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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

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 August 5, 2004 was 25,403,577.

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MAPICS, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2004

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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.

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MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

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

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MAPICS, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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MAPICS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 also have condensed these notes, and they do not contain all disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read 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 Statement of Financial Accounting Standards (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 No. 148. We did not record stock-based compensation expense related to outstanding stock options in the three or nine months ended June 30, 2004 and 2003, as all options granted under our plans had an exercise price equal to fair market value at the grant date.

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 is shown below (in thousands, except per share data):

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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,” SAB 104, “Revenue Recognition,” 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 perpetual license agreements or annual renewable term 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:

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

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

(3) fees are fixed or determinable; and

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

The annual support fee, which is typically paid 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 support 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 experienced any significant warranty claim losses related to our products, and we have no reason to believe that we will incur any material claim losses 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

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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 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 implementation and consulting services revenue, and revenue is recognized when services are provided.

We apply 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 and unvested restricted common stock, and common stock warrants 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):

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

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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 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 tradenames and maintenance contracts, was based on management’s best estimate, which included a consultation and review with a third party appraiser. We allocated the $38.9 million 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 option 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 under the Securities Act of 1933 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 we no longer employ the employee. 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 per share and expires on July 17, 2006.

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The following allocation of the total purchase price reflects the fair value of the assets acquired and liabilities assumed as of June 30, 2004:

Pro Forma Information (Unaudited)

The following unaudited pro forma information presents our results of operations for the nine months ended June 30, 2003 as if the acquisition had taken place on October 1, 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 acquisition occurred on the date indicated or which may result in the future.

The reported income tax expense for the nine months ended June 30, 2004 was calculated based on our projected annual effective tax rate of 36.5%. For the three months ended June 30, 2004, our reported income tax was calculated

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based upon an overall effective tax rate of 37.5%. The reported income tax expense for the three and nine months ended June 30, 2004 differs from the expected income tax expense calculated by applying the federal statutory rate of 35.0% to our income before income tax expense primarily due to the impact of state and foreign income taxes.

The reported income tax benefit for the three and nine months ended June 30, 2003 includes a $2.1 million tax benefit. This tax benefit resulted from changes in income taxes payable due to the resolution of federal income tax uncertainties related to tax net operating losses (NOLs) retained by MAPICS in connection with our 1997 spin-off of Marcam Solutions, Inc. Accordingly, we recorded this income tax benefit and a corresponding decrease in income taxes payable. 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. Excluding the $2.1 million tax benefit discussed above, the reported income tax expense for the three and nine months ended June 30, 2003 was calculated based on our projected effective tax rate of 37.0% and 36.9%. The reported income tax expense excluding the $2.1 million benefit differs from the expected income tax expense calculated by applying the federal statutory rate of 35.0% to our income before income tax expense principally due to the impact of state and foreign income taxes.

At June 30, 2004, we estimate that we had domestic federal NOL carryforwards of $37.7 million and research and experimentation and other credit carryforwards of $9.2 million. At June 30, 2004, we also had $12.2 million foreign NOL carryforwards. The domestic NOL carryforwards and tax credits at June 30, 2004 expire between fiscal 2004 and fiscal 2023. The utilization of a significant portion of the domestic NOL carryforwards and tax credits is limited on an annual basis due to various changes in the ownership of MAPICS and previously acquired companies. We do not believe that these limitations will significantly impact our ability to utilize MAPICS, Frontstep’s and Pivotpoint’s NOL carryforwards 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 is included in our valuation allowance in connection with the purchase price allocation of Frontstep. We also have a valuation allowance for certain of our foreign NOL carryforwards. There have been no changes in the valuation allowance for the three and nine months ended June 30, 2004 from the amount reported at September 30, 2003. We believe these NOL carryforwards and tax credits will continue to result in cash savings in future periods as we use them to offset income taxes payable. 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 then 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 $2.5 million and $7.9 million for the three and nine months ended June 30, 2004 as compared with $2.1 million and $5.5 million for the three and nine months ended June 30, 2003. Amortization of computer software costs for the nine months ended June 30, 2004 included $0.6 million for the prospective adjustment of the amortization lives from five years to three years.

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Changes in Goodwill for the Nine Months Ended June 30, 2004 (in thousands):

On February 18, 2003 we completed the acquisition of Frontstep. 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 the acquisition. The allocation of the total purchase price to the intangible assets, including tradenames, maintenance contracts, and acquired technology was based on management’s best estimate, which included a consultation and review with a third party appraiser. We allocated the $38.9 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 identifiable 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):

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Estimated Amortization Expense for the Fiscal Years Ending (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. At June 30, 2004, we had $2.4 million remaining in our restructuring and exit costs reserve relating to fiscal 2002 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 in accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” We recorded the remaining $1.8 million in exit costs as restructuring costs in our statement of operations.

The total exit cost of $6.2 million during 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 we subsequently terminated on February 21, 2003. During the nine months ended June 30, 2004, we recorded a net adjustment of $1.0 million to decrease the restructuring reserve for abandonment of office space as a result of securing buy-out agreements for two vacated properties 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 as 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. At June 30, 2004, we have $0.6 million remaining in our restructuring and exit costs reserve relating to fiscal 2003 activities.

During the three and nine months ended June 30, 2004, we recorded exit costs of $2.2 and $2.6 million primarily related to employee severance and related costs for approximately 70 employees from all areas in our North America and Europe, Middle East and Africa (EMEA) regions, of which $2.6 million was included in restructuring costs on our statement of operations and accounted for under the provisions of SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”. The work force reduction during the three and nine months ended June 30, 2004 was done primarily to reduce costs. At June 30, 2004, we had $2.0 million remaining in our restructuring and exit costs reserve relating to activities during the nine months ended June 30, 2004.

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The major components of the restructuring and exit costs reserve at June 30, 2004 were as follows (in thousands):

We expect future cash expenditures related to these restructuring activities to be approximately $5.0 million. We expect to pay approximately $3.0 million during the next twelve months, and we therefore have included this amount in current liabilities. We expect to pay the remaining $2.0 million by fiscal 2007.

As shown in the table above, our restructuring and exit costs reserve at June 30, 2004 is comprised of the estimated excess lease and related costs associated with vacated office space and costs accrued for employee severance and related costs associated with work force reductions. We could incur additional restructuring charges if operating results require us to further reduce our work force. Additionally, 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 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.