DEATH OR FOR CAUSE. If an Optionee's position as an Employee of the Company or a Subsidiary terminates for any reason other than death or for Cause (as defined in Section 6.2) he may, unless the applicable Option Agreement provides otherwise, exercise an Option previously granted within three months after the date of such termination, but in no event later than the date on which the Option would have expired in accordance with its terms. To the extent the Option is not so exercised, it shall expire at the end of such three-month period. 6.2. TERMINATION FOR CAUSE. If an Optionee's position as an Employee of the Company or a Subsidiary is terminated for Cause, any Option theretofore granted to him shall expire and cease to be exercisable on the date notice of such termination is delivered to the Optionee. "Cause" shall mean (a) the willful and continued failure by an Optionee to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Optionee by the Board, which demand specifically identifies the manner in which the Board believes that the Optionee has not substantially performed his duties, or (b) the willful engaging by the Optionee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 6.2, no act, or failure to act, shall be deemed "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. 6 7 6.3. DEATH. If an Optionee dies (i) while he is an Employee of the Company or a Subsidiary or (ii) during the three-month period after the termination of his position as an Employee of the Company or a Subsidiary, and at the time of his death the Optionee was entitled to exercise an Option theretofore granted to him, such Option shall, unless the applicable Option Agreement provides otherwise, expire one year after the date of his death, but in no event later than the date on which the Option would have expired if the Optionee had lived. During such one-year period the Option may be exercised by the Optionee's executor or administrator or by any person or persons who shall have acquired the Option directly from the Optionee by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of his death and, to the extent the Option is not so exercised, it shall expire at the end of such one-year period. ARTICLE VII ADMINISTRATION OF PLAN 7.1. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board of Directors or such other committee as may be appointed by the Board of Directors of the Company, which Committee shall consist of not less than two members, all of whom are members of the Board of Directors and "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Members of the Committee shall not be eligible to participate in the Plan. A majority of the Committee shall constitute a quorum thereof and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall be the actions of the Committee. Vacancies occurring on the Committee shall be filled by the Board. The Committee shall have full and final authority (i) to interpret the Plan and each of the Option Agreements, (ii) to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, (iii) to make all determinations necessary or advisable for the administration of the Plan and (iv) to correct any defect, supply any omission and reconcile any inconsistency in the Plan and any Option Agreement. The Committee's determination in all matters referred to herein shall be conclusive and binding for all purposes and upon all persons including, but without limitation, the Company, the shareholders of the Company, the Committee, and each of the members thereof, Employees and their respective successors in interest. 7.2. LIABILITY. No member of the Committee shall be liable for anything done or omitted to be done by him or by any other member of the Committee in connection with the Plan, except for his own willful misconduct or gross negligence. The Committee shall have power to engage outside consultants, auditors or other professional help to assist in the fulfillment of the Committee's duties under the Plan at the Company's expense. 7.3. DETERMINATIONS. In making its determinations concerning the key Employees who shall receive Options as well as the number of shares to be covered thereby and the time or times at which they shall be granted, the Committee shall take into account the nature of the services rendered by such key Employees, their past, present and potential contribution to the Company's success and such other factors as the Committee may deem relevant. The Committee shall determine the form of Option Agreements under the Plan and the terms and conditions to be included therein, provided such terms and conditions are not inconsistent with the terms of the Plan. The Committee may waive any provisions of any Option Agreement, provided such waiver is not inconsistent with the terms of the Plan as then in effect. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. 7 8 ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN 8.1. AMENDMENT OF PLAN. (a) Generally. The Plan may be amended at any time and from time to time by the Board, but, except as provided by Section 9.3, no amendment which (i) increases the aggregate number of shares of Common Stock which may be issued pursuant to Options granted under the Plan, (ii) decreases the minimum Incentive Stock Option exercise price provided in the Plan, (iii) extends the period during which Options may be granted pursuant to the Plan, (iv) changes the class of individuals eligible to the granted Options, (v) materially increases the benefits provided by the Plan, or (vi) has the effect of any of the above shall be effective unless and until the same is approved by the affirmative vote of the holders of a majority of the outstanding shares of the Company's voting stock, either in person or by proxy, in accordance with the applicable provisions of the charter and bylaws of the Company and applicable State law. No amendment to the Plan shall, without the consent of an Optionee, affect such Optionee's rights under an Option previously granted. (b) Amendments Relating to Incentive Stock Options. To the extent applicable, the Plan is intended to permit the issuance of Incentive Stock Options to Employees in accordance with the provisions of Section 422 of the Code. Subject to paragraph 8.1(a) above, the Plan and Option Agreements may be modified or amended at any time, both prospectively and retroactively, and in a manner that may affect Incentive Stock Options previously granted, if such amendment or modification is necessary for the Plan and Incentive Stock Options granted hereunder to qualify under said provisions of the Code. 8.2. TERMINATION. The Board may at any time terminate the Plan as of any date specified in a resolution adopted by the Board. If not earlier terminated, the Plan shall terminate on June 27, 2003. No Options may be granted after the Plan has terminated, but the Committee shall continue to supervise the administration of Options previously granted. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1. RESTRICTIONS UPON GRANT OF OPTIONS. If the listing upon any stock exchange or the registration or qualification under any federal or state law of any shares of Common Stock to be issued on the exercise of Options granted under this Plan (whether to permit the grant of Options or the resale or other disposition of any such shares of Common Stock by or on behalf of Optionees receiving such shares) should be or become necessary or desirable, the Board in its sole discretion may determine that delivery of the certificates for such shares of Common Stock shall not be made until such listing, registration or qualification shall have been completed. The Company agrees that it will use its best efforts to effect any such listing, registration or qualification, provided, however, that the Company shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-8 or such other forms as may be in effect from time to time calling for information comparable to that presently required to be furnished under Form S-8. 8 9 9.2. Restrictions upon Resale of Unregistered Stock. Each Optionee shall, if the Company deems it advisable, represent and agree in writing (i) that any shares of Common Stock acquired by such Optionee pursuant to this Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933 or pursuant to an exemption from registration under said Ac, (ii) that such Optionee is acquiring such shares of Common Stock for his own account and not with a view to the distribution thereof, and (iii) to such other customary matters as the Company may request. In such case, no shares of Common Stock shall be issued to such Optionee unless such Optionee provides such representations and agreements and the Company is reasonably satisfied that such representations and agreements are correct. 9.3. ADJUSTMENTS. The number of shares of Common Stock of the Company authorized for issuance under the Plan, as well as the price to be paid and the number of shares issued upon exercise of outstanding Options, shall be subject to adjustment by the Committee, in its sole discretion, to reflect any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event. 9.4. WITHHOLDING OF TAXES. (a) Each Optionee who exercises a Nonstatutory Stock Option shall agree that no later than the date of such exercise or receipt of shares of Common Stock pursuant thereto he will pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state or local taxes of any kind required by law to be withheld with respect to the transfer to him of such shares of Common Stock. (b) The applicable Option Agreement may provide that an Optionee may satisfy, in whole or in part, the requirements of paragraph (a): (i) by delivery of shares of Common Stock owned by the Optionee for at least six months (or such shorter or longer period as the Committee may approve) having a Fair Market Value (determined as of the date of such delivery) equal to all or part of the amount to be so withheld, or (ii) by electing to have the Company withhold the requisite number of shares from shares otherwise deliverable pursuant to the exercise of the Option giving rise to the tax withholding obligation provided, however, that (A) the Optionee's election and the withholding pursuant thereto take effect during the period beginning on the third business day following the date of release for publication of the quarterly and annual summary statements of the Company's sales and earning's and ending on the twelfth business day following such date, and six months have elapsed since the date the Option was granted, or (B) such election was irrevocably made by the Optionee and filed with the Committee in writing at least six months in advance of the date on which such withholding occurs. The Committee may require, as a condition of accepting any such delivery of Common Stock or any such election by the Optionee, that the Optionee furnish to the Company an opinion of counsel to the effect that such delivery or election will not result in the Optionee incurring any liability under Section 16(b) of the Securities Exchange Act of 1934, as amended. 9 10 9.5. USE OF PROCEEDS. The proceeds from the sale of Common Stock pursuant to Options granted under the Plan shall constitute general funds of the Company and may be used for such corporate purposes as the Company may determine. 9.6. SUBSTITUTION OF OPTIONS. (a) The Committee may, with the consent of the holder of any Option granted under the Plan, cancel such Option and grant a new Option in substitution therefor, provided that the Option as so substituted shall satisfy all of the requirements of the Plan as of the date such new Option is granted. (b) Options may be granted under this Plan in substitution for options held by individuals who are employees of another corporation and who become Employees of the Company or any Subsidiary of the Company eligible to receive Options pursuant to the Plan as a result of a merger, consolidation, reorganization or similar event. The terms and conditions of any Options so granted may vary from those set forth in the Plan to the extent deemed appropriate by the Committee in order to conform the provisions of Options granted pursuant to the Plan to the provisions of the options in substitution for which they are granted. 9.7. NOTICES. Any notice required or permitted hereunder shall be sufficiently given only if sent by registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business, and to the Optionee at the address on file with the Company at the time of grant hereunder, or to such other address as either party may hereafter designate in writing by notice similarly given by one party to the other. 9.8. GOVERNING LAW. The Plan and all determinations made and actions taken hereunder, to the extent not otherwise governed by the Code or the laws of the Untied States of America, shall be governed by the laws of the State of California and construed accordingly. ------------------------------------ - ----------------------------------------- Date 10 EX-13.1 9 PORTIONS OF THE ANNUAL REPORT 1 EXHIBIT 13.1 THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS Sections of the Registrant's Annual Report to Stockholders Incorporated by Reference: 13.1.1 Selected Financial Information 13.l.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13.1.3 Independent Auditors' Report 13.1.4 Consolidated Balance Sheets 13.1.5 Consolidated Statements of Operations 13.1.6 Consolidated Statements of Stockholders' Equity (Deficiency) 13.1.7 Consolidated Statements of Cash Flows 13.1.8 Notes to Consolidated Financial Statements
EXHIBIT 13.1.1 SELECTED FINANCIAL INFORMATION The following table sets forth for the periods indicated selected consolidated financial data for MAI Systems Corporation. This information should be read in conjunction with the consolidated financial statements included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." SELECTED FINANCIAL DATA
Year Ended December 31, -------------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- (dollars in thousands except per share data) STATEMENT OF OPERATIONS DATA (1) Revenue $ 66,095 $ 66,294 $ 64,164 $ 70,978 $ 62,238 Operating Income (loss) 1,741 9,399 (12,744) (8,675) (1,066) Income (loss) before extraordinary items 3,628 8,623 (13,487) (10,172) (2,316) Net income (loss) 4,544 10,189 (13,487) (10,172) (2,316) Income (loss) per share (2): Basic income (loss) per share: Income (loss) before extraordinary item $ 0.53 $ 1.26 $ (1.85) $ (1.08) $ (0.23) Extraordinary item 0.67 0.23 -- -- -- -------- -------- -------- -------- -------- $ 1.20 $ 1.49 $ (1.85) $ (1.08) $ (0.23) ======== ======== ======== ======== ======== Diluted Income (loss) per share: Income (loss) before extraordinary $ 0.53 $ 1.12 $ (1.85) $ (1.08) $ (0.23) Extraordinary Item 0.67 .20 -- -- -- -------- -------- -------- -------- -------- $ 1.20 $ 1.32 $ (1.85) $ (1.08) $ (0.23) ======== ======== ======== ======== ======== Weighted average common shares used in determining income (loss) per share: Basic 7,356 6,820 7,309 9,408 10,587 ======== ======== ======== ======== ======== Diluted 7,356 7,724 7,309 9,408 10,587 ======== ======== ======== ======== ======== BALANCE SHEET DATA Working capital (deficiency) (4,974) 337 (8,270) (11,696) (11,975) Total Assets 16,016 21,033 32,853 34,613 35,757 Long-term debt 1,742 1,021 485 5,230 5,056 Stockholders' equity (deficiency) (7,542) 2,472 2,058 (666) (2,366)
(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. -1- 2 QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 1997 Year Ended December 31, 1998 ---------------------------------------- ------------------------------------------- (dollars in millions) (dollars in millions) (except per share data) (except per share data) 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- -------- -------- -------- -------- Revenue $16.8 $18.4 $17.7 $ 18.1 $ 15.2 $ 14.1 $ 14.7 $ 18.2 Gross Profit 6.0 6.2 8.0 7.1 7.2 5.3 7.0 10.2 Operating income (loss) (1.1) (1.8) (2.0) (3.8) (0.8) (2.4) 0.3 1.8 Income (loss) before income taxes (1.2) (2.1) (2.3) (4.3) (1.1) (2.5) 0.05 1.6 Net income (loss) (2) (1.2) (2.1) (2.3) (4.6) (1.1) (2.5) 0.05 1.2 Income (loss) per share (1): Basic $(0.14) $(0.23) $(0.24) $ (0.47) $ (0.11) $ (0.24) $ 0.01 $ 0.11 Diluted $(0.14) $(0.23) $(0.24) $ (0.47) $ (0.11) $ (0.24) $ -- $ 0.11 Weighted average common shares used in determining income (loss) per share (in thousands): Basic 8,595 9,187 9,559 10,285 10,298 10,594 10,731 10,726 ====== ===== ===== ====== ====== ====== ====== ====== Diluted 8,595 9,187 9,559 10,285 10,298 10,594 10,852 10,798 ====== ===== ===== ====== ====== ====== ====== ====== Share Prices High $ 8.00 $6.13 $ 4.88 $ 4.13 $ 5.13 $ 5.38 $ 3.75 $ 3.75 Low $ 6.00 $3.75 $ 2.94 $ 2.50 $ 1.44 $ 3.25 $ 1.25 $ 1.13
(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 1997 includes charges of $1,151,000 relating to the write off of excess and obsolete inventory. -2- 3 EXHIBIT 13.1.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the audited consolidated financial statements included elsewhere herein. Except for the historical information contained herein, the matters discussed in this Annual Report are forward-looking statements that involve a number of risks and uncertainties. There are certain important factors and risks, including the rapid change in hardware and software technology, market conditions, competitive factors, seasonality and other variations in the buying cycles of certain of the Company's customers, the timing of product announcements, the release of new or enhanced products, the introduction of competitive products and services by existing or new competitors, the significant risks associated with the acquisition of new products, product rights, technologies or businesses, MAI's ability to retain technical, managerial and other personnel, and the other risks detailed from time to time in the Company's SEC reports, including reports on Form 10-K and Form 10-Q, that could cause results to differ materially from those anticipated by the statements made herein. Therefore, historical results and percentage relationships will not necessarily be indicative of the operating results of any future period. See "Factors that May Affect Future Results", in the Company's Annual Report on Form 10-K for 1998. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, working capital improved from a negative working capital of $11,696,000 at December 31, 1997 to a negative working capital of $8,698,000. Excluding unearned revenue (which will not give rise to cash disbursements) of $10,702,000, the Company had working capital of $2,004,000 at December 31, 1998, resulting in a current ratio of 1.11 to 1.0. Unearned revenue for 1997 was $11,967,000, and working capital excluding unearned revenue was $271,000, resulting in a current ratio of 1.02 to 1.0. Excluding unearned revenue, the increase of $1,733,000 was primarily attributable to an increase in receivables of $3,564,000. Cash and cash equivalents decreased from $2,051,000 at December 31, 1997, compared to $2,029,000 at December 31, 1998. Availability under the Company's existing $5,000,000 secured revolving credit facility is based on a calculation using a rolling average of certain cash collections. At December 31, 1998, approximately $3,277,000 was available and drawn down under this facility, and the term of the facility was renewable annually. Subsequent to December 31, 1998, the term was extended to April 30, 2002. Net cash used in investing activities in 1998 totaled $2,323,000, mainly related to software development costs and capital expenditures. Net cash provided by financing activities in 1998 totaled $1,896,000, which is comprised of $68,000 in the exercising of stock options and warrants, $1,917,000 in short-term borrowings, less $89,000 in repayments of long-term debt. Stockholders' deficiency increased from a negative $666,000 at December 31, 1997, to a negative $2,366,000 at December 31, 1998, primarily as a result of a net loss of $2,316,000 for the year. The Company has commitments in connection with minimum guaranteed royalties in certain software products over the next two years of $1,500,000 and $2,500,000 in 1999, and 2000, respectively. The Company also has lease commitments which require payments of $1,800,000 in 1999. Although the Company has a net stockholders' deficiency of $2,366,000 at December 31, 1998, the Company believes it will generate sufficient funds from operations and obtain additional financing, as needed, in 1999 to meet its operating and capital requirements. The Company's belief is based on an improving earnings trend, the extension after year end of the Company's short-term borrowings to a longer term arrangement and the Company's ability to secure additional capital, if needed. As of February 28, 1999, the Company had issued and outstanding 10,837,908 shares of Common Stock. -3- 4 RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to Year Ended December 31, 1998.
Percentage of Percentage of December 31, 1997 Revenue December 31, 1998 Revenue ----------------- ------------- ----------------- ------------- (in thousands) (in thousands) 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%)
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. -4- 5 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. RESULTS OF OPERATIONS Year Ended December 31,1996 Compared to Year Ended December 31, 1997
Percentage of Percentage of December 31, 1996 Revenue December 31, 1997 Revenue ----------------- ------------- ----------------- ------------- (in thousands) (in thousands) Revenues: Hospitality $ 17,531 27.4% $ 32,720 46.1% Process Manufacturing 2,957 4.6% 10,929 15.4% Gaming 2,317 3.6% 4,594 6.5% Legacy 38,529 60.0% 20,515 28.9% Other 2,830 4.4% 2,220 3.1% Total Revenue 64,164 100.0% 70,978 100.0% Gross profit 21,234 33.1% 27,282 38.5% Selling, general and administrative expenses 21,622 33.7% 26,698 37.6% Restructuring (reversals) (244) (0.4%) 900 1.3% Research and development costs 3,117 4.9% 5,583 7.9% Amortization and impairment of intangibles 14,776 23.0% 2,331 3.3% Acquired in process technology 2,534 3.9% -- -- Other operating (income) expense (7,827) (12.2%) 445 0.6% Loss on subsidiary held for sale 556 0.9% -- -- Equity in net losses of unconsolidated subsidiaries 26 -- 151 0.2% Interest expense, net 102 0.2% 1,080 1.5% Provision for income taxes 59 0.1% 266 0.4% Net income (loss) $(13,487) (21.0%) $(10,172) (14.3%)
-5- 6 Revenue for 1997 was $70,978,000 compared to $64,164,000 in 1996, or a 10.6% increase. The Company's revenue from its sales of enterprise solutions in industries in which it competes (hospitality, process manufacturing, gaming and other), increased 96.8% from 1996 to 1997. Hospitality revenue increased 86.6% from $17,531,000 in 1996 to $32,720,000 in 1997 due to the acquisition of Hotel Information Systems and the distribution rights of Lodging Touch. Revenue from process manufacturing increased 269.6% from 1996 to 1997, primarily due to the acquisition of CIMPRO in March 1997. Consistent with the Company's strategy to focus on providing software and services to its vertical markets, the Company's legacy revenue declined 46.8% year over year (traditional hardware contract service revenues and proprietary add-on sales). Gross profit for 1997 was $27,282,000 (38.4%) which was up from $21,234,000 (33.1%) in 1996. The increase in overall gross margin from 33.1% to 38.4% was due to higher gross margins from increases in software sales and professional services. Gross margins in hospitality increased from 38.2% in 1996 to 51.6% in 1997. Gross margins associated with the Company's legacy business decreased from 33.3% in 1996 to 20.2% in 1997, primarily due to declining revenue as the product mix in the hardware maintenance base changed and the Company's older proprietary product customers installed new solutions no longer offered by the Company. In recognition of those trends and the need for improved service coverage for its new businesses, the Company entered into an outsourcing agreement with Olivetti North America, Inc. and Olivetti Canada Ltd. in December 1996. Selling, general and administrative expenses increased 23.5% from $21,622,000 in 1996 to $26,698,000 in 1997. The increase of $5,076,000 reflected the company's significant investment in expending and rebuilding its hospitality sales and marketing organization with the addition of new personnel; increased advertising and promotion expense and, increased travel and entertainment in pursuit of hospitality bookings. Restructuring reversals of $244,000 in 1996 relates to a restructuring plan prior to 1994. Restructuring costs of $900,000 in 1997 is 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. Research and Development costs were $3,117,000 in 1996 compared to $5,583,000 in 1997. Research costs increased 79.1% primarily as a result of increased development resources associated with the addition of HIS, Lodging Touch and the general expansion of the Company's hospitality business. The Company recognized charges for impaired goodwill and acquired in-process technology associated with its acquisition of Hotel Information Systems and MANBASE 8.0 in the amount of $17,310,000 in 1996. There were no such amounts in 1997. The goodwill impairment was due to discontinuance of product lines resulting from the subsequent acquisition of software. In-process technology charged to operations was due to certain acquired technology which was determined to have no future alternative use or value other than in products not yet developed for commercial release. Other operating income for 1996 is comprised principally of a favorable settlement of $7,434,000 net of legal costs and reserves with respect to the Company's litigation concerning the 1992 failed sale of the Company's then European subsidiaries. Other operating expense in 1997 primarily represents foreign exchange losses, and a loss recorded on a subsidiary held for sale in Venezuela. Interest expense, net was $102,000 for 1996 compared to $1,080,000 in 1997. The increase is attributed to $6,000,000 of indebtedness incurred associated with the acquisition of CIMPRO in March 1997. -6- 7 The income tax provision reflects a tax provision for the Company's foreign operations. The Company's income tax provisions in 1996 and 1997 result primarily from profitable foreign operations in those years. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131, respectively. The Company adopted SFAS 130 and 131 in 1998. In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension and other postretirement benefit plans. This statement is effective for fiscal years beginning after December 15, 1997 and restatement of disclosures for earlier periods is required. The Company adopted SFAS No. 132 in 1998. 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, 2000. 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 October 1997, the American Institute of Certified Public Accountants ("AICPA") released Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between significant and insignificant vendor obligations promulgated by SOP 91-1 and requires each element of a software arrangement to meet certain criteria in order to recognize revenue allocated to that element. Additionally, SOP 97-2 requires that total fees under an arrangement be allocated to each element in the arrangement based upon vendor specific objective evidence, as defined. SOP 97-2 is effective for software transactions entered into by the Company in fiscal 1998 and subsequent periods. The adoption in 1998 did not have a significant effect on the Company's results of operations. On December 22, 1998, the AICPA issued Statement of Position 98-9 "Software Revenue Recognition With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends certain paragraphs of SOP 97-2 to require recognition of revenue using the "residual method" with respect to certain transactions. The "residual method" established by SOP 98-9 is effective for fiscal years beginning after March 15, 1999. YEAR 2000 COMPLIANCE RISKS The Year 2000 compliance issue arises from the fact that a significant percentage of the software utilized by United States businesses relies on two-digit date codes to perform computations and decision-making functions. Commencing on January 1, 2000, these computer programs may fail from an inability to interpret date codes properly, misinterpreting "00" as the year 1900 rather than 2000. The Company has completed an evaluation of both its information technology systems and its non-technology systems, such as equipment containing microprocessors. The Company believes that all information technology and non-technology systems in its corporate home office in Irvine, California and in its branch or subsidiary offices in the United States and internationally have been, or by March 31, 1999 will have been, modified to address Year 2000 issues. The Company estimates that the costs associated with implementing its Year 2000 compliance plan for its corporate offices to be approximately $50,000. The Company has designed and tested the most current versions of its products to be Year 2000 ready. The Company has established a Year 2000 "task force" which prepared and released its Year 2000 products readiness report on the Company's "Web Pages" (www.maisystems.com and www.hotelinfosys.com) and plans to make available to clients a copy of this report on a per request basis. The Company launched a direct mail/fax campaign in February 1999 to all of its current maintenance agreement clients as well as to all identifiable clients that may be utilizing the Company's products, informing clients that the "Year 2000 Readiness Program" was available to be viewed at the indicated websites. The mailing also provided clients the opportunity to request information regarding the "Year 2000 Readiness Program" if they so desired. This mailing was executed using the most current client database available. This notification went to approximately 18,000 domestic customers as well as being faxed to approximately 4,000 international customers from the Company's international offices. -7- 8 The report breaks down the Company's products into four categories: "product is ready," "product is scheduled to be tested," "product is not ready (but has some Year 2000 functionality)," and "product will not be tested (and is not ready)." At the present time, of the eighty-nine products listed in the Company's Year 2000 readiness report, twenty-four remain to be tested, and thirty-six fall in the final category of products that will not be tested or ready. Of those products in the latter category, many of these are older products that have been replaced by newer versions of software. The Company is continuing to work on making some of its older software Year 2000 ready. The software still under modification is not required to be upgraded before the end of 1999. Nonetheless, the Company believes that all modifications will be complete and ready for distribution to its customers by the end of June, 1999. Although the Company has been encouraging its customers to upgrade to current product versions, no assurance can be given that all of them will do so in a timely manner, if at all. The costs incurred by the Company to date to implement its Year 2000 readiness plan for its products have not been material to the Company's financial condition or operations. The Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and is used in the Company's products to perform key functions. The Company has undertaken joint compliance review of such software in certain cases where the product is believed to be material to the Company's financial performance, such as its "Lodging Touch" product that is licensed from Enterprise Hospitality Solutions. The Company believes that in such selective cases the licensed software and any related integrated software product is Year 2000 compliant. There can be no assurance, however, that all third party software presently utilized by the Company will be free of errors and defects or be Year 2000 compliant. The Company's present "reasonably likely worst case scenario" for Year 2000 problems involves potential product liability claims by substantial customers involving collateral (business interruption) damages. Although the Company has not experienced any product liability claims to date regarding Year 2000 compliance, there can be no assurance that errors or defects, whether associated with Year 2000 functions or otherwise, will not result in product liability claims against the Company in the future. The Company's license agreements with customers typically contain provisions designed to limit the Company's exposure to potential product liability claims; however, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Defective products or releases could result in loss of revenues, increased service and warranty costs and product liability claims, and could adversely affect the Company's market penetration and reputation, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Since the Company spent a significant amount of time developing its Year 2000 readiness plan and evaluating its products for readiness, it does not believe that an elaborate Year 2000 contingency plan is necessary. However, it is reasonable to assume that some problems may be discovered in products the Company currently believes to be Year 2000 ready. In this case, the Company has the necessary resources available to address these expected problems and provide the appropriate customers with updated software. The Company is in the process of compiling information concerning the Year 2000 compliance of its key suppliers through the process of issuing questionnaires and monitoring responses. In the event that any of the Company's key suppliers do not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected. The Company's Year 2000 compliance plan includes encouraging and/or requiring Year 2000 compliance by all key suppliers. Despite the Company's efforts to become Year 2000 compliant, there is no assurance that the Year 2000 issue will not pose significant problems. There may be delays in the Company's remediation efforts, a failure to fully identify all Year 2000 problems in the systems, equipment or processes of the Company or its vendors or customers, or unanticipated remediation expenses, all of which could have material adverse consequences on the Company's financial position and results of operations. -8- 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, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Orange County, California March 23, 1999 -9- 10 EXHIBIT 13.1.4 CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1998
ASSETS 1997 1998 - ------ ---- ---- (in thousands) Current assets: Cash $ 2,051 $ 2,029 Receivables, less allowance for doubtful accounts of $1,983 in 1997 and $3,323 in 1998 12,268 14,492 Inventories 1,838 1,390 Prepaids and other assets 1,935 2,919 --------- --------- Total current assets 18,092 20,830 Furniture, fixtures and equipment, net 4,355 3,737 Intangibles, net 10,723 10,185 Other assets 1,443 1,005 --------- --------- Total assets $ 34,613 $ 35,757 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Line of credit $ 1,452 $ -- Current portion of long-term debt 682 859 Accounts payable 6,863 7,289 Customer deposits 1,776 2,587 Accrued liabilities 6,477 7,504 Income taxes payable 571 587 Unearned revenue 11,967 10,702 --------- --------- Total current liabilities 29,788 29,528 Line of credit -- 3,277 Long-term debt 5,230 5,056 Other liabilities 261 262 --------- --------- Total liabilities 35,279 38,123 --------- --------- 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; 10,298,539 shares and 10,697,639 issued and issuable at December 31, 1997 and 1998, respectively 105 110 Additional paid-in capital 219,379 219,780 Accumulated other comprehensive income 503 713 Accumulated deficit (220,653) (222,969) --------- --------- Total stockholders' deficiency (666) (2,366) --------- --------- Commitments and contingencies Subsequent event Total liabilities and stockholders' deficiency $ 34,613 $ 35,757 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -10- 11 EXHIBIT 13.1.5 CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, --------------------------------- 1996 1997 1998 ---- ---- ---- (in thousands, except per share data) Revenue: Software, networks and professional services: Software sales $ 5,092 $ 7,608 $ 10,845 Network and computer equipment 6,563 12,120 6,979 Professional services 13,980 30,735 27,203 -------- -------- -------- 25,635 50,463 45,027 Legacy revenue 38,529 20,515 17,211 -------- -------- -------- Total revenue 64,164 70,978 62,238 -------- -------- -------- Direct costs: Software, networks and professional services: Software sales 1,374 1,547 2,871 Network and computer equipment 6,531 8,238 5,599 Professional services 9,318 17,531 13,956 -------- -------- -------- 17,223 27,316 22,426 Legacy costs 25,707 16,380 10,122 -------- -------- -------- Total direct costs 42,930 43,696 32,548 -------- -------- -------- Gross profit 21,234 27,282 29,690 Selling, general and administrative expenses 21,622 26,698 23,798 Restructuring charges (reversals) (244) 900 -- Research and development costs 3,117 5,583 4,058 Amortization and impairment of intangibles 14,776 2,331 2,522 Acquired in-process technology 2,534 -- -- Other operating (income) expense (7,827) 445 378 -------- -------- -------- Operating loss (12,744) (8,675) (1,066) Loss on subsidiaries held for sale (556) -- -- Equity in net (losses) income of unconsolidated subsidiaries (26) (151) 33 Interest income 243 101 202 Interest expense (345) (1,181) (1,098) -------- -------- -------- Loss before income taxes (13,428) (9,906) (1,929) Provision for income taxes 59 266 387 -------- -------- -------- Net loss $(13,487) $(10,172) $ (2,316) ======== ======== ======== Loss per share: Basic loss per share $ (1.85) $ (1.08) $ (0.23) ======== ======== ======== Diluted loss per share $ (1.85) $ (1.08) $ (0.23) ======== ======== ======== Weighted average common shares used in determining loss per share: Basic 7,309 9,408 10,587 ======== ======== ======== Diluted 7,309 9,408 10,587 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -11- 12 EXHIBIT 13.1.6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Accumulated Total Additional Other Stockholders' Total Common Paid-In Comprehensive Accumulated Equity Comprehensive Stock Capital Income Deficit (Deficiency) Income --------- ---------- ------------- ----------- ------------ ------------- (in thousands) Balance at December 31, 1995 $ 74 $ 199,364 $ 28 $(196,994) $ 2,472 $ -- Issuance of common stock for acquisition of HIS, net 12 10,638 -- -- 10,650 -- Issuance of common stock for acquisition of GSI minority interest 1 959 -- -- 960 -- Issuance of common stock for repayment of debt 1 1,136 -- -- 1,137 -- Exercise of stock options and warrants -- 77 -- -- 77 -- Stock option compensation -- 177 -- -- 177 -- Foreign currency translation gains -- -- 72 -- 72 72 Net loss -- -- -- (13,487) (13,487) (13,487) --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 88 212,351 100 (210,481) 2,058 (13,415) ========= 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) (23,184) ========= 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) $ (25,290) ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -12- 13 EXHIBIT 13.1.7 CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------- (in thousands) 1996 1997 1998 -------- -------- -------- Cash flows from operating activities: Net loss $(13,487) $(10,172) $ (2,316) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Acquired in-process technology 2,534 -- -- Amortization and impairment of intangibles 14,776 2,718 2,522 Loss on subsidiary held for sale 556 -- -- Depreciation and amortization 1,296 1,575 1,538 Stock option compensation expense 177 169 10 Write-off of software development costs 736 -- -- Equity in net losses (income) of unconsolidated subsidiaries 26 151 (33) Provision for doubtful accounts receivable 603 6 1,340 Provision for inventory obsolescence 490 1,174 346 Net loss from foreign currency 125 466 233 Changes in assets and liabilities: (Increase) decrease in receivables (2,123) 881 (3,564) (Increase) decrease in inventories (621) 309 102 Decrease (increase) in prepaids and other assets 319 (199) (984) Decrease (increase) in other assets 187 (341) 527 (Decrease) increase in accounts payable and customer deposits 2,213 20 1,237 (Decrease) increase in accrued liabilities (3,477) 1,269 1,355 (Decrease) increase in income taxes payable 56 109 16 (Decrease) increase in unearned revenue (613) (2,053) (1,265) Increase (decrease) in deferred income taxes (132) -- -- (Decrease) increase in other liabilities (33) (1,842) 1 -------- -------- -------- Net cash provided by (used in) operating activities 3,608 (5,760) 1,065 -------- -------- -------- Cash flows from investing activities: Capital expenditures (1,105) (1,157) (920) Purchase of CIMPRO -- (6,228) -- Net cash acquired from the purchase of HIS 219 -- -- Software development costs (736) (291) (2,040) -------- -------- -------- Net cash used in investing activities (1,622) (7,676) (2,960) -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. -13- 14 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31, ------------------------------------ (in thousands) 1996 1997 1998 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net $ -- $ 2,303 $ -- Proceeds from issuance of subordinated notes payable -- 6,000 -- Payments received on notes receivable 174 237 -- Repayments of long-term debt (1,913) (603) (89) Receipt of notes receivable (500) (25) -- Net increase in line of credit -- 1,452 1,917 Proceeds from the exercise of stock options warrants 77 2,333 68 -------- -------- -------- Net cash (used in) provided by financing activities (2,162) 11,697 1,896 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (53) (67) (23) -------- -------- -------- Net decrease in cash and cash equivalents (229) (1,806) (22) Cash and cash equivalents at beginning of year $ 4,086 $ 3,857 $ 2,051 -------- -------- -------- Cash and cash equivalents at end of year $ 3,857 $ 2,051 $ 2,029 ======== ======== ======== Cash paid during the period for: Interest $ 350 $ 1,016 $ 1,093 ======== ======== ======== Income taxes $ 5 $ 141 $ 16 ======== ======== ========
Supplemental disclosure of noncash investing and financing activities (see Notes 6 and 9). The accompanying notes are an integral part of these consolidated financial statements. -14- 15 EXHIBIT 13.1.8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS MAI Systems Corporation (the "Company" or "MAI") designs, sells, installs and supports total technology solutions featuring complex wide and local area networks primarily in the hospitality, process manufacturing and gaming 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. 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 Sales of network and computer equipment are generally recorded when the hardware is shipped. Software revenue is primarily recorded when the application software programs are installed. Hardware and software professional service fees are recognized as income on a time-apportioned basis over the period in which the services are provided. For certain fixed-price contracts, revenue is recognized upon installation. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments which are readily convertible into known amounts of cash and have original maturities of three months or less. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories other than replacement parts are valued at the lower of cost or market using the first-in, first-out ("FIFO") method. Replacement parts used for hardware maintenance are valued at cost and are amortized to expense over the period of benefit. -15- 16 FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are recorded at cost and depreciated on a straight-line basis over estimated useful lives ranging from 3 to 10 years for furniture, fixtures and equipment and 3 to 5 years for equipment held for demonstration and administrative purposes. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. GOODWILL AND OTHER LONG-LIVED ASSETS Goodwill, which represents the excess of purchase price over fair value of net assets acquired, and other intangible assets are being amortized on a straight-line basis over the expected periods to be benefited, generally five to seven years. Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets that are to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell, except for assets covered by Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In 1996, the Company identified certain goodwill which was impaired (See Notes 6 and 7) and, accordingly, wrote down the related assets to their fair market value. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK OPTION PLANS Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma net income (loss) per share disclosures considering 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). -16- 17 Net foreign exchange transaction losses for 1996 and 1997 were $107,000 and $125,000 respectively. Net foreign exchange transaction gain for 1998 was $81,000. 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. 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 $736,000, $291,000 and $2,040,000 of software development costs during 1996, 1997 and 1998, 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, 1997 and 1998, the carrying value of cash and cash equivalents, receivables, accounts payable, accrued liabilities, income taxes payable and other liabilities approximate fair value due to the short term nature of such instruments. The carrying value of long-term debt, including the Company's line of credit, approximates fair value as the related interest rates approximate rates currently available to the Company. INCOME (LOSS) PER SHARE OF COMMON STOCK Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share". This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All income (loss) per share amounts for all periods have been presented and restated to conform to the SFAS No. 128 requirements (see Note 19). Basic and diluted income (loss) per share is computed using shares of common stock issued to date and expected to be issued in accordance with the Plan of Reorganization ("Common Stock") as discussed in Note 17. -17- 18 RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1997 consolidated financial statements to conform to the 1998 presentation. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131, respectively. Application of the statement requirements did not have a material impact on the Company's consolidated financial position, results of operations or loss per share data as currently reported. In February 1998, the FASB issued SFAS No. 132 "Employees' Disclosures About Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension and other postretirement benefit plans. This statement is effective for fiscal years beginning after December 15, 1997 and restatement of disclosures for earlier periods is required. The Company adopted SFAS No. 132 in 1998. 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, 2000. 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 October 1997, the American Institute of Certified Public Accountants ("AICPA") released Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between significant and insignificant vendor obligations promulgated by SOP 91-1 and requires each element of a software arrangement to meet certain criteria in order to recognize revenue allocated to that element. Additionally, SOP 97-2 requires that total fees under an arrangement be allocated to each element in the arrangement based upon vendor specific objective evidence, as defined. SOP 97-2 was effective for software transactions entered into by the Company in fiscal 1998 and subsequent periods. Application of the statement requirements did not have a material impact on the Company's consolidated financial position, results of operations or loss per share data as currently reported. On December 22, 1998, the AICPA issued Statement of Position 98-9 "Software Revenue Recognition With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends certain paragraphs of SOP 97-2 to require recognition of revenue using the "residual method" with respect to certain transactions. The "residual method" established by SOP 98-9 is effective for fiscal years beginning after March 15, 1999. NOTE 2 - INVENTORIES Inventories are summarized as follows:
December 31, ---------------------- 1997 1998 ------ ------ (in thousands) Finished goods $1,068 $ 843 Replacement parts 770 547 ------ ------ $1,838 $1,390 ====== ======
The Company has purchased many products and components from single sources of supply. Because the Company's current products are industry standard, the Company believes that alternative sources of supply of similar products would be available to the Company in the event of any interruption of delivery of a single source supplier. During the fourth quarter of 1997, the Company wrote-off approximately $1,151,000 of inventory primarily due to excess and obsolete parts which is reflected in direct costs in the accompanying consolidated statements of operations. NOTE 3 - ASSETS HELD FOR SALE During 1996, the Company entered into negotiations with a third party to sell 100% of the common stock of its Venezuelan and Puerto Rican subsidiaries for approximately $275,000. As a result, the net assets of the subsidiaries were written down to their net realizable value resulting in a charge of $556,000 in the fourth quarter of 1996. The net assets have been classified as current assets and are included in prepaids and other assets in the accompanying consolidated balance sheet as of December 31, 1997. During 1998, net assets of $75,000 of the Venezuelan subsidiary were written off. -18- 19 NOTE 4 - FURNITURE, FIXTURES AND EQUIPMENT The major classes of furniture, fixtures and equipment are as follows:
December 31, --------------------- (in thousands) 1997 1998 -------- -------- Furniture, fixtures and equipment $ 2,676 $ 2,162 Equipment held for administrative purposes 11,279 12,191 Leasehold improvements 457 508 -------- -------- 14,412 14,861 Less: accumulated depreciation and amortization (10,057) (11,124) -------- -------- $ 4,355 $ 3,737 ======== ========
NOTE 5 - JOINT VENTURES In July 1996, the Company entered into a joint venture agreement with Novo-Invest Casino Development for the purpose of marketing and selling the Company's gaming software in Europe. In accordance with the joint venture agreement, the Company invested $40,000 cash. This joint venture is organized under the laws of Austria and is known as Gaming Systems International Gessellschaft m.b.H. ("GSI Europe"). The Company has a 40% interest in the joint venture and accounts for this investment using the equity method of accounting. The Company is a joint venture partner with Metro Systems Corporation Limited ("MSC") for the purpose of marketing and selling the Company's software in Thailand. The Company has a 49.9% interest in the joint venture and 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. The Company's investment in GSI Europe is included in other assets in the accompanying consolidated balance sheets. NOTE 6 - ACQUISITIONS, 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. The allocation of the purchase price was as follows:
Allocation of Amortization Purchase Price (Useful Life) -------------- ------------- (in thousands) Goodwill $17,914 7 years Customer list 925 7 years In-process technology charged to operations during the fourth quarter of 1996 2,534 N/A ------- $21,373 =======
-19- 20 Included in the net liabilities assumed in connection with the acquisition of HIS was $2,185,000 of debt. In 1996, subsequent to such acquisition, the Company issued 122,919 shares of its Common Stock valued at $1,137,000 to repay certain of the outstanding debt assumed. 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, 1998, 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 $10.84 per share). This adjustment applies to a maximum of 590,785 shares of Common Stock. In April 1998, in accordance with the purchase agreement and related documents pursuant to which the Company acquired HIS in August 1996, the Company issued 246,453 additional shares of Common Stock valued at par. As of December 31, 1998, the fair market value of the Company's common stock was $2.69 per share, which would result in approximately 1,792,139 additional shares being issued. In connection with the acquisition of HIS, a restructuring plan was implemented comprising an employee severance program, an employee relocation program and excess facilities. An amount of $1,360,000 relating to this restructuring plan was included in the cost of acquiring HIS. During the five-month period ended December 31, 1996 and the year ended December 31, 1997, approximately $274,000 and $400,000, respectively, of costs were paid. During 1997, approximately $686,000 of the HIS restructuring reserves were reversed resulting in a reduction of goodwill. As a result, the HIS restructuring reserves were fully utilized or reversed during 1997. 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. 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. -20- 21 Associated with the stock issuance, the Company incurred $300,000 of issuance costs which are included in additional paid-in capital in the accompanying consolidated balance sheet as of December 31, 1997. The acquisition of CIMPRO was accounted for using the purchase method of accounting. The allocation of the purchase price was as follows:
Allocation of Purchase Price -------------- (in thousands) Net current liabilities $ (1,061) Furniture, fixtures and equipment 400 Intangibles 7,475 Long-term liabilities (586) -------- $ 6,228 ========
Intangible assets are being amortized on a straight-line basis over the expected periods to be benefited of five to seven years. MANBASE In May 1996, the Company reacquired the distribution rights to MANBASE 8.0, a manufacturing software application, from Sextant Corporation for approximately $30,000 cash and the forgiveness of $500,000 accounts and notes receivable due from Sextant. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recorded intangible assets of $530,000. The Company recorded an impairment charge of $492,000 to the intangible assets in the fourth quarter of 1996. The amount of impairment was determined based upon projected discounted future cash flows. 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, 1997 and 1998, the unamortized balance of the license acquisition fee was $727,000 and $364,000 respectively, and is included in other assets in the accompanying consolidated balance sheets. Additionally, under the license agreement, the Company shall pay the Licensor royalties of 20% of net revenues subject to certain minimum royalties commencing April 1997. Royalties paid for fiscal years 1997 and 1998 were approximately $218,000 and $750,000, respectively. Minimum annual royalties payable to the Licensor for the two successive twelve-month periods subsequent to December 1998 are $1,500,000 and $2,500,000, respectively. DEFERRED FINANCING COSTS During 1998, the Company commenced efforts to raise additional capital. As of December 31, 1998, the Company has incurred costs of approximately $572,000 which were capitalized and are included in prepaids and other assets. The efforts to raise capital are currently in process. -21- 22 NOTE 7 - INTANGIBLE ASSETS Intangible assets consist of the following
December 31, --------------------------- (in thousands) 1997 1998 -------- -------- Goodwill $ 12,337 $ 11,784 Capitalized software 291 2,331 Customer list 925 925 -------- -------- 13,553 15,040 Less: accumulated amortization (2,830) (4,855) -------- -------- Total $ 10,723 $ 10,185 ======== ========
In October 1996, the Company recorded an impairment charge of $13,787,000 to goodwill relating to the discontinuance of product lines acquired from HIS (see Note 6). The impairment of goodwill was determined based upon projected discounted future cash flows. NOTE 8 - LINE OF CREDIT In April 1998, the Company negotiated a $5,000,000 secured revolving credit facility. The availability of this line of credit is based on a calculation using a rolling average of certain cash collections. The facility is secured by all assets and products of the Company and bears interest at prime plus 2.25% to 5.25%. At December 31, 1998, the facility was renewable annually. Subsequent\ to December 31, 1998, the term was extended to April 30, 2002, and debt was reclassified to long term in the accompanying consolidated balance sheet. At December 31, 1998, approximately $3,277,000 was available and drawn down under this facility. The facility contains various restrictions and covenants, including minimum tangible net worth. The Company was in compliance with or received waivers for all restrictions and covenants at December 31, 1998. Loan origination fees of approximately $130,000 were incurred in connection with this line of credit and are being amortized to interest expense over the term of the facility. NOTE 9 - LONG-TERM DEBT Long-term debt outstanding is as follows:
December 31, ------------------------- (in thousands) 1997 1998 ------- ------- Notes payable $ 4,670 $ 4,677 Obligations under capital leases 493 740 Tax claims 281 296 Other 468 202 ------- ------- 5,912 5,915 Less: current installments (682) (859) ------- ------- Noncurrent portion $ 5,230 $ 5,056 ======= =======
-22- 23 Aggregate maturities of long-term debt are as follows:
Year Ending December 31, ------------------------ (in thousands) 1999 $ 859 2000 230 2001 171 2002 59 2003 - Thereafter 4,596 -------- $ 5,915 ========
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 which represents the fair value of the warrants at the time of issuance. The fair value of the warrants was recorded as a reduction in the face value of the subordinated notes and is being amortized to interest expense over the term of the subordinated notes. The unamortized balance of the original issue discount was $654,000 at December 31, 1998. In September 1997, the Company reduced the exercise price of 800,000 warrants (750,000 related to the subordinated debt and 50,000 held by a related party - see note 18) to $3.04 per share, which approximated fair market value of the Company's Common Stock. As a result, holders of the warrants exercised such warrants and acquired 800,000 shares of the Company's Common Stock at $3.04 per share. Such exercises were paid in cash, except that holders of warrants relating to the subordinated debt, as allowed under the terms of the debt agreement, applied $750,000 of the principal amount of the subordinated debt in payment of a portion of the warrant exercise price. TAX CLAIMS Tax claims include pre-petition unsecured tax claims for income and property taxes from various taxing authorities. Under the terms of the Plan of Reorganization (see Note 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 accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheets at December 31, 1997 and 1998. Currently, the Company is disputing tax claims of $162,000 of the remaining tax claims of approximately $600,000. -23- 24 NOTE 10 - ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES Accrued liabilities consist of the following:
December 31, ---------------------- (in thousands) 1997 1998 ------ ------ Salaries, wages and commissions $1,422 $1,768 Accrued warranty, insurance & sales taxes 1,180 677 Accrued vacation 698 647 Field service outsourcing accrual 1,838 2,871 Other 1,339 1,541 ------ ------ Total $6,477 $7,504 ====== ======
In December 1996, the Company decided to outsource its field service operations to a third party. Pursuant to the decision to outsource its field service operations, the Company charged approximately $940,000 to selling, general and administrative expenses in the accompanying consolidated statement of operations in 1996 comprised of $434,000 of termination benefits to involuntarily terminated employees and $506,000 associated with vacating certain business premises relating to its Canadian operations. Other long-term liabilities at December 31, 1997 and 1998 include disputed tax claims which are payable in 1999 and beyond (See Note 9). NOTE 11 - INCOME TAXES The components of income (loss) before income taxes are as follows:
Years Ended December 31, ---------------------------------------------- (in thousands) 1996 1997 1998 -------- -------- -------- U.S $(12,452) $(12,492) $ (3,458) Foreign (976) 2,586 1,529 -------- -------- -------- Total $(13,428) $ (9,906) $ (1,929) ======== ======== ========
-24- 25 The income tax provision (benefit) is comprised of the following:
Years Ended December 31, ------------------------------------ (in thousands) 1996 1997 1998 ----- ----- ----- Current: U.S. Federal $ 129 $ -- $ -- State 39 -- -- Foreign 23 266 387 ----- ----- ----- 191 266 387 Deferred: U.S. Federal -- -- -- Foreign (132) -- -- ----- ----- ----- (132) -- -- ----- ----- ----- Total $ 59 $ 266 $ 387 ===== ===== =====
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:
December 31, (in thousands) ---------------------- 1997 1998 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 15,214 $ 20,624 Property, plant and equipment 1,201 1,449 Restructuring and other reserves 247 47 Inventory reserves 432 523 Allowance for doubtful accounts 1,178 1,266 Capitalized software and intangibles 3,868 1,868 Accrued expenses 417 516 Other 1,364 349 -------- -------- 23,921 26,642 Less: valuation allowance (23,921) (26,642) -------- -------- Net deferred tax assets $ -- $ -- ======== ========
The Company recorded certain deferred tax assets as of December 31, 1998 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 1997 and 1998 was $2,324,000 and $2,721,000, respectively. The portion of the valuation allowance for which subsequently recognized tax benefits will be applied directly to contributed capital is $213,000. -25- 26 The Company has Federal and state net operating losses (NOL) carryovers of approximately $54,500,000 and $6,000,000 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 limitation under Section 382 of the Internal Revenue Code. The amount of this limitation is not known at this time. The Internal Revenue Service ("IRS") recently completed its examination of the Company's former parent, BGLS Group for the year 1993. The examination resulted in a favorable adjustment to the Company's NOL carryovers. This adjustment has been reflected in the NOL carryover amount discussed above. 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 $1,500,000 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:
Years Ended December 31, --------------------------------- (in percentages) 1996 1997 1998 ----- ----- ----- Statutory tax rate (34.0%) (34.0%) (34.0%) Change in valuation allowance - -- 23.5 100.7 Amortization and write-off of intangibles 44.4 -- 9.1 Deferred tax assets realized but previously reserved including utilization of net operating losses (12.7) -- -- Expiration of state NOLs -- 10.2 -- Effect of foreign operations 1.5 6.2 13.9 Adjustments of NOL carry forwards and deferred tax assets pursuant to the finalization of the IRS Examination and other analysis (78.6) Other 1.2 (3.2) 0.3 ----- ----- ----- Effective tax rate 0.4% 2.7% 11.4% ===== ===== =====
-26- 27 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.
Year Ended December 31, ------------------------------------ (in thousands) 1996 1997 1998 -------- -------- -------- Revenue from unaffiliated customers: United States $ 54,898 $ 57,321 $ 49,841 Asia -- 6,635 6,501 Canada 5,931 4,862 3,854 Other foreign 3,335 2,160 2,042 -------- -------- -------- $ 64,164 $ 70,978 $ 62,238 -------- -------- -------- United States revenue from foreign affiliates $ 665 $ 1,119 $ 379 United States export sales $ 73 $ -- $ -- -------- -------- -------- Operating income (loss): United States (including export sales) $(12,285) $(11,240) $ (2,325) Asia -- 1,284 777 Canada 589 751 651 Other foreign (1,048) 530 (169) -------- -------- -------- $(12,744) $ (8,675) $ (1,066) -------- -------- -------- Identifiable assets: United States $ 26,308 $ 28,466 $ 28,396 Asia -- 3,676 3,382 Canada 1,414 1,510 1,658 Other foreign 5,131 961 2,321 -------- -------- -------- $ 32,853 $ 34,613 $ 35,757 ======== ======== ======== Long-lived assets: United States $10,310 $ 14,511 $ 13,379 Asia $ 300 $ 198 $ 178 Canada $ 235 $ 244 $ 193 Other foreign $ 24 $ 125 $ 172
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. -27- 28 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's reportable segments are strategic business units that were acquired independently. These segments offer products and services to different types of customers. They are managed separately because each business requires different technology and marketing strategies. The Company evaluates performance of each segment based on operating income for fiscal years ending December 31, 1996, 1997, and 1998. As assets were not identified by business segment at December 31, 1996 and 1997, that information is not presented below. YEAR ENDING DECEMBER 31, (IN THOUSANDS)
1998: Process Hospitality Manufacturing Gaming Legacy Other Total ----------- ------------- ------ ------ ----- ----- 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 1997: Process Hospitality Manufacturing Gaming Legacy Other Total ----------- ------------- ------ ------ ----- ----- 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) 1996: Process Hospitality Manufacturing Gaming Legacy Other Total ----------- ------------- ------ ------ ----- ----- Revenues from: Hardware $ 3,895 $ 139 $ 1,142 $ 7,394 $ 1,387 $13,957 Software 3,619 830 570 451 73 5,543 Professional Services 10,017 1,988 605 30,684 1,370 44,664 Total Revenues 17,531 2,957 2,317 38,529 2,830 64,164 Operating Income (loss) (20,377) (5,438) (4,015) 11,395 5,691 (12,744)
-28- 29 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, 1,250,000 authorized shares of Common Stock are reserved for issuance of options. Options under the 1993 Plan may be granted at exercise prices determined by the Compensation Committee of the Board of Directors, provided that the exercise prices shall not be less than the fair market value of the Common Stock on the date of grant. At December 31, 1998, 389,640 options under the 1993 Plan were exercisable and the weighted-average exercise price of these options was $4.76 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 125,000 shares. The exercise price shall not be lower than the fair market value of the Common Stock on the date of grant. As of December 31, 1998, 6,250 options under the Director's Plan were exercisable and the weighted-average exercise price of these options was $2.38. -29- 30 At December 31, 1998, there were 29,101 additional shares available for grant under the stock option plans. The per share weighted-average fair value of stock options granted during 1996, 1997 and 1998 was $4.90, $4.52 and $2.65, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1996 -- risk-free interest rate of 6.20%, volatility of 65% and an expected life of 5 years; 1997 and 1998 -- risk-free interest rate of 6.20%, volatility of 70% and an expected life of 5 years. The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost using the intrinsic value method has been recognized for its stock option grants in the financial statements except as noted below. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been reduced (increased) to the pro forma amounts indicated below:
Years ended December 31, ------------------------------------- (in thousands except per share data) 1996 1997 1998 ---- ---- ---- Net loss: As reported $(13,487) $(10,172) $(2,316) Pro forma (14,210) (11,191) (3,403) Basic loss per share: As reported (1.85) (1.08) (0.23) Pro forma (1.94) (1.19) (0.32) Diluted loss per share: As reported $ (1.85) $ (1.08) $ (0.23) Pro forma (1.94) (1.19) (0.32)
Pro forma net loss and pro forma net loss per share reflects only options granted in 1995, 1996, 1997 and 1998. 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. The following is a summary of stock option activity under the Company's stock option plans:
Number of Weighted-average shares exercise price --------- ---------------- Options outstanding at December 31, 1995 657,291 $ 2.56 Granted 400,166 9.16 Exercised (73,496) 1.87 Canceled (21,004) 5.02 --------- Options outstanding at December 31, 1996 962,957 $ 5.36 Granted 518,167 4.52 Exercised (206,777) 1.70 Canceled (249,005) 6.08 --------- Options outstanding at December 31, 1997 1,025,342 $ 5.45 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 =========
-30- 31 At December 31, 1998, the range of exercise prices and weighted-average remaining contractual life of outstanding options under the Company's stock option plans were $1.65 - $9.75 and 8.32 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. 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 Internal Revenue Code. Participating employees are allowed to contribute from 1% to 15% of their annual compensation. During 1996, 1997 and 1998, 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 $31,000, $12,000 and $3,500 for 1996, 1997 and 1998, 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:
Year Ended December 31, --------------------------- (in thousands) 1996 1997 1998 ----- ----- ----- Service costs $ 40 $ 40 $ 40 Interest cost 109 113 110 Expected return on plan assets (81) (97) (110) ----- ----- ----- Net periodic pension expense $ 68 $ 56 $ 40 ===== ===== =====
-31- 32 The following table sets forth the funded status and amounts recognized in the Company's consolidated statements of operations:
Years Ended December 31, ------------------------ (in thousands) Change in Benefit Obligation: 1997 1998 ------- ------- Projected Benefit Obligation, beginning of year $ 1,532 $ 1,541 Service cost 40 40 Interest cost 112 109 Benefits paid (182) (56) Actuarial loss/(gain) 39 340 ------- ------- Projected Benefit Obligation, end of year $ 1,541 $ 1,974 ======= ======= Change in Plan Assets: Plan assets, beginning of year $ 1,244 $ 1,407 Actual return on plan assets 246 270 Employer contribution 100 55 Benefits paid (182) (56) ------- ------- Plan assets, end of year $ 1,408 $ 1,676 Funded status $ (133) $ (299) Unrecognized (gain)/loss 41 222 ------- ------- Net amount recognized $ (92) $ (77) ======= =======
The weighted average discount rates used in determining the actuarial present value of the benefit obligations were 7.25% for 1997 and 6.75% for 1998. The long term rate of return on assets was 8% in both 1998 and 1997. -32- 33 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, 1997 and 1998 of $118,000 and $81,000, 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 $14,000 at December 31, 1998 mainly consists of remaining severance and termination benefits and is expected to be paid in 1999. 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, 1998, 6,755,751 shares had been issued pursuant to the Plan. Notwithstanding the confirmation and effectiveness of its Plan of Reorganization pursuant to which the Company emerged from a voluntary proceeding under the bankruptcy laws, the United States Bankruptcy Court continues to have jurisdiction, among other things, to resolve disputed pre-petition claims against the Company, to resolve matters related to the assumptions, assignment or rejection of executory contracts pursuant to the Plan, and to resolve other matters that may arise in connection with the implementation of the Plan. 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, 1997 and 1998) under both month-to-month and fixed-term agreements. -33- 34 The aggregate minimum rentals under operating leases with noncancelable terms of one year or more are as follows:
Year Ending December 31, ------------------------ (in thousands) 1999 $1,802 2000 1,540 2001 1,201 2002 1,005 2003 221 ------ $5,769 ======
Rental expense was approximately $1,961,000, $2,226,000 and $2,095,000 for the years ended December 31, 1996, 1997, and 1998, respectively. LEGAL PROCEEDINGS In June 1996, the Company received an $8,500,000 cash settlement relating to the proposed sale of certain of its subsidiaries in 1993. The settlement, net of $525,000 of legal fees, is included in other operating income in the 1996 consolidated statement of operations. The Company has filed and will continue to file objections to claims asserted in its Chapter 11 bankruptcy proceedings. The majority of these claims would, if upheld, give rise to allowed unsecured claims entitling the respective claimants to distributions of Common Stock. A number of filed objections in respect of secured claims, administrative claims, priority claims, tax claims, convenience claims and cure claims were still outstanding at December 31, 1998. To the extent the Company's objection to such claims are not sustained, the Company will be obligated to pay such claims in a lump sum in the case of convenience claims and administrative claims and in the case of secured claims, priority claims, tax claims and cure claims, on a deferred basis over six to seven years, depending on the type of claim, at an interest rate of 6% in accordance with the Plan of Reorganization. The Company does not believe the outcome of these objections to be material. 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 alleges that the Company's failure to register its shares has deprived it of its ability to realize approximately $5,000,000 from sale of the shares to which it is entitled and requests (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. -34- 35 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 due to corporate financings and other transactions, including financing in process (see Note 6). Accordingly, the Company believes that it is in full compliance with all of its obligations under its agreements with CSA, and is contesting the lawsuit. The parties are currently conducting settlement negotiations. The Company is also involved in various other legal proceedings which are incident to its business. Management believes the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. YEAR 2000 COMPLIANCE The Year 2000 compliance issue arises from the fact that a significant percentage of the software utilized by United States businesses relies on two-digit date codes to perform computations and decision-making functions. Commencing on January 1, 2000, these computer programs may fail from an ability to interpret date codes properly, misinterpreting "00" as the year 1900 rather than 2000. It is possible that this issue may have adverse consequences to the Company's information systems, the Company's operations and the third parties needed to support the Company's business activities. It is also possible that the Year 2000 issue may adversely impact the Company's installed base and the desirability of the Company's products and services. It is not currently possible to estimate the extent to which Year 2000 issues may impact the estimates used currently to determine the carrying amounts of recorded assets or liabilities or in the disclosure of gain or loss contingencies. It is also not possible to estimate the extent to which Year 2000 issues may impact the Company's future operations. RELATED PARTY TRANSACTIONS Under the terms of a consulting agreement dated August 15, 1994 (amended as of October 17, 1994, August 16, 1996, August 31, 1997 and August 31, 1998), between Orchard Capital Corporation ("Orchard") and the Company, Orchard provides the services of Richard S. Ressler as the Company's Chairman. Orchard was paid a consulting fee of $20,000 per month through August 15, 1996 and $24,000 per month thereafter. In addition, Orchard earned a bonus of $1,188,000 payable in cash or freely transferable Common Stock (at the option of the Company) when the closing trading price of the shares of the Company's Common Stock for 20 consecutive trading days ending on or after January 1, 1996 exceeded $4.00 per share (adjusted for the 25% stock split - see Note 1). 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 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 February 13, 1995, BGLS distributed, by way of a special dividend, its approximate 3,200,000 shares of the Company's Common Stock to holders of Brooke Group, Ltd. common stock. Accordingly, the Company is no longer a subsidiary of BGLS. As a result of the distribution, a former Chairman of the Company held approximately 1,652,433 shares of Common Stock. During 1996, the Company recognized $390,000 of revenues relating to the sale of network and computer equipment and services in the normal course of business to an affiliated Company. In November 1996, the Company also entered into a maintenance and service contract with this related Company for $350,000 which was recognized ratably over the succeeding 12-month period. In January 1997, the former Chairman of the Company divested all of his shares of the Company's Common Stock. On February 3, 1999, the Company's Chairman purchased 201,106 shares of the Company's Common Stock valued at $500,000. -35- 36 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.
YEAR ENDING DECEMBER 31, ------------------------------------ 1996 1997 1998 -------- -------- -------- Numerator: Numerator for basic and diluted loss per share - net loss $(13,487) $(10,172) $ (2,316) ======== ======== ======== Denominator: Denominator for basic loss per share - weighted average number of common shares outstanding during the period 7,309 9,408 10,587 Incremental common shares attributable to exercise of outstanding options and warrants -- -- -- -------- -------- -------- Denominator for diluted loss per share 7,309 9,408 10,587 ======== ======== ======== Basic loss per share $ (1.85) $ (1.08) $ (0.23) Diluted loss per share $ (1.85) $ (1.08) $ (0.23)
The computation of diluted loss per share for the years ended December 31, 1996, 1997 and 1998 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). -36- EX-21.1 10 SUBSIDIARIES OF MAI SYSTEMS CORPORATION 1 EXHIBIT 21.1 SUBSIDIARIES OF MAI SYSTEMS CORPORATION (12/31/98) The following is a list showing MAI Systems Corporation and each of its subsidiaries, as of December 31, 1998, 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
EX-23.1 11 REPORT ON SCHEDULE & CONSENT OF KPMG LLP 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 March 23, 1999, included the related financial statement schedule as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, 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 March 23, 1999, relating to the consolidated balance sheets of MAI Systems Corporation and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statement of operations, stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which report appears in the December 31, 1998 annual report on Form 10-K of MAI Systems Corporation. /s/ KPMG LLP March 23, 1999 EX-27.1 12 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 1998
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,000 2,029 0 17,815 (3,323) 1,390 20,830 14,861 (11,124) 35,757 29,528 0 0 0 110 (2,476) 35,757 62,238 62,238 (32,548) (32,548) (30,279) (1,340) (896) (1,929) (387) (2,316) 0 0 0 (2,316) (0.23) (0.23)
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