MAPICS INC - 10-K Annual Report

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

The aggregate market value of the common stock held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter (March 31, 2003) was $121,522,738 based on the closing sale price of the common stock of $6.60 per share on the Nasdaq National Market on such date.

The number of shares of the registrant’s common stock outstanding at December 1, 2003 was 23,192,242.

Specifically identified portions of the registrant’s proxy statement for the 2004 annual meeting of shareholders to be held on February 12, 2004 are incorporated by reference in Part III.

We believe that it is important to communicate our future expectations to our shareholders and to the public. This report contains forward-looking statements, including, in particular, statements about our goals, plans, objectives, beliefs, expectations and prospects under the headings “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. You can identify these statements by forward-looking words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “continue,” “could,” “grow,” “may,” “potential,” “predict,” “strive,” “will,” “seek,” “estimate” and similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements include statements concerning future:

Although we believe that the goals, plans, objectives, beliefs, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable in view of the information currently available to us, those statements are not guarantees of performance. They involve uncertainties and risks, and we cannot assure you that our goals, plans, objectives, beliefs, expectations and prospects will be achieved. Our actual results could differ materially from the results anticipated by the forward-looking statements as a result of many factors that are beyond our ability to predict or control, including, but not limited to, those contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Performance” and elsewhere in this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Moreover, new factors that could cause actual results to differ materially from those anticipated by our forward-looking statements emerge from time to time, and it is not possible for us to predict all of such factors and the impact they may have on us. Any forward-looking statement speaks only as of the date it was made. We undertake no obligation to publicly update or revise any forward-looking statement that we may make in this report or elsewhere except as required by law.

We are a developer of enterprise business application software solutions designed specifically for use by manufacturers and marketed throughout the world. Our goal is to deliver application software and consulting services that create value by providing a quick return on investment and improving bottom line financial results for our customers. Our offerings bring our customers the benefit of our proven expertise, knowledge, and understanding of the business issues that are unique to manufacturers.

We target our offerings at the manufacturers who operate using either a discrete or batch-process production workflow. Generally, these companies produce finished goods by machining raw materials or assembling a set of component parts or subassemblies into finished products or use a consistent process to make a batch of product. Within this market, we serve many customers in a distinct group of industries: fabricated metal products; industrial/commercial machinery and computer equipment; electrical equipment and components; transportation equipment; and measurement, analyzing and control instruments and related products. The majority of our customers are discrete manufacturers with annual sales between $20 million and $1 billion, consisting of independent companies and divisions, sites, and subsidiaries of larger companies.

We are headquartered in Alpharetta, Georgia, USA, with offices around the globe and a worldwide sales network of direct sales representatives as well as a group of independent sales affiliates. We were originally incorporated in Massachusetts in 1980, and in 1998 we reincorporated in Georgia. Today, MAPICS® solutions are used by thousands of manufacturers in nearly 70 countries and 19 different languages.

Information about us in addition to the information included in this report is contained in various documents that we file with the Securities and Exchange Commission (SEC). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other documents that we file with or furnish to the SEC are available on our website as soon as practicable after they are filed with or furnished to the SEC. You can view and print copies of these documents, free of charge, by visiting the investor relations section of our website at www.mapics.com or the SEC’s website at www.sec.gov. You may also call the SEC’s Public Reference Room at 1-800-SEC-0330 to obtain copies of these documents.

On February 18, 2003, we completed the transaction of acquiring Frontstep, Inc. (“Frontstep”). Frontstep, formerly known as Symix, was a publicly traded (NASDAQ/NM:FSTP) manufacturing enterprise resource planning application provider headquartered in Columbus, Ohio. The acquisition included our purchase of all of Frontstep’s shares in exchange for 4.2 million shares of our common stock and the assumption by us of $20.1 million of Frontstep’s debt as well as certain outstanding stock options and warrants. Frontstep shareholders received 0.300846 of our shares for each share of Frontstep common stock held.

By combining the two entities, we became the largest provider of Enterprise Resource Planning (ERP), Customer Relationship Management (CRM) and Supply-Chain Management (SCM) applications committed exclusively to solving the unique challenges of discrete and batch-process manufacturers. As a result of the transaction, both MAPICS and Frontstep customers are now served by a much larger manufacturing-focused global company able to leverage a larger combined customer base with complementary offerings and expanded sales channels. The combined company markets offerings from both companies under the MAPICS brand, while leveraging the advantages of the two most dominant platforms, Microsoft and IBM.

Today’s manufacturers face more challenges than ever. Economic constraints, such as labor and direct material costs, pressure from up-stream manufacturers, increased customer demands, and faster delivery requirements are ongoing problems. At the same time, manufacturers must be able to manage plant operations, standardize manufacturing processes, synchronize activities, provide cross-operation visibility, comply with customer requirements, and monitor performance—all across the organization.

Manufacturers can improve their operations and competitiveness by addressing key business drivers such as:

Successful manufacturers require an efficient supply chain, distributed manufacturing resources, and automated methods of interacting with suppliers and customers. Growth, customer satisfaction, and profitability for these manufacturers depend on an accurate and rapid flow of information within an integrated supply chain and extended enterprise systems that link suppliers, customers, and the manufacturer.

Historically, manufacturers have focused on operations within their own four walls, relying on ERP systems to streamline business processes and coordinate internal resources. These systems typically provide applications to support engineering data management, sales management, purchasing, inventory management, manufacturing control, distribution, transportation, finance, customer relationship management, and many other specialized business functions. However, in order to compete more effectively manufacturers are increasingly required to extend the automation of business processes within the enterprise to their external supply chain, linking operations with suppliers and customers. Manufacturers must be able to implement these extended enterprise systems rapidly with minimal disruption to their businesses and maintain them with limited information technology resources. The systems may need to scale to accommodate expansion of the manufacturer’s business through growth, acquisition, and organizational changes.

Today’s manufacturers seek solutions comprised of both product and services. In addition, they are focused on maximizing the effectiveness of their existing technology investments, while adding functionality that can deliver a rapid return on investment. Finally, manufacturers tend to buy from solution providers that are established, understand the problems that are unique to manufacturers, and can provide proven solutions to those problems.

We have been providing solutions to manufacturers’ challenges for over 20 years. Our business is focused on enterprise solutions for manufacturers, and as a result we understand how manufacturers work and operate. This focus enables us to develop solutions to meet the changing needs and requirements of our customers. In addition, our professional services organization assures world-class manufacturers meet business goals and objectives by successfully deploying business solutions using our expertise and products. The MAPICS solution provides our customers:

Our strong manufacturing and technology expertise enables us to develop a suite of application software solutions focused specifically on meeting the needs of manufacturers. In addition to the functionality that helps

manage the core needs of manufacturers (e.g., purchasing, inventory management, manufacturing control, distribution, finance, etc.), we offer strategic extension applications that allow manufacturers to extend their enterprise systems to easily connect with their suppliers and customers that comprise their external supply chain.

Because of our focus on manufacturing, we are committed to delivering software applications that provide state of the art functionality to meet the evolving needs of manufacturers. In addition, our solutions are designed to leverage our customers’ existing information technology investments, while allowing them to implement additional MAPICS’ solutions at their own pace and according to their specific business needs. As new technologies lead manufacturers to seek more open and collaborative ways to link with their value chain, we will continue to provide solutions that enable the exchange of critical business information throughout the manufacturing value chain.

We primarily sell and implement our solutions through a network of over 100 independent value-added remarketers (affiliates) that provide services for customers located in more than 70 countries around the world. Each affiliate markets our solutions within a specific territory. In many instances the affiliates work exclusively with us. For these reasons, our affiliates invest significant resources to continually increase their knowledge about our applications. Our affiliates have resources with manufacturing industry expertise and develop long-standing relationships with many of our customers. They provide experienced local professionals to implement and configure our solutions rapidly and in a cost-effective manner.

To augment our affiliate channel, we also have direct sales personnel with extensive expertise in manufacturing. Our representatives service a specific set of large accounts and are responsible for the selling of advanced MAPICS applications.

Our solutions provide rapid ROI by enabling rapid solution implementation. Our highly flexible solutions leverage customers’ existing technology investments, minimizing the need to perform customer modificiations. In addition, our in-depth manufacturing, product and customer knowledge has enabled us to develop a consistent implementation process utilized by thousands of customers and affiliates around the world. Our solutions implementations generally take from three to twelve months, depending upon the number and type of applications purchased and the complexity of the customer’s business.

The reliability and ease of user customization of our products, combined with our quality assurance and technical support, is designed to minimize our customers’ need to maintain a large information technology staff. In addition, subsequent releases of our software products are designed to preserve our customers’ existing investments in technology with minimal disruption to their businesses. These factors enable us to provide the low total cost of ownership and high return on investment our customers demand.

With a proven network of affiliates, as well as 7 customer call centers around the world, our customers can reach us anytime to ask questions, get tips, or find solutions to problems. We additionally provide customers online access to a knowledge base of thousands of tips, common questions and answers. We use a customer management system to continually measure our performance, responsiveness, and effectiveness and drive customer satisfaction.

Our primary objective is to further grow our business organically by delivering additional solutions to our installed base of customer and through new customer sales and by identifying acquisitions of companies that

will expand our customer base or broaden our offerings to existing customers. This strategy will allow us to further leverage our expertise over an expanding installed base of customers to which we can market product extensions and advanced solutions offerings.

We believe our success is attributable to our strategy to focus on delivering value-based solutions exclusively to the manufacturing industry. Key elements of our strategy are:

Our solutions are comprised of software, implementation and consulting services. To that end, we have continued to invest in functionality, technology, and the scope of consulting expertise within our solutions to improve the ability of our customers to operate on a world-class level. We define world-class manufacturers as those who score in the top 25% of their industry on critical operational and financial measurements such as lead times, operations costs, time-to-market, and customer satisfaction, among others.

We utilize our sales channel and our professional services organization to help our customers maximize the value of their MAPICS’ solution and achieve world-class manufacturing metrics. Beginning in October 2003, we began to market ten solution packages composed of a combination of software and strategic and professional services offerings to solve the most urgent problems faced by manufacturers today.

Our worldwide sales channel consists of affiliate employees and our direct representatives. Their extensive knowledge of manufacturing and their local focus allow them to discuss, understand, and solve the business problems of our customers using MAPICS’ value-added solutions.

We continue to strengthen our sales channel by expanding our existing affiliate network and direct sales organization through acquisition, in order to capitalize on strategic opportunities. We are also increasing our worldwide channel capacity through alliances and other programs to enter new or under-penetrated territories. In addition, we will continue to assist our sales channel via on-line training and remote learning opportunities. These programs are intended to improve our sales channels’ ability to successfully compete for new accounts and to sell additional solutions to our customer base.

We also intend to expand our direct sales force to lead multi-site selling opportunities and service specific strategic accounts and solutions. We believe that the number of these multi-site and strategic opportunities should increase over time due to our customers’ acquisition and expansion activities and the increased numbers of collaborative solutions we have available.

Leverage Our Supply Chain, Collaborative Commerce, and other Strategic Extension Solutions

Through our unique understanding of manufacturers’ needs, we have developed supply chain management solutions that provide the tools for manufacturers to achieve peak performance. In addition, our collaborative commerce applications link elements of the manufacturing infrastructure to ensure the effective flow of information from supplier to manufacturer to customer in a completely web-enabled solution.

These strategic extension solutions are available to our ERP foundation customers as well as to customers who use competitive ERP solutions. We will continue to develop these types of strategic solutions to provide added value for manufacturers and to attract new customers.

We have continued our commitment to improving the value of our collaborative solutions. We also continue to focus on the extended enterprise business model by adding new localized features to increase the value of our

solutions and allow us to more effectively target geographic markets. In addition, we continually evaluate potential acquisitions of complementary technologies and products serving our target market of mid-market manufacturers. Moreover, our sales channel continually provides focused feedback to us regarding customer requirements, industry trends, and competitive offerings. This feedback enables us to anticipate and respond to the future needs of our customers and to incorporate these needs into our solution development efforts.

We offer collaborative business solutions built on the IBM iSeries (using OS/400 and Linux), Microsoft Windows, and Microsoft.NET platforms. We selected IBM and Microsoft as our key technology platform partners as they represent the leading technology platforms.

Our strategy includes developing functionality enhancements to our ERP solutions and strategic extensions via a web services model. In order to do so, we may develop, acquire or resell solutions from partners. Among the many benefits of this strategy are:

We intend to also grow through the acquisition of companies that broaden our customer base or broaden our offerings to customers. The acquisition of Frontstep accomplished both our objectives. With the acquisition, we added over 1,800 customers and acquired a number of solutions that can be used as tools to develop new customer relationships or can be used as tools to broaden sales to our installed base of customers.

In order to address the rapidly changing needs of the manufacturing industry, we often form strategic development or marketing alliances with third parties, which we refer to as solution partners. These partnerships allow us to deliver best of breed offerings that integrate with our solutions.

Our two most significant strategic relationships are with IBM and Microsoft. We will continue to expand these types of development and marketing alliances to enhance the breadth and value of our offerings and expand our market presence.

MAPICS Professional Services, on its own and working with the services operations of our affiliate partners, provides consulting services to manufacturers around the world. This organization helps manufacturers meet their business goals and objectives by ensuring the successful integration of software and systems as well as by providing consulting services in business process management and reengineering.

See the Revenue section of our Management Discussion and Analysis contain in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of our license, support, and implementation and consulting services revenues associated with our software offerings.

MAPICS ERP for iSeries. Our iSeries based solution offers multiple components, yet provides a simplified implementation process. Integrated applications enable single-site, multi-site and multi-national manufacturers to expand production and increase revenue. MAPICS ERP for iSeries leverages J2EE and with web-enabled functionality delivers solutions for growing manufacturing organizations and offers an architecture that gives customers the flexibility to expand as their business evolves. This solution works with the IBM eServer iSeries (formerly the AS/400) platform, a popular platform with manufacturers in our target market.

MAPICS SyteLine ERP. Our most recent version of MAPICS Syteline ERP, SyteLine 7, is built and deployed on the Microsoft .NET technology platform, including SQL Server 2000 and Exchange Server 2000. It presents data in a Microsoft-based interface that has the data management abilities of standard Microsoft productivity applications like Microsoft Office. With SyteLine 7, users can easily add, remove, and edit fields, labels, and complete screens—without the need for technical programming. As the business changes, the system can adapt and move forward with the business. Previous versions of our MAPICS Syteline ERP are based on the Progress Software database and development environment delivering an extended ERP platform. MAPICS Syteline ERP provides the foundation to improve business efficiency, customer service, and overall manufacturing productivity. From selling and sourcing to production and fulfillment, SyteLine manages and automates the business processes manufacturers require to succeed today and prepare for future growth.

Manufacturers who implement CRM solutions as a part of their extended business system are much more likely to achieve their sales and market share goals, control their service costs and improve profitability. MAPICS CRM solutions serve as a single collection point for all customer information and activities and as a single access point for information for employees and business partners. These solutions provide flexible marketing, sales and customer service applications specifically designed for the manufacturing environment. MAPICS’ CRM solutions integrate with our ERP and supply chain management solutions to add value to each manufacturing business process.

The need for shorter product life cycles is being driven by competitive pressures, customer demand and the need to cut operating expense. MAPICS’ Product Lifecycle Management gives manufacturers the tools to collaborate with supply chain partners for faster time-to-market, reduced manufacturing costs, higher quality products and improved customer satisfaction. Capabilities to design, make, deliver and support products are included, such as product data management, multimedia attachment capabilities, integrated workflow and inquiry tools.

We provide a workflow or business process automation application to streamline and automate processes that are within and to reach beyond the four walls of manufacturing. The value of the business process management workflow application lies in the ability to manage both the simple and the complex aspects of business processes. The value to the manufacturer lies in the release of valuable human resources and intellectual capital tied up in handling paperwork instead of value-add activities and exceptions.

MAPICS Enterprise Business Intelligence is an interactive, graphical data access and analysis solution that complements MAPICS’ ERP solutions by providing flexible, multidimensional views of business and operations data. Specifically designed to meet the unique requirements of world-class manufacturers, MAPICS Enterprise Business Intelligence unites our software solutions with the best technologies from Cognos®.

Many of our customers are now using a combination of workflow automation, business intelligence, advanced planning and customer relationship management to improve order fulfillment processes across the supply chain. MAPICS’ Supply Chain Management allows them to improve communications with their downstream customers, while simultaneously forming tighter relationships with their upstream vendors. In addition, our Supply Chain Management solutions provide optimal planning, scheduling and sequencing of production within the enterprise.

In order to improve customer service, manufacturers recognize the need for infrastructure to manage transactions and information flow for the delivery of the after-market services. MAPICS Field Service provides manufacturers an after-market service solution to improve their post-delivery customer service business. MAPICS Field Service combines project management, variance analysis, field service, product return management, and service contract and warranty management tools into a powerful enterprise solution. MAPICS Field Service provides the needed after sales service infrastructure that allows enterprises to improve their customer service and benefit from increased customer retention and improved margins.

Manufacturers are required to meet high standards of safety, quality and efficiency in the maintenance and calibration management of equipment. Standard procedures are requiring more frequent, regular calibrations. MAPICS Maintenance and Calibration Management provides manufacturers with the tools to properly manage the maintenance and calibration process, which helps reduce costs and improve uptime.

Our product development efforts are focused on expanding the breadth and depth of our product functionality by incorporating new technologies while maintaining product reliability. We continue to follow a product life cycle management methodology designed to focus on meeting the needs of the customer, supporting our objectives, and measuring our progress and improvement at all times during the development process. This methodology is a critical component of our ability to continue delivering new and effective functionality and technologies to our customers.

We are focused on developing collaborative solutions that are platform independent and enable manufacturers to serve their customers better, while improving overall operational efficiency. To that end, we are a member of the Web Services Interoperability Organization (WS-I), a web standards organization, founded by our two principal platform partners, IBM and Microsoft. Our participation in defining these standards helps ensure that our solutions can operate with both IBM and Microsoft platforms. Moreover, our affiliate sales channel continually provides focused feedback regarding customer requirements, industry trends, and competitive products, enabling us to anticipate and respond to the future product needs of our customers and to incorporate these needs into our product development efforts.

We have licensed our solutions for use in thousands of manufacturing locations throughout the world. The majority of our customers are discrete manufacturing establishments with annual sales between $20 million and $1 billion, consisting of independent companies as well as divisions, sites, and subsidiaries of larger companies. We also sell additional applications and upgrades to our existing customers. It is also our strategy to leverage our installed customer base to provide positive references to secure new customers.

None of our customers accounted for more than 5% of our total revenues in the fiscal year ended September 30, 2003.

We deliver collaborative business solutions comprising software applications, implementation and consulting services. These solutions create value by providing a quick return on investment and improving bottom line financial results for our customers. Our solutions also allow manufacturers to make the most of their existing technology investments while taking advantage of new technologies at a pace that best fits their needs. Marketing initiatives are designed to showcase how our solutions help manufacturers achieve world-class performance in operational efficiency, customer satisfaction, and market share gains.

We sell our solutions through a network of over 100 independent local affiliates who deliver our solutions in more than 70 countries throughout North America, EMEA (Europe, the Middle East and Africa), and LAAP (Latin America and Asia Pacific). The use of affiliates gives us significant market access and allows our customers to receive localized and customized sales, consulting, implementation and other services. In addition, affiliates typically have extensive knowledge of the manufacturing industries in their geographic regions and develop long-standing relationships with our customers. We continue to encourage our affiliates to grow or consolidate into larger organizations and to further develop their sales skills.

To augment our affiliate channel, our direct sales organization focuses on a specific set of large accounts and the selling of advanced MAPICS applications. We will continue to expand and strengthen our affiliate network, as well as take advantage of opportunities to capitalize on our direct sales organization. We believe that the flexibility of multiple sales channels is critical to our success as our customer base continues to grow in sophistication and demands increasing levels of service and support.

For information regarding the amount of revenue, income (loss) from operations, long-lived assets and other financial data relating to each of our geographic areas, see note (16) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

We license our software products under a license agreement typically executed directly with the customer. The license agreements restrict use of the software to specified purposes.

We currently offer software products under annual renewal term licenses or under perpetual licenses depending on the type of product licensed. Under our annual renewal term license, the customer pays an initial license fee and an annual license fee for the right to use the software over the initial agreement period, which is typically twelve months. Our customers may renew the license by paying an annual license fee. Alternatively, through a perpetual license agreement, our customer pays an initial license fee for the right to use the software perpetually.

Generally, we license our MAPICS ERP for iSeries under annual renewal term licenses and our MAPICS Syteline ERP under perpetual licenses. Strategic extension applications are typically licensed pursuant to existing license agreements with our customers.

Customer Support and Implementation and Business Process Consulting Services

We believe that our worldwide, integrated customer support and professional services operation is essential to achieving rapid product implementation, which in turn is essential to long-term customer satisfaction. Accordingly, we are committed to maintaining a high-quality, knowledgeable affiliate channel that works closely with our professional service and support staff.

With a proven network of affiliates, as well as 7 customer care centers around the world, our customers can reach us anytime to ask questions, get tips, or find solutions to problems. We use a customer management system to continually measure our performance to ensure complete customer satisfaction, responsiveness and effectiveness.

Our customer support and professional services activities can be grouped into two key areas:

We maintain a central call management response and assistance program for customers. Our support centers use a standardized call management system to log calls, track problems or inquiries, identify qualified support personnel to assist customers, follow the inquiry through to a successful resolution and measure support performance. In some geographies outside North America, we provide similar support services to our customers in conjunction with our affiliates. We also provide tools that enable customers to directly access our knowledge database and quickly locate answers to operational issues on their own.

For customers operating under our annual renewal term licenses, the payment of the annual license fee also provides the customer with annual software support services. Customers operating under our perpetual licenses are entitled to annual software support services by paying an annual support fee. The support services under both licenses entitle the customer to receive minor enhancements to the products developed during the year, bug fixes and technical assistance.

MAPICS Customer Care Centers. We provide worldwide customer care and support services through regional customer care centers located in the USA, the Netherlands, Malaysia, China, Thailand, Japan, and Australia.

MAPICS E:Info Support Site. We offer an electronic support website that allows customers to find information and immediate answers to their MAPICS questions 24 hours a day, seven days a week. Customers can search knowledge bases, order software updates, and download the latest fixes.

E:mail Service. This support service sends periodic email messages to customers regarding the latest product and support information they have requested. The information is customized to their unique user profile and covers a broad area of MAPICS related information consisting of early warnings of known issues, how-to’s and important tips and techniques.

No Wait Response System. MAPICS’ easy-to-use “No Wait Response” system gives customers access to the same extensive knowledge base of information that is used by our internal support representatives and includes thousands of tips, questions and answers, and other problem-solutions.

My Support. The MAPICS “My Support” site allows customers to review the support activity for their account, log and/or update an incident, request license keys, and setup customized user profiles for the information they want to receive from MAPICS.

Our independent affiliates often provide on-site implementation and consulting services to assist customers in the installation and use of our products. These implementation services are contracted between the affiliate and the customer. Fees for these services are billed by the affiliate to the customer. Revenue for these services is recorded by the affiliate. In order to help our affiliates improve and maintain their skills, we provide certification programs, educational materials and ongoing instruction on MAPICS’ solutions. We also provide, customers with project management services to orchestrate the affiliate’s activities during multi-site and multi-territory implementation efforts and to supplement their expertise in new application areas, which is billed and recorded by MAPICS.

In addition, MAPICS Professional Services provides worldwide consulting and implementation support for larger or more complex implementations and for software sales through our direct sales force. MAPICS Professional Services assures that world-class manufacturers meet their business goals and objectives by successfully deploying business solutions using our expertise and products. Our certification program ensures the quality of the support that our customers receive is consistent, no matter where they are located.

MAPICS Professional Services can also assist manufacturers in reviewing business processes rather than department functions. Those processes are then structured around serving both internal and external customers. We also ensure that customers implement MAPICS product functionality that satisfies their individual manufacturing goals and objectives, and help customers then put these solutions to practical use.

In delivering these services, MAPICS Professional Services may use a combination of our employees and resources of our affiliates. When projects require the use of affiliate resources, we will execute a subcontract agreement with the affiliate that outlines the scope of work required and the related costs. On all projects

managed by MAPICS Professional Services, we retain (i) the primary responsibility with the customer for timely performance and delivery of agreed upon deliverables, (ii) credit risk on the collection of the billings for the services performed and (iii) any post-implementation warranties or support. As a result, we record all of the revenue for the services performed and classify it as services revenue in the statement of operations. Costs for the services provided by the affiliates are classified in cost of service.

We currently offer manufacturing enterprise solutions based on both IBM (OS/400 and Linux) and Microsoft (Windows and .NET) platforms. We selected IBM and Microsoft as our key platform partners because of their large market share and leadership in web services technology. Our strategy comprises the development of continued functionality enhancements to our ERP solutions and strategic extensions via a web services model. In order to do so, we incorporate solutions from partners, as well as technologies that we build or acquire.

Our success and ability to compete depend heavily on our proprietary technology, including our software. Our software is protected as a copyrighted work. In addition, much of the source code for our software is protected as a trade secret. We provide our products to customers under a non-exclusive license. We also generally enter into confidentiality or license agreements with third parties and control access to and distribution of our software, documentation and other proprietary information. We presently have no patents or patent applications pending. We rely upon license or joint development agreements with solution partners to allow us to use technologies that they develop. We have trademarks that protect the marketing rights of our products. We rely on these trademarks for exclusive marketing of our products to potential or existing customers.

The market for manufacturing solutions software is highly competitive and changes rapidly. We target our solutions primarily at the market for business applications software for discrete manufacturers. We primarily compete with a large number of independent software vendors that serve these same markets, although we also compete with vendors of specialized applications. We believe that manufacturers prefer solution providers that offer “one stop shop” partnering, are focused on and have proven expertise in manufacturing, provide low total cost of ownership solutions, are financially viable, and can leverage their current information technology infrastructure to ensure rapid implementation and return on investment. We believe that our ability to meet all of these requirements differentiates us from the competition.

As of December 1, 2003, we employed 748 persons, of whom 129 were employed in product development, 194 in support, 310 in sales and marketing and 115 in management and administration. None of our employees is represented by a labor union. We have experienced no work stoppages and believe that our employee relations are good.

Our principal administrative, marketing, product development and support facilities are located in Alpharetta, Georgia, a suburb of Atlanta, where we lease approximately 120,000 square feet under a lease that expires in 2007. Approximately 26,000 square feet of the facility in Alpharetta is currently sub-leased to a third party. We also lease approximately 66,000 square feet of office space in Columbus, Ohio as a result of our acquisition of Frontstep. This lease expires in 2004. We also lease approximately 116,000 square feet for regional sales, development, and support locations in North America, EMEA, and LAAP. Total leased space increased 154,000 square feet from fiscal 2002 to fiscal 2003 due to the acquisition of Frontstep.

From time to time, we are involved in legal proceedings incidental to the conduct of our business. The outcome of these claims cannot be predicted with certainty. We do not believe that the legal matters to which we are currently a party are likely to have a material adverse effect on our results of operation or financial condition.

No matters were submitted to a vote of our shareholders during our fourth fiscal quarter ended September 30, 2003.

The following information about our executive officers is as of September 30, 2003

Richard C. Cook, age 56, has been our President and Chief Executive Officer and a member of our board since August 1997. From October 1994 to July 1997, Mr. Cook served as the Senior Vice President and General Manager of our MAPICS Business Group. Mr. Cook served as the President and Chief Executive Officer of MAPICS, Inc., a former subsidiary, from March 1993 to October 1994. Mr. Cook was employed by IBM as Director of its Atlanta Software Development Laboratory from March 1990 to February 1993 and as Director of its Corporate Computer Integrated Manufacturing Project Office from March 1988 to March 1990.

Peter E. Reilly, age 57, has been our Chief Operating Officer since January 2001. Mr. Reilly joined MAPICS in April 1999 as Vice President of International Operations. From March 1997 to April 1999, he was the Vice President of Sales and Marketing for Parlance, a speech-recognition software firm, and from 1966 to 1997 he held various sales and marketing positions at IBM.

Michael J. Casey, age 40, has been our Vice President of Finance, Chief Financial Officer, and Treasurer since September 2001. Before joining MAPICS, Mr. Casey served from July 2000 to September 2001 as the Executive Vice President and Chief Financial Officer of iXL Enterprises, Inc., a global internet consulting firm. From December 1999 to July 2000, Mr. Casey was Senior Vice President and Chief Financial Officer of RedCelsius, Inc., an early stage software company. From November 1997 to December 1999, Mr. Casey served as Senior Vice President, Chief Financial Officer and Treasurer for Manhattan Associates, Inc., a publicly traded developer of supply chain software and services. Prior to November 1997, Mr. Casey held senior financial positions with various technology companies.

Martin D. Avallone, age 42, has been our Vice President, General Counsel and Secretary since October 1998. He has also served as our Vice President of Business Development since October 2000. From July 1997 through September 1998, Mr. Avallone was our General Counsel and Secretary. From May 1986 though July 1997, Mr. Avallone held various legal positions within IBM.

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.

The following table shows the high and low sales prices per share of our common stock as reported on the Nasdaq National Market for each quarter of our last two fiscal years ended September 30, 2003.

As of December 1, 2003, there were 554 holders of record of our common stock, and we estimate that there were approximately 4,500 beneficial owners of our common stock.

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to fund future development and growth, the operation of our business, and the repayment of any amounts outstanding under our revolving credit facility. Additionally, covenants in our revolving credit facility limit the payment of cash dividends. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and such other factors as the board of directors deems relevant. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and note 9 of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

The following table gives information about the common stock that may be issued upon the exercise of options and rights under all of our existing equity compensation plans as of September 30, 2003.

In connection with our 1992 acquisition of Bryce Business Systems, we issued options to acquire a total 24,060 shares of our common stock to the owners of Bryce. The issuance of the options and related option shares was approved by our board of directors but was not required to be submitted to our shareholders for approval. Options for 10,365 of those shares were granted on October 1, 1992 at an exercise price of $15.39 per share and expired on September 30, 2002 unexercised. Options for the remaining 13,695 shares were granted on August 29, 1995 at an exercise price of $7.88 per share. These options are fully vested, and the underlying shares remain available for issuance if the options are exercised.

The table on the following page presents selected statement of operations and balance sheet data for the fiscal years ended and as of September 30, 1999, 2000, 2001, 2002 and 2003. We have derived the selected financial data for those periods and as of those dates from our audited financial statements. You should read this selected financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

We have experienced fluctuations in our quarterly operating results and anticipate that these fluctuations will continue and may intensify.

During the third quarter of fiscal 2001, we recorded a net benefit of restructuring, acquisition and other items of $2.0 million as a result of a settlement agreement with a third party in May 2001 resolving a dispute regarding payment for certain proprietary software and documentation to be re-licensed by us. The settlement was offset by $219,000 of liabilities relating to this software product. Based on changes in circumstances in the fourth quarter of fiscal 2001, we assessed the recoverability of assets recorded, principally as a result of the Pivotpoint acquisition in fiscal 2000. We recognized an impairment of goodwill and certain identifiable intangible assets of $26.0 million as accelerated amortization.

During the second quarter of fiscal 2002, we recorded a restructuring charge of $4.7 million. Additionally, we recorded a $1.0 million benefit related to the settlement of certain escrow claims with former shareholders of Pivotpoint. See note (4) of the notes to our consolidated financial statements contained in Item 8 “Financials Statements and Supplementary Data” for a further discussion of this benefit. As discussed in note (12) of the notes to our consolidated financial statements contained in Item 8. “Financials Statements and Supplementary Data,” we recorded a $5.0 million tax benefit in the third fiscal quarter of fiscal 2002 related to the resolution of federal income tax uncertainties. In the fourth quarter of fiscal 2002, we reduced a $2.3 million purchase commitment accrual from a technology distribution agreement which was mutually terminated. The benefit was recorded as a reduction to general and administrative expenses.

During the second quarter of fiscal 2003, we purchased Frontstep on February 18, 2003. We have included the results of operations from Frontstep as of the acquisition date. As discussed in note (4) of the notes to our consolidated financial statements contained in Item 8. “Financial Statements and Supplementary Data,” we recorded restructuring costs of $250,000, $342,000, and $1.2 million in the second, third, and fourth quarters of fiscal 2003. Additionally, in the third quarter of fiscal 2003, we recorded a $2.1 million tax benefit related to the resolution of federal income tax uncertainties.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis in conjunction with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data”, 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 below in “—Factors Affecting Future Performance” and elsewhere in this report. See also “Special Cautionary Notice Regarding Forward-Looking Statements” at the beginning of “Item 1. Business.”

The terms “fiscal 2001,” “fiscal 2002,” and “fiscal 2003” refer to our fiscal years ended September 30, 2001, 2002, and 2003. The term “fiscal 2004” refers to our fiscal year ending September 30, 2004.

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.

On February 18, 2003, we acquired Frontstep, Inc. Frontstep is a manufacturing application solution provider with world-wide operations. Pursuant to the purchase agreement, we purchased of all of Frontstep’s shares in exchange for 4.2 million shares of MAPICS common stock and we assumed $20.1 million of Frontstep’s debt as well as certain outstanding stock options and warrants. Frontstep shareholders received 0.300846 MAPICS shares for each share of Frontstep common stock held. Furthermore, we entered into a $30 million bank credit facility from which we borrowed $21.7 million on February 18, 2003, the proceeds of which we used to repay the Frontstep debt assumed in the business combination and certain related expenses.

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 our acquisition of Frontstep, we incurred $8.0 million in exit costs during fiscal 2003 for changes to the personnel and facilities structures of the combined entity. These costs included $1.8 million recorded as a restructuring charge in the statement of operations for fiscal 2003 and $6.2 million recorded as additional purchase price as required by Emerging Issues Task Force (EITF) 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” We expect to incur some additional costs in future periods related to continued exit activities including but not limited to exit costs for employees notified of separation after September 30, 2003 and potential adjustments to restructuring liabilities for vacated space. We do not expect these exit costs to be material to our future reported results of operations, financial position, or cash flows. The Frontstep acquisition is more fully described in note (3) of the notes to our consolidated financial statements contained in Item 8. “Financials Statements and Supplementary Data.”

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. We believe the relationship increases our flexibility by allowing us to staff projects with qualified resources as project needs demand, decreases the cost of meeting our development and support goals, and maintains our high standards of quality and services. The implementation of this strategy resulted in a planned reduction of our worldwide workforce of approximately 12%, which we completed in the third quarter of fiscal 2002. See “Results of Operations—Restructuring Costs” for a discussion of the restructuring charge related to this workforce reduction. The development partner we chose is a large, international firm with experience in working with software companies. However, managing software development projects remotely can be difficult and may result in delays or cost overruns, and we may be exposed to greater operational, international, political and economic risks under the offshore agreement.

The following table presents our statements of operations data as a percentage of total revenue for the fiscal 2001, 2002, and 2003.

Our results of operations for fiscal 2003 include the results of Frontstep from February 18, 2003. Our results for periods prior to the acquisition date, including those for fiscal 2001 and 2002, do not include the results of Frontstep.

For fiscal 2003, we recorded net income of $3.8 million or $0.17 per common share (diluted), a decrease from net income of $13.7 million or $0.67 per common share (diluted) in fiscal 2002. Our net income in fiscal 2002 was an improvement from a net loss of $27.0 million or $1.48 per common share (diluted) in fiscal 2001. Total revenue increased $33.0 million or 25.8% from fiscal 2002 to fiscal 2003. Total revenue decreased $9.9 million or 7.1% from fiscal 2001 to fiscal 2002.

Operating expenses including acquisition costs, restructuring costs and other special items, as discussed in the table herein, increased $43.7 million or 38.5% from fiscal 2002 to fiscal 2003. Operating expenses including amortization of goodwill, acquisition costs, restructuring costs and other special items decreased $44.8 million or 28.3% from fiscal 2001 to fiscal 2002.

During the last three fiscal years, we experienced worldwide hesitancy by customers and prospects to commit to new investments, a slowdown in the growth of the market for enterprise applications and a general slowdown in the global economy, particularly in the manufacturing sector we serve. Furthermore, we

experienced sales issues associated with the attacks of September 11, 2001 and the events that followed that delayed numerous transactions, some indefinitely.

The following table details the classification of restructuring costs, acquisition costs and other special items within our statement of operations for fiscal 2001, fiscal 2002, and fiscal 2003.

We generate a significant portion of our total revenue from licensing software, which we do through both our direct sales force and 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 our independent affiliates. Our license agreements are either annual renewable term license agreements or perpetual license agreements. Under our annual renewable term license agreements, 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 our perpetual license agreements, our customer pays an initial license fee for the ongoing right to use the software.

When we first license an iSeries platform 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 time-based 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 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 Microsoft NT and Microsoft.NET platform 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.

The following table shows our software sales revenue from initial licensing and our service revenue from support services and implementation and consulting services for fiscal 2001, fiscal 2002 and fiscal 2003 and the percentage change from fiscal year to fiscal year.

Total revenue for the fiscal 2003 increased as a result of the inclusion of $41.2 million in revenue from the acquired Frontstep business. Excluding Frontstep, the decrease of $8.2 million in total revenue from fiscal 2002 to fiscal 2003 is due to a decrease in both licensing and service revenues which we believe is caused by the continued weakness in the enterprise software business investment, slower growth in the eServer iSeries market and tepid global economic conditions. The manufacturing sector, our primary market, continued to contract during the majority of fiscal 2003. Additionally, as a result of the acquisition of Frontstep, we began focusing our marketing and sales efforts on the newly acquired products and as a result we experienced a decrease in our sales of our existing base products.

The decrease in revenue from fiscal 2001 to fiscal 2002 was primarily due to a decrease in license revenue recognized under our time-based licenses resulting from decreased time-based license volume from the prior year. Additionally, products licensed on a perpetual basis declined $2.0 million from the prior year. We also experienced delays in implementation services due to the global economic downturn.

License Revenue: Total license revenue increased $11.5 million from fiscal 2002 to fiscal 2003 as a result of the license revenue from acquired products from Frontstep. Revenue recognized from previously recorded time-based contracts was lower than the revenue recognized during fiscal 2002. This $4.5 million decrease is attributable to lower licensing volume in our time-based contracts. Additionally, products licensed on a perpetual basis declined $2.7 million.

The decrease in license revenue from fiscal 2001 to fiscal 2002 was primarily due to a $5.5 million decrease in license revenue recognized under our time-based licenses resulting from decreased time-based license volume from the prior year. Additionally, products licensed on a perpetual basis declined $2.0 million from the prior year.

License volume for fiscal 2003 included 1,037 transactions with an average price of $40,000 compared to 518 transactions in fiscal 2002 with an average contract price of $71,000. The increase in the number of

transactions is due to the inclusion of transactions from the acquired Frontstep product lines. The average contract price declined from fiscal 2002 to 2003 as a result of smaller deal sizes from the Frontstep product lines. For fiscal 2001, license volume included 884 transactions with an average price of $53,000.

Support Services: Our support services revenue consists of annual license fees and annual support fees, which are typically paid in advance. The annual fees entitle the customer to receive twelve months of support services, as available. We record these annual fees as services revenue and recognize this revenue ratably over the term of the agreement. The increase in revenue from our support services from fiscal 2002 to fiscal 2003 was primarily due to the inclusion of $21.3 million in support services revenue from our acquired Frontstep products. Excluding the acquired Frontstep products, support services revenue for fiscal 2003 grew slightly from fiscal 2002. Support services revenue increased slightly from fiscal 2001 to fiscal 2002, indicative of the relative stability in this revenue stream.

Implementation and Consulting Services: Our implementation and consulting services revenue is generated by our professional services organization, which may provide our customers with consulting and implementation services relating to our products and the products of our solution partners. The inclusion of Frontstep revenue for the fiscal year ended September 30, 2003 favorably impacted our implementation and consulting services revenue by $8.3 million. Excluding revenue from the Frontstep acquired products, our implementation and consulting services revenue decreased from fiscal 2002 to fiscal 2003 by $1.7 million due to the continued negative impact of the same factors affecting our licensing revenue—slow global economic activity, particularly in the manufacturing sector and its affect on our customers and prospects. The $3.2 million decrease in implementation and consulting services revenue from fiscal 2001 to fiscal 2002 was primarily due to lower consulting services revenue as a result of the continued weakness in demand for these services resulting from lower license volume as compared to fiscal 2001

From fiscal 2001 to fiscal 2002, we experienced a shift in our mix of revenue primarily as a result of changes in the mix of our license revenue resulting from products acquired in our acquisition of Pivotpoint in fiscal 2000, a decrease in license revenue as a percentage of total revenue, and expansion of our professional services business. The trend in revenue mix continued in fiscal 2003 after the acquisition of Frontstep. As we continue to expand our professional services business and our license revenue continues to decrease as a percentage of total revenue, we expect that services revenue will continue to be an increasing percentage of our total revenue.

Our operations are conducted principally in 1) North America, 2) EMEA, and 3) LAAP. The following table shows the percentage of license, services, and total revenue contributed by each of our primary geographic markets:

During fiscal 2003, total revenue in North America decreased as a percentage of total revenue compared to fiscal 2002. We believe the decrease is due to the continued economic and manufacturing weaknesses in the region as well as higher revenue in our international regions from the acquired Frontstep products. During fiscal 2003, EMEA service revenue increased as a percentage of total service revenue due to the inclusion of Frontstep and growth from existing operations in both support and professional services revenue compared with fiscal 2002. Another factor that increased the EMEA contribution to total revenue is the weakening of the US dollar against the major European currencies during the year. During fiscal 2003, LAAP license and service revenue increased as a percentage of total license and service revenue. The increase in the percentage of total license revenue and total service revenue from LAAP is due to the inclusion of Frontstep and growth from existing operations in Asia Pacific license revenue and growth in support revenue from existing operations in Asia Pacific. We believe the growth in the Asia Pacific region is attributable, in part, to the continuing trend of increased international manufacturing presence in the region.

During fiscal 2002, total revenue in North America decreased as a percentage of total revenue compared to fiscal 2001. The decrease was attributable mainly to an increase in license revenue in EMEA as a percentage of total license revenue. This increase was due to two large contracts in the EMEA region in fiscal 2002.

Additional information about our operations in these geographical areas is presented in note (16) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

The following table shows cost of license revenue from software sales, cost of support services revenue and cost of implementation and consulting services revenue for fiscal 2001, fiscal 2002 and fiscal 2003.

Cost of license revenue consists primarily of royalties that we pay to solution partners for products or technology we license, amortization of computer software costs, amortization of intangibles related to acquisitions, and amortization of other intangible assets. We license from our solution partners complementary software products or technology that have been integrated into and sold with our product line. Generally, when we license a solution partner product to a customer, we pay a royalty to the solution partner and record the royalty expense in the period in which the license revenue is recognized. As a result, a significant portion of our cost of license revenue varies in direct relation to recognized license revenue based on the mix of internally

developed and solution partner-developed products during a period. Through our solution partner arrangements, we have been able to enhance the functionality of our existing products and introduce new products utilizing this variable cost approach.

Amortization of computer software costs represents recognition of the costs of some of the software products we sell, including purchased software costs, technology acquired in acquisitions, capitalized internal software development costs and costs incurred to translate software into various foreign languages. We begin amortizing computer software costs upon general release of the product to customers and compute annual amortization on a product-by-product basis based on the greater of the amount determined using:

Cost of license revenue increased from fiscal 2002 to fiscal 2003 due primarily to the inclusion of cost of license revenue from the acquired Frontstep products of $4.7 million, which includes royalties and amortization of computer software costs. Excluding the acquired Frontstep products, cost of license revenue declined $1.6 million for fiscal 2003 as compared to fiscal 2002. The decrease is due to lower royalty expense of $1.6 million as the result of the sale of fewer solution partner products as compared to the sale of our internally developed core products. Cost of license revenue decreased from fiscal 2001 to fiscal 2002 due primarily to approximately $1.6 million in write-offs of capitalized software in fiscal 2001, as discussed below. Excluding the aforementioned write-off, cost of license revenue remained relatively flat as compared to fiscal 2001. 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

In fiscal 2001, cost of license revenue included a write-off of $1.6 million of capitalized software development costs related to the translation of earlier versions of our software which we discontinued to market. Additionally, included in the fiscal 2001 amortization expense is the recognition of impairment as accelerated amortization of $260,000 on identifiable intangible assets related to the Pivotpoint acquisition in fiscal 2000.

Cost of services revenue includes cost associated with our support services activities and our implementation and consulting services activities. These costs consists primarily of:

Immediately after the acquisition of Frontstep, we organized our company into functional operations in order to benefit from the synergies of a combined organization. Discrete cost of services information is not available for the acquired products of Frontstep although the inclusion of the acquired company into our organization did attribute to the increases in cost of services from fiscal 2002 to fiscal 2003.

Cost of Support Services Revenue: The increase in cost of support services revenue from fiscal 2002 to fiscal 2003 was due primarily to the inclusion of cost of support services revenue relating to the acquisition of Frontstep. Cost of support services revenue increased as a result of higher direct expenses, particularly an increase of $3.2 million in royalties for support services revenues. Cost of support services also increased $4.1 million due to an increase in personnel costs related to the ongoing maintenance and support of our products and a $1.5 million increase in associated direct costs, including intangible amortization from the acquired maintenance contracts from the Frontstep acquisition. The decrease in cost of support services revenue from fiscal 2001 to fiscal 2002 was primarily due to overall cost reduction efforts.

Cost of Implementation and Consulting Services Revenue: The increase in cost of implementation and consulting services revenue from fiscal 2002 to fiscal 2003 was due to the inclusion of Frontstep cost of implementation and consulting services revenue and an increase in subcontracted services costs in connection with two large service engagements during fiscal 2003. The cost increase in fiscal 2003 was driven primarily by higher usage of $2.3 million in contract payroll, a $3.9 million increase in personnel costs related to the implementation, consulting and education services we provide and a $2.6 million increase in associated direct costs. The decrease in cost of implementation and consulting services revenue from fiscal 2001 to fiscal 2002 was due to lower implementation and consulting services revenue and cost controls. Costs decreased less than revenues in fiscal 2002 from fiscal 2001 due to the direct costs incurred on the aforementioned two large service engagements. During fiscal 2002, we incurred costs under the two large engagements but did not recognize associated revenue because we had not met the billing milestones before the end of the year.

The following table shows other operating expenses for fiscal 2001, fiscal 2002 and fiscal 2003.

Immediately after the acquisition of Frontstep, we organized our company into functional operations in order to benefit from the synergies of a combined organization. Discrete costs information for all costs included in other operating expenses is not available for the acquired products of Frontstep although the inclusion of the acquired company into our organization did attribute to the increases in these costs from fiscal 2002 to fiscal 2003.

Selling and marketing expenses consist primarily of recognized commission fee expense to our independent affiliates, compensation of our sales and marketing personnel, and direct costs associated with selling programs and marketing campaigns. We defer sales commission fee expense on sales of time-based iSeries licenses and amortize these costs ratably with the related revenue. For perpetual licenses, we expense commissions in the period in which the license is completed and the license revenue is recorded.

The increases in selling and marketing expense as well as the increases as a percentage of total revenue from fiscal 2002 to fiscal 2003 were primarily due to two factors: (1) the inclusion of selling and marketing expenses in fiscal 2003 relating to the acquired products of Frontstep, and (2) the change in product mix of our license

revenue recognized between time-based license revenue and perpetual license revenue. Included in the overall increase is an increase of $1.8 million in affiliate fee commissions and $12.5 million increase in direct sales and marketing personnel and other related costs. 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. The decrease in selling and marketing expenses in fiscal 2002 from fiscal 2001 is primarily due to lower license revenue for the period, which resulted in lower sales commissions recognized for our affiliate channel partners and our direct sales organization.

Product development expenses consist of product development costs and software translation costs. Product development costs consist primarily of compensation for software engineering personnel and independent contractors retained to assist with our product development efforts and costs related to our offshore information technology services partnership through which we outsource a variety of our on-going development activities. We charge all costs of establishing technological feasibility of computer software products to product development expense as they are incurred. We capitalize computer software development and translation costs from the time of establishing technological feasibility through general release of the product, and we subsequently amortize them to cost of license revenue. Software translation costs consist primarily of fees paid to consultants for translating some of our software into foreign languages.

The following table shows information about our product development expenses during the last three fiscal years:

Total product development expense increased slightly in fiscal 2003 as compared with fiscal 2002. The increase was due to increased product development activities offset by higher capitalization of development and translation costs. Total spending on development activities increased for product development costs in fiscal 2003 from fiscal 2002. The increase was due primarily to the addition of product development expenses from the acquired Frontstep products. The increase was offset by a decrease in software translation spending. Software translation spending is typically project related, and the timing of those expenditures is subject to change from period to period.

The increase in software capitalization is due to the inclusion of the development projects surrounding the Frontstep acquired products and the addition of several other projects for new releases. Software capitalization rates generally are affected by the nature and timing of development activities and vary from period to period.

Product development expenses decreased from fiscal 2001 to fiscal 2002 primarily as a result of cost savings from our offshore information technology services partnership, which began in 2002 and the associated restructuring of operations during fiscal 2001.

General and administrative expenses consist primarily of compensation for executive, financial, legal and administrative personnel, outside professional and service fees, facility costs, provisions for bad debts, and other items.

The increase in general and administrative expenses for fiscal 2003 is due in part to the inclusion of additional general and administrative expenses as a result of the Frontstep acquisition. A large part of the overall increase in general and administrative expenses was caused by an increase in bad debts expense of $1.4 million, of which $0.9 million related to acquired Frontstep accounts receivable for which we increased our reserve in order to conform with our methodology for determining the adequacy of our allowance for doubtful accounts. Additionally, general and administrative expenses increased from fiscal 2002 to fiscal 2003 due to the reversal of a $2.3 million accrual for termination of technology distribution agreements in fiscal 2002. The reversal in fiscal 2002 lowered total general and administrative expenses. No such reversal occurred in fiscal 2003. General and administrative expenses decreased from fiscal 2001 to fiscal 2002 primarily due to the reversal of the accrual for the termination of a technology distribution agreement discussed above.

Goodwill amortization for fiscal 2001 was $35.1 million. As discussed below, we ceased amortizing goodwill at the beginning of fiscal 2002.

Throughout fiscal 2001, the U.S. economy entered a recession, as did the economies of other countries in which we operate. The continuing recession adversely affected capital expenditures and software licensing activity, particularly in the manufacturing sector of the economy, to which we sell our software and services. As a result, the revenue and profit realized for the acquisitions we made in fiscal 2000 were less than originally anticipated, and as a result, the estimated fair value of the assets acquired in fiscal 2000 declined.

Based on these circumstances, in the fourth quarter of fiscal 2001 we assessed the recoverability of our goodwill pursuant to Statement of Accounting Financial Standard No. 121, or SFAS, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” We reviewed the identifiable undiscounted future cash flows including the estimated residual value to be generated by the assets to be held and used by the businesses acquired in fiscal 2000 at their asset grouping level. These cash flows were below the carrying value of the assets recorded. Consequently, we recognized an impairment as accelerated amortization of $25.7 million, the amount by which the carrying value of the goodwill exceeded its estimated value using the discounted cash flow method.

On October 1, 2001, we adopted SFAS No. 142, “Goodwill and other Intangible Assets,” which requires that amortization of goodwill be discontinued at the date of adoption and an annual impairment test be completed on the remaining goodwill. Accordingly, we recorded no amortization of goodwill for fiscal 2002 and 2003. We reviewed the recoverability of our goodwill pursuant to SFAS No. 144 for both fiscal 2002 and fiscal 2003 and concluded no impairment was required.

Acquisition costs were recoveries of $2.0 million in fiscal 2001 and $1.0 million in fiscal 2002. We recorded no acquisition costs in fiscal 2003. Costs relating to the acquisition of Frontstep in fiscal 2003 were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” and are discussed in the Restructuring Costs section herein.

In connection with the purchase of Pivotpoint, a portion of the cash proceeds was put into escrow to cover any breach of warranties or representations contained in the purchase agreement or any additional undisclosed post-closing liabilities. In December 2000, we presented a claim against the escrow for the release of funds to cover certain liabilities not disclosed in the closing balance sheet. During the allocation period, we did not adjust the purchase price to reflect these escrow refund claims because the ultimate recovery of any escrow funds was neither probable nor could the amount to be recovered be reasonably estimated. During fiscal 2002, we entered into a settlement agreement with the sellers regarding the amount of the claim and we received approximately $1.3 million in cash for the settlement. Pursuant to SFAS No. 141, “Business Combinations,” $1.0 million of the settlement was related to pre-acquisition contingencies other than income taxes and is included as a reduction to acquisition costs in the consolidated statement of operations for fiscal 2002.

The settlement also included a receipt of $204,000 relating to pre-acquisition tax liabilities from the former shareholders of Pivotpoint. This portion of the settlement was recorded as a reduction of outstanding tax liabilities as of September 30, 2002 from the original purchase accounting allocation. The remaining $50,000 of the settlement was recorded as a liability for expenses incurred in relation to the settlement

During fiscal 2001, we recorded a net benefit in acquisition costs of $2.0 million as a result of a settlement agreement with a third party in May 2001 resolving a dispute regarding payment of royalties for certain proprietary software and documentation to be re-licensed by us. In fiscal 2000, we had charged the write-off of pre-paid royalties and capitalized software relating to this software to acquisition costs. Under the terms of the settlement, the third party paid us $2.2 million for the software and related costs. The settlement was offset by $219,000 of liabilities relating to this software product.

We recorded no restructuring costs in fiscal 2001. We recorded restructuring costs of $4.7 million in fiscal 2002 principally resulting from a five-year agreement with an offshore information technology services company to perform a variety of our ongoing product development activities. During fiscal 2003, we recorded exit costs of $8.0 million relating to the Frontstep acquisition, of which $6.2 million were included in the cost of the acquisition and recorded in the purchase price allocation. The remaining $1.8 million in exit costs were recorded as restructuring costs in our statement of operations. The $8.0 million of exit costs included employee severance and related costs for approximately 175 employees from all areas of the combined company.

The total exit cost of $6.2 million during fiscal 2003 that was included in the purchase price allocation, included $3.3 million in abandonment of office space and related costs and $2.4 million in employee severance and related costs for approximately 85 employees from all areas of Frontstep. Additionally, exit costs included obligations remaining pursuant to a $450,000 consulting agreement that was subsequently terminated on February 21, 2003. We accounted for these costs in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” These costs resulted from our acquisition of Frontstep for which the combined company will receive no future economic benefit.

We accounted for the remaining $1.8 million of exit costs during fiscal 2003 in restructuring costs in our statement of operations under the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”, which is effective for exit or disposal activities that were initiated after December 31, 2002. These costs included $2.1 million in employee severance and related costs for approximately 90 employees from all areas of the company and a recovery of $0.3 million of a previous accrual as discussed above. Restructuring activities for comparative periods prior to the effective date of SFAS No. 146 have been accounted for in accordance with 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).”

The restructuring costs of $4.7 million during fiscal 2002 resulted from staff and facility reductions as a result of 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% during fiscal 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. During fiscal 2003, we adjusted our previously recorded liability by $276,000 in order to reclaim office space that was previously abandoned.

The major components of the restructuring and exit cost reserve at September 30, 2002 and 2003 were as follows (in thousands):

We expect future cash expenditures related to these restructuring activities to be approximately $6.3 million. We expect to pay approximately $4.3 million during fiscal 2004, and have included this amount in current liabilities. The remaining $2.0 million is expected to be paid by fiscal 2007.

As shown in the table above, our restructuring and exit cost reserve at September 30, 2003 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 or make adjustments to our purchase price allocation 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. Depending on the impact of our integration 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 for all space, 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 and exit costs reserve as appropriate.

Interest Income and Interest Expense. Interest income was $786,000, $519,000 and $239,000 for fiscal 2001, fiscal 2002, and fiscal 2003. The decrease in interest income is related to the decrease in interest rates over

the past two years. The decrease was slightly offset in fiscal 2001 and fiscal 2002 by an increase in investable cash.

For fiscal 2003, interest expense principally includes 1) interest on our new credit facility based on our lender’s base rate or LIBOR plus a predetermined margin, 2) commitment fees on the unused portion of our previous and new revolving credit facility, and 3) amortization of debt issuance costs. For fiscal 2002 and fiscal 2001, interest expense principally includes 1) interest on our then existing term loan and revolving credit 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 bank credit facility and revolving credit facility, and 4) amortization of debt issuance costs.

Interest expense was $2.9 million, $1.1 million and $816,000 for fiscal 2001, fiscal 2002, and fiscal 2003. Interest expense decreased in fiscal 2003 from fiscal 2002 because we repaid our previous revolving credit loan during fiscal 2002 and did not incur interest expense associated with this loan in fiscal 2003. In addition, we have incurred a lower effective interest rate on our new bank credit facility as compared to the effective interest rates incurred on previous facilities in fiscal 2002 and fiscal 2001. Interest expense in fiscal 2002 decreased from 2001 due to the repayment of $18.7 million of debt throughout the year and an overall reduction in the weighted average interest rate primarily due to the expiration of the interest rate protection arrangement. The weighted average interest rate for fiscal 2001, fiscal 2002, and fiscal 2003 was 10.2%, 6.7% and 3.7%. As stated earlier, we entered into a new credit facility on February 18, 2003 and as a result, we expect that interest expense will increase in future periods. See “—Liquidity and Capital Resources.”

The effective tax rates before extraordinary item for fiscal 2001, fiscal 2002, and fiscal 2003 were 20.2%, (0.1)% and (13.7)%. The effective tax rates for fiscal 2001 differs from the statutory federal rate of 35.0% principally due to the effect of amortization of goodwill and other intangible assets that are not deductible for income tax purposes. The effective tax rate for fiscal 2002 and fiscal 2003 differs from the statutory federal income tax rate of 35.0% principally due to a $5.0 million benefit and a $2.1 million benefit, respectively, that we recorded. These tax benefits resulted from changes in income taxes payable due to the resolution of federal income tax uncertainties related to tax net operating losses, or NOLs, retained by us in connection with the 1997 separation of Marcam Corporation into two companies. Accordingly, we recorded the benefit of the resolution of the uncertainties as decreases to income taxes payable. We still retain additional favorable income tax attributes in connection with the 1997 separation of Marcam Corporation into two companies, and we may realize additional income tax benefits related to these tax attributes in future periods, if and when, they become certain. Additionally, the impact of state and foreign income taxes and the adjustment of goodwill of Pivotpoint created differences from the expected income tax expense (benefit) calculated by applying the federal statutory rate to our income before income tax expense (benefit) and extraordinary item.

On April 26, 2002, we repaid the outstanding balance of $8.4 million under our original bank credit facility with the proceeds from a new revolving credit facility. The original bank credit facility was terminated upon this repayment. See note (9) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data,” for further discussion of our debt. At the time of refinancing, the balance of the unamortized debt issuance costs relating to our original term loan was $491,000. We wrote down the remaining balance of debt issuance costs, net of income tax benefit of $173,000, and classified the write-down as an extraordinary item for fiscal 2002 in accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” We have not historically required debt financing for operating purposes and do not anticipate requiring debt financing for such purposes in the foreseeable future. The write-down met the criteria for classification as extraordinary since the early termination of the bank credit facility was determined to be an event that is both infrequent and unusual.

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 last three fiscal years and selected balance sheet data as of September 30, 2002 and 2003. You should read these tables and the discussion that follows in conjunction with our statements of cash flows and balance sheets contained in “Item 8. Financial Statements and Supplementary Data.”

In fiscal 2003, net cash provided by operating activities decreased 62.1% from fiscal 2002, primarily due to a decrease in net income and a decrease associated with changes in operating assets and liabilities. Non-cash items had a positive impact on operating cash flow. Significant non-cash items were $12.1 million in depreciation and amortization expenses, a $2.3 million addition to the bad debt allowance, primarily related to acquired Frontstep receivables and an increase in the deferred tax asset of $1.1 million. Changes in operating assets partially offset improvements to operating cash flows added by non-cash items. Significant changes in operating assets and liabilities affecting cash flows after consideration of asset and liability additions from the Frontstep acquisition included a $1.2 million increase in prepaid expense and other current assets, a $10.3 million decrease in accounts payable, accrued liabilities and other current liabilities due mainly as a result of timing of cash payments, a $2.7 million increase in the restructuring reserve relating to exit activities in fiscal 2003 as a result of the acquisition of Frontstep and a $3.5 million decrease in deferred license and service revenue offset by a $4.1 million decrease in deferred royalties and commissions.

In fiscal 2002, net cash provided by operating activities increased 33.4% from fiscal 2001. Significant changes in operating assets and liabilities affecting cash flows included a $7.9 million decrease in accounts receivable, a $3.2 million increase in restructuring reserve due to the restructuring charge of $4.7 million in the second quarter offset by a $4.1 million decrease in accounts payable, accrued expenses and other current liabilities. This decrease was primarily due to the favorable settlement of a royalty obligation in connection with a mutual termination of a technology distribution agreement.

In fiscal 2001, fiscal 2002, and fiscal 2003, we used cash for investing activities related to computer software development, translation of our computer software products, purchases of property and equipment, and

purchases of rights to complementary computer software to be integrated with our product offerings. In fiscal 2001, 2002, and 2003, we received proceeds from stock options exercised and employee stock purchases of $631,000, $582,000 and $295,000.

During fiscal 2001 and fiscal 2002, we made repayments of the Pivotpoint acquisition debt of $10.3 million and $18.7 million. At September 30, 2001, the interest rate on our term loan, including the lender’s margin, was and 5.5%. The then existing bank credit facility required us to enter into an interest rate protection arrangement. Accordingly, we entered into an interest rate swap with a bank, which limited our exposure to fluctuations in interest rates on a significant portion of our term loan. The swap expired on December 31, 2001. Our fiscal 2001 and fiscal 2002 weighted average interest rate, including the interest rate swap and excluding debt issue costs, was 10.2% and 6.7%.

On February 18, 2003, we purchased all of the outstanding stock of Frontstep, Inc. in exchange for 4.2 million shares of MAPICS stock. We also assumed the long-term debt of Frontstep aggregating $20.1 million. To finance this acquisition and payoff the debt assumed, we entered into a new $30.0 million bank credit facility pursuant to which we immediately borrowed $21.7 million. The borrowed amount consisted of a $6.7 million revolving credit loan and a $15.0 million term loan. We subsequently repaid $2.7 million of the borrowings in March 2003. The details of the bank credit facility are disclosed in note (9) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.” Our previous bank credit facility was terminated in conjunction with addition of the new bank credit facility.

The term loan portion of the bank credit facility requires us to make quarterly principal repayments in various amounts beginning on December 31, 2003 and matures on December 31, 2005. However, we may be required under certain circumstances, based on our excess cash flows as defined in the bank credit facility, to prepay all or a portion of the outstanding balance. Alternatively, we may, at our discretion and subject to some limitations, elect to prepay all or a portion of the outstanding balance without penalty. The interest rate on the term loan portion of the loan agreement varies depending upon our ability to maintain specified financial ratios. Additionally, the interest rate is generally adjusted quarterly based on either our lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the interest rate on our term loan, including the lender’s margin, was 3.65%.

Set forth below are the scheduled principal payments under the term loan for the indicated fiscal years ending (in thousands):

generally adjusted quarterly based on either our lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the interest rate on the revolving credit portion of the bank credit facility, including the lender’s margin, was 3.62%. As of September 30, 2003 we had available borrowings under the revolving credit loan of $12.5 million, subject to the borrowing base, of which $8.5 million was unused. As of July 31, 2003, we amended the bank credit facility to decrease the amount of the revolving credit loan from $15.0 million to $12.5 million and modified certain financial covenants. As a result of this amendment, our total available borrowings under the bank credit facility is $27.5 million. In November 2003, we borrowed $1.5 million on the revolving line of credit for normal operation. As of November 2003, we had $7.0 million of unused available borrowings on the revolving line of credit.

The bank credit facility provides for variable interest rates adjusted periodically depending on our ability to maintain certain specified financial ratios. The interest rate is based on the lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the weighted average interest rate on the bank credit facility, excluding amortization of debt issuance cost, was 3.65%

We have pledged substantially all of our assets in the United States, including but not limited to cash, accounts receivable, capitalized software, and fixed assets, as collateral for our obligations under the bank credit facility. Additionally, all of our domestic subsidiaries have guaranteed the repayment of our obligations under the loan agreement, and we have pledged the majority of the capital stock of certain of our foreign subsidiaries to the lender.

The bank credit facility, as amended, contains covenants that, among other things, require us to maintain specified financial ratios and impose limitations or prohibitions on us with respect to:

Also, as part of the covenants, we must also maintain a minimum balance of $12.5 million on deposit at the lending banks through September 30, 2004 and $10.0 million thereafter through the remaining term of the bank credit facility. This $12.5 million is not legally restricted. As of September 30, 2003, we were in compliance with our debt covenants.

At September 30, 2002 and 2003, we had federal net operating loss carryforwards of $9.0 million and $42.7 million, and research and experimentation and other credit carryforwards of $4.4 million and $9.0 million. At September 30, 2003, we also have $8.8 million of foreign net operating loss carryforwards. The net operating losses and tax credits at September 30, 2003 expire between fiscal 2004 and fiscal 2022. The utilization of a significant portion of the domestic net operating losses and tax credits is limited on an annual basis due to various changes in ownership of MAPICS, Frontstep and Pivotpoint. We do not believe that these limitations will significantly impact our ability to utilize the net operating losses before they expire, however, valuation allowances have been provided for foreign NOL’s and income tax credits, based on their expected utilization.

On July 31, 2002, we announced that our board of directors approved a plan to repurchase up to $10.0 million of our outstanding common stock in light of our stock price and liquidity position. Purchases are expected to be made from time to time, depending on market conditions, in private transactions as well as in the open market at prevailing market prices. During fiscal 2002, we repurchased 8,900 shares of stock for approximately $54,000. During fiscal 2003, we repurchased 1,600 shares of stock for approximately $9,000. These shares will be available for general corporate purposes.

We do not have any current plans or commitments for any significant capital expenditures.

We believe that cash and cash equivalents on hand as of September 30, 2003, together with cash flows from operations and available borrowings under our bank credit facility will be sufficient to fund our operations for at least the next 12 months. This forward-looking statement, however, is subject to all of the risks and uncertainties detailed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Future Performance” contained in this report. Additionally, an increased portion of the combined company’s cash flow from operations will be dedicated to the payment of principal and interest on the debt and will not be available for other purposes. If cash generated from operations during this period is less than we expect or if we need additional financing after September 30, 2004, we may need to increase our bank credit facility or to undertake equity or debt offerings. We may be unable to obtain such financing on favorable terms, if at all.

We do not have any off-balance sheet arrangements or financing arrangements with related parties, persons who were previously related parties, or any other parties who might be in a position to negotiate arrangements with us other than on an arms-length basis.

Debt: The debt noted above is included in our Consolidated Balance Sheets. This debt includes $15.0 million for the term loan portion of our bank credit facility and $4.0 million for the revolving credit portion of our bank credit facility. As the revolving credit facility matures in December 2005, it is included in the 1-3 Years column as this would be the “scheduled” payment date if management decides not to repay the outstanding balance prior to the maturity date. It is recorded as a current portion of long term debt in our Consolidated Balance Sheets. See note (9) of Item 8. Financial Statements and Supplementary Data for additional information about are debt.

Leases: We are contractually obligated to make minimum lease payments on several operating leases. We lease office space, computer and office equipment and vehicles under operating leases, some of which contain renewal options and generally requires us to pay insurance, taxes and maintenance. The lease on our headquarters building includes scheduled base rent increases over the term of the lease. We charge to expense the total amount of the base rent payments using the straight-line method over the term of the lease. In addition, we pay a monthly allocation of the building’s operating expenses. We have recorded a deferred credit to reflect the excess of rent expense over cash payments since inception of the lease in March 1999. Total rental expense under all operating lease agreements was $4.1 million, $3.6 million and $3.1 million in fiscal 2001, fiscal 2002, and fiscal 2003. We recorded sub-lease income receipts of $242,000, $678,000 and $409,000 in fiscal 2001, fiscal 2002 and fiscal 2003.

Minimum royalty payments: We have certain relationships with solution providers whereby we sell their products in conjunction with our offerings. We pay a royalty to the respective third party providers based upon the dollar volume of their product we sell. Based upon certain of these agreements, we owe a minimum royalty payment on an annual basis.

Litigation: We are involved in disputes and legal proceedings arising in the normal course of business. While we cannot predict the outcome of these disputes and proceedings, we believe, based upon a review with legal counsel, that none of these disputes or proceedings will have a material impact on our financial position, results of operations or cash flows. However, we cannot be certain of the eventual outcome, and any adverse result in these or other matters that may arise from time to time may harm our financial position, results of operations or cash flows.

Indemnification of third party professional service providers: We provide certain indemnifications from time to time in the normal course of business to professional service providers and financial institutions, which may require us to make payments to an indemnified party in connection with certain transactions and agreements. Generally, the maximum obligation is not explicitly stated and cannot be reasonably estimated. The duration of the indemnifications vary based upon the specific activity underlying the indemnification and can be indefinite. We have not had a material indemnification claim, and we do not believe we will have a material claim in the future. As such, we have not recorded any liability for these indemnifications in our financial statements.

Indemnification of third party sales affiliates and end users: We provide indemnification to our third party sales affiliates and end users against any and all claims, damages, liabilities, losses and costs (including reasonable attorney’s fees) of every nature arising in connection with any suit or proceeding brought against a sales affiliate insofar as such suit or proceeding is based upon a claim that use by the affiliate or an end user of any of the MAPICS products infringes or constitutes wrongful use of any patent, copyright or trade secret right. The duration of the indemnifications vary based upon the life of the specific individual affiliate agreements. We have not had a material indemnification claim, and we do not believe we will have a material claim in the future. As such, we have not recorded any liability for these indemnifications in our financial statements.

Change of control agreements: We are a party to change of control employment agreements and term employment agreements with certain of our executive officers and key employees. Information regarding these agreements are contained in our proxy statement. All such information that is provided in the proxy statement is incorporated in this Item 7 by reference.

The inclusion of the required disclosures had no significant impact on our reported results of operations, financial position, or cash flows.

In applying the accounting policies that we use to prepare our consolidated financial statements, we necessarily make accounting estimates that affect our reported amounts of assets, liabilities, revenues and expenses. Some of these accounting estimates require us to make assumptions about matters that are highly uncertain at the time we make the accounting estimates. We base these assumptions and the resulting estimates on authoritative pronouncements, historical information and other factors that we believe to be reasonable under the circumstances, and we evaluate these assumptions and estimates on an ongoing basis. However, in many instances we reasonably could have used different accounting estimates, and in other instances changes in our accounting estimates are reasonably likely to occur from period to period, with the result in each case being a material change in the financial statement presentation of our financial condition or results of operations. We refer to accounting estimates of this type as “critical accounting estimates.” We believe that the critical accounting estimates that we discuss below are among those most important to an understanding of our consolidated financial statements. Our senior management has discussed these critical accounting estimates and the following discussion of them with our audit committee.

Accounting estimates necessarily require subjective determinations about future events and conditions. Therefore, the following descriptions of critical accounting estimates are forward-looking statements, and actual results could differ materially from the results anticipated by these forward-looking statements. You should read

the following descriptions of our critical accounting estimates in conjunction with note (2) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Performance”

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 SOP 97-2, “Software Revenue Recognition,” SOP 98-9, “Modification of SOP 97-2, “Software Revenue Recognition, with Respect to Certain Transactions,” SAB 101, “Revenue Recognition in Financial Statements,” and AICPA TPA 5100.53 “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition.”

We generate a significant portion of our total revenue from licensing software. In determining when to recognize licensing revenue, we make assumptions and estimates about the probability of collection of the related receivable. Additionally, we specifically evaluate any other elements in our license transactions, including but not limited to options to purchase additional software or users at a future date, extended payment terms, functionality commitments not delivered with the software and existing outstanding accounts receivable balances in making the determination of the amount and timing of revenue recognition. If changes occur in our assumptions, operating results for any reporting period could be adversely affected.

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 in most cases. A small percentage of our contracts have limited express warranties that cover a period of up to three years. These contracts relate to the Syteline product acquired in the acquisition of Frontstep, Inc. We do not plan to provide this specific type of warranty in the future. Under this warranty 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 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 to believe that we will receive any material claims in the future.

We also provide professional consulting and implementation services to our customers; however, the professional services that we provide are generally not essential to the functionality of our delivered products. If the services provided are essential to the functionality of our delivered products, then the related license revenue and services revenue will be recognized as services revenue under the guidance of SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts.” We provide our professional services under services agreements, and the revenues from our professional consulting and implementation services are generally time and material based and are recognized as the work is performed, provided that the customer has a contractual obligation to pay, the fee is non-refundable, and collection is probable. Delays in project implementation will result in delays in revenue recognition. On some occasions our professional consulting services involve fixed-price and/or fixed-time arrangements, and we recognize the related revenues using contract accounting, which requires the accurate estimation of cost, scope and duration of each engagement. We recognize revenue and the related costs for these projects on the percentage-of-completion method, with progress-to-completion measured by using labor costs input and with revisions to estimates reflected in the period in which changes become known. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. If we do not accurately estimate the resources required or the scope of work to be performed, or if we do not manage our projects properly within the planned

periods of time, then future consulting margins on our projects may be negatively affected or losses on existing contracts may need to be recognized.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable comprise trade receivables that are credit based and do not require collateral. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. On an ongoing basis, we evaluate the collectibility of accounts receivable based upon historical collections and assessment of the collectibility of specific accounts. We evaluate the collectibility of specific accounts using a combination of factors, including the age of the outstanding balance(s), evaluation of the account’s financial condition and credit scores, recent payment history, and discussions with our account executive for the specific customer and with the customer directly. Based upon this evaluation of the collectibility of accounts receivable, an increase or decrease required in the allowance for doubtful accounts is reflected in the period in which the evaluation indicates that a change is necessary. If actual results differ, this could have an impact on our financial position, results of operation and cash flows.

Deferred Income Taxes. Deferred tax assets primarily include temporary differences related to deferred revenue and net operating loss and tax credit carryforwards. These carryforwards may be used to offset future taxable income through fiscal 2023, subject to certain limitations. Deferred tax liabilities primarily include temporary differences related to intangible assets and computer software costs. To assess the need for a deferred income tax valuation allowance, we estimate the likelihood of future taxable income from operations, the timing of the reversal of deferred tax liabilities and the timing of the scheduled expiration of NOL’s and tax credits. In the event that we believe that a valuation allowance is necessary, the corresponding reduction to the deferred tax asset would result in a charge to income in the period that the establishment of the valuation allowance is made. We evaluate the realizability of the deferred tax assets and the need for valuation allowances on a regular basis.

We also record a payable for certain federal, state, and international tax liabilities based on the likelihood of an obligation, when needed. In the normal course of business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges, or the resolution of any income tax uncertainties, may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. In the event that actual results differ from these estimates, or if income tax uncertainties are resolved, we may need to adjust our income tax provisions, which could materially impact our financial position and results of operations.

Computer Software Costs. We charge all computer software development costs prior to establishing technological feasibility of computer software products to product development expense as they are incurred. Following the guidance of SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” from the time of establishing technological feasibility through general release of the product, we capitalize computer software development and translation costs and report them on the balance sheet as computer software costs. We begin amortizing computer software costs upon general release of the product to customers and compute amortization on a product-by-product basis. We regularly review software for technological obsolescence and determine the amortization period based on the estimated useful life. As a part of our review, we consider such factors as cash flows from existing customers, future sales of products, new product release plans and future development. As a result, future amortization periods for computer software costs could be shortened to reflect changes in the estimated useful life in the future based on the factors described above. Any resulting acceleration in amortization could have a material adverse impact on our financial position and results of operations. For example, if we were to accelerate our amortization for a one year decrease in the estimated useful life of our capitalized software assets as of September 30, 2003, the resulting additional charge to our earnings would be $2.3 million over the next twelve months.

Goodwill and Other Intangible Assets. On October 1, 2001, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Upon adoption, we ceased amortization of goodwill. We performed a required transitional impairment test, and based on the results of the test, we recorded no impairment to goodwill. We

have continued to amortize all of our other intangible assets over the life of the asset. Our goodwill balances are subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed is impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. At September 30, 2003, our goodwill balance was $42.0 million and our other intangible asset balance was $7.7 million, net of accumulated intangible amortization.

Restructuring. Our restructuring liability is principally comprised of the estimated excess lease and related costs associated with vacated office space and severance charges. 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. For example, we revised our current estimates as of March 31, 2003 for a particular property to assume that our excess lease space will be vacant for an additional twelve months beginning in April 2003. We also revised the estimates to reoccupy a portion of the space as a result of the Frontstep acquisition. Depending on the continued 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 for all space, we may revise our estimates of the excess lease costs and the timing and the amount of sublease income and, as a result, incur additional charges or credits to our restructuring liability as appropriate. These charges or credits may affect either our statement of operations or our Frontstep purchase price allocation. An example that could impact our earnings is as follows: If our excess lease space, related to our fiscal 2003 accrual, were to remain vacant for an additional six months, an additional restructuring charge of approximately $214,000 could be required. If the prevailing market sublease rates were to increase by 10% over our current estimate of sublease rental rates, a recovery of previously recorded restructuring charges of approximately $193,000 could also be required. Additionally, if we were to reoccupy an additional 25% of the space as a result of the Frontstep acquisition or other future events, a recovery of previously recorded restructuring charges of approximately $662,000 could be required.

See note (2) of the notes to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data,” for discussion regarding recently issued or adopted accounting pronouncements.

If we are unable to react effectively to various factors outside our control, our operating results could be adversely impacted and our quarterly results could fluctuate significantly.

Our future success depends on a number of factors, many of which are unpredictable and beyond our control. Moreover, many of these factors are likely to cause our operating results, cash flows and liquidity to fluctuate significantly from quarter to quarter in the future. These factors include, among others:

Due to one or more of these factors, our operating results could fail to meet the expectations of securities analysts or investors. If that happens, the price of our common stock could decline materially.

As of September 30, 2003, we had $19.0 million of outstanding debt under the terms of our bank credit facility, as amended, and a total bank debt to total capital ratio of approximately 38%. The terms of the bank

credit facility provide for a $15.0 million term loan and a revolving credit facility of up to $12.5 million, subject to the borrowing base. As a result, future debt levels may fluctuate. The level of the company’s debt could have several important effects on the company’s future operations, including, among others:

The market for business software in the mid-sized manufacturing industry is highly competitive, and we may be unable to increase, or even maintain, our market share.

The market for business software in the mid-sized manufacturing industry is highly competitive and changes rapidly. The market activities of industry participants, such as new product introductions, frequently result in increased competition. Our competitors offer a variety of products for our target market as well as similar markets. We primarily compete with a large number of independent software vendors, including:

We also compete with vendors of specialized applications. We may be unable to compete successfully with existing or new competitors.

To be successful in the future, we must respond promptly and effectively to changes in technology. We also must respond to our competitors’ innovations. Some of our competitors have significantly greater financial, marketing, service, support and technical resources than we do. Some of these competitors also have greater name recognition than we do. Accordingly, our competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements. They also may be able to devote greater resources to the development, promotion and sale of products.

We expect to face additional competition as other established and emerging companies enter the market for business software and as new products and technologies are introduced. In addition, current and potential competitors may make acquisitions or establish alliances among themselves or with others. These acquisitions or

alliances could increase the ability of competitors’ products to address the needs of our current or prospective customers. As a result, new competitors or alliances among current and new competitors may emerge and rapidly gain a significant share of the enterprise application market. For us, this could result in fee reductions, the loss of current or prospective customers, fewer customer orders, and reduced revenue. In addition, we principally rely on our network of affiliates for the implementation of our products. If the affiliates fail to maintain sufficient financial resources or sufficiently high quality standards, our reputation and competitive position could weaken. Any or all of these events could materially and adversely affect our business, financial condition and results of operations.

If we don’t respond to rapid technological change and evolving industry standards, we will be unable to compete effectively.

The market for our enterprise application software products is constantly changing. These changes include, among others:

Our future success depends upon our ability to continue to enhance our products, as well as our ability to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. In particular, we must anticipate and respond adequately to advances in the functionality of standard business applications software and technologies to deploy these systems. Our business, financial condition and results of operations could be materially and adversely affected if we are unable to develop and market new products and product enhancements that achieve market acceptance on a timely and cost-effective basis.

As a result of the high level of functionality and performance demanded by enterprise software customers, major new products and product enhancements can require long development and testing periods. Despite testing, however, the complex enterprise software programs we offer may contain errors that customers discover only after the programs have been installed and used. Undetected errors may impair the market acceptance of our products or adversely affect our business, financial condition and results of operations. Problems encountered by customers installing and implementing our new products or releases or using our new products, including product functionality, integration, product response time and program errors, also could adversely affect our business, financial condition and results of operations.

Because our quarterly product licensing activity is concentrated toward the end of each quarter, we may not accurately predict future licensing activity, cash flows, and revenues that will be available to offset planned expenses.

Our product licensing occurs predominantly in the third month of each quarter and tends to be concentrated in the latter half of that third month. As a result, our quarterly licensing activity, cash flows and revenues are difficult to predict. Delays in product delivery or in closings of sales near the end of a quarter could cause our quarterly results to fall short of the levels we anticipate. Moreover, we establish our spending levels based on our expected future operating results. If results of operations are less than we anticipate, we may not be able to reduce spending levels proportionately. As a consequence, our operating results, cash flows and liquidity will likely be adversely affected.

Our future revenue is substantially dependent upon our installed customer base.

We have depended and will continue to depend on our installed customer base for additional future revenue from services, support and maintenance and licensing of additional products. Our license, maintenance and

support agreements generally are renewable annually at the option of the customer. There can be no assurance that current installed customers will renew their maintenance and support agreements in future periods, continue to use us or our affiliates for professional services or purchase additional products, any of which could have a material adverse effect on our future financial results and financial condition.

If our operating performance does not support our cash flow requirements, we may breach our secured revolving credit facility.

Our current revolving credit facility, which allows for borrowings of approximately $30.0 million, has a number of financial and operating performance covenants that we have had to amend in the past and that we must satisfy for the term of the bank credit facility. Our ability to satisfy the covenants and to service the debt that we incur under the applicable bank credit facility depends principally upon our ability to achieve positive operating performance and to successfully manage our working capital in order to support the cash flow requirements. If our quarterly operating performance falls substantially below expectations or if we are not able to effectively manage collection efforts or cash expenditures in a given quarter, we may not be able to fully support our cash flow requirements.

We have secured our obligations under the bank credit facility by pledging substantially all of our assets in the United States as collateral. Additionally, all of our domestic subsidiaries have guaranteed the repayment of our obligations under the bank credit facility, and we have pledged a majority of the capital stock of our foreign subsidiaries to the lenders. Any breach of the financial covenants or our inability to satisfy the debt service requirements of the applicable credit facility could result in a default under the bank credit facility and an acceleration of payment of all outstanding debt owed, which could materially and adversely affect our business.

If we are unable to successfully complete and integrate acquisitions, we will be unable to grow our business as planned.

As part of our business strategy, we continually evaluate potential acquisitions of complementary technologies, products and businesses. In our pursuit of acquisitions, we may be unable to:

Acquisitions that we may undertake in the future involve a number of risks. Some of these risks are that:

Any or all of these risks could materially and adversely affect our business, financial condition or results of operations.

If we are unable to work effectively with other software companies, our product development and enhancement efforts will suffer.

Many of our applications were developed by our solution partners, and we expect to continue to rely on solution partners for the development of additional applications. Generally, solution partners continue to own the rights to, and to maintain the technology underlying the applications but license the technology to us. Under a license agreement with a solution partner, we ordinarily are obligated to pay a royalty to the solution partner for sales of the applications developed by the solution partner. We also may develop alliances with and jointly market products offered by third parties. If we fail to pay the required royalty when due or otherwise breach the agreements, the solution partner may terminate the agreement. The unwillingness of a solution partner to renew its agreement or the termination of an agreement with a solution partner could adversely affect our business, financial condition and results of operations.

Our success depends in part on our continued ability to license applications from solution partners. However, solution partners may not be available to develop or support applications for us in the future. Even if available, solution partners may not complete applications for us on a timely basis and within acceptable guidelines. Moreover, solution partners may elect to terminate or not renew existing agreements. Accordingly, we may not be able to make available applications from solution partners that are acceptable in the market.

While many of our solution partner agreements grant MAPICS exclusive rights to its customers, a solution partner may have or develop a relationship with our existing or prospective customers or affiliates. The solution partner may use this relationship to become a competitor of ours. If a solution partner is already a competitor, it may use this relationship to enhance its competitive position. The solution partner could, as a competitor or otherwise, cause us to lose existing or prospective customers. The occurrence of any of the events described above could materially and adversely affect our business, financial condition and results of operations.

The inability to protect our proprietary rights and avoid claims that we infringe the proprietary rights of others could materially harm our business.

Our success greatly depends upon the protection of our proprietary software. We rely on a combination of copyright, trademark and trade secret laws as well as license and non-disclosure agreements to establish and protect our proprietary rights in our products and information. To further protect these rights, we

Despite these precautions, an unauthorized person could copy or reverse-engineer some portions of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, we cannot assure you that our steps to protect our software will be adequate. Moreover, our competitors may independently develop software products that are substantially equivalent or superior to our software products.

We may receive notices claiming that we are infringing the proprietary rights of others. Third parties also could institute legal proceedings against us claiming that our current or future products infringe their proprietary rights. Alternatively, we may make claims or initiate litigation against others for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any claims against us, with or without merit, or claims by us against others could be time consuming and expensive to defend, prosecute or resolve. In addition, these claims could cause product shipment delays or force us to enter into royalty or license agreements to resolve the claims. Moreover, an adverse outcome in litigation or a similar adversarial proceedings could:

If we are required to license proprietary rights from others or wish to do so, we cannot assure you that the necessary licenses will be available on terms that are acceptable to us or at all. One or more of these events could materially and adversely affect our business, financial condition and results of operations.

Our stock price may fluctuate significantly, which could negatively affect the trading of our common stock.

The market price of our common stock has fluctuated significantly in the past and will likely continue to fluctuate in the future. Various factors and events have caused this fluctuation and are likely to cause the fluctuations to continue. These factors include, among others:

In addition, from time to time the stock market experiences significant price and volume fluctuations. Stock market fluctuations have particularly affected the stock prices of technology companies, including ours. These fluctuations may be unrelated to the operating performance of these companies. Furthermore, our operating results and prospects from time to time may be below the expectations of securities analysts and investors. Any such event could cause the market price of our common stock to decline materially.

The economic downturn in the worldwide manufacturing industry continues to adversely affect our financial results.

Our business depends substantially upon the capital expenditures of manufacturers. In turn, these expenditures depend in part upon the demand for these manufacturers’ products. The ongoing recession affecting the worldwide manufacturing industry has resulted in a weakened demand for the products of many of the manufacturers in our target market, which has caused them to reduce or postpone capital expenditures for business information systems. We believe that as a result, the demand for our products and services has been significantly impacted, which has negatively affected our financial results and financial condition. There can be no assurance that economic conditions relating to our customers or potential customers will not become more severe.

Customer related claims, whether successful or not, could be expensive and could harm our business.

Our products are generally used to manage data critical to large organizations. These organizations also share this critical data with others in their value chain using the Internet or other networks. There are many security risks inherent with making data available over a network and in sharing data with third parties, and our

products are not designed to safeguard against all such risks. We occasionally deliver implementation and integration services to our customers. As a result, our development, sale, service and support of products may entail the risk of customer related claims. Our license and service agreements with customers typically contain provisions designed to limit our exposure to such claims. However, these provisions may not be effective under the laws of all jurisdictions. In addition, our liability insurance may not be sufficient in scope or amount to cover all claims if our contractual limitations on liability are ineffective. A successful claim brought against us could materially and adversely affect our business, financial condition and results of operations. In addition, defending such a suit, regardless of its merits, could require us to incur substantial expense and require the time and attention of key management personnel. This could also materially and adversely affect our business, financial condition and results of operations.

The unavailability of skilled personnel or our inability to attract and retain qualified personnel could hinder our ability to compete and grow.

Our future performance depends upon the continued service of a number of senior management and key technical personnel. The loss or interruption of the services of one or more key employees could have a material adverse effect on our business, financial condition and results of operations. Our future financial results also will depend upon our ability to attract and retain highly skilled technical, managerial and marketing personnel. We do not currently maintain key-person life insurance on any of our key employees.

Competition for qualified personnel is intense and is likely to intensify in the future. We compete for qualified personnel against numerous companies, including larger, more established companies with significantly greater financial resources than ours. We have at times experienced and continue to experience difficulty recruiting and retaining qualified personnel. Our business, financial condition and results of operations could be materially adversely affected if we are unable to hire qualified personnel or if we are unable to retain qualified personnel in the future.

We depend on the continued market for IBM’s eServer iSeries computers for a significant portion of our revenue, and we cannot be sure that this market will grow in the future or that we can increase our share of this market.

We continue to depend on the market for software products on the IBM eServer iSeries platform. Much of the revenue for fiscal 2003 was derived from the licensing of our software products and related services for this platform. We will continue to offer enhanced software products for this market, but there is no guarantee that our existing or prospective customers will buy or support these products. The eServer iSeries market is not expected to grow and will likely diminish in the future. Our future growth depends, in part, on our ability to gain market share. There can be no assurance that we can maintain or increase our relative share of this market.

We depend on the continued market for Microsoft technology and software products for a large portion of our revenue, and any decrease in customer demand for these products and technology would adversely affect our operating results.

We continue to depend on the market for Microsoft technology. An increasing amount of our revenue is derived from the licensing of our software products and related services that operate on these platforms. We will continue to offer enhanced software products using these platforms, but there is no guarantee that our existing or prospective customers will buy or support these products.

Any decrease in our licensing activity is likely to result in reduced services revenue in future periods.

Our service, maintenance and support revenue is derived from our installation, implementation, training, consulting, systems integration, and software product maintenance and support services. Typically a decrease in our service, maintenance and support revenue follows a decrease in our licensed software installations. Our

ability to maintain or increase our service, maintenance and support revenue depends in large part on our ability to increase our software licensing activity. Additionally, as our product licensing occurs predominantly in the third month of each quarter and tends to be concentrated in the latter half of that third month, any delays in product delivery or closings of sales at the end of a quarter, could adversely affect our services revenue in future periods.

If our network of independent local companies is unable or unwilling to sell and support our products, our revenues will decline.

We market, sell and provide professional services for our products primarily through a global network of independent local affiliates. We also maintain a limited direct sales force. We rely on our affiliates for sales, product implementation, customization and, outside of North America, certain customer support services that are provided in conjunction with us. If we are unable to maintain effective long-term relationships with our affiliates or if our affiliates fail to meet our customers’ needs, our business, financial condition and results of operations would be adversely affected.

From time to time some of our competitors have established, and may continue to seek to establish, a comparable distribution channel, in part by attempting to attract our affiliates. Our agreements with affiliates are generally of short duration and can be terminated by an affiliate in some instances. If affiliates reduce or discontinue their relationships with us or their support of our products, our business, financial condition and results of operations would be adversely affected.

In addition, the ability of our affiliates to meet our customers’ needs depends upon their ability to attract, develop, motivate and retain highly skilled professionals and technical personnel. These personnel are in great demand and are likely to remain a limited resource for the foreseeable future. Our business, financial condition and results of operations could be materially adversely affected, if the affiliates are unable to attract and retain sufficient numbers of professional and technical personnel.

If we are unable to effectively manage our anticipated growth, our financial condition will be adversely affected.

Anticipated growth through acquisitions may strain our management and systems. Our future operating results depend in part on the ability of our officers and other key employees to manage the integration of acquired businesses, to continue implementing and improving our operational and financial controls, to expand, train and manage our employees effectively, and to successfully develop new products and enhancements to existing products. Our growth also depends on our ability to retain and attract new affiliates, and our affiliates’ ability to grow, to manage their growth and to implement our products in response to the projected demands of our customers. We cannot assure you that we or our affiliates will be able to successfully market and sell our new products or that either we or our affiliates will be able to successfully manage any future expansion. Our business, financial condition and results of operations would be materially and adversely affected if we or our affiliates are unable to effectively manage our growth.

We are subject to the risk of terrorism, including the resulting possible disruptions in business activities and loss of business.

Our business can be effected by the disruptions caused by terrorist activities. Terrorist acts can create disruptions in our ordinary business activities, including, but not limited to, communications, business travel, and the availability of key personnel and physical assets. Additionally, terrorist acts may cause uncertainty about business continuity and the effectiveness of our disaster recovery plans and the disaster recovery plans of our suppliers and trading partners, and may adversely effect the confidence and behavior of our customers, employees, suppliers, and trading partners.

Our international operations subject us to a number of risks that could substantially hinder our future growth and current results.

A substantial portion of our business comes from outside the United States. We believe that future growth and profitability will require expansion of our sales in international markets. To expand international sales successfully, we must continue to invest substantial resources in

International expansion of our operations also will require us to continue to localize our applications and translate them into foreign languages, which can be a difficult and costly process. If we cannot expand our international operations or localize and translate our applications in a timely and accurate manner, our operating results could be adversely affected. In addition, even if we successfully expand our international operations, we cannot assure you that we will be able to maintain or increase our international market presence or demand for our products.

Any or all of these risks could materially and adversely affect our business, financial condition and results of operations.

As a result of the continued expansion of our international operations, fluctuations in the value of foreign currencies in which we conduct our business may cause us to experience currency transaction gains and losses. Because of the number of foreign currencies involved, our constantly changing currency exposure and the volatility of currency exchange rates, we cannot predict the effects of exchange rate fluctuations on our future operating results. These currency risks could materially and adversely affect our business, financial condition and results of operations.

We have adopted measures that have anti-takeover effects and could limit the price of our stock.

Georgia law and our articles of incorporation, bylaws and shareholder rights plan contain provisions that may

Georgia law prohibits us from entering into some business combination transactions with any person for a period of five years from the date the person becomes an “interested shareholder,” unless specific requirements are satisfied. Generally, an “interested shareholder” is any person that owns at least 10% of our outstanding voting stock, other than us and our subsidiaries. Georgia law also requires that each of these transactions:

We have issued preferred stock and may issue additional preferred stock in the future.

We have issued shares of our preferred stock in the past and may issue additional shares of preferred stock in the future without further shareholder approval. Any future issuance of preferred stock will have the terms, conditions, rights, privileges and preferences that our board of directors determines. The rights of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of our preferred stock.

Our articles of incorporation and bylaws contain additional provisions that have anti-takeover effects.

Our board of directors is divided into three classes. Each class serves for a staggered three-year term. In addition, a director may only be removed from the board for cause and upon the vote of at least 80% of all classes of stock entitled to vote in the election of the director. This classification of our board of directors and limitation on the removal of directors could make it more difficult for a potential acquirer to gain control of our board of directors. Our articles of incorporation and bylaws contain additional provisions that have anti-takeover effects.

We have adopted a shareholder rights plan under which we have distributed to our shareholders rights to purchase shares of our Series F junior participating preferred stock. If specific triggering events occur, the holders of the rights will be able to purchase shares of our common stock at a price substantially discounted from the then applicable market price of our common stock. The shareholder rights plan could increase a potential acquirer’s costs of effecting a merger with us or a tender offer for our outstanding securities that is not approved by our board of directors. These increased costs could prevent or discourage such a transaction, even though our shareholders might want to vote in favor of the merger or participate in the tender offer.

Our common stock price could drop because shares of our outstanding stock are eligible for future sale and some holders of our securities have registration rights.

Sales of a substantial number of shares of our common stock, or the prospect of these sales, could adversely affect the market price of our common stock. These sales or the prospect of these sales also could impair our

ability to raise needed funds in the capital markets at a time and price favorable to us. As of December 1, 2003, we had a total of 23,191,242 shares of common stock outstanding, most of which are freely tradable without restriction under the Securities Act of 1933, as amended. The remaining outstanding shares will be eligible for sale in the public market at various times pursuant to Rule 144 under the Securities Act.

As of December 1, 2003, we had options outstanding under our stock option plans for the purchase of a total of 5,414,329 shares of common stock at a weighted average exercise price of $9.11 per share. We have reserved an additional 1,935,315 shares of common stock that we may issue upon the exercise of options granted in the future under our plans. We also have reserved 262,113 shares of common stock that we may issue under our employee stock purchase plan. We have in effect a registration statement under the Securities Act covering our issuance of shares upon the exercise of these outstanding options and our issuance of shares under our employee stock purchase plan. All of these shares will be freely tradable in the public market, except for shares held by our directors, officers and principal shareholders, which will be eligible for public sale at various times pursuant to Rule 144.

Entities affiliated with Foothill Capital Corporation and General Atlantic Partners, LLC have “demand” and “piggyback” registration rights as follows:

The demand registration rights permit the holders of these securities to require us to register the sale of this common stock under the Securities Act. The piggyback registration rights permit the holders of these securities to participate in any registration of our common stock under the Securities Act. If these holders require us to include their shares in a registration that we initiate, it could adversely affect our ability to raise needed capital in the public market at a favorable time and price.

The 1,499,990 shares of common stock underlying our convertible preferred stock and the 1,500,010 shares of common stock held directly by entities affiliated with General Atlantic Partners currently are eligible for sale in the public market subject to the conditions of Rule 144. In addition, the 134,270 shares of common stock underlying the warrants held by entities affiliated with Foothill Capital Corporation will be eligible for sale in the public market at any future time or times permitted by Rule 144.

We cannot predict every event and circumstance that may impact our business and, therefore, the risks and uncertainties discussed above may not be the only ones you should consider.

The risks and uncertainties discussed above are in addition to those that apply to most businesses generally. In addition, as we continue to grow our business, we may encounter other risks of which we are not aware at this time. These additional risks may cause serious damage to our business in the future, the impact of which we cannot estimate at this time.

Except as discussed in the following paragraphs, we do not engage in trading market risk sensitive instruments nor do we purchase, whether for investment, hedging or purposes “other than trading,” instruments that are likely to expose us to market risk, whether foreign currency exchange rate, interest rate, commodity price or equity price risk. We have not issued any debt instruments, entered into any forward or futures contracts, purchased any options or entered into any swaps, except as discussed in the following paragraphs.

On February 18, 2003, we purchased the outstanding common stock of Frontstep and assumed long-term debt of $20.1 million. To finance this acquisition and pay the acquired debt, we entered into a bank credit facility. The bank credit facility includes a $15.0 million term loan and a $15.0 million revolving credit loan. We borrowed $21.7 million against the credit facility to repay the $20.1 million of acquired debt and $1.6 million to pay for the related transaction costs and liabilities, including $0.8 million of debt issuance costs.

The term loan portion of the bank credit facility requires us to make quarterly principal repayments in various amounts beginning on December 31, 2003 and matures on December 31, 2005. However, we may be required under certain circumstances, based on our excess cash flows as defined in the bank credit facility, to prepay all or a portion of the outstanding balance. Alternatively, we may, at our discretion and subject to some limitations, elect to prepay all or a portion of the outstanding balance without penalty. The interest rate on the term loan portion of the loan agreement varies depending upon our ability to maintain certain specified financial ratios. Additionally, the interest rate is adjusted periodically based on either our lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the interest rate on our term loan, including the lender’s margin, was 3.65%.

The bank credit facility requires us to enter into an interest rate protection arrangement for a portion of the term loan. Accordingly, in April 2003 we purchased an interest rate cap from a bank. This interest rate cap limits our exposure to fluctuations in interest rates on a majority of the term loan. The purchase of the interest rate protection agreement did not have a material impact on our results of operation, financial position or cash flows for fiscal 2003. Furthermore, the interest rate cap is not considered material to our results of operation, financial position or cash flows for fiscal 2003. The interest rate cap expires on June 30, 2005.

We borrowed $6.7 million under the revolving credit portion of the loan agreement on February 18, 2003 to finance, along with the term loan, the Frontstep acquisition. The revolving credit loan is subject generally to the same provisions as our term loan and subject to the overall borrowing base. Borrowings under the revolving credit portion of the bank credit facility mature on December 31, 2005. Repayment of the revolving credit loan is due in full on the maturity date. We made a $2.7 million payment against the revolving credit portion of the loan agreement in March 2003. The interest rate on the revolving credit portion of the bank credit facility varies depending upon our ability to maintain certain specified financial ratios. Additionally, the interest rate is generally adjusted quarterly based on either our lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the interest rate on the revolving credit portion of the bank credit facility, including the lender’s margin, was 3.62%. As of September 30, 2003 we had available borrowings under the revolving credit loan of $11.0 million, subject to the borrowing base. As of July 31, 2003, we amended the bank credit facility to decrease the amount of the revolving credit loan from $15.0 million to $12.5 million and modified certain financial covenants.

We prepared a sensitivity analysis of our interest rate exposures from anticipated levels of financing for the twelve months ended September 30, 2003 to assess the impact of hypothetical changes in interest rates. Based upon our analysis, a 10% adverse change in the LIBOR rate from September 30, 2003 rates would not have a material adverse effect on the fair value of our debt instrument and would not materially affect our results of operations, financial condition or cash flows.

Some of our operations generate cash denominated in foreign currency. Consequently, we are exposed to certain foreign currency exchange rate risks. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute products. When the U.S. dollar strengthens against a foreign currency, the value of our sales in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales in that currency converted to U.S. dollars increases.

From time to time, we may enter into forward exchange contracts or purchase options to minimize the effect of changes in exchange rates on our financial position, results of operations and cash flows. We incurred net foreign currency gains of $14,000 in fiscal 2001, net foreign currency losses of $194,000 in fiscal 2002 and net foreign currency gains of $510,000 in fiscal 2003 mostly due to transactions within EMEA. We had no open forward exchange contracts or options or other trading financial instruments with foreign exchange risk at September 30, 2002 or 2003. At September 30, 2003, we had the following non-trading other financial instruments denominated in currencies other than the U.S. dollar (in thousands of U.S. dollars):

As our foreign operations increase, our business, financial condition and results of operations could be adversely affected by future changes in foreign currency exchange rates. For further information see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Performance—Our international operations subject us to a number of risks that could substantially hinder our future growth and current results.”

Although we cannot accurately determine the amounts attributable thereto, we have been affected by inflation through increased costs of employee compensation and other operating expenses. To the extent permitted by the market for our products and services, we attempt to recover increases in costs by periodically increasing prices. Additionally, most of our license agreements and services agreements provide for annual increases in charges.

The following is a list of our consolidated financial statements and supplemental financial information appearing in this Item 8:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of MAPICS, Inc. and its subsidiaries at September 30, 2002 and September 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

MAPICS, Inc. (“MAPICS”) is a global developer of collaborative business application software solutions designed specifically for use by manufacturers. Our goal is to deliver application software and consulting services that create value by providing a quick return on investment and improving bottom line financial results for our customers. Our solutions also allow manufacturers to make the most of their existing technology investments while taking advantage of new technologies at a pace that best fits their needs. In addition, our solutions bring our customers proven expertise, knowledge, and understanding of the business issues that are unique to manufacturers.

MAPICS, Inc. is headquartered in Alpharetta, Georgia, USA, with offices around the globe and a worldwide sales network of affiliate partners. We were originally incorporated in Massachusetts in 1980, and in 1998 we reincorporated in Georgia.

The balance sheets as of September 30, 2002 and 2003 and the statements of operations, cash flows and shareholders’ equity for each of the three years in the period ended September 30, 2003 are consolidated and consist solely of the separate financial statements of MAPICS, Inc. and our subsidiaries. The results of operations of our acquisitions have been included beginning on the date that each company became owned by MAPICS, Inc. We eliminated all significant intercompany accounts and transactions in consolidation.

We operate on a fiscal year that ends on September 30th. References to fiscal years refer to our fiscal year ended or ending September 30th.

We are required to make estimates and assumptions in the preparation of our financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect 1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and 2) the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from estimates.

We consider all highly liquid debt instruments, primarily money market funds, purchased with maturities of three months or less to be cash equivalents.

At September 30, 2003, we held substantially all of our cash with two financial institutions. At September 30, 2002, we held substantially all of our cash and cash equivalents on deposit with two financial institutions. We believe that the carrying amount of cash equivalents is a reasonable estimate of their fair value. As of September 30, 2002 and 2003, our cash and cash equivalents denominated in foreign currencies were $1.5 million and $1.8 million.

In addition to cash and cash equivalents, trade accounts receivable is the only financial instrument which potentially exposes us to concentrations of credit risk. We provide credit in the normal course of business to various types and sizes of manufacturers located throughout the world. As a result, we believe that concentration of credit risk with respect to trade accounts receivable is not significant.

Property and equipment are stated at cost. We calculate depreciation using the straight-line method based upon the following estimated useful lives:

We record a gain or a loss on the disposal of property and equipment based on the difference between the proceeds we receive, if any, and the net book value of the assets we dispose on the date of disposal.

We charge all computer software development costs prior to establishing technological feasibility of computer software products to product development expense as they are incurred. From the time of establishing technological feasibility through general release of the product, we capitalize computer software development and translation costs and report them on the balance sheet as a component of computer software costs at the lower of unamortized cost or net realizable value. Amortization of computer software costs represents recognition of the costs of some of the software products we sell, including purchased software costs, capitalized software development costs and costs incurred to translate software into various foreign languages. We begin amortizing computer software costs upon general release of the product to customers and compute amortization on a product-by-product basis based on the greater of the amount determined using:

Additionally, in fiscal 2000 as part of the acquisition of Pivotpoint and in fiscal 2003 as part of the acquisition of Frontstep, a portion of the purchase price from both acquisitions was allocated to acquired technology. The acquired technology is included in computer software costs and is being amortized over a five-year period from the date of acquisition.

Software is subject to rapid technological obsolescence and, as a result, future amortization periods for computer software costs could be shortened as a result of changes in technology in the future. Where future revenue is not expected to cover the related unamortized computer software costs, we either accelerate amortization or write-off the remaining unamortized amounts. In fiscal 2001, we wrote off $1.6 million of computer software development cost related to the translation of a version of our software that is no longer marketed for which a new release is now available.

We include amortization of computer software costs in cost of license revenue in the statement of operations. Amortization of computer software costs was $6.6 million, $6.5 million, and $7.6 million in fiscal 2001, 2002, and 2003.

Goodwill and other intangible assets resulted primarily from our acquisitions of Frontstep in February 2003, Pivotpoint in January 2000 and of the MAPICS business in 1993. Under SFAS 142, “Goodwill and Other Intangible Assets”, we discontinued periodic amortization of goodwill. We calculate amortization of intangible assets, which is included in cost of license revenue using the straight-line method over the estimated lives of the intangible assets as follows:

We perform an impairment analysis of our goodwill on an annual basis. Based upon our review in fiscal 2003, we have not deemed our goodwill to be impaired.

We defer direct costs, including bank origination and amendment fees and legal fees, incurred in obtaining credit facilities and amortize such costs over the term of the related facility. In fiscal 2001 and fiscal 2002, we incurred $96,000 and $64,000 in debt issue costs related to our then existing bank credit facility. In fiscal 2002, in conjunction with the then existing revolving credit facility, we capitalized an additional $132,000 of debt issue costs which were fully amortized during fiscal 2003 upon termination of the facility. In fiscal 2003, we capitalized $756,000 in conjunction with our new bank credit facility and are amortizing such costs over the life of the bank credit facility which is over three years.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell.

As required by SFAS No. 144, we periodically assess the recoverability of the cost of our long-lived assets and other intangible assets. We base this fair value assessment on several criteria, including but not limited to sales trends, undiscounted operating cash flows and other operating factors. If the undiscounted cash flows are below the carrying value of the assets recorded, we recognize an impairment in the amount the carrying value exceeds estimated fair value. See Note (8) for further discussion on impairment of long-lived assets.

The financial position and results of operations for a majority of our foreign subsidiaries are measured using the currency of the respective countries as the functional currency. Assets and liabilities are translated into the reporting currency (U.S. dollars) at the foreign exchange rate in effect at the balance sheet date, while revenue and expenses for the period are translated at the average exchange rate in effect during the period. Translation gains and losses are accumulated and reported as a separate component of stockholders’ equity. We incurred net foreign currency transaction losses of $194,000 in fiscal 2002 and net foreign currency transaction gains of $14,000 and $510,000 in fiscal 2001 and fiscal 2003, mostly related to transactions within EMEA. The company has not entered into any foreign currency hedging contracts during any of the periods presented.

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,’ “ SAB 101, “Revenue Recognition in Financial Statements,” and AICPA Technical Practice Aid (TPA) 5100.53, “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition.”

We generate a significant portion of total revenue from licensing software. Our sales channel consists of our direct sales force and 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 our independent affiliates. Our license agreements are either annual renewable term license agreements or perpetual license agreements.

For our annual renewable term license agreements, when we first license a 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:

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

The annual support fee, which is typically paid 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 in most cases. A small percentage of our contracts have limited express warranties that cover a period of up to three years. These contracts relate to the SyteLine^® product acquired in the acquisition of Frontstep, Inc. No new contracts containing this specific type of warranty are planned to be used in the future. 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 provide customers with available annual maintenance services that include electronic usage support and defect repairs. 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 to believe that we will receive any material claims in the future.

Under the terms of our license agreements, our customers are responsible for implementation 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 consulting and implementation 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 estimates 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.

We defer sales commissions due to our affiliates on sales of time-based iSeries licenses and amortize these costs ratably over the same period as the revenue is recorded. We also evaluate the amount of direct sales force commissions for deferral and generally expense amounts as incurred. For perpetual licenses, we expense commissions in the period the sale is completed and the license revenue is recorded. We include the costs of these commissions in selling and marketing expense. We generally pay the commissions to our affiliates when we receive payment from our customers for the license fee.

We defer royalties due to our solution partners on sales of time-based iSeries licenses and amortize these costs ratably over the same period as the license revenue is recorded. For perpetual licenses, we expense the royalties in the period the sale is completed and the license revenue is recorded. We include the costs of these royalties in cost of license. We generally pay the royalties to our solution partners when we receive payment from our customers for the license fee.

We expense advertising costs as they are incurred. Advertising expenses in fiscal 2001, fiscal 2002, and fiscal 2003 were $817,000, $1.4 million, and $949,000, respectively.

We apply Accounting Principles Board 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, “Accounting for Stock-Based Compensation.” As a result, we generally do not recognize compensation expense for stock options issued to our directors or our employees, except for stock options and other stock-based awards issued under specific performance plans. We record expense for all stock-based awards issued to non-employees, other than our non-employee directors We also apply the disclosure provisions of SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure-an Amendment of FASB Statement No. 123.” We use the fair value method to account for stock-based employee compensation in our SFAS 123 pro-forma disclosures for each period presented. See note (14) for disclosure of our pro-forma calculation of stock-based employee compensation.

We account for income taxes using the asset and liability method as prescribed by SFAS No. 109, “Accounting for Income Taxes.” Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates applied to taxable income. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We provide a valuation allowance for deferred tax assets when we believe it is more likely than not that we will not realize all or a portion of the assets.

We apply SFAS No. 128, “Earnings Per Share,” which requires us to present “basic” and “diluted” net income (loss) per common share for all periods presented in the statements of operations. We compute basic net income (loss) per common share, which excludes dilution, by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if holders of our preferred stock, common stock options, common stock warrants or 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 (loss) per share includes:

The following table presents the calculations of basic and diluted net income (loss) per common share or common share equivalent:

Because their inclusion would have an antidilutive effect on net loss per common share, we excluded the average number of common share equivalents listed below from the computation of diluted net loss per share for fiscal 2001 (in thousands):

SFAS No. 130, “Reporting Comprehensive Income,” requires us to present comprehensive income, which is net income plus all other changes in net assets from non-owner sources, and its components in the financial statements. Components of comprehensive income other than net income include the effect of our interest rate hedge and foreign currency translation adjustments. Comprehensive income is presented as a component on our consolidated statement of shareholders’ equity.

Certain prior year amounts have been reclassified to conform to the current year presentation.

In July 2002, the 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 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 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 applied SFAS No. 146 to activities that we incurred fiscal 2003. See note (4) for further details.

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 the 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 pronouncements as discussed above in “Revenue Recognition.” The Issue had no significant impact on our results of 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” (the Interpretation). The Interpretation clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantors’ accounting for, and disclosure of, the issuance of certain types of guarantees. The 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 with regards to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements for both interim and annual periods ended after December 15, 2002. We have provided the required disclosures related to our policy on product warranties and other items above in “Revenue Recognition” and in note (13). The Interpretation had no significant impact on our reported results of 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 No. 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 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. See note (14) for the pro forma calculation as required by SFAS No. 123 for the year ended September 30, 2003. We adopted the amended

interim disclosure requirements during the quarter ended March 31, 2003. The adoption of the additional disclosure requirement did not have a significant impact on our reported results of 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 September 30, 2003. We will apply the consolidation requirement of FIN 46 in future periods if we should own any interest in any variable interest entity.

On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement establishes accounting and reporting standards for derivative instruments including derivatives embedded in other contracts and for hedging activities. This statement amends SFAS No. 133 for the following: 1) implementation issues previous cleared by FASB and the Derivatives Implementation Group process, 2) clarification of the definition of a derivative and, 3) clarification of the definition of expected cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003. We adopted SFAS No. 149 on June 30, 2003. The adoption of Statement 149 did not have a material effect on our consolidated financial position, results of operations or cash flows.

On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. This Statement represents a significant change in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. This Statement is effective for all financial instruments created or modified after May 31, 2003, and for other instruments as of September 1, 2003. We have had no newly created or modified financial instruments since May 31, 2003; however, we currently have outstanding preferred stock, which has the characteristics of a mandatorily redeemable financial instrument. The preferred stock has a conditional obligation for its redemption, and we will reclassify this preferred stock as a liability if the event for redemption occurs or is certain to occur. We adopted SFAS No. 150 on June 1, 2003. The adoption of this statement did not have a significant impact on our reported results of operations, financial position, or cash flows.

On February 18, 2003, we acquired Frontstep, Inc, a business software and services provider for mid-sized manufacturing companies headquartered in Columbus, Ohio. The combined company markets offerings from both companies under the MAPICS® brand. The combined company 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, we believe the combined company will benefit from a more balanced sales strategy with both larger direct and affiliate channels serving the global manufacturing market.

Pursuant to the terms of the merger agreement, shareholders of Frontstep received, in the aggregate, 4.2 million shares of MAPICS common stock in exchange for all of the outstanding Frontstep shares. We assumed Frontstep’s outstanding debt of $20.1 million as well as certain outstanding stock options and warrants. We accounted for the acquisition as a purchase under the guidance of SFAS No. 141, “Business Combinations”. Accordingly, the results of operations of Frontstep for the period from February 18, 2003 are included in the accompanying condensed consolidated financial statements.

We allocated the total purchase price to the net tangible assets and intangible assets acquired based on our estimate of fair value at the date of acquisition. The allocation of the total purchase price to the acquired technology and other intangible assets, including trade name and maintenance contracts, was based on management’s best estimate which utilized a third party appraisal. We allocated the balance of the total purchase price to goodwill.

The equity value of the shares issued was calculated based on an average price of $7.07 per share, which was derived by using the average of the price of MAPICS common stock for the 5 business days surrounding the date of measurement, November 24, 2002, in accordance with Emerging Issues Task Force (EITF) Issue No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”. The date of measurement reflects the date the merger was announced. Direct transaction costs include our fees paid or accrued for professional services performed in connection with the acquisition of Frontstep.

The purchase price includes the fair value of the vested options under the Frontstep options plans. The option plans and all outstanding options were converted into MAPICS options using the same conversion ratio that was used for the exchange of Frontstep stock. We registered 542,258 shares of our common stock for these plans as follows: 238,974 shares to be issued under the Frontstep Amended and Restated Non-Qualified Stock Option Plan for Key Employees, 182,945 shares to be issued under the Frontstep Second Amended and Restated 1999 Non-Qualified Stock Option Plan for Key Employees, and 120,339 shares to be issued under the Symix Non-Qualified Stock Options Plan for Key Executives. Substantially all of the shares under these plans are fully vested, and the options expire on the original expiration date or 90 days after the employee is no longer employed by us. Upon surrender of the options, they are no longer available for reissuance.

Additionally, the purchase price includes the estimated fair value of a stock warrant, which was approved for issuance on February 18, 2003. The warrant can be converted into 134,270 shares of common stock at a price of $7.81 and expires on July 17, 2006.

The following allocation of the total purchase price reflects our estimate of fair value for the assets acquired and liabilities assumed and is subject to adjustment when additional information concerning asset and liability balances is finalized. Any increase or decrease in the net assets acquired will cause a corresponding decrease or increase in goodwill.

The following unaudited pro forma information presents our results of operations as if the acquisitions had taken place on October 1, 2001 for fiscal 2002 and October 1, 2002 for fiscal 2003:

These pro forma results of operations include adjustments to the historical financial statements of the combined companies and have been prepared for comparative purposes only. These pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future.

In March 2000, we acquired a software education business. In exchange for the business, we issued 106,668 shares of restricted MAPICS common stock to the former owners of the business. Under the purchase agreement, if, on March 1, 2003, the price per share of our common stock was less than $18.75, we were required to pay additional consideration, in the form of shares or cash, equal to the difference between $18.75 and the quoted market price multiplied by the number of shares issued to the former owners that they still held on March 1, 2003. On February 28, 2003, our stock closed at $6.90 per share. As a result, we issued an additional 81,774 shares of common stock and paid cash of $700,000 as additional consideration under the purchase agreement. In accordance with applicable accounting literature, we decreased additional paid-in capital by $1.3 million to account for the value of the additional consideration.

Acquisition Costs. Acquisition costs were a recovery of $2.0 million in fiscal 2001 and $1.0 million in fiscal 2002. We recorded no acquisition costs in fiscal 2003. Costs relating the acquisition of Frontstep in fiscal 2003 were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” and are discussed in the Restructuring Costs section herein.

Restructuring Costs. We recorded no restructuring costs in fiscal 2001. We recorded restructuring costs of $4.7 million in fiscal 2002 resulting from a five-year agreement with an offshore information technology services company to perform a variety of our ongoing product development activities. During fiscal year 2003, we

recorded exit costs of $8.0 million relating to the Frontstep acquisition, of which $6.2 million were included in the cost of the acquisition and recorded in the purchase price allocation. The remaining $1.8 million in exit costs were recorded as restructuring costs in our statement of operations.

As stated above, we incurred restructuring costs of $4.7 million during fiscal 2002 principally resulting from staff and facility reductions as a result of 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% during fiscal 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. During fiscal 2003, we adjusted our previously recorded liability by $276,000 in order to reclaim office space that was previously abandoned.

The total exit cost of $6.2 million during the fiscal 2003 that was included in the purchase price allocation, included $3.3 million in abandonment of office space and related costs and $2.4 million in employee severance and related costs for approximately 85 employees from all areas of Frontstep. Additionally, exit costs included obligations remaining pursuant to a $450,000 consulting agreement that was subsequently terminated on February 21, 2003. We accounted for these costs in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” These costs resulted from our acquisition of Frontstep for which the combined company will receive no future economic benefit.

We accounted for the remaining $1.8 million of exit costs during fiscal 2003 in restructuring costs in our statement of operations under the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”, which is effective for exit or disposal activities that were initiated after December 31, 2002. These costs included $2.1 million in employee severance and related costs for approximately 90 employees from all areas of the Company and a recovery of $276,000 of a previous accrual as discussed herein. Restructuring activities for comparative periods prior to the effective date of SFAS No. 146 have been accounted for in accordance with 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).”

The major components of the restructuring and exit cost reserve at September 30, 2002 and 2003 were as follows (in thousands):

We expect future cash expenditures related to these restructuring activities to be approximately $6.3 million. We expect to pay approximately $4.3 million during fiscal 2004, and we therefore have included this amount in current liabilities. The remaining $2.0 million is expected to be paid by fiscal 2007.

The following is a summary of the activity in the allowance for doubtful accounts during the last three fiscal years (in thousands):

Other allowance for doubtful accounts balance consists of $4.2 million of allowance for doubtful accounts that were part of the accounts receivable acquired in the Frontstep acquisition. The remaining balance relates to an allowance reserve against deferred maintenance revenue billings.

We establish reserves for customer receivable balances when we believe it is probable that we will not collect those receivables. We include the related provision for bad debts in general and administrative expenses.

During fiscal 2002 and fiscal 2003, we disposed of some of our computer equipment, furniture and fixtures and leasehold improvements. In fiscal 2002, the assets we disposed of had a book value of $65,000, which we recorded as a loss. In fiscal 2003, the assets we disposed of had a book value of $163,000, which we also recorded as a loss.

Changes in Goodwill for the Twelve Months Ended September 30, 2003 and 2002:

In March 2002, certain tax liabilities, deferred tax assets, and net operating losses from the acquisition of Pivotpoint were adjusted to reflect current estimates based on the settlement of an IRS exam, and pursuant to SFAS No. 109, “Accounting for Income Taxes,” goodwill was adjusted downward by $678,000 as of March 31, 2002. At September 30, 2002, the remaining balance of goodwill net of accumulated amortization was $3.7 million.

On February 18, 2003 we completed the acquisition of Frontstep. We allocated the total purchase price to the net tangible assets acquired based on our estimate of fair value at the date of the acquisition. The allocation of the total purchase price to tradenames, maintenance contracts and acquired technology was based on management’s best estimate which utilized a third party appraisal. We allocated the $38.3 million balance of the total purchase price to goodwill. See note (3) for further details on the acquisition.

We adopted SFAS 142, “Goodwill and Other Intangible Assets” on October 1, 2001. Accordingly, we discontinued periodic amortization of goodwill. Goodwill is assessed annually for impairment by applying a fair-value-based test. We have subsequently performed an impairment analysis of our goodwill for the period ended September 30, 2003. Based upon our review, we have not deemed our goodwill to be impaired. Additionally, the standard requires a transitional impairment test during the period of adoption. Based on the transitional impairment test completed on March 31, 2002, we did not record an impairment charge for goodwill as of that date.

During fiscal 2001, we recorded $35.1 million in amortization of goodwill. The impact of amortization of goodwill on net income for the year ended September 30, 2001 was as follows (in thousands, except per share data):

Intangible assets that have finite useful lives are amortized over their estimated useful lives. Our intangible assets consist principally of tradenames, trademarks, maintenance contracts, and installed customer base and affiliate network, and we consider all to have finite lives.

We acquired $5.8 million of intangible assets as part of the Frontstep acquisition. See note (3) for further details on the acquisition. These assets consisted of tradename and maintenance contracts and are being amortized over the remaining estimated life. The weighted average amortization lives of the acquired tradename and maintenance contracts is 5 years. The weighted average amortization lives of the installed customer base and affiliate network is 13 years.

In fiscal 2000, in conjunction with our acquisition of Pivotpoint, we borrowed $40.0 million under the term loan portion of a bank credit facility to finance a portion of the purchase price. The term loan required us to make quarterly principal repayments in various amounts and was scheduled to mature on December 31, 2002.

On April 26, 2002, we entered into a secured revolving credit facility, which provided for a revolving credit line of up to $10.0 million. On that date, we borrowed $8.4 million under the revolving credit facility to repay the remaining balance of the previous term loan under our previous bank credit facility, and we terminated the previous bank credit facility. At the time of refinancing, the balance of the unamortized debt issuance costs relating to our original term loan was $491,000. We wrote down the remaining balance of debt issuance costs, net of income tax benefit of $173,000, and classified the write-down as an extraordinary item in our consolidated statement of operations in accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” We have not historically required debt financing for operating purposes and do not anticipate requiring debt financing for such purposes in the foreseeable future. The write-down met the criteria for classification as extraordinary since the early termination of the then existing bank credit facility was determined to be an event that is both infrequent and unusual. We repaid the entire $8.4 million on the secured revolving credit facility during fiscal 2002. In conjunction with the revolving credit facility, we capitalized $132,000 of debt issue costs and were amortizing such costs over the life of the revolving credit facility. These costs were fully amortized as of February 2003. This revolving credit facility was terminated in conjuction with the Frontstep acquisition. There were no outstanding borrowings against this facility at the time of the termination.

On February 18, 2003, we purchased the outstanding common stock of Frontstep and assumed long-term debt of Frontstep aggregating to $20.1 million. We entered into a bank credit facility consisting of a $15.0 million term loan and, at that time, a $15.0 million revolving credit loan to repay the debt assumed from Frontstep. We borrowed $21.7 million against the bank credit facility to repay the $20.1 million of acquired debt and to pay the $1.6 million of related transaction costs and liabilities, including $756,000 of debt issuance costs. The debt issuance costs are being amortized using the straight-line method over the expected life of the bank credit facility.

Set forth below are the scheduled principal payments under the term loan for the indicated fiscal years ending (in thousands):

We borrowed $6.7 million under the revolving credit portion of the loan agreement on February 18, 2003 to finance, along with the term loan, the Frontstep acquisition. The revolving credit loan is subject generally to the same provisions as our term loan and subject to the overall borrowing base. Borrowings under the revolving credit portion of the bank credit facility mature on December 31, 2005. Repayment of the revolving credit loan is due in full on the maturity date. We made a $2.7 million payment against the revolving credit portion of the loan agreement in March 2003. The interest rate on the revolving credit portion of the bank credit facility varies depending upon our ability to maintain certain specified financial ratios. Additionally, the interest rate is generally adjusted quarterly based on either our lender’s base rate or LIBOR plus a predetermined margin. At September 30, 2003, the interest rate on the revolving credit portion of the bank credit facility, including the lender’s margin, was 3.62%. As of September 30, 2003 we had available borrowings under the revolving credit loan of $12.5 million, subject to the borrowing base, of which $8.5 million was unused. As of July 31, 2003, we amended the bank credit facility to decrease the amount of the revolving credit loan from $15.0 million to $12.5 million and modified certain financial covenants. In November 2003, we borrowed $1.5 million on the revolving line of credit. As of November 2003 we had $7.0 million of unused available borrowings on the revolving line of credit.

The bank credit facility, as amended, contains covenants that, among other things, require us to maintain specified financial ratios and impose limitations or prohibitions on us with respect to:

Also, as part of the covenants, we must also maintain a minimum balance of $12.5 million on deposit at the lending banks through September 30, 2004 and $10.0 million thereafter until the loan is repaid. This $12.5 million is not legally restricted. As of September 30, 2003, we were in compliance with our debt covenants.

During fiscal 2000, we entered into an interest rate swap arrangement with a bank, as required by our then existing bank credit facility. The purpose of the interest rate swap arrangement was to reduce our exposure to interest rate fluctuations by converting variable rate interest payments to fixed rate interest payments on a portion of the outstanding balance under our term loan. Under the terms of the interest rate swap arrangement; we paid the bank a fixed rate of 7.00% on a decreasing notional principal amount in exchange for a variable rate payment based on three-month LIBOR. The hedge expired on December 31, 2001. Upon adoption of SFAS No. 133, we determined that the interest rate swap was an effective hedge and recorded the hedge as a liability of $69,000 on our balance sheet. At September 30, 2001 and 2002, the hedge had a liability of $100,000 and $0, respectively. We recognized no gain or loss related to this swap during fiscal 2001 and 2002. Because this swap was considered an effective hedge, we recorded a change in accumulated other comprehensive loss of $(62,000), net of income taxes, for fiscal 2001 and $62,000, net of income taxes, for fiscal 2002. Accumulated other comprehensive loss is presented as a separate component of shareholders’ equity on our consolidated balance sheet.

The bank credit facility requires us to enter into an interest rate protection arrangement for a portion of the term loan. Accordingly, in April 2003 we purchased an interest rate cap from a bank. This interest rate cap limits our exposure to fluctuations in interest rates on a majority of the term loan in decreasing amounts. The purchase of the interest rate protection agreement did not have a material impact on our results of operation, financial position or cash flows for the fiscal 2003. Furthermore, the interest rate cap is not considered material to our results of operation, financial position or cash flows for the fiscal 2003. The interest rate cap expires on June 30, 2005.

Accrued expenses and other current liabilities consist of the following (in thousands):

Accrued payroll and related expenses include $1.6 million and $2.6 million for compensated absences as of September 30, 2002 and 2003.

The components of income tax expense (benefit) before extraordinary item are as follows (in thousands):

The reconciliation of aggregate tax expense (benefit) per the consolidated statement of operations is as follows (in thousands):

The components of income (loss) from domestic and foreign operations before income tax expense (benefit) are as follows (in thousands):

The actual income tax expense (benefit) before extraordinary item differs from the expected income tax expense (benefit) calculated by applying the federal statutory rate of 35.0% to income before income tax expense (benefit) and extraordinary item as follows (in thousands):

The aggregate effective income tax benefit rate for fiscal 2002, including the extraordinary item, is (1.4)%.

The effective tax rates for fiscal 2001 differs from the statutory federal rate of 35.0% principally due to the effect of amortization of goodwill and other intangible assets that are not deductible for income tax purposes. The effective tax rate for fiscal 2002 and fiscal 2003 differs from the statutory federal income tax rate of 35.0% principally due to a $5.0 million benefit and a $2.1 million benefit, respectively, that we recorded. These tax benefits resulted from changes in income taxes payable due to the resolution of federal income tax uncertainties related to tax net operating losses, or NOLs, retained by us in connection with the 1997 separation of Marcam Corporation into two companies. Accordingly, we recorded the benefit of the resolution of the uncertainties as decreases to income taxes payable. We still retain additional favorable income tax attributes in connection with the 1997 separation of Marcam Corporation into two companies, and we may realize additional income tax benefits related to these tax attributes in future periods if and when they become certain. Additionally, the impact of state and foreign income taxes and the adjustment of goodwill from Pivotpoint created differences from the expected income tax expense (benefit) calculated by applying the federal statutory rate to our income before income tax expense (benefit) and extraordinary item.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that we will realize some or all of the deferred tax assets. The realization of the Company’s deferred tax assets, which relate primarily to net operating loss carryforwards and temporary differences is dependent on generating sufficient taxable income in future periods. We have recorded deferred tax assets at the amount we believe is more likely than not to be realized. In addition, we have not recorded any deferred tax liabilities for the unremitted earnings of our foreign subsidiaries as these amounts are considered to be permanently reinvested.

In connection with the acquisition of Frontstep, we recorded a net deferred income tax asset of $14.5 million. Included in the deferred tax asset were gross domestic NOL’s of $22.5 million, gross foreign NOL’s of $2.0 million and tax credits of $4.6 million. We also recognized valuation allowances of $3.7 million in connection with the Frontstep acquisition. The valuation allowances were provided due to income tax limitations related to certain foreign NOL’s and tax credits. In fiscal 2003 we recognized additional valuation allowances of $716,000 related to expected limitations on the utilization of domestic tax credits and foreign NOL’s. The changes in the valuation allowance is as follows:

At September 30, 2002 and 2003, we had federal net operating loss carryforwards of $9.0 million and $42.7 million, and research and experimentation and other credit carryforwards of $4.4 million and $9.0 million. At September 30, 2003, we also have $8.8 million of foreign net operating loss carryforwards. The net operating losses and tax credits at September 30, 2003 expire between fiscal 2004 and fiscal 2023. The utilization of a significant portion of the domestic net operating losses and tax credits is limited on an annual basis due to various changes in ownership of MAPICS, Frontstep and Pivotpoint. We do not believe that these limitations will significantly impact our ability to utilize the net operating losses before they expire, however as stated above, valuation allowances have been provided for certain foreign NOL’s and income tax credits, based on their expected utilization.

In March 2002, the Internal Revenue Service completed its examination of the Pivotpoint income tax returns for tax years 1992 through 1995. As a result of this examination, we paid income taxes of approximately $190,000 plus accrued interest. The examination did not have a significant effect on our net operating loss carryforwards or other tax credit carryforwards.

Debt: The debt noted above is included in our Consolidated Balance Sheets. This debt includes $15.0 million for the term loan portion of our bank credit facility and $4.0 million for the revolving credit portion of our bank credit facility. As the revolving credit facility matures in December 2005 it is included in the 1-3 Years column as this would be the “scheduled” payment date if management decides not to repay the outstanding balance prior to the maturity date. It is recorded as a current portion of long term debt in our Consolidated Balance Sheets. See note (9) for additional information about our debt.

Change of control agreements: We are a party to change of control employment agreements and term employment agreements with certain of our executive officers and key employees.

The inclusion of the required disclosures had no significant impact on our reported results of operations, financial position, or cash flows.

Our authorized capital stock consists of 90,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $1.00 per share.

On February 18, 2003, we issued 4.2 million shares of common stock and a warrant in connection with the acquisition of Frontstep. We also converted the outstanding Frontstep options into 542,258 MAPICS options. See note (3) for more details regarding the acquisition.

As of September 30, 2002 and 2003, we had outstanding 125,000 shares of series D convertible preferred stock and 49,999 shares of series E convertible preferred stock. For information regarding the series F junior participating preferred stock, see “Rights Plan.” In October 2003, 25,000 shares of series D convertible preferred stock were converted into 250,000 shares of MAPICS common stock. As a result, the liquidation preference for the series D convertible preferred stock has been reduced to $7.5 million. We had 1,749,990 shares reserved for the conversion of the series D and series E convertible preferred stock at September 30, 2003. Following the October 2003 conversion, we had 1,499,990 shares reserved for the conversion of the preferred stock.

Each share of series D convertible preferred stock and series E convertible preferred stock is convertible at any time at the option of the holder into 10 shares of common stock, subject to adjustment in the event of our liquidation or dissolution as defined in the preferred stock agreements. The holders of convertible preferred stock are generally entitled to vote on an as converted basis and are entitled to receive dividends at the same rate as dividends are paid with respect to common stock. If at any time after September 30, 1998, for a period of not less than 30 consecutive trading days, the market value of our common stock exceeds $30.14 per share, we may effect the mandatory conversion of all then outstanding shares of series D convertible preferred stock into shares of common stock. Likewise, if at any time after July 23, 1999, for a period of not less than 30 consecutive trading days, the market value of our common stock exceeds $30.14 per share, we may effect the mandatory conversion of all then outstanding shares of series E convertible preferred stock into shares of common stock.

Upon any event of our liquidation or dissolution, we must pay holders of convertible preferred, before any distribution is made upon stock ranking junior to the convertible preferred stock, the greater of 1) $75.36 per share plus an amount per share equal to any dividends declared but unpaid on the convertible preferred stock or 2) such amounts per share as would have been payable had each share been converted to common stock.

In May 1994, in connection with the sale of subordinated notes, we issued warrants to purchase an aggregate of 526,309 shares of common stock at an exercise price of $6.50, as adjusted from time to time. We refer to these warrants as the sub debt warrants. These sub-debt warrants were exercisable during the period commencing June 30, 1994 and ending April 30, 2001. The sub-debt warrants expired unexercised on April 30, 2001.

In July 1996, in connection with the issuance and sale of the series E convertible preferred stock, we issued and sold warrants to purchase an aggregate of 1,000,000 shares of common stock at an exercise price of $11.53, as adjusted from time to time. The series E warrants were exercisable at any time during the period commencing July 23, 1996 and ending July 23, 2003. The series E warrants expired unexercised on July 23, 2003.

On February 18, 2003, we issued a warrant in conjunction with the acquisition of Frontstep for the future purchase of 134,270 shares of our common stock at a price of $7.81 per share. This warrant expires on July 17, 2006.

We have a shareholder rights plan under which we declared a dividend of 1) one preferred stock purchase right, or a “right,” for each outstanding share of common stock, and 2) a number of rights for each outstanding share of convertible preferred stock equal to the number of shares of common stock issuable upon conversion of that convertible preferred stock. Each right entitles holders to purchase one one-thousandth of a share, or a “unit,” of series F junior participating preferred stock at an exercise price of $60.00 per unit, subject to adjustment. The rights become exercisable for common stock only under specific circumstances and in the event of particular events relating to a change in control of us. Under specific circumstances pursuant to the rights plan, we may redeem the rights. The rights expire on December 16, 2006, unless redeemed or exchanged earlier. The rights have an anti-takeover effect, in that they would cause substantial dilution to a person or group that acquires a significant interest in us on terms not approved by our board of directors.

At September 30, 2003, we had eight stock option plans and an employee stock purchase plan, described below.

The 1998 Long-Term Incentive Plan. The MAPICS, Inc. 1998 Long-Term Incentive Plan, or 1998 LTIP, allows us to issue up to 6,000,000 shares of common stock through various stock-based awards to our directors, officers, employees and consultants, including an additional 1,500,000 shares authorized in fiscal 2000,an additional 1,000,000 shares authorized in fiscal 2002 and an additional 1,500,000 shares authorized in fiscal 2003. The stock-based awards can be in the form of (a) incentive stock options, or ISOs, or non-qualified stock options; (b) stock appreciation rights; (c) performance units; (d) restricted stock; (e) dividend equivalents; and (f) other stock based awards. In general, the exercise price specified in the agreement relating to each ISO granted under the 1998 LTIP is required to be not less than the fair market value of the common stock as of the date of grant.

During fiscal 2001, fiscal 2002, and fiscal 2003, we granted 94,000; 3,610; and 230,000 shares of restricted stock to some of our employees under the 1998 LTIP. Restricted stock are shares of common stock that we granted outright without cost to the employee. The shares, however, are restricted in that they may not be sold or otherwise transferred by the employee until they vest, generally after the end of three years. If the employee is terminated prior to the vesting date for any reason other than death or retirement, the restricted stock generally will be forfeited and the restricted stock will be returned to us. After the shares have vested, they become unrestricted and may be transferred and sold like any other shares of common stock. We recognize compensation expense over the vesting period based on the fair value on the grant date. Unearned restricted stock compensation, which represents compensation expense attributable to future periods, is presented as a separate component of shareholders’ equity. During fiscal 2001, fiscal 2002, and fiscal 2003, we recognized compensation expense, including the effect of forfeitures, of $261,000, $185,000 and $241,000 related to restricted stock awards.

The Directors Plan. The MAPICS, Inc. 1998 Non-Employee Director Stock Option Plan allows us to issue non-qualified stock options to purchase up to 460,000 shares of common stock to eligible members of the board of directors who are neither our employees nor our officers, including an additional 150,000 shares authorized in fiscal 2002. In general, the exercise price specified in the agreement relating to each non-qualified stock option granted under the Directors Plan is required to be the fair market value of the common stock at the date of grant. Subject to specific provisions, stock options granted under the Directors Plan become exercisable in various increments over a period of one to four years, provided that the optionee has continuously served as a member of the board of directors through the vesting date. The stock options granted under the Directors Plan expire ten years from the date of grant.

The Directors Incentive Plan. The 1998 Non-Employee Directors Stock Incentive Plan provides for the issuance of common stock, deferred rights to receive common stock and non-qualified stock options to purchase up to 160,000 shares of common stock to eligible members of the board of directors who are neither our employees nor our officers, including an additional 100,000 shares authorized in fiscal 2002. During fiscal 2001, fiscal 2002, and fiscal 2003, we issued 12,033; 7,751; and 11,884 shares of common stock under the Directors Incentive Plan.

The 1987 Plan. Prior to its expiration on December 31, 1996, the Marcam Corporation 1987 Stock Plan allowed us to grant ISOs to our employees and non-qualified stock options and stock awards to our officers, employees and consultants. In general, the exercise price specified in the agreement relating to each ISO granted under the 1987 Plan was required to be not less than the fair market value of the common stock as of the date of grant. Subject to specific provisions, stock options granted under the 1987 Plan were fully exercisable on the date of grant or became exercisable thereafter in installments specified by the board of directors. The stock options granted under the 1987 Plan expire on dates specified by the board of directors not to exceed a period of ten years from the date of grant.

The 1994 Plan. Prior to its discontinuation in February 1998, the Marcam Corporation 1994 Stock Plan allowed us to grant ISOs to our employees and non-qualified stock options and stock awards to our officers, employees and consultants. In general, the exercise price specified in the agreement relating to each ISO granted under the 1994 Plan was required to be not less than the fair market value of the common stock as of the date of grant. The 1994 Plan required non-qualified stock options to be granted with an exercise price that was not less than the minimum legal consideration required under applicable state law. Subject to specific provisions, stock options granted under the 1994 Plan were fully exercisable on the date of grant or became exercisable after the date of grant in installments specified by the board of directors. The stock options granted under the 1994 Plan expire on dates specified by the board of directors not to exceed a period of ten years from the date of grant.

The 1992 Plan. The Frontstep Amended and Restated Non-Qualified Stock Option Plan for Key Employees was approved on February 18, 2003 in connection with the acquisition of Frontstep. The 1992 Plan provides that we are authorized to issue 238,974 shares of common stock to holders of options under a prior Frontstep plan. The options of the original Frontstep plan were converted based on the same conversion ratio used for the exchange of Frontstep stock into MAPICS common stock. No additional options will be granted under the 1992 Plan. Substantially all of the options under the 1992 Plan are fully vested and expire on the original scheduled expiration date or 90 days after the employee is no longer employed by us. Upon the surrender of the options, they are no longer available for reissuance.

The 1999 Plan. The Frontstep Second Amended and Restated 1999 Non-Qualified Stock Option Plan for Key Employees was approved on February 18, 2003 in connection with the acquisition of Frontstep. The 1999 Plan provides that we are authorized to issue 182,945 shares of common stock to holders of options under a prior Frontstep plan. The options of the original Frontstep plan were converted based on the same conversion ratio used for the exchange of Frontstep stock into MAPICS common stock. No additional options will be granted under the 1999 Plan. All options under the 1999 Plan are fully vested and expire on the original scheduled expiration date or 90 days after the employee is no longer employed by us. Upon the surrender of the options, they are no longer available for reissuance.

The Executive Plan. The Symix Non-Qualified Stock Options Plan for Key Executives was approved on February 18, 2003 in connection with the acquisition of Frontstep. The Executive Plan provides that we are authorized to issue 120,339 shares of common stock to holders of options under a prior Frontstep plan. The options of the original Frontstep plan were converted based on the same conversion ratio used for the exchange of Frontstep stock into MAPICS common stock. No additional options will be granted under the Executive Plan.

All options under the Executive Plan are fully vested and expire on the original scheduled expiration date or 90 days after the employee is no longer employed by us. Upon the surrender of the options, they are no longer available for reissuance. During fiscal 2003, all of these options expired unexercised and were cancelled.

The 2000 ESPP. The MAPICS, Inc. 2000 Employee Stock Purchase Plan, or 2000 ESPP, was approved during fiscal 2000 and provides that we are authorized to issue up to 500,000 shares of common stock to our full-time employees, nearly all of whom are eligible to participate. The 2000 ESPP is a qualified plan under Section 423 of the Internal Revenue Code. Under the terms of the 2000 ESPP, employees, excluding those owning 5 percent or more of the common stock, can choose every six months to have up to 10 percent of their base and bonus earnings withheld to purchase common stock, subject to limitations. The purchase price of the common stock is 85 percent of the lower of its beginning-of-period or end-of-period market price.

Under the 2000 ESPP, we sold 118,485; 79,750; and 39,652 shares of common stock to employees during fiscal 2001, fiscal 2002 and fiscal 2003. At September 30, 2002 and 2003, we had available 301,765 and 262,113 shares for issuance under the 2000 ESPP. The 2000 ESPP expires on December 31, 2007.

Additional Stock Option Grants. During prior fiscal years, the board of directors authorized the issuance of stock options to purchase 25,260 shares of common stock, which we granted outside of the existing stock option plans. As of September 30, 2003, 13,695 of these options are still available for exercise.

Except for the look-back options issued under the 2000 ESPP, all stock options granted under our stock-based compensation plans, as well as those stock options granted outside our stock-based compensation plans, were granted at the fair market value of the common stock at the date of grant.

The following table reflects the activity and historical weighted average exercise prices of our stock options for the periods from September 30, 2000 through September 30, 2003.

The following tables summarize information about the stock options outstanding at September 30, 2003:

We apply APB Opinion No. 25 and related interpretations in accounting for our stock option plans and employee stock purchase plan and have adopted the disclosure-only provisions of SFAS No. 123. In general, we have not recognized compensation expense for stock options granted to our directors, officers or employees under our stock-based compensation plans. If we did recognize compensation cost for stock options issued to our directors, officers and employees as prescribed in SFAS No. 123, we would have reduced or increased our net income (loss), net income (loss) per common share (basic) and net income (loss) per common share (diluted) as follows (in thousands, except per share data):

We estimated the fair value of the options granted under the stock option plans at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

We estimated the fair value of the look-back options granted under the 2000 ESPP at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

During fiscal 2003, the option look-back period was extended as a result of the delayed filing of the Form 8-K/A subsequent to the closing of the Frontstep acquisition during fiscal 2002.

On July 31, 2002, we announced that our Board of Director’s approved a plan to repurchase our outstanding common stock up to $10 million in light of our stock price and liquidity position. Purchases will be made from time to time, depending on market conditions, in private transactions as well as in the open market at prevailing market prices. During fiscal 2002, we repurchased 8,900 shares of stock for $54,000. During fiscal 2003, we repurchased 1,600 shares of stock for $9,000. These shares will be available for general corporate purposes. See Note (9) for restrictions on the repurchase of treasury stock.

We have a defined contribution 401(k) retirement plan covering substantially all of our employees in the United States. Under this plan, eligible employees may contribute a portion of their salary until retirement. We match a portion of the employees’ contributions and pay the administration costs of the plan. We incurred total expenses under this plan of $845,000, $867,000 and $1.1 million in fiscal 2001, fiscal 2002, and fiscal 2003.

We have a self-insured group medical plan to which both we, and eligible employees are required to make contributions. The plan is administered by a third party who reviews all claims filed and authorizes the payment of benefits. We expense medical claims as they are incurred, and we recognize a liability for claims incurred but not reported. As of September 30, 2002 and 2003 we had a reserve of $320,000 and $903,000 for medical claims.

We have three operating segments for which we evaluate our business and for which we have discrete financial information available. These operating segments include 1) software sales to customers in the manufacturing environment, 2) providing support services to the customers that purchase our software, and 3) providing implementation and other consulting services to customers that purchase our software. In evaluating financial performance, we focus on operating profit as a measure of a segments profit or loss. Operating profit for this purpose is income before interest, taxes and allocation of certain corporate expenses. Operating profit is significant as it includes the revenue and related costs that apply to the individual segments. Interest, taxes and allocation of certain corporate expenses are not related specifically to the operating segments. We are including other operating costs, including selling and marketing, product development, and general and administrative expenses in the presentation of reportable segment information because these expenses are not allocated separately to our operating segments. We do not utilize assets as a measure of a segment’s performance. Assets are reviewed at the enterprise level and thus are not included in our segment disclosure.

The following table includes financial information for fiscal 2001, 2002 and 2003 related to our segments. The information presented below may not be indicative of results if the segment were an independent organization (in thousands).

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 geography’s profit or loss. Operating profit for this purpose is income before

interest, taxes and allocation of some corporate expenses. We include our corporate division in the presentation of reportable segment information because some of the income and expense of this division are not allocated geographically. We generally do not evaluate assets by geography, except for accounts receivable.

The following tables include financial information related to our geographic areas (in thousands):

The information presented above may not be indicative of results if the geographic areas were independent organizations. No single customer accounts for more than 5% of our revenue. We eliminate transfers between geographic areas in the preparation of the consolidated financial statements.

No single foreign country had a material portion of total revenue from unaffiliated customers or total long-lived assets. Long-lived assets consist of property and equipment, net of accumulated depreciation; capitalized software and other intangible assets, net of accumulated amortization; and other non-current assets. The table below discloses our domestic and international revenues from unaffiliated customers and long-lived assets (in thousands).

In fiscal 2002 and fiscal 2003, we made cash payments for income taxes, net of income tax refunds, of $617,000 and $662,000. In fiscal 2001, we received cash refunds of income taxes, net of income tax payments, of $1.6 million. In fiscal 2001, fiscal 2002, and fiscal 2003 we made cash payments for interest of $3.1 million, $575,000 and $425,000.

Non-cash investing and financing activities are summarized below (in thousands):

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the Evaluation Date in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods in Securities and Exchange Commission rules and forms, including a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2003, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are not required at this time to provide the information specified in Item 308(a) and (b) of the SEC’s Regulation S-K regarding an annual report by management on our internal control over financial reporting or an attestation report by our independent accountants with regard thereto.

We will provide information relating to our directors under the captions “Proposal 1—Election of Directors—Nominees” and “—Information Regarding Nominees and Continuing Directors” in our proxy statement for our 2004 annual meeting of shareholders to be held on February 12, 2004 or in a subsequent amendment to this report. Information relating to our executive officers is set forth in “Item 4A. Executive Officers of the Registrant” in this report. We will provide information relating to the audit committee of our board of directors under the caption “Report of the Audit Committee of the Board of Directors” in the above referenced proxy statement or amendment. We will provide information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 by our directors and executive officers and beneficial owners of more than 10% of our common stock under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the above referenced proxy statement or amendment. All such information that is provided in the proxy statement is incorporated in this Item 10 by reference.

We have adopted the MAPICS Ethics Code, which applies to all of our directors, officers and employees. The ethics code is publicly available on our website at www.mapics.com/company/investor. If we make any substantive amendment to the ethics code, or grant any waiver, including any implicit waiver, from a provision of the code, that applies to our chief executive officer, chief financial officer or chief accounting officer, we will disclose the nature of the amendment or waiver on that website. We may elect to also disclose the amendment or waiver in a report on Form 8-K filed with the SEC.

We will provide information relating to executive compensation under the captions “Proposal 1—Election of Directors—Director Compensation” and “—Benefits to Non-Employee Directors,” “Executive Compensation,” “Report of the Compensation Committee of the Board of Directors” and “Stock Performance Graphs” in the proxy statement or subsequent amendment referred to in Item 10 above. All such information that is provided in the proxy statement is incorporated in this Item 11 by reference, except for the information under the captions “Report of the Compensation Committee of the Board of Directors” and “Stock Performance Graph” which specifically is not so incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

We will provide information regarding ownership of our common stock by specified persons under the caption “Stock Ownership” in the proxy statement or subsequent amendment referred to in Item 10 above. We will provide information regarding compensation plans under which our equity securities were authorized for issuance as of September 30, 2003 under the caption “Executive Compensation—Equity Compensation Plans” in the proxy statement or subsequent amendment referred to in Item 10 above. All such information that is provided in the proxy statement is incorporated in this Item 12 by reference.

During fiscal 2003 there were no relationships or transactions between us and any of our affiliates that are required to be reported pursuant to this Item 13.

We will provide information regarding principal accounting fees and services under the caption “Independent Public Accountants” in the proxy statement or subsequent amendment referred to in Item 10 above. All such information that is provided in the proxy statement is incorporated in this Item 14 by reference.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

Our consolidated financial statements listed below, as, are set forth in Item 8 of this report:

We have omitted all schedules to our consolidated financial statements because they are not required under the related instructions or are inapplicable, or because we have included the required information in our consolidated financial statements or related notes.

The following exhibits either (a) are filed with this report or (b) have previously been filed with the Securities and Exchange Commission and are incorporated herein by reference to those prior filings. Previously filed registration statements and reports which are incorporated by reference are identified in the column captioned “SEC Document Reference.” We will furnish any exhibit upon request to Martin D. Avallone, our Vice President, General Counsel and Secretary, 1000 Windward Concourse Parkway, Suite 100, Alpharetta, Georgia 30005. We charge $.50 per page to cover expenses of copying and mailing.

We filed the following Current Reports on Form 8-K during the quarter ended September 30, 2003:

Current Report on Form 8-K dated July 11, 2003, reporting, pursuant to Items 9 and 12, that we issued a press release announcing preliminary financial results for the quarter ended June 30, 2003, and scheduled the release of final results for the quarter and nine months ended June 30, 2003

Current Report on Form 8-K dated August 1, 2003 reporting, pursuant to Item 12, that we issued a press release reporting financial results for the quarter ended June 30, 2003

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MAPICS, Inc

By:		/s/ MICHAEL J. CASEY

		Michael J. Casey
		Vice President of Finance, Chief Financial Officer and Treasurer

Date:		December 22, 2003

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Georgia		04-2711580
(State of incorporation)		(I.R.S. Employer Identification No.)

Anaren Microwave, Inc.		Kerry Ingredients U.K. Ltd.
AP Technoglass Company		Kyocera Corporation
Ashley Furniture Industries, Inc.		MAG Instruments, Inc.
Bally Gaming, Inc.		Medtronic Sofamar Danek
Bayer Corporation		Olson International
Bostik, Inc.		Novar Controls
Bristol-Myers Squibb Company		Pall Corporation
Carlisle-Tensolite		Peg Perego Pines USA, Inc.
Club Car		Power Systems Manufacturing, LLC
Day-Bright Capri Omega		Powerex Inc.
Dialight Corporation		Roper Industries
Dirona SP		Shiseido Cosmetics (America) Ltd.
Dukane Corporation		Sub-Zero Freezer Co., Inc.
Eaton Corporation		Sylvania Lighting International B.V.
Emerson Electric Co.		Tactical Vehicle Systems, LP
Freightliner, Inc.		Trans-matic Manufacturing, Inc.
General Electric Co., P.L.C.		Viking Yachts
Genlyte Thomas Group LLC		Volvo Corporation
Goodyear Tire & Rubber Co.		Weber Aircraft
Hartzell Propeller, Inc.		Westinghouse Electric Corporation
Herman Miller, Inc.		Xanoptics
Honda Motor Co., Ltd.		YORK International Corporation
IKO Industries		Zomax Optical Media Inc.

	High		Low
Fiscal 2002:
First Quarter	$	6.80	$	5.07
Second Quarter		7.82		5.87
Third Quarter		8.25		5.21
Fourth Quarter		6.39		4.00

Fiscal 2003:
First Quarter	$	7.41	$	4.90
Second Quarter		7.23		6.45
Third Quarter		8.19		6.00
Fourth Quarter		10.96		7.95

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		(b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Shareholders:

MAPICS, Inc. Amended and Restated 1998 Long-Term Incentive Plan	3,725,726		$	8.46	1,628,664

MAPICS, Inc. Amended and Restated 1998 Non-Employee Directors Stock Option Plan	275,250		$	9.70	184,000

MAPICS, Inc. Amended and Restated 1998 Non-Employee Directors Stock Incentive Plan	49,791	(1)	$	4.43	71,918
Marcam Corporation 1987 Stock Plan	84,947		$	7.69	—
Marcam Corporation 1994 Stock Plan	1,145,029		$	9.76	—

Frontstep, Inc. Non-Qualified Stock Option Plan for Key Employees (1992)	110,460		$	16.84	—

Symix Systems, Inc. Non-Qualified Stock Option Plan for Key Executives	—		$	—	—

Frontstep, Inc. 1999 Non-Qualified Stock Option Plan for Key Employees	72,948		$	14.64	—
MAPICS, Inc. 2000 Employee Stock Purchase Plan	N/A			N/A	262,113

Equity Compensation Plans Not Approved by Shareholders	13,695		$	7.88	—

Total	5,477,846				2,146,695

	Fiscal Year Ended September 30,
	1999		2000			2001			2002			2003
	(In thousands, except per share data)
Statements of Operations Data:
Revenue:
License(3)	$	71,195	$	40,986		$	47,675		$	40,207		$	44,461
Services		63,523		77,690			90,476			88,092			116,871

Total revenue		134,718		118,676			138,151			128,299			161,332

Operating expenses:
Cost of license revenue		13,689		12,438			16,437			14,647			17,746
Cost of services revenue		19,012		31,176			35,427			32,436			49,415
Selling and marketing		51,601		41,293			41,563			35,092			51,973
Product development		18,083		16,375			17,277			15,331			16,519
General and administrative		12,673		17,427			14,635			12,447			19,934
Amortization of goodwill		—		6,959			35,121			—			—
Acquisition costs		—		12,958			(1,981	)		(1,000	)		—
Restructuring costs		—		2,125			—			4,707			1,787

Total operating expenses		115,058		140,751			158,479			113,660			157,374

Income (loss) from operations		19,660		(22,075	)		(20,328	)		14,639			3,958
Interest income (expense), net		1,801		(1,885	)		(2,099	)		(600	)		(576	)

Income (loss) before income tax expense (benefit) and extraordinary item		21,461		(23,960	)		(22,427	)		14,039			3,382
Income tax expense (benefit)		8,262		(6,239	)		4,533			(20	)		(465	)

Income (loss) before extraordinary item		13,199		(17,721	)		(26,960	)		14,059			3,847
Loss on early extinguishments of debt, net of income tax benefit		—		—			—			(318	)		—

Net income (loss)	$	13,199	$	(17,721	)	$	(26,960	)	$	13,741		$	3,847

Net income (loss) per common share (basic):
Income (loss) before extraordinary item	$	0.70	$	(0.99	)	$	(1.48	)	$	0.77		$	0.18
Loss on early extinguishments of debt, net of income tax benefit		—		—			—			(0.02	)		—

Net income (loss)	$	0.70	$	(0.99	)	$	(1.48	)	$	0.75		$	0.18

Net income (loss) per common share (diluted):
Income (loss) before extraordinary item	$	0.62	$	(0.99	)	$	(1.48	)	$	0.69		$	0.17
Loss on early extinguishments of debt, net of income tax benefit		—		—			—			(0.02	)		—

Net income (loss)	$	0.62	$	(0.99	)	$	(1.48	)	$	0.67		$	0.17

Weighted average number of common shares outstanding (basic)		18,943		17,896			18,223			18,355			21,057

Weighted average number of common shares and common share equivalents outstanding (diluted)		21,444		17,896			18,223			20,520			23,229

Item Number		Page Number
PART I
1.	Business	2
2.	Properties	12
3.	Legal Proceedings	13
4.	Submission of Matters to a Vote of Security Holders	13
4A.	Executive Officers of the Registrant	13

PART II
5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	14
6.	Selected Financial Data	16
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
7A.	Quantitative and Qualitative Disclosures About Market Risk	51
8.	Financial Statements and Supplementary Data	53
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	93
9A.	Controls and Procedures	93

PART III
10.	Directors and Executive Officers of the Registrant	94
11.	Executive Compensation	94
12.	Security Ownership of Certain Beneficial Owners and Management	94
13.	Certain Relationships and Related Transactions	94
14.	Principal Accounting Fees and Services	94

PART IV
15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	95

	SIGNATURES	99

	As of September 30,
	1999		2000			2001			2002			2003
	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	21,351	$	12,175		$	18,077		$	23,661		$	21,360
Working capital (deficit)		6,487		(34,455	)		(30,232	)		(17,368	)		(40,670	)
Total assets(1)		95,394		156,931			115,153			108,110			192,921
Long-term liabilities		155		21,245			6,145			3,563			12,471
Shareholders’ equity(2)		38,259		26,392			243			14,960			49,650

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter			Total
	(In thousands)
Fiscal 2001:
Total revenue	$	30,931		$	34,995		$	37,013	$	35,210		$	138,151
Income (loss) before income tax expense (benefit)		(1,540	)		288			2,807		(23,982	)		(22,427	)
Net income (loss)	$	(1,360	)		173			509		(26,282	)		(26,960	)
Net income (loss) per common share (diluted)	$	(0.08	)	$	0.01		$	0.03	$	(1.44	)	$	(1.48	)
Weighted average number of common shares and common equivalent shares outstanding (diluted)		18,132			20,270			20,249		18,291			18,223
Fiscal 2002:
Total revenue	$	33,293		$	33,207		$	31,257	$	30,542		$	128,299
Income before income tax expense		3,022			484			4,321		6,212			14,039
Net income	$	1,859			330			7,515		4,037			13,741
Net income per common share (diluted)	$	0.09		$	0.02		$	0.36	$	0.20		$	0.67
Weighted average number of common shares and common equivalent shares outstanding (diluted)		20,402			20,540			20,596		20,461			20,520
Fiscal 2003:
Total revenue	$	31,052		$	38,083		$	47,077	$	45,120		$	161,332
Income (loss) before income tax expense (benefit)		2,248			(2,326	)		1,467		1,993			3,382
Net income	$	1,416		$	(1,463	)	$	3,001	$	893		$	3,847
Net income per common share (diluted)	$	0.07		$	(0.07	)	$	0.12	$	0.04		$	0.17
Weighted average number of common shares and common equivalent shares outstanding (diluted)		20,469			20,435			24,790		25,427			23,229

	Years Ended September 30,
	2001		2002		2003
Revenue:
License	34.5	%	31.3	%	27.6	%
Services	65.5		68.7		72.4

Total revenue	100.0		100.0		100.0

Operating expenses:
Cost of license revenue	11.9		11.4		11.0
Cost of services revenue	25.6		25.3		30.6
Selling and marketing	30.1		27.4		32.2
Product development	12.5		11.9		10.2
General and administrative	10.6		9.7		12.4
Amortization of goodwill	25.4		—		—
Acquisition costs	(1.4	)	(0.8	)	—
Restructuring costs	—		3.7		1.1

Total operating expenses	114.7		88.6		97.5

Income (loss) from operations	(14.7	)	11.4		2.5
Interest income	0.6		0.4		0.1
Interest expense	(2.1	)	(0.9	)	(0.5	)

Income (loss) before income tax expense (benefit) and extraordinary item	(16.2	)	10.9		2.1
Income tax expense (benefit)	3.3		—		(0.3	)

Income (loss) before extraordinary item	(19.5	)	10.9		2.4

Loss on debt extinguishments	—		(0.2	)	—

Net income (loss)	(19.5	)%	10.7	%	2.4	%

	Cost of License Revenue		General and Administrative Expenses			Acquisition Costs			Restructuring Costs			Total

	(in thousands)
Year Ended September 30, 2001:
Settlement of third party royalty agreement	$	—	$	—		$	(1,981	)	$	—		$	(1,981	)
Write-off of software development costs and intangible assets		1,811		—			—			—			1,811

Total	$	1,811	$	—		$	(1,981	)	$	—		$	(170	)

Year Ended September 30, 2002:
Reverse costs for termination of technology distribution agreements	$	—	$	(2,290	)	$	—		$	—		$	(2,290	)
Settlement of pre-acquisition contingency		—		—			(1,000	)		—			(1,000	)
Severance and personnel costs		—		—			—			1,026			1,026
Costs of abandonment of excess office space		—		—			—			3,681			3,681

Total	$	—	$	(2,290	)	$	(1,000	)	$	4,707		$	1,417

Year Ended September 30, 2003:
Severance and personnel costs	$	—	$	—		$	—		$	2,063		$	2,063
Cost of abandonment of excess office space		—		—			—			(276	)		(276	)

Total	$	—	$	—		$	—		$	1,787		$	1,787

	Fiscal Years Ended
	September 30, 2001			Change %		September 30, 2002			Change %		September 30, 2003
	(in thousands)
Software sales revenue:
License volume	$	47,240		(21.8	)	$	36,932		12.0		$	41,370
Deferrals		(36,315	)	22.9			(27,984	)	11.2			(24,850	)
Recognized deferred revenue		36,750		(14.9	)		31,259		(10.6	)		27,941

Total license revenue	$	47,675		(15.7	)	$	40,207		10.6		$	44,461

Service revenue:
Support services	$	78,594		1.0		$	79,384		27.9		$	101,493
Implementation and consulting services		11,882		(26.7	)		8,708		76.6			15,378

Total service revenue	$	90,476		(2.6	)	$	88,092		32.7		$	116,871

Total revenue	$	138,151		(7.1	)	$	128,299		25.7		$	161,332

	Years Ended September 30,									Change from Prior Year
	2001			2002			2003			2002		2003
	(in thousands)
Product development costs	$	21,299		$	18,038		$	22,619		(15.3	)%	25.4	%
Software translation costs		2,098			2,900			1,468		38.2	%	(49.4	)%

Total product development activities		23,397			20,938			24,087		(10.5	)%	15.0	%

Less:
Capitalized product development costs		(5,358	)		(3,752	)		(7,275	)
Capitalized software translation costs		(762	)		(1,855	)		(293	)

		(6,120	)		(5,607	)		(7,568	)

Product development expenses	$	17,277		$	15,331		$	16,519		(11.3	)%	7.7	%

As a percentage of total revenue		12.5	%		11.9	%		10.2	%

	Cost of Abandonment of Excess Space			Severance			Other			Total
*Fiscal 2002 Restructuring Activities*
Balance at September 30, 2002	$	3,573		$	25		$	—		$	3,598
Adjustment to restructuring reserve for reclaiming office space		(276	)		—			—			(276	)
Less: cash payments		(508	)		(25	)		—			(533	)

Balance at September 30, 2003—fiscal 2002 activities	$	2,789		$	—			—		$	2,789

*Fiscal 2003 Restructuring Activities*
Balance at September 30, 2002	$	—		$	—		$	—		$	—
Included in purchase price of Frontstep:
Exit costs		3,341			2,431			450			6,222
Frontstep restructuring accrual prior to acquisition		100			382			90			572
Less: cash payments		(940	)		(2,386	)		(352	)		(3,678	)
Less: fixed asset writedown		(497	)		—			—			(497	)

Balance at September 30, 2003		2,004			427			188			2,619

Included in restructuring costs:
Exit costs		—			2,064			—			2,064
Less: cash payments		—			(1,183	)		—			(1,183	)

Balance at September 30, 2003		—			881			—			881

Balance at September 30, 2003—fiscal 2003 activities	$	2,004		$	1,308		$	188		$	3,500

Total restructuring reserve at September 30, 2003	$	4,793		$	1,308		$	188		$	6,289

	Fiscal Years Ended September 30,
	2001			2002			2003
	(in thousands)
*Summary of Cash Flows*
Net cash provided by operating activities	$	23,241		$	31,010		$	11,756
Net cash used for investing activities		(7,536	)		(7,096	)		(12,530	)
Net cash used for financing activities		(9,803	)		(18,330	)		(1,527	)

Net increase (decrease) in cash and cash equivalents	$	5,902		$	5,584		$	(2,301	)

	September 30,
	2002			2003
	(in thousands)
*Balance Sheet Data*
Cash and cash equivalents	$	23,661		$	21,360
Working capital deficit		(17,368	)		(40,670	)

September 30, 2004	$	5,500
September 30, 2005		7,500
September 30, 2006		2,000
September 30, 2007		—

			Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years
*Contractual Obligations (in thousands)*
Debt	$	19,000	$	5,500	$	13,500	$	—	$	—
Operating leases		14,137		5,355		8,238		507		37
Minimum royalty payments		1,220		900		240		80		—

Total	$	34,357	$	11,755	$	21,978	$	587	$	37

Cash and cash equivalents	$	1,831
Trade accounts receivable (a)	$	9,842
Trade accounts payable	$	2,841

		Page
Report of Independent Auditors		54

Consolidated Balance Sheets as of September 30, 2002 and 2003		55

Consolidated Statements of Operations for the years ended September 30, 2001, 2002, and 2003		56

Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2001, 2002, and 2003		57

Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2002, and 2003		58

Notes to Consolidated Financial Statements		59

	Series D and E Convertible Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit			Restricted Stock Compensation			Accumulated Other Comprehensive Loss			Treasury Stock					Total Shareholders’ Equity
	Shares	Par Value		Shares	Par Value		Additional Paid-In Capital			Accumulated Deficit			Restricted Stock Compensation			Accumulated Other Comprehensive Loss			Shares		Cost			Total Shareholders’ Equity
Balance as of September 30, 2000	175		175	20,370		204		63,608			(19,810	)		(704	)				2,278			(17,081	)		26,392
Stock options exercised								(102	)										(30	)		230			128
Employee stock purchases								(419	)										(118	)		922			503
Stock and options issued to non-employees								1											(8	)		75			76
Tax benefit associated with exercise of stock options and stock awards								32																	32
Issuance of restricted stock								(197	)					(579	)				(94	)		776			—
Compensation payable in common stock														574					35			(313	)		261

Subtotal	175		175	20,370		204		62,923			(19,810	)		(709	)				2,063			(15,391	)		27,392

Net loss											(26,960	)													(26,960	)
Other comprehensive loss, net of income taxes:
Foreign currency translation																	(127	)							(127	)
Interest rate hedge																	(62	)							(62	)

Comprehensive loss											(26,960	)					(189	)							(27,149	)

Balance as of September 30, 2001	175		175	20,370		204		62,923			(46,770	)		(709	)		(189	)	2,063			(15,391	)		243
Stock options exercised								(17	)										(43	)		190			173
Employee stock purchases								19											(80	)		390			409
Stock and options issued to non-employees								61											(8	)		41			102
Tax benefit associated with exercise of stock options and stock awards								137																	137
Issuance of restricted stock								6						(23	)				(4	)		17
Compensation payable in common stock														428					43			(346	)		(82	)
Treasury stock acquired																			9			(54	)		(54	)

Subtotal	175		175	20,370		204		63,129			(46,770	)		(304	)		(189	)	1,980			(15,153	)		1,092

Net Income											13,741														13,741
Other comprehensive income, net of income taxes:
Foreign currency translation																	65								65
Interest rate hedge																	62								62

Comprehensive income											13,741						127								13,868

Balance as of September 30, 2002	175	$	175	20,370	$	204	$	63,129		$	(33,029	)	$	(304	)	$	(62	)	1,980		$	(15,153	)	$	14,960

Business acquisitions payable in common stock				4,282		43		30,375																	30,418
Employee stock purchases								15											(40	)		180			195
Tax benefit associated with exercise of stock options and stock awards								22																	22
Stock options exercised								(16	)										(22	)		116			100
Issuance of restricted stock								767						(2,139	)				(230	)		1,372			—
Compensation payable in common stock								92						368					6			(60	)		400
Treasury stock acquired																			2			(9	)		(9	)

Subtotal	175		175	24,652		247		94,384			(33,029	)		(2,075	)		(62	)	1,696			(13,554	)		46,086

Net Income											3,847														3,847
Other comprehensive income, net of income taxes:
Foreign currency translation																	(283	)							(283	)

Comprehensive income											3,847						(283	)							3,564

Balance as of September 30, 2003	175	$	175	24,652	$	247	$	94,384		$	(29,182	)	$	(2,075	)	$	(345	)	1,696		$	(13,554	)	$	49,650

Computer equipment		3 years
Furniture and fixtures		4 years
Leasehold improvements		Shorter of lease term or useful life of asset

Installed customer base and affiliate network		7-15 years
Maintenance contracts		5 years
Tradenames and trademarks		5-10 years

		Fiscal Year 2001
Common share equivalents:
Convertible preferred stock		1,750
Common stock options		176
Contingently issuable stock		125

Total		2,051

Equity value of shares issued	$	29,677
Fair value of vested options		951
Fair value of warrant		490
Direct transaction costs		2,305

Total purchase price	$	33,423

	Amount (In thousands)
Cash and cash equivalents	$	59
Accounts receivable, net		17,558
Deferred royalties		2,358
Prepaid expenses and other current assets		960
Property and equipment		3,373
Computer software costs		12,550
Goodwill (a)		38,277
Other intangible assets (b)		5,756
Other non-current assets		686
Deferred income taxes, net		14,546
Current portion of long-term debt		(8,545	)
Accounts payable		(7,719	)
Accrued expenses and other current liabilities		(9,180	)
Restructuring reserve and exit costs, current (c)		(6,197	)
Deferred revenue		(18,949	)
Long-term debt		(11,512	)
Restructuring reserve and exit costs, non-current (c)		(598	)

	$	33,423

	Fiscal Year Ended September 30,
	(Unaudited)
	2002		2003
	(In thousands, except per share data)
Total revenue	$	158,304	$	185,421
Income (loss) before extraordinary item		4,096		(13,855	)
Net income (loss)		3,778		(13,855	)
Net income (loss) per common share (basic)	$	0.17	$	(0.61	)
Net income (loss) per common share (diluted)	$	0.15	$	(0.56	)
Weighted average number of common shares outstanding (basic)		22,555		21,057
Weighted average number of common shares outstanding (diluted).		24,720		21,057

	Cost of Abandonment of Excess Space			Severance			Other			Total
*Fiscal 2002 Restructuring Activities*
Balance at September 30, 2002	$	3,573		$	25		$	—		$	3,598

Adjustment to restructuring reserve for reclaiming office space		(276	)		—			—			(276	)
Less: cash payments		(508	)		(25	)		—			(533	)

Balance at September 30, 2003—fiscal 2002 activities	$	2,789		$	—			—		$	2,789

*Fiscal 2003 Restructuring Activities*
Balance at September 30, 2002	$	—		$	—		$	—		$	—

Included in purchase price of Frontstep:
Exit costs		3,341			2,431			450			6,222
Frontstep restructuring accrual prior to acquisition		100			382			90			572
Less: cash payments		(940	)		(2,386	)		(352	)		(3,678	)
Less: fixed asset writedown		(497	)		—			—			(497	)

Balance at September 30, 2003		2,004			427			188			2,619

Included in restructuring costs:
Exit costs		—			2,064			—			2,064
Less: cash payments		—			(1,183	)		—			(1,183	)

Balance at September 30, 2003		—			881			—			881

Balance at September 30, 2003—fiscal 2003 activities	$	2,004		$	1,308		$	188		$	3,500

Total restructuring reserve at September 30, 2003	$	4,793		$	1,308		$	188		$	6,289

	Beginning of Year Balance		Provision for Bad Debts		Write-Offs			Other		End of Year Balance
Fiscal 2001	$	2,523	$	2,261	$	(2,082	)	$	754	$	3,456
Fiscal 2002		3,456		1,100		(2,822	)		—		1,734
Fiscal 2003		1,734		2,283		(4,229	)		4,868		4,656

Changes in Goodwill for Fiscal 2002 and Fiscal 2003 (in thousands):
Balance as of September 30, 2001	$	4,367
Change in estimate of pre-acquisition Pivotpoint income tax liabilities		(678	)

Balance as of September 30, 2002		3,689
Addition to goodwill in conjunction with the acquisition of Frontstep		38,277

Balance as of September 30, 2003	$	41,966

	Fiscal Year Ended September 30, 2001
Reported net income (loss)	$	(26,960	)
Add back:
Goodwill amortization		35,121

Net income excluding goodwill amortization	$	8,161

Basic net income (loss) per common share:
Reported net income (loss)	$	(1.48	)
Add back:
Goodwill amortization		1.93

Net income excluding goodwill amortization	$	0.45

Weighted average number of common shares outstanding (basic)		18,223

Diluted net income (loss) per common share:
Reported net income (loss)	$	(1.33	)
Add back:
Goodwill amortization		1.73

Net income excluding goodwill amortization	$	0.40

Weighted average number of common shares outstanding (diluted)		20,274

	As of September 30, 2002
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Installed customer base and affiliate network	$	7,934	$	(4,602	)	$	3,332
Maintenance contracts		—		—			—
Tradenames and trademarks		856		(821	)		35

Total	$	8,790	$	(5,423	)	$	3,367

	As of September 30, 2003
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Installed customer base and affiliate network	$	8,334	$	(5,652	)	$	2,682
Maintenance contracts		4,822		(565	)		4,257
Tradenames and trademarks		909		(106	)		803

Total	$	14,065	$	(6,323	)	$	7,742

	Twelve Months Ended
Aggregate amortization expense, September 30, 2003	$	1,383

Estimated Amortization Expense for the Fiscal Years Ended (in thousands):
September 30, 2004	$	1,825
September 30, 2005	$	1,825
September 30, 2006	$	1,825
September 30, 2007	$	1,825
September 30, 2008	$	760

Changes in deferred income tax valuation allowance (in thousands):
Beginning balance at September 30, 2002	$	—
Valuation allowances recognized in connection with the acquisition of Frontstep		(3,704	)
Additions to valuation allowance		(716	)

Ending balance at September 30, 2003	$	(4,420	)

	Number of Shares Under Options		Weighted Average Exercise Price ($)
Outstanding at September 30, 2000	4,748,380		$	11.22
Granted	875,946			5.03
Exercised	(29,500	)		4.34
Canceled/expired	(899,664	)		12.91

Outstanding at September 30, 2001	4,695,162			9.78
Granted	976,547			7.32
Exercised	(42,750	)		4.05
Canceled/expired	(358,843	)		11.46

Outstanding at September 30, 2002	5,270,116			9.25
Granted(a)	1,062,438			12.25
Exercised	(22,350	)		4.11
Canceled/expired	(832,358	)		14.28

Outstanding at September 30, 2003	5,477,846		$	9.12

Exercisable at:
September 30, 2001	2,523,239		$	10.88
September 30, 2002	2,940,541		$	10.42
September 30, 2003	3,606,715		$	10.11