SecProbe.io

CORRESP
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filename1.htm

March 17, 2005

United States Securities and Exchange Commission

Division of Corporation Finance

Attn:
Ms. Celeste M. Murphy

Office
of Mergers and Acquisitions

450 Fifth Street, NW. – Mail Stop 4-6

Washington, DC. 20549-0406

Re: MAI Systems Corporation –Schedule 13E-3/A File No. 5-38111,
filed January 31, 2005; Schedule 14C/A - File No. 1-09158, filed
January 31, 2005; Form 10-Q/A for the Quarter Ended September 30,
2004 - File No. 1-09158

Dear Ms. Murphy:

Pursuant
to your letter of March 1, 2005, we are responding on behalf of MAI
Systems Corporation (“MAI” or the “Company”) to your specific comments and
questions. Our responses follow in the order they were raised in your letter.
We have also enclosed various exhibits to this letter which provide the supporting
details as requested.

General

1.               We note your response to our
prior comment no. 3. It appears that the disclosure required pursuant to
Instruction C of Schedule 13E-3 with respect to Canyon Capital and Orchard
Capital is missing. Please provide the necessary disclosure with respect to the
partners/members and natural persons, of Canyon Capital and Orchard Capital.

Company
Response to Staff Comment No. 1.  We have amended the Schedule 13E-3
to make the requested disclosures about Orchard Capital.  Regarding
Canyon Capital, their counsel, Sidley, Austin, Brown and Wood, has submitted a
supplemental letter dated March 10, 2005 setting forth the reasons why
they believe Canyon Capital should not be considered a ‘filing person.’  Their letter is set forth in Appendix B to our letter.
We understand that the Staff has accepted the positions of counsel for
Canyon Capital, and therefore, have deleted Canyon Capital as a filing person
in Amendment No. 2 to our Schedule 13E-3.

[Reference: the
responsive text is found in Amendment No. 2 to Schedule 13E-3].

2.               We note your response to our
prior comment no. 4 that the investor group’s other purchases during the past
year were undertaken to cure a debt default and to improve your working capital
position in exchange for the investor group obtaining voting control of the
company. Further, you responded that these transactions did not have a purpose
or

reasonable likelihood of achieving the objectives under Rule 13e-3(a)(3)(ii).
However, the fact that the first step in a series of transactions did not in
and of itself have a reasonable likelihood of causing one of the effects listed
in Rule 13e-3(a)(3)(ii) is not dispositive of whether the series of
transactions, taken as a whole, had such effect. We note, however, that on page 28
of your definitive proxy statement filed August 25, 2004 you disclosed
management’s intent to investigate the costs and benefits of a going-private
transaction. The disclosure also indicates that preliminary findings were in
hand at the time. In light of your intent to consider a going-private
transaction and the fact that these transactions would facilitate going
private, and that HIS Holding includes members of your board and management,
please explain to us why the purchase/conversion of shares by the investor group was not the
first of a series of transactions that had the purpose of producing any of the
effects under Rule 13e-3(a)(3)(ii).

Company Response to Staff Comment No. 2.
Question and Answer No. 4 of Release No. 34-17719 (“Q&A No. 4”)
indicates that “a transaction effected with
a view to increasing the probability of success or reducing the
aggregate expense of, or otherwise facilitating,
the result sought to be achieved would be part of a series of transactions
constituting a Rule 13e-3 transaction (emphasis added).” The purchase/conversion of shares by the investor group in the management
equity/conversion transaction described in the proxy statement was not  effected with a view to increasing
the probability of success or reducing the aggregate expense of or otherwise
facilitating either of the effects described in Rule 13e-3(a)(ii) (i.e.,
a reduction in the number of
shareholders or the termination of quotation on an inter-dealer quotation
system). Rather, the transaction was undertaken with a view to solving the
immediate and substantial financial difficulties the Company was facing due to
a debt default and working capital deficiency.

Q&A No. 4 further indicates that “a Rule 13e-3
transaction would be deemed to commence with the first transaction which occurs
at or after the time when it becomes
reasonably likely that any of the specified effects will occur and
which directly or indirectly contributes to the production of such effects
(emphasis added).” At the times when the management equity/conversion
transaction was agreed to, was submitted for stockholder approval and was
consummated, it was not  reasonably
likely that either of the specified effects would occur. The “preliminary
findings” referred to in the proxy statement were simply management’s initial
basic thoughts about the general possibility of saving money in the future by
considering going private. As indicated in the proxy statement, management had
not concluded any formal review or presented definitive findings or conclusions
to the board regarding its thoughts. Management’s thoughts were only in their
infancy at that time and generally consisted of the same basic and obvious
thoughts that likely have occurred to most, if not all, thinly traded public
companies, i.e., operating as a private company might avoid some of the
escalating costs relating to Sarbanes-Oxley compliance, reporting requirements,
directors’ and officers’ insurance, etc. The Company’s board did not formally
request management to review and analyze the possibility of going private until
after the stockholders’ meeting and did not appoint the special committee to
consider the going private transaction until after the management
equity/conversion transaction was consummated.  The Company believes that the very earliest
date upon which it may have
become reasonably likely that the
Company may engage in a going private transaction was November 15, 2004,
the date upon which the Company’s board formally considered management’s
analysis regarding going private and appointed the Special Committee to further
consider a going private transaction. Accordingly, the management
equity/conversion transaction did not
occur at or after the time

it had become reasonably likely that either of the
effects specified in Rule 13e-3(a)(3)(ii)would occur. Therefore, the
management equity/conversion transaction was not the first of a series of
transactions that had the purpose of producing either of the specified effects.

[Reference: Not
Applicable].

Schedule 13E-3

Item 5. Past Contracts, Transactions, Negotiations
and Agreements.

3.              We note your addition of Canyon
Capital Advisors, LLC as a filing person pursuant to your response to our prior
comment no. 2. We also note that you have disclosed elsewhere that Canyon
Capital serves as your principal senior lender. As a result, your lending
transactions with Canyon Capital should be disclosed pursuant to Item 5 of Schedule 13E-3.
We further note that your disclosure on page C-38 indicates a consulting
agreement with Orchard Capital Corporation. Please confirm that no other
transactions exist that should be disclosed under Item 5 of Schedule 13E-3
or revise your disclosure as appropriate or otherwise advise us why such
disclosure is not necessary.

Company
Response to Staff Comment No. 3.  Please
refer to our response to Staff Comment No. 1.  We have deleted any reference to Canyon
Capital as a filing person and any related disclosure.  We have, however amended the Schedule 13E-3
to disclose under Item 5 our consulting agreement with Orchard Capital
Corporation.  We are not aware of any
other transactions that exist that should be disclosed under Item 5 of Schedule 13E-3.

[Reference: the
responsive text is found in Amendment No. 2, Item 5 to Schedule 13E-3].

4.              Please advise us why disclosure
regarding the operating agreement governing HIS Holding is not necessary
pursuant to item1005 (e) of Regulation M-A. It would appear that the agreement provides the mechanism for
the voting and transfer of your shares, among other things, held by HIS
Holdings on behalf of its members, your affiliates.

Company Response to Staff Comment
No. 4.

[Reference: the
responsive text is found in Amendment No. 2, Item 5 to Schedule 13E-3].

Item 6 Purpose of the Transaction and Plans or Proposals.

5.              Please correct your references to
Item 1006 of Regulation M-A.

Company
Response to Staff Comment No. 5.  The
reference to Item 1006 of Regulation M-A has been corrected.  The Schedule 13E-3 now states that the
Reverse Stock Split transaction provides for the achievement of the steps
listed in Item 1006(c)(6),(7), and (8), e.g. the delisting of the Company’s
common stock from the OTC Bulletin Board, the eligibility of the Company’s
common stock for termination of registration under Section 12(g)(4) of
the

1934
Act, and the suspension of the Company’s obligation to file reports under Section 15(d) of
the 1934 Act.

[Reference: the
responsive text is found in Item 6, Amendment No. 2 to
Schedule 13E-3].

Schedule 14C

Financial Analysis Performed by Management pp. 11-14

6.              Please provide the going concern value that was
determined by management in their analysis.

Company
Response to Staff Comment No. 6.  As disclosed in the last sentence of the
paragraph titled “Going Concern Value” on
page 12, “Management was then able
to arrive at a going concern value based on the earnings value (total invested
capital) and discounted cash flow value discussed below”.  Within the sections titled “Earnings Value” and “Discounted Cash Flow
Value” (which represent Going Concern Values) we have disclosed our
values determined by management.

[Reference:
not applicable].

Prior Transactions Between the Investor Group and
Our Company. p. 27

7.              We note your response to our
prior comment no. 15. In light of the fact that your proxy statement requested
stockholder approval for the conversion of $3,194,156 of your indebtedness,
please inform us of the basis upon which you were able to convert the
additional accrued interest of $123,055, as disclosed on page 27 of your
information statement.

Company Response to Staff Comment No. 7.
As
indicated in the proxy statement, the Company was not legally required to
secure shareholder approval for the management equity/conversion transaction.
Rather, the Company voluntarily sought shareholder approval because of the
change in control that was to result from the transaction. The Company’s
shareholders approved the conversion of $3,194,156 of indebtedness and,
therefore, approved of the change in control that resulted from that conversion.

The
conversion of the additional $123,055 of interest did not require shareholder
approval. Rather, it required only approval by the Company and the investor
group, which was accomplished.  We also
refer you to the Company’s Form 8-K filing on October 1, 2004, which
states that approximately $3.3 million of debt will be converted to equity.
Additionally, the Board of Directors approved for the conversion of the $3.3
million of debt to equity in the minutes dated September 22, 2004 (these
minutes, along with several others, were supplementally provided to Mr. Daniel
Lee via overnight courier on January 4, 2005).  This conversion increased the investor group’s
beneficial ownership only an additional 2 percentage points beyond the 61
percentage point increase that had already been approved by the shareholders
and that already was to result in a change in control. The Company is not aware
of any legal basis upon which the Company and the investor group would have

been
prohibited from converting the additional accrued interest without obtaining
shareholder approval.

[Reference: Not Applicable].

8.              Please disclose the details of
the distribution of the 2,433,333 shares acquired by HIS Holding to the
individual members of the company. When was the distribution made and what was
the reason for the distribution? How many shares did each member receive?

Company
Response to Staff Comment No. 8.  We
have now provided details surrounding the distribution of the 2,433,333 shares
acquired by HIS Holding to the individual members of the company, including
confirmation that the distribution was made on November 1, 2004 and the
number of shares issued to each member of HIS Holding.

[Reference: the responsive text is found in the
Preliminary Information Statement under the section entitled “Prior
Transactions Between the Investor Group and Our Company,” p. 27].

Interest of Certain Persons in or Opposition to the
Reverse Stock Split – Security Ownership of Certain Beneficial Owners and
Management, pp. 27-29

9.              With respect to your revised
disclosure under footnote (7) to the beneficial ownership table, please
elaborate on what circumstances would lead to Messrs. Kretzmer and Dolan’s
interest in HIS Holding increasing to 20% each. As such an increase effectively
results in Messrs. Kretzmer and Dolan’s increased ownership of your shares
held by HIS Holding, please advise us why the agreement governing the 20%
increase should not be filed as an exhibit pursuant to Item 1005 (e) of
Regulation M-A.

Company
Response to Staff Comment No. 9.  We
have now provided disclosure in the Information Statement on the circumstances
under which Messrs. Kretzmer’s and Dolan’s ownership position in HIS
Holding could increase to 20% each.
Additionally, we have now included the HIS Holding Operating Agreement
as an exhibit to the Information Statement.

[Reference: the responsive text is found in the
Preliminary Information Statement under the section entitled “Prior
Transactions Between the Investor Group and Our Company,” pages 27-29].

Financial Statements, Supplementary Financial.
Information. Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Quantitative and Qualitative  Disclosure About Market Risk. p. 30

10.       Please update you financial statements pursuant to Rule 3-12
of Regulation S-X.  See Rule 3.01(c) of
Regulation

S-X.

Company
Response to Staff Comment No. 10.  We believe that we have met all three
conditions specified under SX Rule 3-01(c) and, accordingly, the
financial statements will not

become stale until March 31,
2005 and the financial statements included in this filing are not required to
be updated at this time.

[Reference:
not applicable].

11.       Please
consolidate your management’s discussion and analysis in Appendixes C and D
into one discussion.

Company
Response to Staff Comment No. 11.  We have consolidated our management’s
discussion and analysis into one discussion.

[Reference:
the responsive text is found in the revised Appendix C].

Pro Forma Financial
Information, Page B-1

12.       On page B-1
you disclose that the unaudited pro forma consolidated statements of operations
for the three and nine months ended September 30, 2004 give effect to the
transactions as if each had occurred on January 1, 2004.  Revise your disclosure to address the pro
forma presentation of your consolidated statement of operations for the year
ended December 31, 2003.

Company
Response to Staff Comment No. 12.  We have revised our disclosure to address
the pro forma presentation of our consolidated statement of operations for the
year ended December 31, 2003 to give effect to the transactions as if each
had occurred on January 1, 2003.

[Reference:
the responsive text is found in the first paragraph under “Pro Forma Financial
Information- The Pro Forma Financial Information Showing Effect of the Reverse
Stock Split and the Management Equity/Conversion Transaction”].

13.       We
note your response to our prior comment no. 50 and Appendix A to your response.
It is not clear fro