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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission File Number: 000-18674

MAPICS, Inc.

(Exact name of registrant as specified in its charter)

1000 Windward Concourse Parkway, Suite 100

Alpharetta, Georgia 30005

(Address of principal executive offices)

(678) 319-8000

(Registrant’s telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No  ¨

The number of shares of the registrant’s common stock outstanding at February 5, 2003 was 18,446,007.

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MAPICS, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended December 31, 2002

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PART I: FINANCIAL INFORMATION

ITEM 1: Financial Statements

MAPICS, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MAPICS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

Except for the balance sheet as of September 30, 2002, the accompanying condensed consolidated financial statements are unaudited; however, in our opinion, these condensed consolidated financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly our consolidated financial position, results of operations and cash flows as of the dates and for the periods indicated.

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. As permitted by the rules of the SEC applicable to quarterly reports on Form 10-Q, these financial statements are condensed and consolidated, consisting of the condensed financial statements of MAPICS, Inc. and our subsidiaries. We eliminated all significant intercompany accounts and transactions in the consolidation. We also have condensed these notes, and they do not contain all disclosures required by generally accepted accounting principles. While we believe that the disclosures presented are adequate to make these condensed consolidated financial statements not misleading, you should read them in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

We operate on a fiscal year ending September 30^th. The term “fiscal 2001” refers to our fiscal year ended September 30, 2001, the term “fiscal 2002” refers to our fiscal year ended September 30, 2002, and the term “fiscal 2003” refers to our fiscal year ending September 30, 2003. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for a full year.

(2) Revenue Recognition

We generate revenues primarily by licensing software, providing software support and maintenance and providing professional services to our customers. We record all revenues in accordance with the guidance provided by Statement of Position (SOP), 97-2, “Software Revenue Recognition,” SOP 98-9, “Modification of SOP 97-2, “Software Revenue Recognition, with Respect to Certain Transactions,” SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts,” and AICPA Technical Practice Aid (TPA) 5100.53, “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition.”

Software License and Support Revenue

We generate a significant portion of total revenue from licensing software, which we conduct principally through our global network of independent affiliates. We license our software products under license agreements, which the ultimate customer typically executes directly with us rather than with the affiliate. Our license agreements are either annual renewable term license agreements or perpetual license agreements.

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We generally license our software products that operate on the IBM iSeries platform under annual renewable term licenses. When we first license an iSeries product, we receive both an initial license fee and an annual license fee. Our customers may renew the license for an additional one-year period upon payment of the annual license fee. We recognize the initial license fees under these annual renewable term licenses ratably as license revenue over the initial license period, which is generally twelve months. In addition, payment of the annual license fee entitles the customer to available software support for another year. If the annual license fee is not paid, the customer is no longer entitled to use the software and we may terminate the agreement. We record this annual license fee as services revenue ratably over the term of the agreement.

Under our perpetual license agreements, we record both an initial license fee and an annual support fee. We record initial license fees as license revenue and typically recognize revenue when the following criteria are met:

(1) the signing of a license agreement between us and the ultimate customer;

(2) delivery of the software to the customer or to a location designated by the customer;

(3) fees are fixed or determinable; and

(4) determination that collection of the related receivable is probable.

The annual support fee, which is typically paid annually in advance, entitles the customer to receive twelve months of support services, as available. We record these annual support fees as services revenue and recognize this revenue ratably over the term of the agreement.

The license agreements for our software products include a limited express warranty. The warranty provides that the product, in its unaltered form, will perform substantially in accordance with our related documentation for period of up to 90 days from delivery. If the product does not perform substantially in accordance with the documentation, we may repair or replace the product or terminate the license and refund the license fees paid for the product. All other warranties are expressly disclaimed. In addition to this warranty and in return for the payment of annual license or support fees, we also provide customers with available annual maintenance services that include electronic usage support and defect repairs. To the extent that product defects arise, most are identified long after the product has been installed and used and after the warranty period has expired. In most instances, a product workaround and repair can be made and such repairs are delivered as part of maintenance services. Historically, we have not received any material warranty claims related to our products, and we have no reason believe that we will receive any material claims in the future.

Professional Services Revenue

Under the terms of our license agreements, our customers are responsible for installation and training. Our professional services organization or, in many instances, the affiliates provide our customers with the consulting and implementation services relating to our products. We provide our professional services under services agreements, and we charge for them separately under time and materials arrangements or, in some circumstances, under fixed price arrangements. The professional services that we provide are not essential to the functionality of our delivered products. We recognize revenues from time and materials arrangements as the services are performed, provided that the customer has a contractual obligation to pay, the fee is non-refundable, and collection is probable. Under a fixed price arrangement, we recognize revenue on the basis of the estimated percentage of completion of service provided. We recognize changes in estimate in the period in which they are determined. We recognize provisions for losses, if any, in the period in which they first become probable and reasonably estimable.

We also offer educational courses and training materials to our customers and affiliates. These consulting and implementation services and education courses are included in services revenue and revenue is recognized when services are provided.

(3) Computation and Presentation of Net Income Per Common Share

We apply Statement of Financial Accounting Standard (SFAS) No. 128, “Earnings Per Share,” which requires us to present “basic” and “diluted” net income per common share for all periods presented in the statements of operations. We compute basic net income per common share, which excludes dilution, by dividing income available

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to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if holders of our preferred stock, common stock options, common stock warrants and contingently issuable stock converted or exercised their holdings into common stock that then shared in our earnings.

The weighted average number of common shares and common equivalent shares outstanding that we used to calculate diluted net income per share includes:

The following table presents the calculations of basic and diluted net income per common share or common share equivalent (in thousands, except per share data):

(4) Comprehensive Income

The components of comprehensive income were as follows (in thousands):

(5) Income Taxes

The reported income tax expense for the three months ended December 31, 2002 was calculated based on a rate of 37.0%. The reported income tax expense differs from the expected income tax expense calculated by applying the federal statutory rate of 35.0% to our income before income tax expense principally due to the impact of state and foreign income taxes.

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We adopted SFAS 142, “Goodwill and Other Intangible Assets” on October 1, 2001. Accordingly, we discontinued periodic amortization of goodwill. Goodwill will be assessed at least annually for impairment by applying a fair-value-based test.

Intangible assets that have finite useful lives will continue to be amortized over their estimated useful lives. Our intangible assets consist principally of tradenames, trademarks, and installed customer base and affiliate network, and all are considered to have finite lives. The gross carrying amount of intangible assets as of December 31, 2002 was $8.8 million with a balance of $5.6 million in accumulated amortization. The amortization of intangible assets for the three months ended December 31, 2002 was $190,000.

Amortized Intangible Assets (in thousands):

The weighted average amortization lives of the installed customer base and affiliate network and of the tradenames and trademarks is 13 years and 10 years, respectively.

Aggregate Amortization Expense (in thousands):

Estimated Amortization Expense for the Fiscal Years Ended (in thousands):

The balance of goodwill at December 31, 2002 was $3.7 million. There were no changes to the carrying amount of goodwill during the three months ended December 31, 2002.

(7) Restructuring Costs

On January 15, 2002, we announced a five-year agreement with an offshore information technology services company to perform a variety of our ongoing product development activities. The agreement was a contributing factor in a planned reduction of our worldwide workforce by approximately 12% by June 30, 2002. The restructuring charge of $4.7 million during fiscal 2002 included $3.7 million related to the abandonment of excess office space and $1.0 million related to employee severance and related costs for approximately 65 employees, primarily product development and support personnel.

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The major components of the remaining restructuring accrual at December 31, 2002 were as follows (in thousands):

We expect future cash expenditures related to these restructuring activities to be approximately $3.4 million. We expect to pay approximately $1.2 million within the twelve-month period ending December 31, 2003, and we therefore have included this amount in current liabilities.

As shown in the table above, our restructuring liability is principally comprised of the estimated excess lease and related costs associated with vacated office space. We could incur additional restructuring charges or reverse prior charges accordingly in the event that the underlying assumptions used to develop our estimates of excess lease costs change, such as the timing and the amount of any sublease income. Additionally, as discussed in note (10), we have a pending business combination with Frontstep, Inc. that we expect to close on February 18, 2003. Depending on the impact of our acquisition of Frontstep, market conditions for office space and our ability to secure a suitable subtenant and sublease for the space, which to date we have not secured, we may revise our estimates of the excess lease costs and the timing and amount of sublease income and, as a result, incur additional charges or credits to our restructuring liability as appropriate.

(8) Contingent Liabilities

In March 2000, we acquired an education business. In exchange for the business, we issued 106,668 shares of restricted common stock. If, on March 1, 2003, the price per share of our common stock is less than $18.75, we must pay additional consideration equal to the difference between $18.75 and the quoted market price multiplied by the number of shares of common stock issued at acquisition that the sellers still hold on March 1, 2003. If the closing market price on March 1, 2003 is $7.00 per share, the value of the additional consideration would be approximately $1.3 million. As the stock price at March 1, 2003 is not known this estimate is subject to change. We may elect to pay all or a portion of this additional consideration with shares of common stock and any remainder in cash. The effect of this additional consideration will be to increase our goodwill. We will review this additional goodwill for impairment, and we anticipate that this review will indicate that the goodwill is impaired, which will result in a charge to expense for the three months ended March 31, 2003.

(9) Operating Segments and Geographic Information

We have one operating segment that provides software and services to manufacturing enterprises worldwide. Our principal administrative, marketing, product development and support operations are located in the United States. Areas of operation outside of North America include Europe, Middle East and Africa, or EMEA, and Latin America and Asia Pacific, or LAAP.

We regularly prepare and evaluate separate financial information for each of our principal geographic areas, including 1) North America, 2) EMEA and 3) LAAP. In evaluating financial performance, we focus on operating profit as a measure of a geographic area’s profit or loss. Operating profit for this purpose is income before interest, taxes and allocation of certain corporate expenses. We include our corporate division in the presentation of reportable segment information because some of the income and expenses of this division are not allocated separately to the operating segments.

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The following table includes interim financial information for the three months ended December 31, 2002 and 2001 related to our operating segment and geographic areas. The information presented below may not be indicative of results if the geographic areas were independent organizations (in thousands).

(10) Pending Business Combinations

On November 25, 2002, we and Frontstep, Inc. announced that we had entered into a definitive merger agreement pursuant to which we will acquire Frontstep. Pursuant to the terms of the merger agreement, shareholders of Frontstep, including holders of Frontstep’s Series A Convertible Participating Preferred Stock, will receive, in the aggregate, 4.2 million shares of MAPICS common stock in exchange for all of the outstanding Frontstep shares and we will assume up to $21.5 million of Frontstep’s debt as well as certain outstanding stock options and warrants. Frontstep shareholders will receive 0.300846 MAPICS shares for each share of Frontstep common stock held as of the effective time of the merger. Closing, which is expected to occur on February 18, 2003, remains subject to certain closing conditions including, but not limited to, approval of the acquisition by MAPICS and Frontstep shareholders. In connection with the merger agreement, Frontstep officers, directors and certain shareholders, including all holders of the preferred stock, have entered into agreements to vote shares held by them in favor of the proposed transaction. Pursuant to these voting agreements, shareholders expected to hold a majority of the voting shares of Frontstep common stock as of the record date have committed to vote their shares in favor of the transaction. Under Ohio law, the transaction must be approved by the holders of at least two-thirds of the voting power of Frontstep. The proposed merger is intended to qualify as a tax-free reorganization pursuant to Section 368(a) of the Internal Revenue Code.

As part of the integration of the two companies, we will be reviewing and making changes to the personnel and facilities structures of the combined entity as well as reviewing and eliminating possible redundancies in our software offerings. We expect to incur expenses in future periods related to these acquisition and restructuring activities.

Additionally, we have signed a commitment letter for a $30.0 million syndicated credit facility, the proceeds of which will be used to repay the amounts of debt assumed from Frontstep in the business combination. We anticipate closing on this new credit facility on February 18, 2003.

(11) Recently Issued or Adopted Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal

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activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We will apply SFAS No. 146 to any exit or disposal activities that we may enter into in future periods.

In November 2002, the FASB reached a consensus on EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (the Issue). The guidance in this Issue is effective for revenue arrangements entered into in fiscal years beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earning processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. We currently follow the appropriate pronouncement as discussed in note 2 and anticipate the Issue to have no significant impact on the results of our operations, financial position, or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This Interpretation clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This Interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. The Interpretation’s provisions for initial recognition and measurement are required on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of both interim and annual periods that ended after December 15, 2002. We have provided the required disclosures related to our policy on product warranties and contingent consideration arising from acquisitions in notes 2 and 8 of this Form 10-Q. The inclusion of the required disclosures had no significant impact on the results of our operations, financial position, or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure-an Amendment of FASB Statement No. 123.” This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments pertaining to the alternative methods of transition are effective for financial statements for fiscal years ended after December 15, 2002. The amendments to the disclosure requirements are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002, with early application encouraged. We apply Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations in accounting for our stock option plans and our employee stock purchase plan and the disclosure-only provisions of SFAS No. 123. We plan to adopt the amended interim disclosure requirements during the quarter ending March 31, 2003. We anticipate that the adoption of the additional disclosure requirement will not have a significant impact on the results of our operations, financial position or cash flows.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities which possess certain characteristics. The Interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have any ownership in any variable interest entities as of December 31, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

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ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and notes contained in “Item 1. Financial Statements” in Part I of this report and our consolidated financial statements for the fiscal year ended September 30, 2002 filed with the SEC as part of our Annual Report on Form 10-K report for that fiscal year. The following discussion and analysis contains forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. Our actual results could differ materially from the results anticipated by these forward-looking statements as a result of many known and unknown factors that are beyond our ability to control or predict, including but not limited to those discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Performance” contained in the above-referenced Form 10-K. The cautionary statements made in that Form 10-K are applicable to all related forward-looking statements wherever they appear in this report. See also “Special Cautionary Notice Regarding Forward-Looking Statements” in “Item 1. Business” of that Form 10-K.

Overview

We are a global developer of extended enterprise applications that principally focuses on manufacturing establishments in discrete and batch-process industries. Our solutions enable manufacturers around the world to compete better by streamlining their business processes, maximizing their organizational resources, and extending their enterprises beyond the four walls of their factory for secure collaboration with their value chain partners.

Our flagship solutions include two enterprise resource planning foundations that streamline business processes for manufacturing, customer service, engineering, supply chain planning and financial reporting. The solutions support international and multi-site operations on a variety of platforms, including the IBM eServer iSeries, Windows NT, UNIX and Linux. We also offer supply chain management, collaborative commerce and enterprise asset management systems and functionality designed to enable companies to link members of their supply chain to send and receive valuable real-time information to improve business decision-making at all levels.

We generate a significant portion of our total revenue from licensing software, which is conducted principally through our global network of independent affiliates. The affiliates provide the principal channel through which we license our software. However, the ultimate customer typically executes a license agreement directly with us rather than the affiliate. We currently offer software products under an annual renewable term license or a perpetual license depending on the type of product purchased. Under our annual renewable term license, the customer pays an initial license fee and an annual license fee for the right to use the software over the initial license period, typically twelve months. Our customers may renew the license for additional one-year periods upon payment of the annual license fee in subsequent years. The annual renewable term license agreements are executed in most cases with the purchase of our IBM iSeries platform products. Under a perpetual license, our customer pays an initial license fee for the ongoing right to use the software.

When we first license an iSeries product, we receive both an initial license fee and an annual license fee. In accordance with TPA 5100.53, we recognize the initial license fee as license revenue ratably over the initial license period, which is generally twelve months. In addition, customers must pay an annual license fee, which entitles the customer to continuing use of the software and customer support services as available. We record these annual license fees as services revenue and recognize this revenue ratably over twelve months. If a customer does not pay its annual license fee the following year, it is no longer entitled to use our software and we may terminate the agreement. We believe this licensing arrangement provides a source of recurring revenue from our installed base of iSeries customers. Additional software products or applications are not included as part of the annual license fee and are available for an additional initial and annual license fee.

        With regard to our ERP for Extended Systems products, we generally license them on a perpetual basis. Customers must pay an initial license fee and an annual support fee in the first year. We record initial license fees for perpetual licenses as license revenue and typically recognize them upon delivery of the software to the ultimate customer, provided collection is probable. The annual support fee entitles the customer to receive annual support services, as available. We record these fees as services revenue and recognize this revenue ratably over the term of the periodic agreement.

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Pending Acquisition of Frontstep, Inc.

On November 25, 2002, we and Frontstep announced the signing of a definitive agreement for MAPICS to acquire Frontstep. Frontstep is a publicly traded (NASDAQ/NM:FSTP) manufacturing application solution provider headquartered in Columbus, Ohio. Pursuant to the definitive agreement, terms of the acquisition include MAPICS’ purchase of all of Frontstep’s shares in exchange for 4.2 million shares of MAPICS common stock and the assumption by us of up to $21.5 million of Frontstep’s debt as well as certain outstanding stock options and warrants. Frontstep shareholders will receive 0.300846 MAPICS shares for each share of Frontstep common stock held. Closing, which is expected to occur on February 18, 2003, is subject to certain conditions, including the approval of the transaction by MAPICS and Frontstep shareholders. Furthermore, we have signed a commitment letter for a $30 million syndicated credit facility, the proceeds of which will be used to repay the Frontstep debt assumed in the business combinations. We anticipate closing that facility on February 18, 2003.

As a result of the transaction, both MAPICS and Frontstep customers will be served by a much larger manufacturing-focused global company that can leverage a larger combined customer base with complementary offerings and new sales channels. The combined company, which will market offerings from both companies under the MAPICS brand, expects to leverage Frontstep’s investment in delivering SyteLine 7 on Microsoft.NET and to continue MAPICS’ success on the IBM platform while sustaining active product development for each. In addition, the combined company will benefit from a more balanced sales strategy with both larger direct and affiliate channels serving the global manufacturing market.

As part of the integration of the two companies, we will be reviewing and making changes to the personnel and facilities structures of the combined entity as well as reviewing and eliminating possible redundancies in our software offerings. We expect to incur expenses in future periods related to these acquisition and restructuring activities.

Results of Operations

Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001

Summary. For the three months ended December 31, 2002, we reported net income of $1.4 million, or $0.07 per share (diluted), compared to net income of $1.9 million, or $0.09 per share (diluted), for the three months ended December 31, 2001. For the three months ended December 31, 2002, total revenue decreased $2.2 million or 7% from the year earlier quarter. Operating expenses decreased $1.1 million or 4% for the three months ended December 31, 2002 compared to the prior year quarter.

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The following table presents our statements of operations data as a percentage of total revenue for the three months ended December 31, 2002 and December 31, 2001:

Revenue. Total revenue for the three months ended December 31, 2002 was $31.1 million, a decrease of $2.2 million or 7%, compared to total revenue of $33.3 million for the three months ended December 31, 2001. The decrease in total revenue was primarily due to a decrease in license revenue recognized during the three months ended December 31, 2002 as compared to the three months ended December 31, 2001.

License revenue for the three months ended December 31, 2002 was $8.5 million, a decrease of $3.2 million or 27%, compared to license revenue of $11.7 million for the three months ended December 31, 2001. During the three months ended December 31, 2002, our license revenue included license revenue from time-based license contracts of $7.0 million recognized ratably, with the remainder recorded from license revenue recognized upon delivery under our perpetual licenses. In comparison, during the three months ended December 31, 2001, our license revenue included license revenue from time-based contracts of $9.0 million recognized ratably, with the remainder recorded from license revenue recognized upon delivery under our perpetual licenses.

Licensing activity during the three months ended December 31, 2002 also decreased. We signed $7.8 million in license contracts during the three months ended December 31, 2002 compared to $8.6 million in the previous year. We deferred $6.3 million of time-based license revenue to be recognized ratably in future periods during the three months ended December 31, 2002 compared to $6.0 million in the year earlier period. We believe the decreased licensing activity is attributable to the continued economic slowdown, its effect on manufacturers and many customers and prospects continuing to delay purchases or implementations due to economic uncertainty.

Services revenue for the three months ended December 31, 2002 was $22.6 million compared to $21.6 million for the three months ended December 31, 2001, an increase of $1.0 million or 4%. The increase was mainly due to an increase in maintenance and support services revenue, partially offset by a decrease in our professional services revenues in conjunction with the lower licensing activity.

        Our operations are conducted principally in (1) North America, (2) the Europe, Middle East and Africa region, or EMEA, and (3) the Latin America and the Asia Pacific regions, or LAAP. During the three months ended December 31, 2002, license revenue in EMEA decreased as a percentage of total license revenue to 18.9% compared to 29.7% in the year earlier period. The decrease as a percentage of total license revenue was related to a perpetual license contract in excess of $1.0 million from a strategic customer in EMEA during the three months ended

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December 31, 2001. The following table shows the percentage of license revenue, services revenue, and total revenue contributed by each of our primary geographic markets:

Additional information about our operations in these geographic areas is presented in note (9) of the notes to our condensed consolidated financial statements in this report.

Cost of License Revenue. Cost of license revenue for the three months ended December 31, 2002 was $3.6 million compared to $4.0 million for the three months ended December 31, 2001. The decrease of $375,000 or 9% was due to lower product royalty expense as a result of lower license revenue recognized in the period offset partially by higher amortization of capitalized software. We expect cost of license revenue to vary from period to period based on the mix of products licensed between internally developed products and royalty bearing products and the timing of computer software amortization costs.

Cost of Services Revenue. Cost of services revenue for the three months ended December 31, 2002 was $8.1 million compared to $8.6 million for the three months ended December 31, 2001, a decrease of $560,000 or 6%. Cost of services revenue as a percentage of services revenue also decreased to 35.7% during the three months ended December 31, 2002 as compared to 39.9% in the year earlier period. Cost of services revenue decreased as a result of lower direct expenses, particularly for sub-contractor fees and personnel related expenses for professional services due to lower professional services revenues.

Selling and Marketing Expenses. Selling and marketing expenses for three months ended December 31, 2002 were $10.5 million compared to $8.3 million in the year earlier quarter, an increase of $2.1 million or 26%. Selling and marketing expense also increased as a percentage of total revenue to 33.7% for the three months ended December 31, 2002 from 25.0% in the year earlier quarter. The increase in selling and marketing expense as well as the increase as a percentage of total revenue was primarily due to two factors: (1) the change in product mix of our license revenue recognized between time-based license revenue and perpetual license revenue, and (2) higher amounts of license revenue recognized for which we owed commissions to our affiliates. We believe that affiliate commissions will fluctuate from period to period based on our product mix and the levels of sales by our affiliates and by our direct sales organization. Additionally, expenses for marketing activities, particularly in marketing program spend and personnel related costs, were higher during the three months ended December 31, 2002 as compared to the year earlier quarter.

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Product Development Expenses. The following table shows information about our product development expenses during the three months ended December 31, 2002 and December 31, 2001:

Spending on product development activities decreased 20% during the three months ended December 31, 2002 compared to the same period in the prior year. Spending activities decreased for both product development and software translation activities. Our offshore information technology services partnership and associated restructuring of operations in fiscal 2002 resulted in reduced product development costs during the three months ended December 31, 2002 compared to the year earlier quarter and will likely reduce the amounts of software development costs capitalized and subsequently amortized. Software translation costs are typically project related, and the timing of those expenditures is subject to change from period to period.

Software capitalization rates generally are affected by the nature and timing of development activities and vary from period to period. For the three months ended December 31, 2002, capitalization of product development and translation costs increased 29% from the three months ended December 31, 2001.

General and Administrative Expenses. General and administrative expenses were $3.1 million for the three months period ended December 31, 2002 compared to $4.1 million in the year earlier quarter. The $977,000 or 24% decrease was primarily due to decreases in foreign exchange losses primarily in our EMEA region and bad debt expense.

Interest Income and Interest Expense. Interest income was $76,000 for the three months ended December 31, 2002 compared to $138,000 in the previous year period. The decrease of $62,000 or 45% resulted primarily from a decrease in interest rates, partially offset by a higher balance of cash for the three months ended December 31, 2002.

For the three months ended December 31, 2002, interest expense principally included commitment fees on the unused portion of our revolving credit facility and amortization of debt issuance costs. For the three months ended December 31, 2001, interest expense principally included (1) interest on our term loan based on our lender’s base rate or LIBOR plus a predetermined margin, (2) the difference between interest paid and interest received under our interest rate protection arrangement, (3) commitment fees on the unused portion of our revolving credit facility, and (4) amortization of debt issuance costs. For the three months ended December 31, 2002, interest expense was $46,000 compared to $505,000 in the year earlier quarter. We repaid the remaining portion of our bank credit facility during fiscal 2002, and as a result, interest expense decreased 91% from the previous period. Taking into effect the interest rate protection arrangement and excluding the amortization of debt issue costs, the effective annual interest rate on our term loan for the three months ended December 31, 2001 was 7.5%. The term of our interest rate protection arrangement ended on December 31, 2001. As mentioned previously, we expect to complete the acquisition of Frontstep during the second quarter of fiscal 2003 as well as to close on a $30 million syndicated credit facility. As a result of these transactions, we expect interest expense to increase in future periods.

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Income Tax Expense (Benefit). The effective income tax rates for the three months ended December 31, 2002 and December 31, 2001 were 37.0% and 38.5%, respectively. The effective income tax rate for the two periods differs from the federal statutory rate of 35.0% because of the effect of state and foreign income taxes.

We retained certain favorable income tax attributes in connection with the separation of Marcam Corporation into two companies in 1997. We have realized certain of these attributes in subsequent periods, which were recorded as income tax benefits at that time. Additional future income tax benefits related to these remaining attributes may be realized in future periods if and when they become certain.

Liquidity and Capital Resources

Historically, we have funded our operations and capital expenditures primarily with cash generated from operating activities. Changes in net cash provided by operating activities generally reflect the changes in earnings plus the effect of changes in working capital. Changes in working capital, especially trade accounts receivable, trade accounts payable and accrued expenses, are generally the result of timing differences between collection of fees billed and payment of operating expenses.

The following tables show information about our cash flows during the three months ended December 31, 2002 and December 31, 2001 and selected balance sheet data as of December 31, 2002 and September 30, 2002.

Operating Activities

We generated $4.1 million in cash flows from operating activities before changes in operating assets and liabilities during the three months ended December 31, 2002 compared to $6.3 million in cash flows from operating activities before changes in operating assets and liabilities during the three months ended December 31, 2001. The $2.2 million decrease from the year earlier quarter included a $1.1 million decrease in deferred income taxes, a $443,000 decrease in net income and a $406,000 reduction in the provision for bad debts.

Significant changes in operating assets and liabilities during the three months ended December 31, 2002 included (1) a $3.3 million decrease in accounts receivable attributable to lower licensing activity during the quarter and an increase in cash collections, days sales outstanding decreased to 65 days at December 31, 2002 from 77 days at September 30, 2002, (2) a $3.3 million net decrease in deferred revenue and deferred costs; and (3) a $1.5 million decrease in accounts payable, accrued expenses and other current liabilities resulting primarily from the timing of cash payments.

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Investing and Financing Activities

For the three months ended December 31, 2002 compared to the same quarter in the prior year, we increased spending for property and equipment by $114,000, and we increased spending for additions to computer software by $181,000. Additionally, for the three months ended December 31, 2002, we incurred transaction costs of $653,000 related to the pending business combination with Frontstep.