UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the six months ended March 31, 2001 Commission file no. 0-11527
MPSI SYSTEMS INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-1064024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4343 South 118th East Avenue, Tulsa Oklahoma 74146
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (918) 877-6774
-----------------------------
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
----- -----
Number of shares of common stock outstanding at March 31, 2001 - 2,911,783
--------------
1
INDEX
<Table>
Page No.
--------
Part I. FINANCIAL INFORMATION:
Financial Statements:
Consolidated Balance Sheets - March 31, 2001 and September 30, 2000........................ 3
Consolidated Statements of Operations - Three Months and Six Months
Ended March 31, 2001 and 2000......................................................... 5
Consolidated Statement of Stockholders' Equity - Six Months
Ended March 31, 2001.................................................................. 6
Consolidated Statements of Cash Flow -
Six Months Ended March 31, 2001 and 2000.............................................. 7
Notes To Consolidated Financial Statements................................................. 8
Management's Discussion and Analysis of Financial Condition and
Quarterly Results of Operations............................................................ 12
Part II. OTHER INFORMATION (Including Index to Exhibits)............................................. 15
SIGNATURES............................................................................................ 16
</Table>
2
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
ASSETS 2001 2000
--------------- ---------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 389,000 $ 876,000
Short-term investments, at cost 3,000 3,000
Receivables:
Trade, net 4,130,000 3,310,000
Current portion of long-term receivables, net of
unamortized discount 1,118,000 1,266,000
Work in process inventory 19,000 47,000
Prepayments 96,000 88,000
--------------- ---------------
Total current assets 5,755,000 5,590,000
Long-term receivables, net of current portion
and unamortized discount 493,000 912,000
Property and equipment, net of accumulated amortization 988,000 1,046,000
Capitalized product development costs, net 1,578,000 1,885,000
Other assets 156,000 170,000
--------------- ---------------
Total assets (Note 3) $ 8,970,000 $ 9,603,000
=============== ===============
</Table>
See accompanying notes to consolidated financial statements.
3
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
--------------- ---------------
(UNAUDITED)
Current liabilities:
Note payable to bank (Note 3) $ 1,840,000 $ 2,000,000
Accounts payable 817,000 1,006,000
Accrued liabilities 1,003,000 1,187,000
Deferred revenue 1,644,000 1,284,000
--------------- ---------------
Total current liabilities 5,304,000 5,477,000
Noncurrent deferred revenue 566,000 712,000
Noncurrent deferred income taxes 118,000 121,000
Other noncurrent liabilities 73,000 96,000
--------------- ---------------
Total liabilities 6,061,000 6,406,000
--------------- ---------------
Commitments and contingencies -- --
Stockholders' Equity:
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, 2001 and September 30, 2000 146,000 146,000
Junior Common Stock, $.05 par value, 500,000 shares
authorized, none issued or outstanding -- --
Additional paid-in capital 13,145,000 13,145,000
Deficit (10,792,000) (10,539,000)
Other accumulated comprehensive income 410,000 445,000
--------------- ---------------
Total stockholders' equity 2,909,000 3,197,000
--------------- ---------------
Total liabilities and stockholders' equity $ 8,970,000 $ 9,603,000
=============== ===============
</Table>
See accompanying notes to consolidated financial statements.
4
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Information services and software maintenance $ 3,839,000 $ 4,597,000 $ 7,897,000 $ 8,383,000
Software licensing 32,000 106,000 61,000 121,000
------------- ------------- ------------- -------------
Total revenues 3,871,000 4,703,000 7,958,000 8,504,000
------------- ------------- ------------- -------------
Cost of Sales:
Information services and software maintenance 1,497,000 1,786,000 2,676,000 3,161,000
Software licensing 166,000 137,000 376,000 216,000
------------- ------------- ------------- -------------
Total cost of sales 1,663,000 1,923,000 3,052,000 3,377,000
------------- ------------- ------------- -------------
Gross profit 2,208,000 2,780,000 4,906,000 5,127,000
Operating expenses:
General and administrative 744,000 816,000 1,664,000 1,775,000
Marketing and client services 1,327,000 1,691,000 2,588,000 3,173,000
Research and development 335,000 339,000 666,000 657,000
------------- ------------- ------------- -------------
Total operating expenses 2,406,000 2,846,000 4,918,000 5,605,000
------------- ------------- ------------- -------------
Operating loss (198,000) (66,000) (12,000) (478,000)
Other income (expense):
Interest income 25,000 45,000 57,000 83,000
Interest expense (175,000) (120,000) (241,000) (172,000)
Gain (loss) on foreign exchange (16,000) (10,000) (38,000) 13,000
Other, net 11,000 2,000 12,000 3,000
------------- ------------- ------------- -------------
Loss before income taxes (353,000) (149,000) (222,000) (551,000)
Provision for income taxes 23,000 33,000 31,000 (1,000)
------------- ------------- ------------- -------------
Net loss $ (376,000) $ (182,000) $ (253,000) $ (550,000)
============= ============= ============= =============
Per Share:
Basic and diluted loss
per common share $ (.13) $ (.06) $ (.09) $ (.19)
Shares Outstanding:
Basic 2,912,000 2,866,000 2,912,000 2,857,000
Diluted 2,912,000 2,866,000 2,912,000 2,857,000
</Table>
See accompanying notes to consolidated financial statements.
5
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
<Table>
<Caption>
OTHER
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------------- PAID-IN COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
------------ ------------ ------------ ------------- ------------- ------------
Balance,
September 30, 2000 2,912,000 $ 146,000 $ 13,145,000 $(10,539,000) $ 445,000 $ 3,197,000
Net loss -- -- -- (253,000) -- (253,000)
Other accumulated
comprehensive
income:
Foreign currency
translation adjustment -- -- -- -- (35,000) (35,000)
------------
Total comprehensive loss $ (288,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance,
March 31, 2001 2,912,000 $ 146,000 $ 13,145,000 $(10,792,000) $ 410,000 $ 2,909,000
============ ============ ============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
6
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (NOTE 2)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED MARCH 31,
------------------------------
2001 2000
------------- -------------
Loss from operations $ (253,000) $ (550,000)
Adjustments to reconcile loss from operations to cash provided by operations:
Depreciation and amortization of property and equipment 167,000 223,000
Amortization of product development costs 573,000 280,000
Changes in assets and liabilities:
Decrease (increase) in assets:
Receivables (254,000) 74,000
Inventories 28,000 34,000
Other 6,000 37,000
Increase (decrease) in liabilities:
Trade payables and accruals (413,000) 39,000
Taxes payable (26,000) (97,000)
Deferred revenue 214,000 355,000
------------- -------------
Net cash provided by operating activities 42,000 395,000
------------- -------------
Cash flows from investing activities:
Purchase equipment (63,000) (54,000)
Software developed for internal use (37,000) (107,000)
Capitalized product development costs (269,000) (679,000)
------------- -------------
Net cash used by investing activities (369,000) (840,000)
------------- -------------
Cash flows from financing activities:
Net proceeds from bank line of credit -- 332,000
Debt repayments (160,000) --
Proceeds from exercised stock options -- 70,000
------------- -------------
Net cash provided (used) by financing activities (160,000) 402,000
------------- -------------
Decrease in cash and cash equivalents (487,000) (43,000)
Cash and cash equivalents at beginning of period 876,000 296,000
------------- -------------
Cash and cash equivalents at end of period $ 389,000 $ 253,000
============= =============
</Table>
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL NOTES:
Certain notes to the September 30, 2000 audited consolidated financial
statements filed with Form 10-K are applicable to the unaudited
consolidated financial statements for the six months ended March 31,
2001. Accordingly, reference should be made to the audited financial
statements at September 30, 2000.
In the opinion of the Company, the unaudited consolidated financial
statements as of March 31, 2001 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 six months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company paid interest of $241,000 and $172,000 during the six
months ended March 31, 2001 and 2000, respectively. Income taxes of
$56,000 and $97,000 were paid during the six months ended March 31,
2001 and 2000, respectively.
3. NOTE PAYABLE TO BANK, SUBSEQUENT EVENTS:
At March 31, 2001, the Company owed $1,840,000 to Bank of America under
a revolving line of credit arrangement secured by accounts and
contracts receivable, inventory, general intangibles and certain cash
accounts. The note bears interest at Bank of America floating prime
rate plus 3% (approximately 12%). The weighted average interest rates
were 12.69% for the six months ended March 31, 2001 and 9.59% for the
six months ended March 31, 2000.
In June 2000, Bank of America notified the Company that it must either
liquidate or move its line of credit. The outstanding balance at that
time was $2,000,000, and the Company was given 120 days to effect a
change. Subsequent to that notice, MPSI has diligently worked this
issue on two fronts: (1) investigation of alternative financing
sources, and (2) regular pay down of the debt from operating cash
flows. Although no acceptable financing alternative has been
identified, the outstanding balance has been steadily reduced from
$2,000,000 at September 30, 2000 to $900,000 at September 30, 2001.
Bank of America has granted extensions of the credit maturity effective
October 2000, January 2001, April 2001, May 2001 and October 2001. With
each extension, except October 2001, the Bank also waived the minimum
net worth covenant requirement of $3,500,000. The latest extension by
Bank of America, effective January 6, 2002, was granted concurrently
with a $250,000 pay down by the Company and set the new maturity date
at October 1, 2002. A further debt payment of $100,000 is required on
or before April 1, 2002. In connection with the extension, the Bank
revised the $3.5 million minimum net worth covenant with which the
Company had not been in compliance. Henceforth, the Company will be
required to maintain a minimum net worth of $1,700,000. Balances
outstanding under the extension bear interest at Bank of America
floating prime plus 7% (approximately 13% presently). Additionally, the
extension agreement eliminated subjective acceleration clauses from the
original agreements which remain in effect except to the extent amended
by the extension documents.
If the Company is unable to maintain the revised minimum net worth
covenant or if the Company fails to maintain an adequate collateral
level as determined through a defined borrowing base computation, the
bank could call the note before its maturity date. If this were to
occur, the Company may not have sufficient cash to repay the note
requiring management to take actions such as delaying payments to
suppliers or reducing operating expenditures. Such actions, if
necessary, could have an adverse effect on the Company's operations or
financial condition.
4. BUSINESS SEGMENTS:
The Company identifies segments based upon line of business, which
results in three reportable segments: Convenience Retailing, Pricing,
and Business Development. The Business Development segment includes the
former DataMetrix and Postal activities. The Convenience Retailing
segment derives its revenues from providing decision support software,
information databases and consulting services to businesses which have
an investment in retail outlet networks, primarily in the petroleum
industry. In many cases, pricing products are sold within the same
customer base applicable to Convenience Retailing. However, Pricing
services are directed more towards operational issues rather than
retail site location or operation. The Business Development segment
derives its revenues primarily from the sales of DataMetrix branded
products, including visual mapping information for cities in the United
States. The Company's measure of segment profit is operating income.
Amortization is specifically assigned to each reported segment as
capitalized
8
development costs are written off to segmented cost of sales over their useful
economic life. Depreciation is allocated to each reported segment through
pre-determined corporate percentages. Identifiable assets in the Convenience
Retailing, Pricing and Business Development segments, which are recorded in the
Convenience Retailing segment, are shared resources which are not specifically
allocated. All assets acquired are managed as shared resources and are not
identifiable to specific reporting segments.
Comparative business segment information has been reclassified herein to conform
with the March 31, 2001 disclosure format. Information on segments and a
reconciliation to income before taxes are as follows:
<Table>
<Caption>
SEGMENTS
------------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
------------ ------------ ------------ ------------
QUARTER ENDED MARCH 31, 2001
Revenues:
Information services and
software maintenance .................. $ 3,180,000 $ 515,000 $ 144,000 $ 3,839,000
Software licensing ....................... 29,000 -- 3,000 32,000
------------ ------------ ------------ ------------
Total revenues ...................... $ 3,209,000 $ 515,000 $ 147,000 $ 3,871,000
============ ============ ============ ============
Operating income (loss) .................. $ 2,000 $ (76,000) $ (124,000) $ (198,000)
============ ============ ============
Other income (expense) ................... (155,000)
------------
Loss before income tax ................... $ (353,000)
============
Amortization of capitalized
product development ................. $ 136,000 $ -- $ 29,000 $ 165,000
Amortization of U.S.
geographic database ................. -- -- 99,000 99,000
Depreciation ............................. 67,000 13,000 4,000 84,000
Identifiable assets ...................... 8,970,000 -- -- 8,970,000
Additions to long-lived assets ........... 81,000 -- -- 81,000
QUARTER ENDED MARCH 31, 2000
Revenues:
Information services and
software maintenance .................. $ 3,600,000 $ 733,000 $ 264,000 $ 4,597,000
Software licensing ....................... 14,000 91,000 1,000 106,000
------------ ------------ ------------ ------------
Total revenues ...................... $ 3,614,000 $ 824,000 $ 265,000 $ 4,703,000
============ ============ ============ ============
Operating income (loss) .................. $ 294,000 $ 144,000 $ (504,000) $ (66,000)
============ ============ ============
Other income (expense) ................... (83,000)
------------
Loss before income tax ................... $ (149,000)
============
Amortization of capitalized
product development ................. $ 120,000 $ 5,000 $ 10,000 $ 135,000
Amortization of U.S.
geographic database ................. -- -- 66,000 66,000
Depreciation ............................. 109,000 4,000 20,000 133,000
Identifiable assets ...................... 10,665,000 -- -- 10,665,000
Additions to long-lived assets ........... 70,000 -- -- 70,000
</Table>
9
Information on segments and a reconciliation to income (loss) before taxes for
the six months ended March 31, 2001 and March 31, 2000 are as follows:
<Table>
<Caption>
SEGMENTS
------------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
------------ ------------ ------------ ------------
SIX MONTHS ENDED MARCH 31, 2001
Revenues:
Information services and
software maintenance ......................... $ 6,590,000 $ 1,056,000 $ 251,000 $ 7,897,000
Software licensing .............................. 35,000 22,000 4,000 61,000
------------ ------------ ------------ ------------
Total revenues ............................. $ 6,625,000 $ 1,078,000 $ 255,000 $ 7,958,000
============ ============ ============ ============
Operating income (loss) ......................... $ 372,000 $ (78,000) $ (306,000) $ (12,000)
============ ============ ============
Other income (expense) .......................... (210,000)
------------
Loss before income tax .......................... $ (222,000)
============
Amortization of capitalized
product development ........................ $ 317,000 $ -- $ 58,000 $ 375,000
Amortization of U.S.
geographic database ........................ -- -- 198,000 198,000
Depreciation .................................... 134,000 25,000 8,000 167,000
Identifiable assets ............................. 8,970,000 -- -- 8,970,000
Additions to long-lived assets .................. 100,000 -- -- 100,000
SIX MONTHS ENDED MARCH 31, 2000
Revenues:
Information services and
software maintenance ......................... $ 6,871,000 $ 1,192,000 $ 320,000 $ 8,383,000
Software licensing .............................. 14,000 106,000 1,000 121,000
------------ ------------ ------------ ------------
Total revenues ............................. $ 6,885,000 $ 1,298,000 $ 321,000 $ 8,504,000
============ ============ ============ ============
Operating income (loss) ......................... $ 413,000 $ 101,000 $ (992,000) $ (478,000)
============ ============ ============
Other income (expense) .......................... (73,000)
------------
Loss before income tax .......................... $ (551,000)
============
Amortization of capitalized
product development ........................ $ 193,000 $ 11,000 $ 10,000 $ 214,000
Amortization of U.S.
geographic ................................. -- -- 66,000 66,000
Depreciation .................................... 181,000 7,000 35,000 223,000
Identifiable assets ............................. 10,665,000 -- -- 10,665,000
Additions to long-lived assets .................. 161,000 -- -- 161,000
</Table>
10
5. COMPREHENSIVE INCOME
Comprehensive income is net income, plus certain other items that are
recorded directly to shareholders' equity, bypassing net income. The only
such items currently applicable to the Company are foreign currency
translation adjustments.
Comprehensive loss was $(377,000) and $(219,000) for the quarters ended
March 31, 2001 and 2000, respectively. For the six months ended March 31,
2001 and 2000, comprehensive loss was $(288,000) and $(555,000),
respectively.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS. MPSI reported a net loss of $376,000 or $.13 per share
on revenues of $3.9 million for the quarter ended March 31, 2001 compared with a
net loss of $182,000 or $.06 per share on revenues of $4.7 million for the
comparable quarter last year. For the six months ended March 31, 2001, MPSI
reported a net loss of $253,000 or $.09 per share on revenues of $8.0 million.
This compared with a net loss of $550,000 or $.19 per share on revenues of $8.5
million for the comparable six months of last fiscal year. As discussed in more
detail below, while revenues for the quarter and six months ended March 31, 2001
were down as compared with last year, operating expenses decreased significantly
due to downsizing which occurred in the U.S. offices during fiscal 2000. During
the first fiscal quarter of 2001 approximately $250,000 of non-recurring
expenses were charged to operations for severance costs related to the final
phase of a year-long organizational and cost reduction program.
CONVENIENCE RETAILING SEGMENT. This business unit accounted for revenues of
$3,209,000, and $3,614,000 for the fiscal quarters ended March 31, 2001 and
2000, respectively, with corresponding operating profits of $2,000 and $294,000.
The decline in revenues ($405,000) and profitability ($292,000) for the second
fiscal quarter of 2001, as compared with 2000, is primarily attributable to
continuing price reductions being offered as new software technology is released
globally. The Company was able to reduce prices 35% on average for U.S.
customers in fiscal 2000 and expects to be similarly competitive in foreign
arenas. These reductions have been offset somewhat by cost reductions
implemented in fiscal 2000 that were completed in the first fiscal quarter of
fiscal 2001. Revenues for the six months ended March 31, 2001 and 2000 were
$6,625,000 and $6,885,000, respectively. Operating income for the six months
ended March 31, 2001 was $372,000 as compared to an operating income of $413,000
for the comparable six-month period last year. Although revenues decreased
$260,000 for the reasons noted herein, operating income decreased by only
$41,000 as a result of further cost cutting measures implemented during the
first fiscal quarter. The Company has experienced a 71% increase in orders
through the first six months of fiscal 2001 compared with the same period last
year. Management attributes this upsurge to the attractive attributes of the new
Retail Explorer ("REX")(TM) technology and to the Company's revised pricing
policies. The timing of new or renewed market study orders can have a
substantial impact upon reported revenues and net income between accounting
periods.
In October 2001, MPSI's largest customer notified the Company that it would
explore other convenience retailing software and data services as a possible
alternative to MPSI products. Of the $4.6 million annual revenues derived from
that customer in fiscal 2000, approximately $3.2 million related to convenience
retailing products and services.
PRICING SEGMENT. Revenues of $515,000 for the quarter ended March 31, 2001,
as compared to $824,000 during the same quarter last fiscal year are down
$309,000 primarily due to the timing of orders. The Company experienced an
operating loss of $76,000 for the second fiscal quarter of 2001 compared to an
operating income of $144,000 during the comparable quarter last year. Revenues
for the six months ended March 31, 2001 of $1,078,000 declined as compared to
revenues of $1,298,000 reported for the six months ended March 31, 2000. This
segment reported an operating loss of $78,000 for the six months ended March 31,
2001 as compared to an operating income of $101,000 for the comparable period
last year. Because this segment deals with a relatively small number of high
dollar projects, timing of client pilot tests and orders can substantially
affect period results.
BUSINESS DEVELOPMENT SEGMENT. This unit (which continues to market mapping
products under the DataMetrix brand and is in the process of developing products
which will be marketed through the internet) generated revenues of $147,000
during the fiscal quarter ended March 31, 2001 as compared with $265,000 during
the comparable period last fiscal year. Business Development incurred an
operating loss of $124,000 for the quarter ended March 31, 2001 as compared with
an operating loss of $504,000 during the same fiscal quarter last year. The
improvement in operations is a result of reduced personnel costs in DataMetrix.
For the six months ended March 31, 2001 and 2000, respectively, Business
Development generated revenues of $251,000 and $320,000 with related operating
losses of $306,000 and $992,000. This unit has not yet achieved critical mass
which has resulted in continuing, although reduced, losses.
CONSOLIDATED OPERATING EXPENSES. Consolidated operating expenses were
$2,406,000 for the quarter ended March 31, 2001 as compared with $2,846,000
during the same quarter last fiscal year. For the six months ended March 31,
2001, consolidated operating expenses were $4,918,000 as compared with
$5,605,000 for the same period last fiscal year.
12
Consolidated general and administrative expenses for the quarter ended
March 31, 2001 were down approximately $72,000 (9%) as compared to the same
fiscal quarter of last year. General and administrative expenses for the six
months ended March 31, 2001 were down approximately $111,000 (6%) as compared to
the same period last fiscal year. The decline in costs for the quarter and six
months were the result of reduced costs associated with severance which took
place during the second fiscal quarter of 2000.
Consolidated marketing and client service expenses for the quarter ended
March 31, 2001 were down $364,000 (22%) as compared to the same fiscal quarter
of last year. For the six months ended March 31, 2001, expenses were down
approximately $585,000 (18%) as compared with the same fiscal periods of last
year. Consolidated marketing expenses have been significantly reduced as a
result of (1) focused target marketing on major global petroleum marketers, and
(2) increased reliance on value-added resellers to service smaller customers.
Additionally, the Company has adjusted its selling and marketing objectives to
accommodate for changes in product offerings and the marketplace, and has
realigned personnel to meet those objectives.
Consolidated research and development expenses (excluding amounts
capitalized for product development as discussed under Financial Condition and
Liquidity below) for the quarter and six months ended March 31, 2001, were
comparable with the same fiscal periods last year. Total costs associated with
product development and maintenance of existing products have been reduced as a
result of new technology policies which seek to produce modular products which
are easier to develop, less costly to customize and maintain, and can more
readily be transported to other vertical market applications.
OTHER INCOME AND EXPENSES. Interest expense of $175,000 and $241,000 was
higher during the quarter and six months ended March 31, 2001, respectively, as
compared to $120,000 and $172,000 for the comparable periods last fiscal year.
The additional expense relates to increased carrying charges assessed by
vendors. The Company is typically a net borrower during its first two fiscal
quarters as a result of the timing of client orders. Additionally, revenues were
down as the result of more competitive pricing as compared to last fiscal year,
which had an adverse impact on billings and cash flows.
MPSI enters into multi-year contracts for market studies, some of which are
denominated in foreign currencies (principally the Singapore Dollar and the
British Pound Sterling ). This exposes MPSI to exchange gains or losses
depending upon the periodic value of the U.S. Dollar relative to the respective
foreign currencies. The Company experienced exchange gains (losses) of
approximately $(16,000) and $(38,000) during the quarter and six months ended
March 31, 2001 respectively, as compared to $(10,000) and $13,000 for the
comparable periods last fiscal year. Although MPSI anticipates continuing
exposure to exchange fluctuations, no material adverse effect is expected as the
Company denominates a limited number of contracts in foreign currencies. The
Company does not utilize derivative financial instruments to hedge their foreign
currency risks.
INCOME TAXES. Income taxes for the quarter and six months ended March 31,
2001 were $23,000 and $31,000, respectively, as compared to $33,000 and $(1,000)
for the same fiscal periods last year. The changes in income taxes are primarily
due to (a) foreign taxes withheld at the source by customers and (b) settlement
of an IRS tax audit (for which the Company had accrued approximately $60,000 at
September 30, 1999 against an ultimately lower settlement which resulted in a
favorable adjustment of approximately $45,000 in the first fiscal quarter of
2000). The amount of foreign income taxes withheld can fluctuate significantly
between fiscal periods based upon not only the geographic areas in which the
Company operates, but on the particular products and services delivered within
an individual country.
FINANCIAL CONDITION AND LIQUIDITY
Working capital, the Company's primary measure of liquidity, was $451,000
at March 31, 2001 as compared with $113,000 at September 30, 2000 and was
considerably better than the negative working capital of $366,000 at March 31,
2000. Generally, the increase in liquidity is principally attributable to (a)
reduced operating expenses related to the downsizing and reorganization, and (b)
reductions in production costs associated with the REX software and the related
databases. Although at March 31, 2001 cash decreased by approximately $487,000
compared with September 30, 2000, net trade receivables increased $672,000 as a
result of orders received and invoices prepared late in the second quarter.
Additionally, the Company was able to reduce its corporate working capital debt
by $160,000 during the first six months of fiscal 2001.
Accounts payable and accrued liabilities were reduced by approximately
$373,000 during the first six months of fiscal 2001. The reductions in corporate
debt and other current liabilities were somewhat offset by an increase in
deferred revenue of approximately $360,000 as a result of orders received late
in the second fiscal quarter of 2001. While increases in deferred
13
revenue have the effect of lowering working capital, such increases do not
require commensurate cash outflows as is the case with other current liability
accounts.
In June 2000, the Company's principal bank, Bank of America, announced its
internal plans to substantially reduce its lending exposures in certain
industries and to certain customer categories. MPSI fell within the criteria
and, accordingly, was notified effective June 30, 2000 that it must either
liquidate or move its line of credit. The outstanding balance at that time was
$2,000,000, and the Company was given 120 days to effect a change. Subsequent to
that notice, MPSI has diligently worked this issue on two fronts: (1)
investigation of alternative financing sources, and (2) regular pay down of the
debt from operating cash flows. Although no acceptable financing alternative has
been identified, the outstanding balance has been steadily reduced from
$2,000,000 at September 30, 2000 to $900,000 at September 30, 2001 as a result
of (1) cash generated from operations, (2) installment payments received on
long-term software license agreements (where revenue had been recognized in
previous years), and (3) lower capital software development costs following the
release of REX globally in the first half of fiscal 2001. The pay downs have
continually pressured MPSI's operating liquidity and prevented accumulation of
additional cash reserves even though the Company had generated positive cash
flow from operations of more than $1.9 million in fiscal 2001. Largely on the
basis of the Company's diligent efforts at liquidation, Bank of America has
granted extensions of the credit maturity effective October 2000, January 2001,
April 2001, May 2001 and October 2001. With each extension, except October 2001,
the Bank also waived the $3,500,000 minimum net worth covenant requirement with
which the Company had not been in compliance. The latest extension by Bank of
America, effective January 6, 2002, was granted concurrent with a $250,000 pay
down by the Company and set the new maturity date at October 1, 2002. See Note 3
to the consolidated financial statements for additional information about the
extension. This action significantly lengthened the Bank's commitment to MPSI
when compared with previous extension periods and provided for an adjustment of
the minimum net worth covenant, with which the Company had not been in
compliance, down to $1.7 million.
In the absence of an alternative banking solution that provided some
measure of working capital draw capability, MPSI had to deal with peaks and
valleys in cash flow by adjusting payments to suppliers and other creditors. On
occasion during 2001, this situation caused the Company to fall behind with
timely payment of payroll taxes, 401(k) matching contributions and some
operational overheads such as insurance premiums. Thus far, MPSI has been able
to manage these situations satisfactorily such that no significant exposure or
loss of critical suppliers has resulted. Additionally, as of the date of the
latest extension by the bank, the Company had significantly improved the payment
timing to its suppliers and other creditors. Management expects that cash flow
from operations will be sufficient to meet operating requirements and liquidate
the remaining bank debt in fiscal 2002. However, if the Company is unable to
maintain the minimum net worth covenant or to maintain an adequate collateral
level as determined through a defined borrowing base computation, the bank could
call the note before its maturity date. The bank has not taken such action to
date. If this were to occur, the Company may not have sufficient cash to repay
the note requiring management to take such actions as delaying payments to
suppliers or reducing operating expenditures. Such actions, if necessary, could
have an adverse effect on the Company's operations or financial condition.
Management will continue to seek cost-effective alternate financing sources, not
only as a means of accelerating liquidation of the current note, but also to
provide back-up working capital availability.
Capitalized product development expenditures for the six months ended March
31, 2001 were $269,000 compared with $679,000 in the same period last year. The
fiscal year 2001 capitalized costs principally reflect completion of the REX
generic global system, initial work on the REX updates and the Company's
internet product offering. The internet offering is intended to open up access
to many smaller clients who have traditionally not been able to utilize the
Company's technology due to price or computer system constraints.
MPSI's backlog of market studies at March 31, 2001 in the amount of
approximately $12.3 million, ($8.2 million at September 30, 2000), contained a
substantial number of recurring studies under multi-year client commitments.
Such studies represent a significant amount of the estimated revenues for fiscal
year 2001. Because customer commitments for market studies may entail multi-year
terms, the number of such agreements in force may have significant implications
on the conclusions to be drawn concerning fluctuations in backlog between
accounting periods. For example, if a customer commits to a five-year series of
market studies in year one, backlog of that year would substantially increase.
Thereafter, as the Company delivers successive market studies, backlog would
decline in years 2 - 4.
- ----------
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-K which is filed with the Securities and Exchange Commission.
14
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings - None.
Item 2 -- Changes in Securities - None.
Item 3 -- Defaults Upon Senior Securities -
The registrant's credit facility with Bank of America in the
amount of approximately $900,000 became due and payable according to
its terms on January 5, 2002. Prior to the due date, the registrant had
breached a covenant in the credit facility requiring the maintenance of
a minimum net worth. See Note 3 to the consolidated financial
statements for additional information about the Company's banking
relationship. The latest extension by Bank of America, effective
January 6, 2002, was granted concurrently with a $250,000 pay down by
the Company and set the new maturity date at October 1, 2002. This
action significantly lengthened the Bank's commitment to MPSI when
compared with previous extension periods and provided for an adjustment
of the equity covenant down to $1.7 million.
Item 4 -- Submission of Matters to a Vote of Security Holders - None
Item 5 -- Other Information -
Nasdaq advised the registrant on January 17, 2001 that it
would de-list the registrant's securities from The Nasdaq Stock Market
on January 26, 2001 unless the registrant filed its annual report on
Form 10-K for the year ended September 30, 2000 on or before January
25, 2001. As the registrant intended to file its Form 10-K upon
securing an alternative credit facility, the registrant filed an appeal
with Nasdaq, but was unable to file the financial document with the SEC
in time to avoid being de-listed. Accordingly, effective close of
business February 22, 2001, MPSI's stock was de-listed from The Nasdaq
Stock Market and subsequently trades Over the Counter on Pink Sheets.
Item 6 -- Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Earnings per share computation
(b) Reports on Form 8-K - None
15
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 February 25, 2002 By /s/ Ronald G. Harper
------------------- --------------------------------
Ronald G. Harper, President
(Chief Executive Officer) and
Director
Date February 25, 2002 By /s/ James C. Auten
------------------- --------------------------------
James C. Auten, Vice President
(Chief Financial Officer)
16
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Earnings Per Share Computation
</Table>