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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004 | Commission file no. 0-11527 |
MPSI SYSTEMS INC.
Delaware | 73-1064024 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4343 South 118th East Avenue, Tulsa Oklahoma 74146
Registrant’s telephone number, including area code (918) 877-6774
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
Number of shares of common stock outstanding at March 31, 2004 - 2,911,780
INDEX
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15 | ||||||||
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17 | ||||||||
CEO Certification Pursuant to Section 302 | ||||||||
CFO Certification Pursuant to Section 302 | ||||||||
Certification Pursuant to 18 U.S.C. Section 1350 |
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PART I. FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, | ||||
Assets | 2004 | |||
(Unaudited) | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 276,000 | ||
Receivables | 1,118,000 | |||
Other current assets | 212,000 | |||
Total current assets | 1,606,000 | |||
Capitalized product development costs, net | 481,000 | |||
Property and equipment, net of accumulated depreciation and amortization | 305,000 | |||
Other assets | 276,000 | |||
Total assets (Note 3) | $ | 2,668,000 | ||
See accompanying notes to condensed consolidated financial statements.
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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Cont’d)
March 31, | ||||
Liabilities and Stockholders' Equity | 2004 | |||
(Unaudited) | ||||
Current liabilities: | ||||
Accounts payable | $ | 610,000 | ||
Accrued liabilities | 789,000 | |||
Deferred revenue | 1,404,000 | |||
Total current liabilities | 2,803,000 | |||
Noncurrent deferred revenue | 309,000 | |||
Total liabilities | 3,112,000 | |||
Commitments and contingencies | ||||
Stockholders’ Equity (Deficiency): | ||||
Preferred Stock, $.10 par value, 1,000,000 shares authorized, none issued or outstanding | — | |||
Common Stock, $.05 par value, 20,000,000 shares authorized, 2,912,000 shares issued and outstanding at | ||||
March 31, 2004 | 146,000 | |||
Junior Common Stock, $.05 par value, 500,000 shares authorized, none issued or outstanding | — | |||
Additional paid-in capital | 13,145,000 | |||
Deficit | (14,040,000 | ) | ||
Other accumulated comprehensive income | 305,000 | |||
Total stockholders’ equity (deficiency) | (444,000 | ) | ||
Total liabilities and stockholders’ equity (deficiency) | $ | 2,668,000 | ||
See accompanying notes to condensed consolidated financial statements.
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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Revenues | $ | 2,169,000 | $ | 2,239,000 | ||||
Cost of Sales | 1,129,000 | 1,036,000 | ||||||
Gross profit | 1,040,000 | 1,203,000 | ||||||
Operating expenses: | ||||||||
General and administrative | 716,000 | 540,000 | ||||||
Marketing and client services | 651,000 | 790,000 | ||||||
Research and development | 235,000 | 383,000 | ||||||
Total operating expenses | 1,602,000 | 1,713,000 | ||||||
Operating income (loss) | (562,000 | ) | (510,000 | ) | ||||
Other income (expense) | (3,000 | ) | (12,000 | ) | ||||
Loss before income taxes | (565,000 | ) | (522,000 | ) | ||||
Provision for income taxes | 19,000 | 2,000 | ||||||
Net loss | $ | (584,000 | ) | $ | (524,000 | ) | ||
Per Share: | ||||||||
Basic and diluted loss per common share | $ | (.20 | ) | $ | (.18 | ) |
See accompanying notes to condensed consolidated financial statements.
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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
Other | ||||||||||||||||||||||||||||||||
Common stock | Additional | accumulated | Total | |||||||||||||||||||||||||||||
paid-in | comprehensive | stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | capital | Deficit | income | equity | |||||||||||||||||||||||||||
Balance, December 31, 2003 | $ | 2,912,000 | $ | 146,000 | $ | 13,145,000 | $ | (13,456,000 | ) | $ | 313,000 | $ | 148,000 | |||||||||||||||||||
Net loss | — | — | — | (584,000 | ) | — | (584,000 | ) | ||||||||||||||||||||||||
Other accumulated comprehensive income: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (8,000 | ) | (8,000 | ) | ||||||||||||||||||||||||
Total comprehensive loss | $ | (592,000 | ) | |||||||||||||||||||||||||||||
Balance, March 31, 2004 | 2,912,000 | $ | 146,000 | $ | 13,145,000 | $ | (14,040,000 | ) | $ | 305,000 | $ | (444,000 | ) | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2)
(Unaudited)
Three Months Ended March 31, | ||||||||||||
2004 | 2003 | |||||||||||
Net loss | $ | (584,000 | ) | $ | (524,000 | ) | ||||||
Adjustments to reconcile net loss to cash used by operating activities: | ||||||||||||
Depreciation and amortization | 198,000 | 226,000 | ||||||||||
Net loss on closure of foreign subsidiaries | — | 28,000 | ||||||||||
Decrease in assets | 27,000 | 154,000 | ||||||||||
Decrease in liabilities | (257,000 | ) | (35,000 | ) | ||||||||
Net cash used by operating activities | (616,000 | ) | (151,000 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||
Purchase equipment | — | (17,000 | ) | |||||||||
Capitalized product development costs | — | (73,000 | ) | |||||||||
Net cash used by investing activities | — | (90,000 | ) | |||||||||
Decrease in cash | (616,000 | ) | (241,000 | ) | ||||||||
Cash at beginning of period | 892,000 | 864,000 | ||||||||||
Cash at end of period | $ | 276,000 | $ | 623,000 | ||||||||
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | General Notes: | |||
Certain notes to the December 31, 2003 audited consolidated financial statements filed with Form 10-KSB, as amended, are applicable to the unaudited consolidated financial statements for the three months ended March 31, 2004. Accordingly, reference should be made to the audited consolidated financial statements at December 31, 2003. | ||||
Revenue Recognition. Effective January 1, 2003, the Company adopted a revised method of estimating its percentage of completion for its major consulting and technology projects. In fiscal 2002 and prior periods, the Company aggregated all phases of a production project together (contractually and internally) and made its percentage of completion calculation based upon the ratio of actual costs incurred at any measurement date to total estimated costs for the project. Effective in fiscal 2003 the Company began to unbundle its project pricing (contractually and internally) so that individual phases of the production process are separately priced (and costed). Accordingly, the percentage of completion will be adjusted as each phase is complete and the aggregation of completed phases will represent the overall percentage of completion for the project / contract. Management has elected to make this change because it is a more conservative and accurate method of determining percentage of project completion and because this method results in financial information about internal profit centers which will be critical to performance evaluation of the production groups and to resource allocation decisions. | ||||
In the opinion of Management, the unaudited consolidated financial statements as of March 31, 2004 contain all adjustments (including normal recurring accruals) necessary to fairly present the financial position and the results of operations of the Company. The timing of market study orders and software license agreements can significantly impact quarterly results of operations and, accordingly, the results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. | ||||
New Accounting Standard.In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46, “Consolidation of Variable Interest Entities,” that provides guidance in determining when variable interest entities should be consolidated in the financial statements of the primary beneficiary. For the Company, the consolidation provisions of FIN 46, as revised, are effective in fiscal years beginning after December 15, 2004. The adoption of FIN 46 is not expected to have a material effect on the Company’s financial position or results of operations. | ||||
2. | Supplemental Cash Flow Information: | |||
The Company paid interest of $7,000 and $3,000 during the three months ended March 31, 2004 and 2003, respectively. Income taxes of $10,000 and $14,000 were paid during the three months ended March 31, 2004 and 2003, respectively. | ||||
3. | Business Segments: | |||
Prior to fiscal 2003, the Company identified its operating segments based upon line of business, which resulted in three reportable segments: Convenience Retailing, Pricing, and Business Development. During the first quarter of fiscal 2003 the Company undertook a reorganization in connection with a reduction in force aimed at reducing monthly operating costs. That reorganization resulted in an amalgamation of resources from the three previous segments, a change in the divisional operating responsibilities and a different management focus based upon geographic operating differences and resource requirements. Product offerings, consisting of decision support modeling technology for multi-outlet convenience retailers, are essentially equivalent across all segments. |
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Set forth below is certain condensed financial information presented with respect to the operational segments that shall carry forward in 2004, together with a reconciliation to loss before income taxes. These reported operational segments represent aggregations of certain information relative to operations in homogenous countries within the defined geographic segments. All revenue is from external customers as there are no inter-segment sales. |
($000) | S E G M E N T S | |||||||||||||||
Quarter Ended March 31, | Europe / Africa / | Pacific | ||||||||||||||
2004 | Americas | Middle East | Rim | Totals | ||||||||||||
Revenues | $ | 1,296 | $ | 26 | $ | 847 | $ | 2,169 | ||||||||
Contribution margin | $ | 504 | $ | (142 | ) | $ | 202 | $ | 564 | |||||||
Reconciling items not allocated to operating segments: | ||||||||||||||||
Corporate administration, sales and technology expense | (1,126 | ) | ||||||||||||||
Other income (expense) | (3 | ) | ||||||||||||||
Loss before income taxes | $ | (565 | ) | |||||||||||||
Total assets | $ | 2,668 |
Quarter Ended March 31, | Europe / Africa / | Pacific | ||||||||||||||
2003 | Americas | Middle East | Rim | Totals | ||||||||||||
Revenues | $ | 1,276 | $ | 262 | $ | 701 | $ | 2,239 | ||||||||
Contribution margin | $ | 264 | $ | 60 | $ | 337 | $ | 661 | ||||||||
Reconciling items not allocated to operating segments: | ||||||||||||||||
Corporate administration, sales and technology expense | (1,171 | ) | ||||||||||||||
Other income (expense) | (12 | ) | ||||||||||||||
Loss before income taxes | $ | (522 | ) | |||||||||||||
Total assets | $ | 4,630 |
4. | Contingent Liability | |||
On March 29, 2004 the Company received an assessment notice from the Oklahoma Department of Labor (“DOL”). The DOL is requiring MPSI to pay an additional $151,000 of separation payments to employees furloughed in March 2003 and subsequently terminated. This assessment was over and above severance payments already made by MPSI to such employees in accordance with MPSI’s severance policy. MPSI has filed a protest and request for hearing before an administrative law judge. A hearing date has not yet been set, however, on the basis of the DOL assessment, the Company has accrued an aggregate of $151,000 related to this matter. |
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5. | Comprehensive Income | |||
Comprehensive income is net income, plus certain other items that are recorded directly to stockholders’ equity, bypassing net income. The only such items currently applicable to the Company are foreign currency translation adjustments. | ||||
Comprehensive loss was $(592,000) and $(379,000) for the quarters ended March 31, 2004 and 2003, respectively. |
ITEM 2 - | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS |
Results of Operations
Consistent with historical results in the first fiscal quarter, MPSI experienced sluggish results. The Company reported a net loss of $584,000 or $.20 per share on revenues of $2.2 million for the quarter ended March 31, 2004 compared with a loss of $524,000 or $.18 per share on revenue of $2.2 million for the comparable quarter ended March 31, 2003. Included in the March 2004 results was the recognition of approximately $151,000 of separation costs mandated by a governmental agency in respect of the Company’s March 2003 reduction in force (see note 4 to the consolidated financial statements). Excluding the nonrecurring separation costs, the Company’s modest improvement in operating results, as reflected during the first quarter of 2004 (a loss of $433,000 or $.15 per share) compared with the 2003 quarter, is principally the result of positive effects of 2003 staff and other cost reduction activities as discussed in greater detail below.
Revenue for the quarters ended March 31, 2004 and 2003 were virtually equal, although in both cases below the average quarterly results targeted by management for the respective annual fiscal periods. To a certain extent, the first fiscal quarter of any year is subject to sluggishness, as many of MPSI’s most significant customers are just beginning to operate under new annual cost budgets and MPSI must overcome the sales cycle to begin tapping those budgets. As to the March 2004 quarter, there was also another negative impact associated with the Company’s accelerated production activities during the last quarter of fiscal 2003 which had the effect of moving revenue into fiscal year 2003 that might otherwise have been taken up during the first quarter of fiscal 2004. These activities in the fourth quarter of fiscal 2003 were in line with management’s attempts to capitalize on late orders in order to maximize earnings for that fiscal year.
Although the fluctuations in revenue from most MPSI product lines were nominal between the March 2004 quarter and the comparable March 2003 quarter, the Company did experience variances in regional revenue contributions from certain of its geographic segments between the indicated quarters. Revenue from Europe/South Africa was down approximately $236,000 (90%) in the March 2004 quarter compared with the March 2003 quarter, principally as the result of customer project timing. However, the cyclical pattern of business particularly in South Africa portends a generally lower level of revenue from that country for fiscal 2004 as a whole. In Asia, MPSI experienced an increase in revenue between the two indicated quarters of approximately $146,000 (20%). National database deliveries in Japan, which production is in full swing during the March 2004 quarter compared to being in a start-up mode during the March 2003 quarter, accounted for most of the change. National databases delivered to customers in Japan and Korea have been a significant contributor to MPSI revenues over the last 18 months. Beginning in the September 2004 quarter, MPSI expects Japanese and Korean clients to sign on for another series of database updates that will generate follow-on revenue well into 2005. Revenue in MPSI’s North American segment was virtually the same between the indicated quarters (approximately $1.3 million). However, management is pleased that efforts to introduce a new consulting service, Capital Optimization Solutions, have been well received as evidenced by the revenue trend ($465,000 in the quarter ended March 31, 2004 versus $137,000 for the comparable quarter last year).
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Despite the normal sluggishness associated with first quarter activities for the reasons noted above, management is pleased with the trend of new orders. Orders for the quarter ended March 31, 2004 of approximately $2.9 million represented a 100% improvement over the $1.4 million of orders taken during the quarter ended March 31, 2003. As a result, backlog was $5.1 million at March 31, 2004. The Company expects approximately $2.6 million of the March 2004 backlog to turn over during the remainder of 2004. Although the March 31, 2004 backlog is lower than the backlog at March 31, 2003 ($6.4 million), management attributes most of the difference to the effects of the national database orders from Asia which were new to backlog at March 31, 2003 and most of which have been earned through March 31, 2004. As noted above, expected renewals by Asian clients for updates to these national databases later this year should have the effect of substantially raising backlog to a more comparable level. The timing of large multi-year orders such as the Asian national databases can have a significant impact on the level of backlog at any particular point in time.
Gross margins from production activities declined to 48% during the March 2004 quarter compared with 54% achieved in the first quarter last year. This decline reflected a change in project mix. The March 2004 quarter included fewer multi-client, high margin projects as compared with the March 2003 quarter. Historically, as a fiscal year progresses, the opportunities for clients to add on to already produced market model projects improve, and with it MPSI generally experiences improved annual gross margin percentages. Further, as to MPSI’s pricing-oriented revenue stream, more of such revenues in the March 2004 quarter were concentrated from lower margin products (pricing surveys) as compared to pricing revenue in the March 2003 quarter which were the result of higher margin consulting projects.
Excluding the one-time accrual for additional separation costs of $151,000 (see Note 4 to Consolidated Financial Statements), operating expenses were down $262,000 (15%) in the quarter ended March 31, 2004 as compared with the March 2003 quarter. This cost improvement is primarily due to staff and other cost reductions implemented in late March 2003 and thereafter. With those actions, MPSI anticipated quarterly cost savings of approximately $300,000. The apparent shortfall for the March 2004 quarter is due to higher than normal professional service fees associated with the Company’s “going-private” activities, which are expected to culminate during the June 2004 quarter.
Other income and expenses relate principally to foreign exchange transaction gains/losses, interest and income taxes. Although the Company continues to be exposed to possible foreign exchange gains/losses due to the fact that portions of MPSI’s billings to customers are denominated in foreign currencies, these activities had no material effect on quarterly results in either the March 2004 or 2003 quarters. Likewise, interest expense was not a major factor to either quarter. The Company experienced interest expense of $7,000 for the March 2004 quarter compared with $3,000 for the quarter ended March 31, 2003. As the Company has no outstanding debt, interest charges generally relate to supplier financing. Income taxes of $19,000 during the quarter ended March 31, 2004 were up from $2,000 in the March 2003 quarter. MPSI presently experiences only nominal annual US income tax due to net operating loss carryforwards from prior years. The recorded income taxes relate to foreign income tax withheld at the source of customer payments, principally in Canada and Japan, during the March 2004 quarter.
Financial Condition and Liquidity
The Company’s working capital deficit was approximately $1,197,000 at March 31, 2004, an improvement of 26% when compared with the deficit of $1,616,000 at March 31, 2003. That improvement was principally associated with cost saving measures implemented in 2003 (which resulted in lower operating accounts payable and accrued liabilities at March 31, 2004). Further, a higher percentage of “pre-billings” to customers was earned at March 31, 2004 than was the case at March 31, 2003 (as evidenced by the relationship between accounts receivable and the current portion of deferred revenue at the respective measurement points). However, as compared with working capital at the end of fiscal 2003, the Company experienced a decrease of $456,000 (62%). Working capital in the fourth quarter of any fiscal year typically benefits from “windfall” orders from customers utilizing remaining portions of the annual operating budgets. Since December 31, 2003 and in line with typical first quarter sluggishness, the Company has had to tap into its cash reserves and extend payment cycles to suppliers. MPSI has no working capital debt facility to smooth the fluctuation in cash liquidity sometimes experienced due to the timing
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of new orders/billings versus fixed expenses. Management anticipates that the relatively low liquidity situation at March 31, 2004 will improve beginning in the June 2004 quarter.
As reflected in the Statement of Cash Flows, the Company’s liquidity position has not allowed for substantial capital investment. This situation has had no detrimental effects on operations, however, since (a) the present product technology leads the field and should require no substantial upgrades this fiscal year, and (b) internal computer networks were modestly upgraded in 2003 and are sufficient to meet projected 2004 operating requirements. The Company has no present equipment acquisition commitments but will likely undertake modest upgrades later in 2004. Likewise, certain web-oriented product development is slated for later this year.
Current and noncurrent portions of deferred revenue related to the Company’s ability to bill customers in advance for most projects. Such increases to account receivable or cash are recorded with an offsetting entry to deferred revenue until such time as the Company has completed each project’s earnings process (see revenue recognition policies in the Footnotes to Consolidated Financial Statements). The noncurrent portions of deferred revenue relate principally to multi-year software license and maintenance contracts, which were prepaid at origination and are earned over the life of the respective agreements. The current portion of deferred revenue relates principally to retail consulting service projects ($1.0 million) and multi-year software license revenues expected to turn over within the twelve months following March 31, 2004 ($354,000). The Company anticipates that all of current deferred service-oriented revenue and $287,000 of current deferred software licensing revenue will turn over during the remainder of fiscal year 2004.
Other than changes associated with quarterly earnings, there have been no material variations in the equity accounts since March 31 or December 31, 2003. The Board of Directors has authorized and management is in the process of taking the Company private. These actions have been undertaken in response to the increasing costs of remaining a public company versus the lack of benefits currently associated therewith. MPSI has filed preliminary proxy materials for review by the Securities and Exchange Commission. At the completion of that review process, MPSI will file definitive proxy materials and distribute them to all stockholders of record at the established record date. At the Company’s next annual meeting, expected to take place during the June 2004 quarter, a vote on the “going-private” issue will take place. Assuming that vote is in the affirmative, MPSI expects to file for de-registration shortly thereafter.
Off-Balance Sheet Arrangements
None.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Use of Estimates
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (hereinafter referred to as “GAAP”) and the application of GAAP requires management to make estimates that affect the Company’s reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In many instances, the Company could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation of its financial condition or results of operations will be affected.
On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, provision for doubtful accounts, recovery of capitalized product development costs, useful lives of property and equipment, income taxes, contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
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of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
In addition to these estimates and assumptions that are utilized in the preparation of historical financial statements, the inability to properly estimate the timing and amount of future revenues could significantly impact the Company’s future operations. While the Company’s software allows it to monitor potential revenues and aids in its ability to manage the size of its operations, management must make assumptions and estimates as to the timing and amount of future revenue. Specifically, the Company’s sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transactions. The Company aggregates these estimates periodically to generate a sales pipeline and then evaluates the pipeline to identify trends in the Company’s business. This pipeline analysis and related estimates of revenue may differ significantly from actual revenues in a particular reporting period as the estimates and assumptions were made using the best available data at the time, which is subject to change. Specifically, the slowdown in the global economy and information technology spending has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or canceled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion rate of the pipeline into contracts could cause the Company to plan or budget inaccurately and thereby could adversely affect the Company’s business, financial condition or results of operations. In addition, because of unpredictable timing of high-dollar contracts, management may not be able to adjust the Company’s cost structure to respond to a variation in the conversion of the pipeline in a timely manner, and thereby the delays may adversely and materially affect the Company’s business, financial condition or results of operations.
Critical Accounting Policies
In addition to making critical accounting estimates, the Company must ensure that its financial statements are properly stated in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions (e.g., revenue recognition, stock-based compensation, depreciation methodology, etc.). The Company believes that the following accounting policies are critical to understanding the Company’s historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates: revenue recognition, stock-based compensation, the provision for doubtful accounts, capitalized product development costs, income taxes, and foreign currency transactions.
The Company’s management has reviewed its critical accounting policies, its critical accounting estimates, and the related disclosures with its Audit Committee. These policies, and the Company’s procedures related to these policies, are described in detail below.
• | Revenue Recognition:Effective January 1, 2003, the Company adopted a revised method of estimating its percentage of completion for its major consulting and technology projects. In fiscal 2002 and prior periods, the Company aggregated all phases of a production project together (contractually and internally) and made its percentage of completion calculation based upon the ratio of actual costs incurred at any measurement date to total estimated costs for the project. Effective for fiscal 2003 the Company has begun to unbundle its project pricing (contractually and internally) so that individual phases of the production process are separately priced (and costed). Accordingly, percentage of completion will be adjusted as each phase is complete and the aggregation of completed phases will represent the overall percentage of completion for the project / contract. Management has elected to make this change because it is a more conservative and accurate method of determining percentage of project completion and because this method results in financial information about internal profit centers which will be critical to performance evaluation of the production groups and to resource allocation decisions. | |||
The Company recognizes software revenue under the provisions of the Accounting Standards Executive Committee’s Statement of Position 97-2 (“SOP 97-2”) entitled “Software Revenue Recognition” (as amended by SOP 98-9). Under the terms of SOPs 97-2 and 98-9, companies are required to defer all revenue from multiple-element software arrangements if sufficient vendor specific objective evidence does not exist for the allocation |
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of revenue to the various elements of the arrangement. As a result, the Company recognizes revenue on multi-year software license agreements ratably over the life of the arrangement. | ||||
Revenue is recognized when the Company has no remaining obligations under the software license and maintenance contracts other than providing post-contract customer support services related to the maintenance portion of the contract and performance obligations under any optional and separately priced training or consulting arrangements. Maintenance revenues are recognized ratably over the term of the contracts as the post-contract customer support services are provided and the related costs incurred are recognized. Optional training and consulting represents service transaction on which revenue and expense are recognized when the earnings process is substantially complete. | ||||
Beginning in fiscal 2001, MPSI changed its software licensing and maintenance contracting methods. Following the change, most software products are perpetually licensed in a fashion that mandates up-front payment of the license fees. Maintenance is an optional annual commitment by clients who wish to obtain future upgrades without additional cost. This change in licensing did not materially impact fiscal 2001. | ||||
• | Stock-Based Compensation:At December 31, 2002, the Company has one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. | |||
• | Receivables: Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables (immaterial in the condensed statements reflected herein) based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. | |||
• | Capitalized Product Development Costs: Cost of software held for resale (which was either purchased with the intent to incorporate the acquired software in MPSI products or developed internally) is presented net of accumulated amortization. | |||
The costs of internally developed software held for resale include direct labor, materials and overhead, and relate to significant enhancements to existing software or to development of new software products. All costs incurred to establish the technological feasibility of internally developed software are charged to research and development expense as incurred. Royalties, which may become payable because of ongoing proprietary interests related to third-party software imbedded in MPSI products, are charged to cost of sales-software licensing as applicable software sales are recognized. | ||||
The annual amortization of software products is computed on a product-by-product basis and is the greater of the amount determined using (1) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (2) the straight-line method over the remaining economic life of the product. Historically, the straight-line method has resulted in a greater amount of amortization in each accounting period and has, therefore, been the basis for amortization in the current period and in prior periods. Amortization starts when a product is available for general release to customers and is reflected in cost of sales – software licensing. | ||||
In the event that capitalized product development costs are subsequently determined not to be fully recoverable from future operations, the carrying value of such software is reduced to an amount equal to its net realizable value less costs of marketing and distribution. The reduction in carrying value is recorded in cost of sales. |
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• | Income Taxes: The Company applies the liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the results of operations during the period that includes the enactment date. |
Foreign Currency Translation: Assets and liabilities of the Company’s foreign operations are translated from the foreign operating currency to the U.S. Dollar equivalent for consolidated reporting purposes using the applicable exchange rates at the balance sheet date. Revenues and expenses are translated at average rates for the year. Exchange differences from these translations are included in other comprehensive income. Where amounts denominated in a foreign currency are, or are expected to be, converted into dollars by remittance or repayment, the realized exchange differences are reflected in the results of operations.
Portions of this document may constitute forward-looking statements as defined by federal law. Although the Company believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Additional information about issues that could lead to material changes in performance is contained in the Company’s annual report on Form 10-KSB, as amended, which is filed with the Securities and Exchange Commission. |
ITEM 3 – CONTROLS AND PROCEDURES
MPSI Systems Inc.’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report. Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to MPSI Systems Inc. (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act. There have not been any significant changes to the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of this evaluation.
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings –
In March 2003, MPSI furloughed 18 employees in the United States pending a determination of subsequent business volume, particularly as it related to several major proposals outstanding at the time. Ultimately, the results of those proposals were not sufficient to recall all furloughed employees so that the Company communicated permanent severance notices to the affected group of 10 employees in September 2003 and began paying severance and other separation costs in accordance with company policies.
The Company was notified at various times during the fourth quarter of 2003 and the first quarter of 2004 that certain of the severed employees had filed claims for additional separation compensation with the Oklahoma Department of Labor (“DOL”), Wage & Hour Division. On March 29, 2004, the DOL provided the Company with additional assessment notices, effective March 19, 2004, for 10 former employees with the total of additional assessments being approximately $151,000.
On April 14, 2004, the Company filed a formal protest with the DOL and is awaiting a hearing date. The Company’s position is that it fully complied with all laws applicable to the furlough/severance situations and that all payments in accordance with Company policies have been previously made. Management is not able to determine the ultimate outcome of these matters.
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Item 2 — Changes in Securities — None.
Item 3 — Defaults Upon Senior Securities – None.
Item 4 — Submission of Matters to a Vote of Security Holders — None
Item 5 — Other Information – None.
Item 6 — Exhibits and Reports on Form 8-K.
(a) | Exhibits: |
31.1 | Chief Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2 | Chief Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | Reports on Form 8-K — None |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed in its behalf by the undersigned hereunto duly authorized.
MPSI SYSTEMS INC. | ||||
Date May 13, 2004 | By /s/ Bryan D. Gross | |||
Bryan D. Gross, President | ||||
(Chief Executive Officer) | ||||
Date May 13, 2004 | By /s/ James C. Auten | |||
James C. Auten, Vice President | ||||
(Chief Financial Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
31.1 | Chief Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Chief Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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