**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

** **

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** **

**FORM 10-Q**

** **

| **ý**                                                                                                                                          | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                |                                                                                                |
| **For the period ended September 30, 2003 or**                                                                                                 |
|                                                                                                                                                |                                                                                                |
| **o**                                                                                                                                               | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|                                                                                                                                                |                                                                                                |
| **For the transition period from           to         .** |
|                                                                                                                                                |                                                                                                |
| **Commission file number: 1-9158**                                                                                                                  |

 

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** **

**MAI Systems Corporation**(Exact name of registrant asspecified in its charter)

** **

| **Delaware**                                                                     |   | **22-2554549**                     |
|----------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                  |   | (IRS Employer Identification  No.) |
|                                                                             |   |                               |
| **26110 Enterprise Way, Lake Forest, CA 92630**                                  |
| Address of principal executive offices                                           |
|                                                                             |
| Registrant’s telephone number  including area code  **(949) 598-6000** |

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes  o  No  ý

 

The aggregatemarket value of the common stock held by non-affiliates of the registrant,based upon the last sale price of the Common Stock reported on the NationalAssociation of Securities Dealers Automated Quotation National Market System on  October 20, 2003 was $1,487,575.

 

Thenumber of shares of common stock issued, outstanding and subscribed as ofOctober 20, 2003 was 14,875,752.

 

 

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**PARTI - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

** **

**MAI SYSTEMSCORPORATION**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
|                                                                                                                                                                                                              |   | **(in  thousands, except share data)** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                                                                                                              |   | **As of  December  31, 2002**          |   | **As of  September  30,2003  (unaudited)** |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| **ASSETS**                                                                                                                                                                                                        |   |                                   |   |   |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Current assets:                                                                                                                                                                                                   |   |                                   |   |   |   |
| Cash                                                                                                                                                                                                              |   | $                                      | 545    |   | $ | 161 |   |
| Receivables, less allowance for doubtful  accounts of $336 in 2002 and $338 in 2003                                                                                                                               |   | 1,834                                  |   | 1,715 |   |
| Inventories                                                                                                                                                                                                       |   | 60                                     |   | 77 |   |
| Notes receivable                                                                                                                                                                                                  |   | 250                                    |   | — |   |
| Prepaids and other assets                                                                                                                                                                                         |   | 628                                    |   | 618 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total current assets                                                                                                                                                                                              |   | 3,317                                  |   | 2,571 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Furniture, fixtures and equipment, net                                                                                                                                                                            |   | 843                                    |   | 821 |   |
| Intangibles, net                                                                                                                                                                                                  |   | 1,823                                  |   | 2,601 |   |
| Other assets                                                                                                                                                                                                      |   | 194                                    |   | 44 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total assets                                                                                                                                                                                                      |   | $                                      | 6,177  |   | $ | 6,037 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**                                                                                                                                                                 |   |                                   |   |   |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Current liabilities:                                                                                                                                                                                              |   |                                   |   |   |   |
| Current portion of long-term debt                                                                                                                                                                                 |   | $                                      | 3,289  |   | $ | 3,506 |   |
| Accounts payable                                                                                                                                                                                                  |   | 1,077                                  |   | 864 |   |
| Customer deposits                                                                                                                                                                                                 |   | 1,811                                  |   | 1,963 |   |
| Accrued liabilities                                                                                                                                                                                               |   | 2,007                                  |   | 2,466 |   |
| Income taxes payable                                                                                                                                                                                              |   | 89                                     |   | 87 |   |
| Unearned revenue                                                                                                                                                                                                  |   | 3,693                                  |   | 3,483 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total current liabilities                                                                                                                                                                                         |   | 11,966                                 |   | 12,369 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Long-term debt                                                                                                                                                                                                    |   | 7,234                                  |   | 7,193 |   |
| Other liabilities                                                                                                                                                                                                 |   | 1,759                                  |   | 1,026 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total liabilities                                                                                                                                                                                                 |   | 20,959                                 |   | 20,588 |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Commitments and contingencies                                                                                                                                                                                     |   |                                   |   |   |   |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| 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; 14,675,752 and 14,875,752 shares  issued,outstanding and subscribed at December 31, 2002 and  September 30, 2003, respectively. |   | 150                                    |   | 152 |   |
| Additional paid-in capital                                                                                                                                                                                        |   | 218,251                                |   | 218,112 |   |
| Accumulated other comprehensive loss:                                                                                                                                                                             |   |                                   |   |   |   |
| Minimum pension liability                                                                                                                                                                                         |   | (918                                   | )      | (918 | ) |
| Foreign currency translation                                                                                                                                                                                      |   | (31                                    | )      | (2 | ) |
| Unearned Compensation                                                                                                                                                                                             |   | (91                                    | )      | (62 | ) |
| Accumulated deficit                                                                                                                                                                                               |   | (232,143                               | )      | (231,833 | ) |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total stockholders’ deficiency                                                                                                                                                                               |   | (14,782                                | )      | (14,551 | ) |
|                                                                                                                                                                                                              |   |                                   |   |   |   |
| Total liabilities and stockholders’  deficiency                                                                                                                                                              |   | $                                      | 6,177  |   | $ | 6,037 |   |

 

**The accompanyingnotes are an integral part of these condensed consolidated financialstatements.**

** **

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**MAI SYSTEMSCORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                         |   | **(Unaudited)**                                     |   | **(Unaudited)**                                    |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                         |   | **For the  Three Months Ended  September 30,** |   | **For the  Nine Months Ended  September 30,** |   |
|                                                                         |   | **(in  thousands, except per share data)**          |   | **(in  thousands, except per share data)**         |   |
|                                                                         |   | **2002**                                            |   | **2003**                                           |   | **2002** |   | **2003** |   |
| Revenue:                                                                     |   |                                                |   |                                               |   |   |   |   |   |
| Software                                                                     |   | $                                                   | 1,396  |                                               | $      | 842 |   | $ | 3,787 |   | $ | 3,098 |   |
| Network and computer equipment                                               |   | 328                                                 |   | 104                                                |   | 731 |   | 339 |   |
| Services                                                                     |   | 3,987                                               |   | 3,868                                              |   | 12,413 |   | 11,315 |   |
| Total revenue                                                                |   | 5,711                                               |   | 4,814                                              |   | 16,931 |   | 14,752 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Direct costs:                                                                |   |                                                |   |                                               |   |   |   |   |   |
| Software                                                                     |   | 158                                                 |   | 167                                                |   | 507 |   | 425 |   |
| Network and computer equipment                                               |   | 276                                                 |   | 73                                                 |   | 569 |   | 238 |   |
| Services                                                                     |   | 1,366                                               |   | 1,109                                              |   | 4,485 |   | 3,384 |   |
| Total direct costs                                                           |   | 1,800                                               |   | 1,349                                              |   | 5,561 |   | 4,047 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Gross profit                                                                 |   | 3,911                                               |   | 3,465                                              |   | 11,370 |   | 10,705 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Selling, general and administrative  expenses                                |   | 2,404                                               |   | 2,307                                              |   | 6,787 |   | 7,277 |   |
| Research and development costs                                               |   | 797                                                 |   | 764                                                |   | 2,461 |   | 2,104 |   |
| Amortization of intangibles                                                  |   | 25                                                  |   | —                                             |   | 134 |   | — |   |
| Other operating (income) loss                                                |   | 232                                                 |   | (134                                               | )      | 237 |   | (181 | ) |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Operating income                                                             |   | 453                                                 |   | 528                                                |   | 1,751 |   | 1,505 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Interest income                                                              |   | 1                                                   |   | —                                             |   | 4 |   | 1 |   |
| Interest expense                                                             |   | (372                                                | )      | (286                                               | )      | (1,146 | ) | (928 | ) |
| Other non-operating expense                                                  |   | (14                                                 | )      | (98                                                | )      | (41 | ) | (309 | ) |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Income from continuing operations before  income taxes                       |   | 68                                                  |   | 144                                                |   | 568 |   | 269 |   |
| Income tax benefit (expense)                                                 |   | (8                                                  | )      | (12                                                | )      | (16 | ) | 41 |   |
| Income from continuing operations                                            |   | 60                                                  |   | 132                                                |   | 552 |   | 310 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Loss from discontinued operations                                            |   | (223                                                | )      | —                                             |   | (43 | ) | — |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Net income (loss)                                                            |   | $                                                   | (163   | )                                                  | $      | 132 |   | $ | 509 |   | $ | 310 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Income (loss) per share:                                                     |   |                                                |   |                                               |   |   |   |   |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Continuing Operations:                                                       |   |                                                |   |                                               |   |   |   |   |   |
| Basic income per share                                                       |   | $                                                   | 0.00   |                                               | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted income per share                                                     |   | $                                                   | 0.00   |                                               | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Discontinued Operations:                                                     |   |                                                |   |                                               |   |   |   |   |   |
| Basic income (loss) per share                                                |   | $                                                   | (0.01  | )                                                  | $      | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Diluted income (loss) per share                                              |   | $                                                   | (0.01  | )                                                  | $      | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Net income per share:                                                        |   |                                                |   |                                               |   |   |   |   |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Basic income (loss) per share                                                |   | $                                                   | (0.01  | )                                                  | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted income (loss) per share                                              |   | $                                                   | (0.01  | )                                                  | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Weighted average common shares used in  determining income (loss) per share: |   |                                                |   |                                               |   |   |   |   |   |
|                                                                         |   |                                                |   |                                               |   |   |   |   |   |
| Basic                                                                        |   | 14,119                                              |   | 14,575                                             |   | 13,876 |   | 14,525 |   |
| Diluted                                                                      |   | 14,569                                              |   | 14,875                                             |   | 14,326 |   | 14,825 |   |

 

**The accompanying notes are an integral partof these condensed consolidated financial statements.**

 

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**MAI SystemsCorporation**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **

**(Unaudited)**

** **
|                                                  |   | **For the  Nine Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                  |   | **(in  thousands)**                                |   |
|                                                  |   | **2002**                                           |   | **2003** |   |
|                                                  |   |                                               |   |   |   |
| Net cash provided by operating activities:            |   | $                                                  | 1,933  |   | $ | 619 |   |
|                                                  |   |                                               |   |   |   |
| Cash flows used in investing activities:              |   |                                               |   |   |   |
| Proceeds from note receivable                         |   | —                                             |   | 250 |   |
| Capital expenditures                                  |   | (128                                               | )      | (240 | ) |
| Acquisition of unconsolidated subsidiary              |   | —                                             |   | (79 | ) |
| Capitalized software development costs                |   | (615                                               | )      | (619 | ) |
| Net cash used in investing  activities           |   | (743                                               | )      | (688 | ) |
|                                                  |   |                                               |   |   |   |
| Cash flows from financing activities:                 |   |                                               |   |   |   |
| Net decrease in line of credit                        |   | (280                                               | )      | — |   |
| Repayments on long-term debt                          |   | (89                                                | )      | (312 | ) |
| Net cash used in financing activities                 |   | (369                                               | )      | (312 | ) |
|                                                  |   |                                               |   |   |   |
| Net cash provided by (used in) continuing  operations |   | 821                                                |   | (381 | ) |
|                                                  |   |                                               |   |   |   |
| Net cash used in discontinued operations              |   | (1,487                                             | )      | — |   |
|                                                  |   |                                               |   |   |   |
| Effect of exchange rate changes on cash               |   | (13                                                | )      | (3 | ) |
|                                                  |   |                                               |   |   |   |
| Net change in cash                                    |   | (679                                               | )      | (384 | ) |
|                                                  |   |                                               |   |   |   |
| Cash at beginning of period                           |   | 1,224                                              |   | 545 |   |
|                                                  |   |                                               |   |   |   |
| Cash at end of period                                 |   | $                                                  | 545    |   | $ | 161 |   |

 

See note 5 for disclosure onnon -cash transactions.

 

**The accompanyingnotes are an integral part of these condensed consolidated financial statements.**

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**MAI SystemsCorporation**

** **

**Notes to CondensedConsolidated Financial Statements**

** **

**Three Months endedSeptember 30, 2003**

** **

**(Unaudited)**

**1.****                                      Basisof Presentation**

 

Companies forwhich this report is filed are MAI Systems Corporation and its wholly ownedsubsidiaries (the “Company”).  Theinformation contained herein is unaudited, but gives effect to all adjustments(which are normal recurring accruals) necessary, in the opinion of Companymanagement, to present fairly the condensed consolidated financial statementsfor the interim period.  All significantintercompany transactions and accounts have been eliminated in consolidation.

 

Although theCompany believes that the disclosures in these financial statements areadequate to make the information presented not misleading, certain informationand footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to the rules and regulationsof the Securities and Exchange Commission (the “SEC”), and these financialstatements should be read in conjunction with the financial statements includedin the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002, which is on file with the SEC.

 

**2.****                                      Liquidity**

 

Although theCompany has a net stockholders’ deficiency of $14,551,000 and a working capitaldeficit of $9,798,000 (which includes subordinated debt due to CSA of$2,800,000, see note 7) at September 30, 2003, the Company believes itwill continue to generate sufficient funds from operations and obtainadditional financing or restructure its subordinated note with CSA to meet itsoperating and capital requirements.  TheCompany is currently in negotiations with CSA to restructure the terms of theexisting debt, including extending the maturity date.  The Company expects to generate positive cash flow from itscontinuing operations during 2003 from shipping out products and services fromits current backlog as of September 30, 2003 as well as new orders. In theevent that the Company cannot generate positive cash flow from its continuingoperations during 2003, the Company can substantially reduce its research and developmentefforts to mitigate cash outflow to help sustain its operations.  There can be no assurance that the Companywill be able to sustain profitability, generate positive cash flow fromoperations or restructure its debt as necessary.  These financial statements have been prepared assuming theCompany will continue to operate as a going concern.  If the Company is unsuccessful in the aforementioned efforts, theCompany could be forced to liquidate certain of its assets, reorganize itscapital structure and, if necessary, seek other remedies available to theCompany, including protection under the bankruptcy laws.

 

Therestructured debt, pursuant to the original inter-creditor agreement betweenCanyon Capital and Coast, which was sold to Wamco on May 15, 2003,contains various restrictions and covenants. In the event that the Company were not in compliance with the variousrestrictions and covenants and were unable to receive waivers fornon-compliance, the term debt would be immediately due and payable.  The Company was not in compliance with butreceived a waiver for one of its covenants as of and for the three month periodended September 30, 2003 (see note 7). There is no guaranty that the Company will meet its debt covenants inthe future.  The Company is currentlynegotiating with Wamco to change such covenants, but there is no assurance thatthe Company will be able to successfully change the covenants.

 

**3.****                                      Inventories**

 

Inventoriesare summarized as follows:

 
|              |   | **(dollars  in thousands)** |   |
|-------------------|--------|-----------------------------|--------|
|              |   | **December 31,  2002** |   | **September 30,  2003** |   |
|              |   |                        |   |   |   |
| Finished goods    |   | $                           | 45     |   | $ | 63 |   |
| Replacement parts |   | 15                          |   | 14 |   |
|              |   |                        |   |   |   |
|              |   | $                           | 60     |   | $ | 77 |   |

 

4

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**4.****                                      Planof Reorganization**

 

In connectionwith the Company’s Chapter 11 bankruptcy proceedings in 1993, shares of CommonStock are currently being distributed by the Company to its former creditorspursuant to the Plan of Reorganization (the “Plan”) as approved by UnitedStates Bankruptcy Court.  The Companydoes not anticipate that additional shares will be issued under the plan.  As of September 30, 2003, 6,758,251shares had been issued pursuant to the Plan.

 

Notwithstandingthe confirmation and effectiveness of its Plan of Reorganization pursuant towhich the Company emerged from a voluntary proceeding under the bankruptcylaws, the United States Bankruptcy Court continues to have jurisdiction, amongother things, to resolve disputed pre-petition claims against the Company, toresolve matters related to the assumptions, assignment or rejection ofexecutory contracts pursuant to the Plan, and to resolve other matters that mayarise in connection with the implementation of the Plan.

 

**5.****                                      BusinessAcquisitions**

 

**Hotel InformationSystems, Inc.**

 

EffectiveAugust 9, 1996, the Company acquired substantially all of the assets andassumed certain liabilities of Hotel Information Systems, Inc. (“HIS”) pursuantto an asset purchase agreement dated June 30, 1996 (as amendedJuly 10, 1996) for 1,179,000 unregistered shares of the Company’s commonstock valued at $10,900,000.  The netassets 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 ofHIS in Singapore, Hong Kong and Mexico. The acquisition of HIS has been accounted for by the purchase method ofaccounting.  The total purchase pricefor HIS was $21,373,000, which included net liabilities assumed of HIS of$7,873,000 and acquisition costs of approximately $2,600,000.

 

During 1996,the Company entered into arbitration proceedings regarding the purchase priceof HIS.  The Company placedapproximately 1,100,000 shares of Common Stock issued in connection with theacquisition of HIS in an escrow account to be released in whole, or in part,upon final resolution of post closing adjustments.

 

InNovember 1997, the purchase price for the acquisition of HIS was reducedby $931,000 pursuant to arbitration proceedings.  As a result, goodwill was reduced by $931,000 and approximately100,650 shares were required to be released from the escrow account andreturned to the Company (this has not occurred as of September 30,2003).  In addition, the Company hadfurther claims against HIS relating to legal costs and certain disbursementsinappropriately made by HIS prior to the closing estimated at $650,000.  The Company was required, as needed,pursuant to the asset purchase agreement and related documents, to issueadditional shares of Common Stock in order that the recipients ultimately receiveshares worth a fair value of $9.25 per share. This adjustment applied to a maximum of 73,466 shares of CommonStock.  As of September 30, 2003,the fair market value of the Company’s common stock was $0.09 per share, whichwould have resulted in approximately 5,755,453 additional shares beingissued.  Also, included in the escrowaccount at December 31, 2002 are 200,000 shares of the Company’s commonstock, which do not have a guarantee of value.

 

OnMarch 25, 2003, the Company entered into a settlement agreement with HISand one of its former corporate officers whereby (i) the parties dismissed allclaims, known and unknown, against each other; (ii) the Company forgave andwrote off a note receivable from the former corporate officer of HIS in the amountof $66,000 (which was expensed to other expense in the 2002 consolidatedstatement of operations); (iii) the Company paid $50,000 in cash and issued anon-interest bearing unsecured promissory note which requires 35 consecutivemonthly payments of $5,000 each commencing April 1, 2003; and (iv) theremaining 374,116 shares in the escrow account will be released to theCompany.  If the Company is delinquentfour times in any twelve month period during the term of the unsecuredpromissory note in making its $5,000 monthly payments to HIS, and HIS issuesrespective valid default notices, the Company will be subject to a $225,000penalty.  The 374,116 shares have beenreceived by MAI together with the HIS authorization to legally transfer suchshares to MAI.

 

Imputinginterest at 11%, the present value of the $175,000 promissory note at the dateof the settlement was $149,000.  TheCompany recorded the present value of this debt issuance and the $50,000 cashpayment as a reduction to additional paid-in capital.

 

**Hospitality Services& Solutions**

 

OnJune 23, 2002, the Company acquired substantially all of the assets andassumed certain liabilities of Hospitality Services & Solutions (“HSS”)including a 35% ownership in AMDB – HIS (“AMDB”) pursuant to a stock purchaseagreement for 100,000 shares of common stock valued at $32,000 (the quotedmarket price of the common stock at the time the terms were agreed), and$75,000 in cash.  Additionally, theshareholders of HSS received a 20% minority

 

5

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interest inthe Company’s combined operations in Asia. HSS was acquired for the Company toexpand its operations in the Asian marketplace, strengthen its management teamin the territory and create new opportunities for its new enterprise capablesuite of products.  The net assetsacquired from HSS are used in the business of software design, engineering andservice relating to hotel information systems. The net assets also include subsidiaries of HSS in Malaysia, Singaporeand Thailand.  The Company recorded$297,000 of goodwill (deductible for tax purposes) in connection with theacquisition of HSS.  Pro forma resultsof operations as if this acquisition had occurred at the beginning of 2001 and2002 are not shown because its impact would have been immaterial.

 

Included inthe acquired assets of HSS was a 35% interest in AMDB, an online reservationservice, originally purchased by HSS for $66,000.  On February 20, 2003, the Company entered into an agreementwhereby it acquired the remaining 65% for $79,000 payable over 6 monthinstallments.  The net liabilites of$15,000 acquired are used to support an online reservation service related tohotel information systems.  The Companyrecorded $160,000 of goodwill in connection with the acquisition of AMDB.  Pro forma results of operations as if thisacquisition had occurred at the beginning of 2002 and 2003 are not shownbecause its impact would have been immaterial.

 

**6.****                                      BusinessDivestitures**

 

**Gaming SystemsInternational**

 

OnJune 19, 1999, the Company sold Gaming Systems International (“GSI”) foran amount in excess of the book value of net assets sold.  Assets sold of approximately $3,749,000consisted of accounts receivable of $1,514,000, inventories of $364,000,furniture, fixtures and equipment of $218,000, intangible assets of $1,573,000and prepaid expenses of $80,000. Liabilities assumed by the buyer consisted of accounts payable andaccrued liabilities of $197,000, deposits of $100,000, unearned revenue of$351,000 and long-term debt of $446,000. The Company received three promissory notes totaling $4,925,000 withface values of $1,100,000, $1,500,000 and $2,325,000, respectively.  Interest was paid monthly at the rate of 10%per annum on both the $1,100,000 and $1,500,000 notes, with the principal dueand payable on June 19, 2001 and June 19, 2003, respectively.  A third party guaranteed the $1,100,000promissory note.  Principal payments andinterest, at prime plus 1%, was to commence for the $2,325,000 promissory noteon October 1, 2002 in 48 monthly installments of approximately $48,000 ofprincipal, plus accrued interest.

 

Imputinginterest at a rate of 10%, the present value of the $2,325,000 promissory noteat the date of sale was $1,682,000, which resulted in a combined carrying valueof $4,282,000 for all three promissory notes. The gain on sale of $1,227,000had been deferred until collection of the proceeds representing the gain can beassured. As of December 31, 2000, the Notes were held for sale and werewritten down to an amount, which approximated their estimated net realizablevalue of $2,700,000.

 

OnApril 6, 2001 the Company entered into an agreement with the maker of theNotes whereby the maker reconvened 100% of the Common Stock of GSI to theCompany. For the purpose of selling GSI to a third party. In connection withthe agreement, the Company canceled the Notes and entered into a new $1.1million secured promissory note with the same party. The maker will be paid acommission of 30% of cash receipts from the third party, which will be firstapplied to the $1.1 million note and paid in cash to the maker thereafter. OnJuly 27, 2001, the Company entered into an Asset Purchase Agreement(“Agreement”) with the third party for approximately $3.2 million whereby all ofthe assets of GSI were acquired and all of the liabilities assumed, except forapproximately $300,000 of obligations, which will remain with GSI.  The payment terms under the Agreementrequired a $1 million non-refundable cash payment to the Company, which wasreceived on July 27, 2001 and a $1.5 million payment, which was receivedin December 2001.  The Company alsoreceived a secured promissory note in the amount of $750,000, of which $500,000was received in December 2002 and $250,000 in January 2003. The thirdparty was also required to pay an additional $250,000 subject to a maximum$250,000 reduction pursuant to the resolution of certain uncertainties as ofthe date of the Agreement, which, as part of the settlement, inJanuary 2003 the Company received $46,000.  Due to the uncertainty of collecting the unsecured amount of$250,000, gain recognition on that part of the proceeds was deferred untilcollection was assured.  The Companyrecorded a gain on the sale of GSI of $245,000 in the fourth quarter of 2001.

 

**Legacy**

 

OnOctober 9, 2001, the Company sold certain rights under customer contractstogether with the related assets and liabilities of its domestic Legacyhardware maintenance division to the third party currently providing theon-site repair and warranty service to the Company’s Legacy hardwaremaintenance customers.  Pursuant to theagreement, the Company retained the software maintenance component of thecustomer contracts and will continue to provide the

 

6

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softwaresupport services directly to the domestic Legacy customer base.  Additionally, the third party will berequired to pay the Company approximately 15% of the third party’s hardwaremaintenance revenue stream relating to the hardware maintenance customercontracts subsequent to October 31, 2003. In connection with the sale, the Company received $328,000 in cash andsold approximately $157,000 of assets consisting of inventory, spare parts,fixed assets and certain accounts receivable. The third party also assumed approximately $1,091,000 of liabilitiesconsisting of accrued liabilities of approximately $366,000 and deferredrevenue of approximately $725,000.  Thesale resulted in a gain of approximately $1,262,000 in October 2001.

 

**MAI Canada**

 

OnDecember 6, 2002, the Company sold all the assets and certain liabilitiesof its Canadian operations, including all legacy divisions, to the managementof this subsidiary pursuant to a stock purchase agreement.  In connection with the sale, the Companyalso entered into a software distribution agreement whereby the buyer has anon-exclusive right and license to market and installs the Company’shospitality products in Canada.  Thesale resulted in a loss of approximately $630,000, which is included in theloss on disposal of discontinued operations. Prior to the sale, the Canadian operations incurred a net income of$5,000 and $178,000 for the three-month and nine-month periods endedSeptember 30, 2002, respectively. 

 

**Process Manufacturing**

 

OnDecember 6, 2002, the Company entered into an Asset Purchase Agreementwhereby all the assets and certain liabilities of its process manufacturingsoftware division were sold to a third party for cash of $250,000.  The sale resulted in a loss of approximately$391,000, which is included in the loss on disposal of discontinuedoperations.  Prior to the sale, ProcessManufacturing operations incurred a net loss of $203,000 and  $215,000 for the three-month and nine-monthperiods ended September 30, 2002.

 

**7.****                                      Lineof Credit and Bridge Loan and Long Term Debt**

 

**Line of Credit &Bridge Loan**

 

OnJuly 28, 1999, the Company obtained a Bridge Loan from Coast BusinessCredit (“Coast”) in the amount of $2,000,000. The Bridge Loan originally bore interest at prime plus 5% (prime plus 8%when default interest rates apply). Loan origination fees of $75,000 paid toCoast in connection with the Bridge Loan were amortized to interest expenseover the term of the loan. During the first quarter of 2001, the remainingbalance of the Bridge Loan was repaid in full. In April 1998, the Company negotiated a $5,000,000 securedrevolving credit facility with Coast. The availability of this facility was based on a calculation using arolling average of certain cash collections. The facility is secured by allassets, including intellectual property of the Company, and bore interest atprime plus 4.5% and was due to expire on April 30, 2003. The creditfacility was amended to allow for aggregate borrowings on an interest only basisunder the credit facility not to exceed $3,360,000. In connection with theamendment, the Company agreed to pay Coast a fee of $300,000 (“Loan Fee”) inweekly installments of $35,000 commencing after the Bridge Loan was paid infull. The Loan Fee was fully paid by April 23, 2001.  The Loan Fee of $300,000 is classified inprepaid and other current assets and was being amortized to interest expenseover the original term of the facility. The loan fee was fully amortized in the first quarter of 2003.

 

On January 13,2003, the Company re-negotiated the terms of the credit facility whereby theoutstanding balance of $1,828,000. As of that date was converted to a term loanwhich accrues interest at 9.25% per annum and requires monthly payments of$58,000 over a 36 months period commencing March 1, 2003.  The new term loan matures onFebruary 28, 2005, at which time all remaining principal and accruedinterest is due and payable.  TheCompany will also be required to pay Coast additional principal payments on aquarterly basis based upon an EBITDA-based formula commencing March 31,2003.  For the three-months endedSeptember 30, 2003, there are no additional principal payments requiredunder the EBITDA-based formula.  Theconsolidated balance sheet as of December 31, 2002 and September 30,2003 reflects the re-class of the secured revolving credit facility to a termloan.

 

OnFebruary 7, 2003, the Federal Deposit Insurance Corporation (“FDIC”) putCoast and its parent company, Southern Pacific Bank, into receivership and heldall of Coast’s assets for sale to third parties.  On May 15, 2003, the loan was sold to Wamco 31, Ltd.(Wamco).  This sale of the loan by theFDIC did not change any of the terms of the Company’s loan agreement.

 

Therestructured debt, pursuant to the original inter-creditor agreement betweenCanyon Capital and Coast, which was sold to Wamco on May 15, 2003,contains various restrictions and covenants, including a minimum quick ratio of0.31

 

7

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to l.00 andminimum debt service coverage ratio of 1.25 to l.00 for the three-month periodended September 30, 2003.  Theminimum quick ratio increases to .34 to 1.00 as of December 31, 2003 andfor each and every fiscal quarter ending thereafter.  In the event that the Company were not in compliance with thevarious restrictions and covenants and were unable to receive waivers fornon-compliance, the term debt would be immediately due and payable.  The Company was not in compliance with itsminimum quick ratio but received a waiver for such covenant as of and for thethree month period ended September 30, 2003.  There is no guaranty that the Company will meet its debtcovenants in the future.  The Company iscurrently negotiating with Wamco to change such covenants, but there is noassurance that the Company will be able to successfully change the covenants.

 

**Long-Term Debt**

 

InMarch 1997, the Company issued $6,000,000 of 11% subordinated notespayable due in 2004 to an investment fund managed by Canyon Capital ManagementLP (“Canyon”).  In September 1997,this indebtedness was reduced to $5,250,000 through application of a portion ofthe proceeds realized from the exercise of warrants by Canyon.  The notes called for semi-annual interestpayments.

 

The Company andCanyon subsequently entered into a forbearance agreement providing that theCompany pays Canyon weekly interest payments of $12,500 effectiveJanuary 1, 2000.  In addition, theCompany executed a security agreement, which provided Canyon with a lien on allof the Company’s tangible and intangible property, which lien is junior to thelien granted to Wamco.

 

OnApril 13, 2000, the Company entered into an agreement with Canyon, waivingall existing events of default, accelerated the maturity date to March 3,2003 and provided for continued weekly interest payments of $12,500.  On January 31, 2001, the Companyentered into an agreement with Canyon whereby the specified accrued interest of$431,000 was added to the principal balance of the subordinated notes payable.  As part of this agreement, the Company alsoagreed to pay Canyon an additional $79,000 loan fee, of which $29,000 was addedto principal.  The principal balanceoutstanding on the subordinate notes payable to Canyon was approximately$5,662,000 at December 31, 2002 and September 30, 2003.

 

OnJanuary 13, 2003, the Company modified the terms of its agreement withCanyon, whereby the Company is required to make monthly payments of $52,000until the Wamco term loan is paid off in full at which time the note payablewill be converted into a three-year amortizing loan which will accrue interestat 11% per annum and requires equal monthly payments of principal and interestsuch that the subordinated debt will be paid in full at the end of the amendedterm.  Upon the repayment of the Wamcodebt in full, the Company will also be required to pay Canyon additionalprincipal payments on a quarterly basis based upon an EBITDA-based formula.  Additionally, the Company issued to Canyon200,000 shares of its common stock valued at $20,000 (the quoted market priceof the common stock at the time the terms were agreed) and agreed to issue onemillion warrants at an exercise price of $0.40 per share valued at $ 42,000(using the Black-Scholes option-pricing model with the followingweighted-average assumptions: risk-free interest rate of 6.5%, volatility of80% and an expected life of 5 years). The $62,000 is being amortized to interest expense over the term of themodified note.

 

In connectionwith a settlement agreement with CSA, the Company issued $2.8 million ofsubordinated debt to CSA. The $2.8 million of debt is secured by all of theCompany’s assets, which is subordinate to Wamco and Canyon,  accrues interest at 10% per annum andrequires payments of $37,500 from March 1, 2002 through September 1,2002 and monthly payments of $107,500 commencing on October 1, 2002 untilOctober 2003 when all remaining unpaid principal and accrued interest isto be paid in full. The balance outstanding on the subordinate debt to CSA was$2,800,000 at December 31, 2002 and September 30, 2003.

 

The agreementwith CSA was amended whereby the Company shall be required to pay the requiredpayments under the subordinated note unless and until it paid $1 million byDecember 31, 2002.  Upon payment ofthe $1 million, contractual payments under the subordinated note would haveceased until a final payment in the amount of $400,000 is paid byFebruary 28, 2003. If the Company did not make all of the modifiedpayments to CSA, the subordinated note will revert back to its originalterms.  The Company did not make themodified payment and have not made any payments since September 2002.  Under the terms of the subordinationagreement between Wamco, Canyon and CSA, the Company is not allowed to make anyprincipal or interest payments to CSA until the Wamco and Canyon debt,including any accrued interest, is repaid in full or the CSA debt isrestructured and approved by Wamco and Canyon. The Company is currently innegotiations with CSA to restructure the terms of the subordinated notesincluding extending its maturity date. There can be no assurance that CSA and MAI will come to terms on arestructuring or that Wamco and Canyon will ultimately approve the terms of therestructuring.  In the event that theCompany is unable to meet the required payments to its primary lenders or meetits payment obligations to its other secured creditors, they are entitled toexercise certain rights under the respective agreements the Company has withthem, including but not limited to, foreclosing on all of the Company’stangible and intangible assets.  Suchaction would have a substantial adverse effect on our ability to continue as agoing concern.  The CSA debt is shown ascurrent.

 

8

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CSA has notformally notified the Company of its default. As of December 31, 2002 and September 30, 2003, accruedinterest relating to the CSA subordinated debt was $408,000 and $657,000respectively, and is included in accrued liabilities in the accompanyingconsolidated balance sheets.

 

**8.****                                      CommonStock**

 

InJanuary and February of 2001, the Company entered into agreementswith several creditors to retire approximately $2.1 million of Companyobligations in exchange for 798,000 shares of Common Stock and $470,000 ofcash.  This resulted in a gain of$1,377,000.  To fulfill its performanceunder the agreement, the Company issued the 798,000 shares of its Common Stockand registered the shares with the SEC. The Company must also pay the $470,000 to the creditors as prescribed inthe respective agreements.  All paymentsrequired under the agreements were made in 2001 and the first quarter of 2002.

 

InMay 2002, the Company issued 612,500 shares of restricted common stock toits members of the board of directors and certain of its corporateofficers.  Recipients are not requiredto provide consideration to the Company other than rendering the service andhave the right to vote the shares.

 

Under SFAS No.123, compensation cost is recognized for the fair value of the restricted stockawarded, which is its fair market value without restrictions at the date ofgrant, which was $0.25 per share.  Thetotal market value of the shares of $153,125 was treated as unearnedcompensation and is being amortized to expense in proportion to the vestingschedule through March 2005. The unamortized balance as of September 30, 2003 is $62,000.

 

**9.****                                      PreferredStock**

 

OnMay 20, 1997, the Company authorized the issuance of up to 1,000,000shares 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 andrestrictions thereof without any further vote by the holders of Common Stock.

 

**10.****                               IntangibleAssets**

 

Intangibleassets consist primarily of goodwill and capitalized software.  Intangible assets other than goodwill areamortized on a straight-line basis over their estimated useful lives.  Prior to 2002, goodwill, representing theexcess of the purchase price over the estimated fair value of the net assets ofthe acquired business, was amortized over the period of expected benefit offive to seven years.  However, effectiveJanuary 1, 2002, the Company adopted Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets, (“SFAS No. 142”)which requires that the Company cease amortization of all goodwill andintangible assets having indefinite useful economic lives.  The Company determined that there was noimpairment upon adoption. Such assets are not to be amortized until their livesare determined to be finite. However, a recognized intangible asset with anindefinite useful life should be tested for impairment annually or on aninterim basis if events or circumstances indicate that the fair value of theasset has decreased below its carrying value. The Company will evaluate its goodwill as of December 31, 2003 anddetermined that fair value had not decreased below carrying value and noadjustment to impair goodwill was necessary in accordance with SFAS No. 142.

 

Goodwill andcapitalized software as of December 31, 2002 and September 30, 2003are as follows:

 
|                      |   | **(dollars  in thousands)** |   |
|---------------------------|--------|-----------------------------|--------|
|                      |   | **December 31,  2002** |   | **September 30,  2003** |   |
|                      |   |                        |   |   |   |
| Goodwill                  |   | $                           | 962    |   | $ | 1,121 |   |
| Accumulated amortization  |   | —                      |   | — |   |
| Goodwill, net             |   | 962                         |   | 1,121 |   |
|                      |   |                        |   |   |   |
| Capitalized software      |   | 861                         |   | 1,480 |   |
| Accumulated amortization  |   | —                      |   | — |   |
| Capitalized software, net |   | 861                         |   | 1,480 |   |
|                      |   |                        |   |   |   |
| Total                     |   | $                           | 1,823  |   | $ | 2,601 |   |

 

The Company’sweighted average amortization period for capitalized software is expected to bethree years.  The following table showsthe estimated amortization expense for these assets for each of the fivesucceeding years:

 

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Year Ending December 31,

*(in thousands)*

** **

| 2003   |   | $      | — |   |
|--------|--------|--------|--------|--------|
| 2004   |   | 493    |   |
| 2005   |   | 493    |   |
| 2006   |   | 494    |   |
| 2007   |   | — |   |
| 2008   |   | — |   |
|   |   | $      | 1,480  |   |

 

**11.****                               Income(Loss) Per Share of Common Stock**

 

Basic anddiluted income or loss per share is computed using the weighted average sharesof common stock outstanding during the period. Consideration is also given inthe diluted income per share calculation for the dilutive effect of stockoptions and warrants.

 

The followingtable illustrates the computation of basic and diluted earnings per share underthe provisions of SFAS 128:

 
|                                                                                                                    |   | **For the  Three Months Ended  September 30,** |   | **For the  Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                    |   | **2002**                                            |   | **2003**                                           |   | **2002** |   | **2003** |   |
|                                                                                                                    |   | **(in  thousands except per share data)**           |   | **(in  thousands except per share data)**          |   |
| Numerator:                                                                                                              |   |                                                |   |                                               |   |   |   |   |   |
| Numerator for basic and diluted earnings  (loss) per share – net income (loss)                                     |   | $                                                   | (163   | )                                                  | $      | 132 |   | $ | 509 |   | $ | 310 |   |
|                                                                                                                    |   |                                                |   |                                               |   |   |   |   |   |
| Denominator:                                                                                                            |   |                                                |   |                                               |   |   |   |   |   |
| Denominator for basic earnings (loss) per  share weighted average number of Common shares outstanding during the period |   | 14,119                                              |   | 14,575                                             |   | 13,876 |   | 14,525 |   |
|                                                                                                                    |   |                                                |   |                                               |   |   |   |   |   |
| Incremental common shares attributable to  exercise of outstanding shares                                               |   | 450                                                 |   | 300                                                |   | 450 |   | 300 |   |
|                                                                                                                    |   |                                                |   |                                               |   |   |   |   |   |
| Denominator for diluted earnings (loss) per share                                                                       |   | 14,569                                              |   | 14,875                                             |   | 14,326 |   | 14,825 |   |
|                                                                                                                    |   |                                                |   |                                               |   |   |   |   |   |
| Basic earnings (loss) per share                                                                                         |   | $                                                   | (0.01  | )                                                  | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted earnings (loss) per share                                                                                       |   | $                                                   | (0.01  | )                                                  | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |

 

The number ofanti-dilutive options and warrants that were excluded from the computation ofincremental common shares were 2,667,272 and 3,041,500 for the nine monthperiod ended September 30, 2002 and 2003, respectively.

 

**12.****                               StockOption Plans**

 

The Companyaccounts for stock-based compensation in accordance with Accounting PrinciplesBoard, APB, No. 25, “Accounting for Stock Issued to Employees.” The Company hasadopted the disclosure-only provisions of FAS No. 123 “Accounting forStock-Based Compensation.” Under APB No. 25, compensation expense relating toemployee stock options is determined based on the excess of the market price ofthe Company’s stock over the exercise price on the date of grant, the intrinsicvalue method, versus the fair value method as provided under FAS No. 123.

 

InDecember 2002, the FASB issued FAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure”, which amended FAS No. 123,“Accounting for Stock-Based Compensation.” The new standard providesalternative methods of transition for a voluntary change to the fair marketvalue based method for accounting for stock-based employee compensation.Additionally, the statement amends the disclosure requirements of FAS No. 123to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results. This statement iseffective for financial statements for the year ended December 31,2002.  In compliance with FAS No. 148,the Company has elected to continue to follow the intrinsic value method inaccounting for its stock-based employee compensation plan as defined by APB No.25.

 

AtSeptember 30, 2003, the Company had two stock-based employee compensationplans.  The Company accounts for thatplan under the recognition and measurement principles of APB No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.Accordingly, no stock-based employee compensation cost is reflected in netincome (loss), as all options granted under the plan had an exercise priceequal to the market value of the underlying common stock on the date ofgrant.  Had compensation cost for theCompany’s stock option plan been determined 

 

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based on thefair value at the grant date for awards for the three-month periods endedSeptember 30, 2002 and 2003, consistent with the provisions of FASNo. 123, the Company’s net income (loss) and net income (loss) per sharewould have decreased.  The followingtable represents the effect on net income and net income per share if theCompany had applied the fair value based method and recognition provisions ofStatement of Financial Accounting Standards (SFAS) No. 123, “Accounting forStock-Based Compensation”, to stock-based employee compensation.

 
|                                                                                             |   | **For the  three-months ended  September 30,** |   | **For the  nine-months ended   September 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                             |   | **(in  thousands, except per  share data)**         |   | **(in  thousands, except per  share data)**         |   |
|                                                                                             |   | **2002**                                            |   | **2003**                                            |   | **2002** |   | **2003** |   |
| Net income (loss):                                                                               |   |                                                |   |                                                |   |   |   |   |   |
| As reported                                                                                      |   | $                                                   | (163   | )                                                   | $      | 132 |   | $ | 509 |   | $ | 310 |   |
| Add: Stock-based employee compensation  expense recorded                                         |   | —                                              |   | —                                              |   | — |   | — |   |
| Less:   Stock based employee compensation expense determined under fair value  calculations |   | (33                                                 | )      | (17                                                 | )      | (99 | ) | (51 | ) |
| Pro forma                                                                                        |   | $                                                   | (196   | )                                                   | $      | 115 |   | $ | 410 |   | $ | 259 |   |
|                                                                                             |   |                                                |   |                                                |   |   |   |   |   |
| Basic income (loss) per share:                                                                   |   |                                                |   |                                                |   |   |   |   |   |
| As reported                                                                                      |   | $                                                   | (0.01  | )                                                   | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
| Add: Stock-based employee compensation  expense recorded                                         |   | —                                              |   | —                                              |   | — |   | — |   |
| Less:   Stock based employee compensation expense determined under fair value  calculations |   | —                                              |   | —                                              |   | (0.01 | ) | — |   |
| Pro forma                                                                                        |   | $                                                   | (0.01  | )                                                   | $      | 0.01 |   | $ | 0.03 |   | $ | 0.02 |   |
|                                                                                             |   |                                                |   |                                                |   |   |   |   |   |
| Diluted income (loss) per share:                                                                 |   |                                                |   |                                                |   |   |   |   |   |
| As reported                                                                                      |   | $                                                   | (0.01  | )                                                   | $      | 0.01 |   | $ | 0.04 |   | $ | 0.02 |   |
| Add: Stock-based employee compensation  expense recorded                                         |   | —                                              |   | —                                              |   | — |   | — |   |
| Less:   Stock based employee compensation expense determined under fair value  calculations |   | —                                              |   | —                                              |   | (0.01 | ) | — |   |
| Pro forma                                                                                        |   | $                                                   | (0.01  | )                                                   | $      | 0.01 |   | $ | 0.03 |   | $ | 0.02 |   |

 

**13.****                               LegalProceedings**

 

*Internal Revenue Service*

 

OnSeptember 30, 2003, the Company entered into a settlement agreement withthe United States Internal Revenue Service (the “Service”) on a tax claim whichresulted from the Company’s Chapter 11 proceedings whereby it agreed to pay anaggregate of $489,000 in equal monthly installments of $7,438 over a period ofsix (6) years at an interest rate of 6%. The $489,000 settlement is reflected as debt in the financialstatements.  The settlement resulted ina one-time gain of $262,000 which is reflected in other operating income. Inthe event that the Company fails to pay the Service any payment, and suchpayment failure continues for sixty days after written notice of such failure,$1,832,100, plus accrued interest thereon, less any payments made by theCompany will be immediately due and payable to the Service.

 

*CSA Private Limited*

 

CSA is a MAIshareholder.  On August 9, 1996,MAI acquired from Hotel Information Systems, Inc. (“HIS”)

 

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substantiallyall their assets and certain of their liabilities (the “HIS Acquisition”).  At the time of MAI’s acquisition of HIS in1996, CSA was a shareholder of HIS and, in connection with the purchase, MAIagreed to issue to CSA shares of its Common Stock worth approximately $4.8million in August 1996, which amount had increased to approximately $6.8million as of December 31, 2000, pursuant to the agreement. The Companyentered into a settlement agreement with CSA in February, 2001 whereby it (i)issued CSA 1,916,014 additional shares of our Common Stock to bring CSA’s totalshare ownership to 2,433,333 shares; (ii) filed a registration statement forall of CSA’s shares of our Common Stock which has been declared effective bythe SEC so that such shares are now freely tradable; and (iii) executed a secureddebt instrument in favor of CSA in the principal sum of $2,800,000 which issubordinate only to the Company’s present group of two (2) senior securedleaders and required cash installment payments to commence in March 2002.

 

In connectionwith the settlement agreement with CSA, the Company recorded the $2.8 milliondebt issuance as a reduction in paid in capital and the 1,916,014 additionalshares at par as an addition to Common Stock and a reduction to additional paidin capital.

 

*Cher-Ae Heights Indian Community*

 

A lawsuit wasfiled by Cher-Ae Heights Indian Community (“Cher-Ae Heights”) against LogixDevelopment Corporation (Logix). Now known as MAI Development Corporation, as aco-defendant for a breach of contract by the Company’s formerly owned gamingsubsidiary along with the new owners, Monaco Informatiques Systemes (“MIS”),who acquired the assets and certain liabilities of the gaming subsidiary onJuly 27, 2001. Based upon this suit, MIS informed the Company that it didnot intend to pay the next $500,000 due to the Company under a promissory noteand security agreement.  OnOctober 24, 2002, the Company entered into a global settlement agreementbetween the parties whereby all claims, known and unknown, between the partieswere dismissed and the Company received $796,000.

### * *

### *Logix Development Corporation*

 

The Companyentered into a settlement agreement with Logix in July of 2002 whereby it(i) issued Logix 200,000 shares of our Common Stock (ii) required the Companyto make various cash installment payments totaling $175,000 to be paid within 1year and (iii) executed a contract with Logix for a consulting project in theamount of $50,000.

### * *

### *Other Litigation*

 

The Company isalso involved in various other legal proceedings and claims that are incidentto its business. Management believes that the ultimate outcome of these matterswill not have a material adverse effect on the consolidated financial position,results of operations or liquidity of the Company.

** **

**14.****                               ComprehensiveIncome**

 

The followingtable summarizes components of comprehensive income:

 
|                                          |   | **For The  Three Months Ended  September 30,** |   | **For The  Nine Months Ended  September 30,** |   |
|-----------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                          |   | **2002**                                            |   | **2003**                                           |   | **2002** |   | **2003** |   |
|                                          |   |                                                |   |                                               |   |   |   |   |   |
| Net income (loss)                             |   | $                                                   | (163   | )                                                  | $      | 132 |   | $ | 509 |   | $ | 310 |   |
|                                          |   |                                                |   |                                               |   |   |   |   |   |
| Change in cumulative translation  adjustments |   | (37                                                 | )      | (11                                                | )      | (128 | ) | 28 |   |
|                                          |   |                                                |   |                                               |   |   |   |   |   |
| Comprehensive income (loss)                   |   | $                                                   | (200   | )                                                  | $      | 121 |   | $ | 381 |   | $ | 338 |   |

 

Accumulatedother comprehensive income in the accompanying consolidated balance sheetsconsists of cumulative translation adjustments.

 

**Item 2. Management’s Discussion And Analysis Of Financial Condition And ResultsOf Operations**

 

**Critical Accounting Policies and Estimates**

 

The discussionand analysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect our reported assets, liabilities, revenues and expenses.On an on-going basis, we evaluate our

 

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estimates,including those related to revenue recognition, accounts receivable andintangible assets. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. This forms the basis of judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

We believe thefollowing critical accounting policies and the related judgments and estimatesaffect the preparation of our consolidated financial statements:

** **

Revenue Recognition

 

The Companyearns revenue from sales of hardware, software and professional services andfrom arrangements involving multiple elements of each of the above.  Revenue for multiple element arrangementsare recorded by allocating revenue to the various elements based on theirrespective fair values as evidenced by vendor specific objective evidence.  The fair value in multi-element arrangementsis determined based upon the price charged when sold separately.  Revenue is not recognized until persuasiveevidence of an arrangement exists, delivery has occurred, the fee is fixed ordeterminable and collectibility is probable. Sales of network and computer equipment are recorded when title and riskof loss transfers.  Software revenuesare recorded when application software programs are shipped to end users,resellers and distributors, provided the Company is not required to provideservices essential to the functionality of the software or significantlymodify, customize or produce the software. Professional services fees for software development, training andinstallation are recognized as the services are provided. Maintenance revenuesare recorded evenly over the related contract period.

** **

Allowance for Doubtful Accounts

 

The Companyrecords an allowance for doubtful accounts based on specifically identifiedamounts that it believes is uncollectible. The Company also records additional allowances based upon certainpercentages of our aged receivables, which are determined based on historicalexperience and or assessment of the general financial conditions affecting ourcustomer base.  If the Company’s actualcollection experience changes, revisions to its allowance may be required.  Any unanticipated change in the Company’scustomer’s credit worthiness or other matters affecting the collectibility ofamounts due from such customers, could have a material affect on its results ofoperations in the period in which such changes or events occur.  After all attempts to collect a receivablehave failed, the receivable is written off against the allowance.

** **

Impairment of Long-Lived Assets andLong-Lived Assets to be Disposed Of

 

Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” provides a single accounting model forlong-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as heldfor sale, and broadens the scope of businesses to be disposed of that qualifyfor reporting as discontinued operations and changes the timing of recognizinglosses on such operations.

 

The Companyadopted SFAS No. 144 on January 1, 2001. The adoption of SFAS No.144 did not affect the Company’s financialstatements.  In accordance with SFAS No.144, long-lived assets, such as furniture, fixtures and equipment are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated futurecash flows, and impairment charge is recognized by the amount by which thecarrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of would be separatelypresented in the balance sheet and reported at the lower of the carrying amountor fair value less costs to sell, and are no longer depreciated.  The assets and liabilities of a disposedgroup classified as held for sale would be presented separately in theappropriate asset and liability sections of the balance sheet.

 

Prior to theadoption of SFAS No. 144, the Company accounted for long-lived assets to bedisposed of in accordance with SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of”.

** **

Goodwill

 

Prior to 2002,goodwill, representing the excess of the purchase price over the estimated fairvalue of the net assets of the acquired business, was amortized over the periodof expected benefit of five to seven years. Long-lived assets and certain identifiable intangibles to be held andused by the Company were reviewed for impairment whenever events or changes incircumstances indicated that the carrying amount of the asset may not berecoverable. Recoverability of 

 

13

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assets to beheld and used was assessed by a comparison of the carrying amount of an assetto future undiscounted net cash flows expected to be generated by the asset. Ifsuch assets were considered to be impaired, the impairment recognized wasmeasured by the amount by which the carrying amount of the assets exceeded thefair value of the assets.  Assets thatwere to be disposed of were reported at the lower of the carrying amount orfair value less cost to sell.

 

However,effective January 1, 2002, the Company adopted Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFASNo. 142”) which requires that the Company cease amortization of goodwill andall intangible assets having indefinite useful economic lives. Such assets arenot to be amortized until their lives are determined to be finite. However, arecognized intangible asset with an indefinite useful life should be tested forimpairment annually or on an interim basis if events or circumstances indicatethat the fair value of the asset has decreased below its carrying value. TheCompany evaluates its goodwill annually in December.

** **

Software Development Costs

 

The Companycapitalizes costs related to the development of certain software products.  Capitalization of costs begins whentechnological feasibility is established and ends when the product is availablefor general release to customers. Technological feasibility is reached upon theearlier of completion of a detailed program design or working model.

 

Amortizationis computed on an individual product basis and is recognized over the greaterof the remaining economic lives of each product or the ratio that current grossrevenues for a product bear to the total of current and anticipated revenuesfor that product, commencing when the products become available for generalrelease to customers.  Softwaredevelopment costs are generally being amortized over a three-year period.  The Company continually assesses therecoverability of software development costs by comparing the carrying value ofindividual products to their net realizable value.

 

The Companycapitalized $615,000 and $619,000 for the nine-month period endedSeptember 30, 2002 and 2003, respectively for software development costsrelating to its new N-Tier, Internet-native corporate application suite ofproducts written in java.  Although theCompany has not yet sold any of the modules to this suite of applications, theCompany believes that its new product will produce new sales adequate torecover amounts capitalized.

** **

Reclassifications

 

Certain prioryear amounts have been reclassed to conform with the 2003 presentation.

 

**Liquidity and Capital Resources**

 

AtSeptember 30, 2003, working capital decreased from a working capitaldeficiency of $8,649,000 at December 31, 2002 to a working capitaldeficiency of $9,798,000.  Excludingunearned revenue of $3,483,000, the Company’s working capital deficiency atSeptember 30, 2003 would be $6,315,000. Excluding unearned revenue of $3,693,000, the Company’s working capitaldeficiency at December 31, 2002 would be $4,956,000.  Excluding unearned revenue, the decrease inthe working capital deficiency of $1,359,000 was primarily attributabledecrease in accounts payable of $213,000 offset by decreases in cash of$384,000, net accounts receivable of $119,000, note receivable of $250,000 andincreases in current portion of long term debt of $217,000, customer depositsof $152,000 and accrued liabilities of $459,000.

 

Net cash usedin investing activities for the period ended September 30, 2003 totaled$688,000, which is comprised of capital expenditures of $240,000, capitalizedsoftware of $619,000 and acquisition of unconsolidated subsidiary of $79,000offset by proceeds from note receivable of $250,000.

 

Net cash usedin financing activities for the period ended September 30, 2003 totaled$312,000, which represents repayments on long-term debt.  On January 13, 2003, the Companyconverted its credit facility to a term loan which requires monthly principaland interest payments of $58,000 and matures on February 28, 2005.  In addition, the Company amended itssubordinated note to require monthly interest only payments of $52,000 throughFebruary 28, 2005, at which time it will convert to a term loan to beamortized over a three years period. The restructured debt, pursuant to the original intercreditor agreementbetween Canyon and Coast, which was sold to Wamco on May 15, 2003,contains various restrictions and covenants, including a minimum quick ratio of0.31 to l.00 and minimum debt service coverage ratio of 1.25 to l.00 for thethree-month period ended September 30, 2003. The minimum quick ratioincreases to 0.34 to 1.00 as of December 31, 2003 and for each and everyfiscal quarter ending thereafter.  Inthe event that we were not in compliance with the various restrictions andcovenants and were unable to receive waivers for non-compliance,

 

14

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the term debtwould be immediately due and payable. The Company was not in compliance withand received a waiver for its minimum quick ratio covenant as of and for thethree-month period ended September 30, 2003. There is no guaranty that theCompany will meet its debt covenants in the future.  The Company is currently negotiating with Wamco to change suchcovenants, but there is no assurance that the Company will be able tosuccessfully change the covenants.

 

Stockholders’deficiency decreased from $14,782,000 at December 31, 2002 to $14,551,000at September 30, 2003, mainly as a result of net income during the periodof $310,000, the issuance of common stock and warrants to Canyon Capital valuedat $62,000, and amortization of unearned compensation of $29,000 offset by areduction in additional paid-in capital of $199,000 relating to the issuance of$149,000 of debt and $50,000 of cash to satisfy a legal settlement (see note5).

 

Although theCompany has a net stockholders’ deficiency of $14,551,000 and a working capital deficit of $9,798,000. (which includessubordinated debt due to CSA of $2,800,000) at September 30, 2003, the Companybelieves it will generate sufficient funds from operations and obtainadditional financing or restructure its subordinated note with CSA to meet itsoperating and capital requirements.  TheCompany is currently in negotiations with CSA to restructure the terms of theexisting debt, including extending the maturity date.  The Company expects to generate positive cash flow from itscontinuing operations during 2003 from shipping out products and services fromits current backlog as of September 30, 2003 as well as new orders.  In the event that the Company cannotgenerate positive cash flow from its continuing operations during 2003, theCompany can substantially reduce its research and development efforts to mitigatecash outflow to help sustain its operations. There can be no assurance that the Company will be able to sustainprofitability, generate positive cash flow from operations or restructure itsdebt as necessary.  These financialstatements have been prepared assuming the Company will continue to operate asa going concern.  If the Company isunsuccessful in the aforementioned efforts, the Company could be forced toliquidate certain of its assets, reorganize its capital structure and, ifnecessary, seek other remedies available to the Company, including protectionunder the bankruptcy laws.

 

## **Contractual Obligations and Commercial Commitments**

 

The followingtable summarizes the Company’s obligations and commitments as ofSeptember 30, 2003:

 
|                             |   | **Payments  Due by Period (in thousands)** |   |
|----------------------------------|--------|--------------------------------------------|--------|
| **Contractual Cash Obligations** |   | **Total**                                  |   | **Less Than  1  Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After 5  Years** |   |
|                             |   |                                       |   |   |   |   |   |   |   |   |   |
| Long-Term Debt                   |   | $                                          | 10,699 |   | $ | 3,507 |   | $ | 3,948 |   | $ | 2,992 |   | $ | 252 |   |
| Operating Leases                 |   | 1,978                                      |   | 596 |   | 1,064 |   | 239 |   | 79 |   |
| Consulting Agreements            |   | 360                                        |   | 360 |   | — |   | — |   | — |   |
|                             |   | $                                          | 13,037 |   | $ | 4,463 |   | $ | 5,012 |   | $ | 3,231 |   | $ | 331 |   |

 

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**Results of Operations**

 

Three Months Ended September 30, 2002 Compared to Three MonthsEnded September 30, 2003

 
|                                          |   | **September 30,  2002** |   | **Percentage  of  Revenue** |   | **September 30,  2003** |   | **Percentage  of  Revenue** |   |
|-----------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                          |   | **(in  thousands)**          |   |                        |   | **(in  thousands)**          |   |                        |   |
| Revenue:                                      |   | $                            | 5,711  |                        | 100.0  | %                            | $      | 4,814                       |   | 100.0 | % |
| Gross profit                                  |   | 3,911                        |   | 68.5                        | %      | 3,465                        |   | 71.9                        | %      |
| Selling, general and administrative  expenses |   | 2,404                        |   | 42.0                        | %      | 2,307                        |   | 47.9                        | %      |
| Research and development costs                |   | 797                          |   | 14.0                        | %      | 764                          |   | 15.9                        | %      |
| Amortization of intangibles                   |   | 25                           |   | 0.4                         | %      | —                       |   | —                      |   |
| Other operating expense (income)              |   | 232                          |   | 4.1                         | %      | (134                         | )      | (2.8                        | )%     |
| Interest expense, net                         |   | 372                          |   | 6.5                         | %      | 286                          |   | 5.9                         | %      |
| Other non-operating expense                   |   | 14                           |   | 0.2                         | %      | 98                           |   | 2.0                         | %      |
| Income tax expense                            |   | 8                            |   | 0.1                         | %      | 12                           |   | 0.2                         | %      |
| Loss from discontinued operations             |   | (223                         | )      | (3.9                        | )%     | —                       |   | —                      |   |
| Net income (loss)                             |   | $                            | (163   | )                           | (2.9   | )%                           | $      | 132                         |   | 2.7 | % |

 

Revenue for2003 was $4,814,000 compared to $5,711,000 in 2002 or a 18.6% decrease. Revenuedecreased $897,000 in 2003, as a result of decreased professional services andmaintenance services due to decreased capital spending on informationtechnology in 2003 mainly due to the effects of the September 11, 2001terrorist attacks on the hospitality industry.

 

The decreasein revenue in 2003 was mainly attributable to a decrease in service volume andrates as many hotels have reduced their operating costs by canceling orreducing contracted services, including support, in a post September 11,2001 economy.  Many hotels haverequested that their suppliers reduce the cost of service or delay any priceincreases while they are experiencing reduced guest occupancy and lower averagedaily rates on their inventory of rooms. Certain hotels have also established their own help desks to furtherreduce costs.  As a result, the Companypostponed increasing its support prices until the first quarter of 2003 andagreed, with certain of its clients, to provide a second line of support versusa first line of support that was previously provided to such clients.  Our continuing hospitality business isexpected to generate sufficient cash from operations to adequately fund itsongoing operating activities.

 

Gross profitfor 2003 decreased to $3,465,000 from $3,911,000 in 2002.  The decrease in gross profit is mainly dueto the decrease in software and maintenance services revenues  which was offset by the Company’s costreductions during the period.

 

Selling,general and administrative expenses (“SG&A”) decreased slightly from$2,404,000 in 2002 to $2,307,000 in 2003 as a result of continued efforts toreduce costs.

 

Research anddevelopment costs decreased from $797,000 in 2002 to $764,000 in 2003.  The Company capitalized $257,000 and$200,000 of software development costs in 2002 and 2003, respectively,associated with the Company’s product development of its new internet nativesuite of applications.

 

The decreasein amortization of intangibles in 2003 versus the comparable period of 2002 isdue to the fact that the Company amortized $25,000 of software developmentcosts in 2002 relating to costs capitalized in 1999.  These costs were fully amortized during 2002.

 

Net interestexpense was $372,000 in 2002 compared to $286,000 in 2003.  The decrease is due to lower balances ofinterest bearing debt and lower interest rates on variable debt during 2003 ascompared to 2002.

 

Otheroperating expense (income) in 2002 was $232,000 compared to ($134,000) in2003.  Other operating income in 2003was mainly due to a settlement agreement related to a disputed tax claim by theUnited States Internal Revenue Service that resulted in a one-time gain of$262,000 (see note 13).

 

Othernon-operating expense increased from $14,000 in 2002 to $98,000 in 2003.  Non-operating expense relates to pensionexpense under a defined benefit plan for former employees from our discontinuedoperations.

 

Results fromdiscontinued operations were $223,000 in 2002. Results from discontinued operations in 2003 were $0 as all entitiesheld for sale were sold in the fourth quarter of 2002.

 

16

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Nine Months Ended September 30, 2002 Compared to Nine Months EndedSeptember 30, 2003
|                                          |   | **September 30,  2002** |   | **Percentage  of  Revenue** |   | **September 30,  2003** |   | **Percentage  of  Revenue** |   |
|-----------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                          |   | **(in  thousands)**          |   |                        |   | **(in  thousands)**          |   |                        |   |
| Revenue                                       |   | $                            | 16,931 |                        | 100.0  | %                            | $      | 14,752                      |   | 100.0 | % |
| Gross profit                                  |   | 11,370                       |   | 67.2                        | %      | 10,705                       |   | 72.6                        | %      |
| Selling, general and administrative  expenses |   | 6,787                        |   | 40.0                        | %      | 7,277                        |   | 49.3                        | %      |
| Research and development costs                |   | 2,461                        |   | 14.6                        | %      | 2,104                        |   | 14.3                        | %      |
| Amortization of intangibles                   |   | 134                          |   | 0.8                         | %      | —                       |   | —                      |   |
| Other operating expense (income)              |   | 237                          |   | 1.4                         | %      | (181                         | )      | (1.2                        | )%     |
| Interest expense, net                         |   | 1,142                        |   | 6.8                         | %      | 927                          |   | 6.3                         | %      |
| Other non-operating expense                   |   | 41                           |   | 0.2                         | %      | 309                          |   | 2.1                         | %      |
| Income tax expense (benefit)                  |   | 16                           |   | 0.1                         | %      | (41                          | )      | (0.3                        | )%     |
| Loss from discontinued operations             |   | (43                          | )      | (0.3                        | )%     | —                       |   | —                      |   |
| Net income                                    |   | $                            | 509    |                        | 3.0    | %                            | $      | 310                         |   | 2.1 | % |

 

Revenue for2003 was $14,752,000 compared to $16,931,000 in 2002 or a 12.9% decrease.Revenue decreased $2,179,000 in 2003, as a result of decreased professionalservices and maintenance services due to decreased capital spending oninformation technology in 2003 mainly due to the effects of theSeptember 11, 2001 terrorist attacks on the hospitality industry.

 

The decreasein revenue in 2003 was mainly attributable to a decrease in service volume andrates as many hotels have reduced their operating costs by canceling orreducing contracted services, including support, in a post September 11,2001 economy.  Many hotels haverequested that their suppliers reduce the cost of service or delay any priceincreases while they are experiencing reduced guest occupancy and lower averagedaily rates on their inventory of rooms. Certain hotels have also established their own help desks to furtherreduce costs.  As a result, the Companypostponed increasing its support prices until the first quarter of 2003 andagreed, with certain of its clients, to provide a second line of support versusa first line of support that was previously provided to such clients.  Our continuing hospitality business isexpected to generate sufficient cash from operations to adequately fund itsongoing operating activities.

 

Revenue in ourAsian operations increased from $1,797,000 in 2002 to $2,111,000 in 2003 as aresult of its acquisition of HSS in June 2002 (see note 5) which allowedthe Company to expand its operations in the Asian marketplace, strengthen itsmanagement team in the territory and create new opportunities for its new enterprisecapable suite of products.

 

Gross profitfor 2003 decreased to $10,705,000 (72.6%) from $11,370,000 (67.2%) in2002.  The decrease in gross profit ismainly due to the decrease in software and maintenance services revenues whichwas offset by the Company’s cost reductions during the period.

 

Selling,general and administrative expenses (“SG&A”) increased from $6,787,000 in2002 to $7,277,000 in 2003.  Theincrease is mainly due to an increase in selling and marketing expenses fortrade shows, advertisement and travel as the Company continues to actively andaggressively market its newly developed enterprise suite of applications andservices.

 

Research anddevelopment costs decreased from $2,461,000 in 2002 to $2,104,000 in 2003.  The decrease is due to the capitalization of$615,000 and $619,000 of software development costs in 2002 and 2003,respectively, associated with the Company’s product development of its newinternet native suite of applications. The decrease is also due to a decrease in headcount associated with theCompany’s focus on reducing costs.

 

Otheroperating expense (income) was $237,000 in 2002 and ($181,000) in 2003.  Other operating income in 2003 is due toreceipt of approximately $46,000 of cash resulting from a legal settlement anda settlement agreement on a tax claim with the United States Internal RevenueService that resulted in a one-time gain of $262,000 (see note 13).

 

The decreasein amortization of intangibles in 2003 versus the comparable period of 2002 isdue to the fact that the Company amortized $134,000 of software developmentcosts in 2002 relating to costs capitalized in 1999.  These costs were fully amortized during 2002.

 

Net interestexpense was $1,142,000 in 2002 compared to $927,000 in 2003.  The decrease is due to lower balances ofinterest bearing debt and lower interest rates on variable rate debt during2003 as compared to 2002

 

Othernon-operating expense increased from $41,000 in 2002 to $309,000 in 2003.  Non-operating expense relates to pensionexpense under a defined benefit plan for former employees from our discontinuedoperations.

 

The income taxprovision (benefit) only reflects a tax provision for our foreign operationsand alternative minimum taxes for domestic operations due to the utilization fornet operating loss carry forward.  Theincome tax benefit in 2003

 

17

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is due to theCompany recording a domestic income tax receivable during the period to recovertaxes previously paid.

 

Results from discontinuedoperations was $43,000 in 2002.  Resultsfrom discontinued operations in 2003 was $0 as all entities held for sale weresold in the fourth quarter of 2002.

 

**Item 3. Quantitative And Qualitative Disclosures About Market Risk**

*** ***

***Market Risk Disclosures***

 

The followingdiscussion about our market risk disclosures contains forward-lookingstatements.  Forward-looking statementsare subject to risks and uncertainties. Actual results could differ materially from those discussed in theforward-looking statements.  We areexposed to market risk related to changes in interest rates and foreigncurrency exchange rates.  We do not havederivative financial instruments for hedging, speculative, or trading purposes.

*** ***

***Interest RateSensitivity***

 

Of our $10.7million principal amount of indebtedness at September 30, 2003, none bearsinterest at a variable rate.  However,$5.7 million bears interest at a fixed rate of 11%, $2.8 million bears interestat a fixed rate of 10%, $1.6 million bears interest at 9.25% and $0.6 millionbears fixed interest rates ranging from 6% to 17.5%. Since these debtinstruments bear interest at fixed rates, we have no exposure to decreases ininterest rates because we still are required to pay the fixed rate even ifcurrent interest rates are lower.

*** ***

***Foreign CurrencyRisk***

 

We believethat our exposure to currency exchange fluctuation risk is reduced because ourtransactions with international vendors and customers are generally transactedin US dollars. The currency exchange impact on intercompany transactions wasimmaterial for the quarter ended September 30, 2003.

 

**Item 4. Evaluation of Disclosure Controls and Procedures**

 

***(a)******         Evaluationof disclosure controls and procedures***

 

Our chiefexecutive officer and our chief financial officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of adate (“Evaluation Date”) within 90 days before the filing date of this quarterlyreport, have concluded that as of the Evaluation Date, our disclosure controlsand procedures were adequate and designed to ensure that material informationrelating to us and our consolidated subsidiaries would be made known to them byothers within those entities.

 

***(b)******         Changesin internal controls***

 

There were nosignificant changes in our internal controls or to our knowledge, in otherfactors that could significantly affect our disclosure controls and proceduressubsequent to the Evaluation Date.

 

**PART II - OTHER INFORMATION**

** **

**Item 1.****           LegalProceedings**

 

*Internal RevenueService*

 

OnSeptember 30, 2003, the Company entered into a settlement agreement withthe United States Internal Revenue Service (the “Service”) on a tax claim whichresulted from the Company’s Chapter 11 proceedings whereby it agreed to pay$489,000 in equal monthly installments of $7,438 over a period of six (6) yearsat an interest rate of 6%.  The $489,000settlement is reflected as debt in the financial statements and resulted in a one-timegain of $262,000 which is included in other operating income. In the event thatthe Company fails to pay the Service any payment, and such payment failurecontinues for sixty days after written notice of such failure, $1,832,100, plusaccrued interest thereon,

 

18

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less anypayments made by the Company will be immediately due and payable to theService.

 

*CSA Private Limited*

 

CSA is a MAIshareholder.  On August 9, 1996,MAI acquired from Hotel Information Systems, Inc. (“HIS”) substantially alltheir assets and certain of their liabilities (the “HIS Acquisition”).  At the time of MAI’s acquisition of HIS in1996, CSA was a shareholder of HIS and, in connection with the purchase, MAIagreed to issue to CSA shares of its Common Stock worth approximately $4.8million in August 1996, which amount had increased to approximately $6.8million as of December 31, 2000, pursuant to the agreement. The Companyentered into a settlement agreement with CSA in February, 2001 whereby it (i)issued CSA 1,916,014 additional shares of our Common Stock to bring CSA’s totalshare ownership to 2,433,333 shares; (ii) filed a registration statement forall of CSA’s shares of our Common Stock which has been declared effective bythe SEC so that such shares are now freely tradable; and (iii) executed asecured debt instrument in favor of CSA in the principal sum of $2,800,000which is subordinate only to the Company’s present group of two (2) seniorsecured leaders and required cash installment payments to commence inMarch 2002 (see note 6).

 

In connectionwith the settlement agreement with CSA, the Company recorded the $2.8 milliondebt issuance as a reduction in paid in capital and the 1,916,014 additionalshares at par as an addition to Common Stock and a reduction to additional paidin capital.

 

*Cher-Ae HeightsIndian Community*

 

A lawsuit wasfied by Cher-Ae Heights Indian Community (“Cher-Ae Heights”) against LogixDevelopment Corporation (Logix), now known as MAI Development Corporation, as aco-defendant for a breach of contract by the Company’s formerly owned gamingsubsidiary along with the new owners, Monaco Informatiques Systemes (“MIS”),who acquired the assets and certain liabilities of the gaming subsidiary onJuly 27, 2001. Based upon this suit, MIS informed the Company that it didnot intend to pay the next $500,000 due to the Company under a promissory noteand security agreement.  OnOctober 24, 2002, the Company entered into a global settlement agreementbetween the parties whereby all claims, known and unknown, between the partieswere dismissed and the Company received $796,000 (see note 5)

 

*Logix DevelopmentCorporation*

 

The Companyentered into a settlement agreement with Logix in July of 2002 whereby it(i) issued Logix 200,000 shares of our Common Stock (ii) required the Companyto make various cash installment payments totaling $175,000 to be paid within 1year and (iii) executed a contract with Logix for a consulting project in theamount of $50,000.

 

*Other Litigation*

 

The Company isalso involved in various other legal proceedings and claims that are incidentto its business. Management believes that the ultimate outcome of these matterswill not have a material adverse effect on the consolidated financial position,results of operations or liquidity of the Company.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

(a)                                  None.

 

(b)                                 None.

 

(c)                                  None

 

(d)                                 None.

** **

**Item 3. Defaults Upon Senior Securities**

 

(a)                                  None

 

19

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**Item 4. Submission of Matters to a Vote of Security Holders**

 

(a)                                  None

 

(b)                                 None

 

(c)                                  None

 

(d)                                 None

 

**Item 5. Other Information**

 

(a)                                  None.

 

**Item 6. Exhibits and Reports on Form 8-K**

** **
| (a)    |   | Exhibits                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |
| 31.1   |   | Certification  of Chief Executive Officer, W. Brian Kretzmer, as required by  Section 3.02 of Sarbane-Oxley Act of 2002 |
|   |   |                                                                                                                         |
| 31.2   |   | Certification  of Chief Financial Officer, James W. Dolan, as required by Section 3.02  of Sarbane-Oxley Act of 2002    |
|   |   |                                                                                                                         |
| 32.1   |   | Certification  of Chief Executive Officer, W. Brian Kretzmer, as required by  Section 9.06 of Sarbane-Oxley Act of 2002 |
|   |   |                                                                                                                         |
| 32.2   |   | Certification  of Chief Financial Officer, James W. Dolan, as required by Section 9.06  of Sarbane-Oxley Act of 2002    |
|   |   |                                                                                                                         |
| (b)    |   | Reports on  Form 8-K                                                                                                         |
|   |   |                                                                                                                         |
|   |   | Filed  May 2, 2003                                                                                                      |
|   |   |                                                                                                                         |
|   |   | Filed  April 30, 2003                                                                                                   |
|   |   |                                                                                                                         |
|   |   | Filed  April 24, 2003                                                                                                   |
|   |   |                                                                                                                         |
|   |   | Filed  November 5, 2003                                                                                                      |

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                    |   |   | MAI SYSTEMS  CORPORATION                                                         |
|-------------------------|--------|--------|----------------------------------------------------------------------------------|
|                    |   |   | (Registrant)                                                                     |
|                    |   |   |                                                                             |
|                    |   |   |                                                                             |
| Date:  November 6, 2003 | By:    |   | /s/ James W.  Dolan                                                              |
|                    |   |   | James W.  Dolan                                                                  |
|                    |   |   | Chief  Financial and Operating Officer  (Chief Financial and Accounting Officer) |

 

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