Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2003

OR

For the transition period from                      to                     

Commission File Number: 000-18674

MAPICS, Inc.

(Exact name of registrant as specified in its charter)

1000 Windward Concourse Parkway, Suite 100

Alpharetta, Georgia 30005

(Address of principal executive offices)

(678) 319-8000

(Registrant’s telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

The number of shares of the registrant’s common stock outstanding at February 2, 2004 was 23,530,311.

Table of Contents

MAPICS, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended December 31, 2003

TABLE OF CONTENTS

2

Table of Contents

PART I: FINANCIAL INFORMATION

MAPICS, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

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

3

Table of Contents

MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

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

4

Table of Contents

MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

5

Table of Contents

MAPICS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Except for the balance sheet as of September 30, 2003, the accompanying condensed consolidated financial statements are unaudited; however, in our opinion, these condensed consolidated financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly our consolidated financial position, results of operations and cash flows as of the dates and for the periods indicated.

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. As permitted by the rules of the SEC applicable to quarterly reports on Form 10-Q, these financial statements are condensed and consolidated, consisting of the condensed financial statements of MAPICS, Inc. and our subsidiaries. We eliminated all significant intercompany accounts and transactions in the consolidation. We also have condensed these notes, and they do not contain all disclosures required by generally accepted accounting principles. While we believe that the disclosures presented are adequate to make these condensed consolidated financial statements not misleading, you should read them in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

We operate on a fiscal year ending September 30^th. The term “fiscal 2002” refers to our fiscal year ended September 30, 2002, the term “fiscal 2003” refers to our fiscal year ended September 30, 2003, and the term “fiscal 2004” refers to our fiscal year ending September 30, 2004. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for a full year.

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

As permitted by SFAS No. 148 and SFAS No. 123, we continue to apply the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations in accounting for our stock option plans and our employee stock purchase plan and the disclosure-only provisions of SFAS No. 123 as amended by SFAS 148. We did not record stock-based compensation expense related to outstanding stock options in the three months ended December 31, 2003 and December 31, 2002, as all options granted under our plans had an exercise price equal to fair market value.

SFAS No. 148 requires us to provide pro forma disclosure of the impact on our results of operations had we adopted the expense measurement provisions of SFAS No. 123. SFAS No. 123 permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with our stock option plans and our employee stock purchase plan. The pro forma impact on our results of operations had we adopted the fair value based method of SFAS No. 123 using the Black-Scholes option-pricing model are shown below (in thousands, except per share data):

6

Table of Contents

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.”

Software License and Support Services Revenue

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.

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:

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.

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. Provided all other elements of revenue recognition are met, 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.

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 a 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.

Implementation and Consulting Services Revenue

Under the terms of our license agreements, our customers are responsible for implementation and training. Our professional services organization or, in many instances, our independent affiliates provide our customers with the consulting and implementation services relating to our products. We provide our consulting and implementation services

7

Table of Contents

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 generally 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 apply Statement of Financial Accounting Standard (SFAS) No. 128, “Earnings Per Share,” which requires us to present “basic” and “diluted” net income per common share for all periods presented in the statements of operations. We compute basic net income per common share, which excludes dilution, by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if holders of our preferred stock, common stock options, common stock warrants and contingently issuable stock converted or exercised their holdings into common stock that then shared in our earnings.

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

8

Table of Contents

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

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 is leveraging MAPICS’ success on the IBM platform and Frontstep’s investment in delivering SyteLine 7 on Microsoft.NET while sustaining active product development for each. In addition, we believe the combined company is benefiting 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 estimates 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 included a consultation and review with a third party appraiser. We allocated the balance of the total purchase price to goodwill.

The calculation of the total purchase price was as follows (in thousands):

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

9

Table of Contents

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 as of December 31, 2003.

Pro Forma Information (Unaudited)

The following unaudited pro forma information presents our results of operations as if the acquisition had taken place on October 1, 2002 for the three months ended December 31, 2002 (in thousands, except per share data):

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.

10

Table of Contents

The reported income tax expense for the three months ended December 31, 2003 and 2002 was calculated based on our projected effective tax rate of 37.0%. The reported income tax expense differs from the expected income tax expense calculated by applying the federal statutory rate of 35.0% to our income before income tax expense due to the impact of state and foreign income taxes.

At December 31, 2003, we estimate that we had federal net operating loss carryforwards of $39.9 million and research and experimentation and other credit carryforwards of $9.2 million. The NOLs and tax credits at December 31, 2003 expire between fiscal 2004 and fiscal 2020. The utilization of a significant portion of the NOL’s and tax credits is limited on an annual basis due to various changes in ownership of MAPICS, Frontstep and a previously acquired company, Pivotpoint, Inc. We do not believe that these limitations will significantly impact our ability to utilize MAPICS’, Frontstep’s and Pivotpoint’s NOLs and MAPICS’ and Pivotpoint’s tax credits before they expire. However, we estimate that these limitations will impact our ability to utilize Frontstep’s tax credits. As a result, a significant portion of these credits have been provided for in our valuation allowance in connection with the purchase price allocation of Frontstep. There have been no changes in the valuation allowance for the three months ended December 31, 2003 from the amount reported at September 30, 2003. We believe these NOL’s and tax credits will continue to result in cash savings in future periods as we use them to offset income taxes payable. In addition, we still retain additional uncertain favorable income tax attributes in connection with the 1997 separation of Marcam Corporation into two companies, and additional income tax benefits related to these tax attributes may be realized in future periods if and when they become certain. We have recorded the net deferred tax assets at the amount we believe is more likely than not to be realized.

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 the straight-line method over the estimated economic life of the product, which is generally three to five years for purchased software costs and software development costs and two years for software translation costs.

We performed a net realizable value test for all of our products lines at the end of fiscal year 2003 and found our future support services revenue to be sufficient to cover our estimable amortization over a five-year life. The MAPICS ERP for iSeries and MAPICS Syteline ERP products are being amortized over a five-year life. However, 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. Based on the current technology and market trends of our products, we prospectively changed the estimated remaining economic lives to a three-year life from a five-year life for certain product offerings that no longer generate significant license revenue.

We include amortization of computer software costs in cost of license revenue in the statement of operations. Amortization of computer software costs was $2.9 million and $1.5 million for the three months ended December 31, 2003 and 2002. Amortization of computer software costs for the three months ended December 31, 2003 included $0.6 million for the prospective adjustment of the amortization lives from five to three years.

Changes in Goodwill for the Three Months Ended December 31, 2003 (in thousands):

11

Table of Contents

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, including consultation and review with a third party appraiser. We allocated the $38.6 million balance of the total purchase price to goodwill. See note (6) for further details on the acquisition.

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. The gross carrying amount, accumulated amortization and net carrying amount of our amortized intangible assets are detailed below:

Amortized Intangible Assets (in thousands):

We acquired $5.8 million of intangible assets as part of the Frontstep acquisition. These assets consisted of a $0.9 million tradename and $4.8 million in maintenance contracts and are being amortized over the remaining estimated life. See note (6) for further details on the acquisition. The weighted average amortization lives of the acquired tradename and maintenance contracts is 5 years.

The $8.3 million of installed customer base and affiliate network relates to the $6.0 million MAPICS installed customer base intangible asset and the acquired $2.3 million Pivotpoint customer base intangible asset. The weighted average amortization lives of the installed customer base and affiliate network is 13 years. All of our intangible assets will be fully amortized by February 2008.

Aggregate Amortization Expense (in thousands):

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

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

12

Table of Contents

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.

The total exit cost of $6.2 million during the fiscal 2003 that was included in the Frontstep 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 $0.5 million consulting agreement that was subsequently terminated on February 21, 2003. During the three months ended December 31, 2003, we recorded a net adjustment of $0.9 million to decrease the restructuring reserve for abandonment of office space as a result of securing a buy out agreement for a vacated property for which we had previously reserved in the purchase price of Frontstep.

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.” 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 for vacated space. During the three months ended December 31, 2003, we recorded a net increase of $0.1 million to the restructuring reserve primarily for employees that were part of the fiscal 2003 work force reduction that were notified of termination after September 30, 2003.

The major components of the restructuring and exit cost reserve at December 31, 2003 were as follows (in thousands):

We expect future cash expenditures related to these restructuring activities to be approximately $4.1 million. We expect to pay approximately $2.0 million during the next twelve months, and we therefore have included this amount in current liabilities. We expect to pay the remaining $2.1 million by fiscal 2007.

As shown in the table above, our restructuring and exit cost reserve at December 31, 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 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

13

Table of Contents

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.

Debt: The debt noted above is included in our Condensed Consolidated Balance Sheets. This debt includes $13.8 million for the term loan portion of our bank credit facility and $5.5 million for the revolving credit portion of our bank credit facility. Because the revolving credit facility matures in December 2005, it is included in the 1-3 Years column as this will 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 Condensed Consolidated Balance Sheets.

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 $0.6 million and $0.5 million for the three months ended December 31, 2003 and December 31, 2002. We recorded sub-lease income receipts of $185,000, and $165,000 for the three months ended December 31, 2003 and December 31, 2002.

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

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 income (loss) from operations as a measure of a segment’s 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 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.

14

Table of Contents

The following table includes interim financial information for the three months ended December 31, 2003 and 2002 related to our segments. The information presented below may not be indicative of results if the segment were an independent organization (in thousands).

Our principal administrative, marketing, product development and support operations are located in the United States. Areas of operation outside of North America include Europe, Middle East and Africa (EMEA), Asia Pacific and Latin America. In addition to the operating segments disclosed above, we regularly prepare and evaluate separate financial information for each of our principal geographic areas: 1) North America, 2) EMEA, 3) Asia Pacific and 4) Latin America . In evaluating financial performance, we focus on operating profit as a measure of a geographic area’s profit or loss. Operating profit for this purpose is income before interest, taxes and allocation of certain corporate expenses. We include our corporate division in the presentation of geographical areas information because some of the income and expenses of this division are not allocated separately to the geographical areas. We have not allocated a portion of the product development costs of $3.5 million for three months ended December 31, 2003 and $3.5 million for the three months ended December 31, 2002, or administrative costs of $4.6 million for the three months ended December 31, 2003 and $3.5 million for the three months ended December 31, 2002 incurred in the United States to the other geographic areas for the three months ended December 31, 2003 and 2002.

15

Table of Contents

The following table includes interim financial information for the three months ended December 31, 2003 and 2002 related to our geographic areas. The information presented below may not be indicative of results if the geographic areas were independent organizations (in thousands).