UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 2003 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
Number of shares of common stock outstanding at September 30, 2003 - 2,911,781
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheet - September 30, 2003 ............................ 3
Condensed Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2003 and 2002 ............................................... 5
Consolidated Statement of Stockholders' Equity - Nine Months
Ended September 30, 2003 ........................................................ 6
Condensed Consolidated Statements of Cash Flow -
Nine Months Ended September 30, 2003 and 2002 ................................... 7
Notes To Condensed Consolidated Financial Statements ................................. 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Quarterly Results of Operations ...................................................... 11
Item 3 - Controls and Procedures........................................................... 17
PART II. OTHER INFORMATION.................................................................... 17
SIGNATURES..................................................................................... 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
ASSETS 2003
-------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 557,000
Receivables 1,435,000
Other current assets 222,000
-----------
Total current assets 2,214,000
Capitalized product development costs, net 754,000
Property and equipment, net of accumulated depreciation
and amortization 436,000
Other assets 476,000
-----------
Total assets (Note 3) $ 3,880,000
===========
See accompanying notes to consolidated financial statements.
3
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONT'D)
SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003
-------------
(UNAUDITED)
Current liabilities:
Accounts payable $ 468,000
Accrued liabilities 1,040,000
Deferred revenue 1,867,000
-------------
Total current liabilities 3,375,000
Noncurrent deferred revenue 517,000
-------------
Total liabilities 3,892,000
-------------
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
September 30, 2003 146,000
Junior Common Stock, $.05 par value, 500,000 shares
authorized, none issued or outstanding -
Additional paid-in capital 13,145,000
Deficit (13,647,000)
Other accumulated comprehensive income 344,000
-------------
Total stockholders' equity (deficiency) (12,000)
-------------
Total liabilities and stockholders' equity (deficiency) $ 3,880,000
-------------
See accompanying notes to consolidated financial statements.
4
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues $ 2,968,000 $ 1,686,000 $ 8,134,000 $ 8,769,000
Cost of sales 1,306,000 1,038,000 3,731,000 3,994,000
----------- ----------- ----------- ------------
Gross profit 1,662,000 648,000 4,403,000 4,775,000
----------- ----------- ----------- ------------
Operating expenses:
General and administrative 445,000 457,000 1,460,000 2,560,000
Marketing and client services 643,000 908,000 2,101,000 2,780,000
Research and development 251,000 393,000 939,000 1,114,000
----------- ----------- ----------- ------------
Total operating expenses 1,339,000 1,758,000 4,500,000 6,454,000
----------- ----------- ----------- ------------
Operating income (loss) 323,000 (1,110,000) (97,000) (1,679,000)
Other expense, net (27,000) (97,000) (60,000) (208,000)
----------- ----------- ----------- ------------
Income (loss) before income taxes 296,000 (1,207,000) (157,000) (1,887,000)
Provision for income taxes 17,000 15,000 33,000 120,000
----------- ----------- ----------- ------------
Net income (loss) $ 279,000 $(1,222,000) $ (190,000) $ (2,007,000)
=========== =========== =========== ============
Per share:
Basic and diluted income (loss) per common share $ .10 $ (.42) $ (.07) $ (.69)
See accompanying notes to consolidated financial statements.
5
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
OTHER
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
------------------ PAID-IN COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
------ ------ ------- ------- ------ ------
Balance,
December 31, 2002 2,912,000 $ 146,000 $13,145,000 $(13,457,000) $ 226,000 $ 60,000
Net loss - - - (190,000) - (190,000)
Other accumulated
comprehensive
income:
Foreign currency
translation adjustment - - - - 118,000 118,000
-----------
Total comprehensive income (loss) $ (72,000)
-----------
Balance,
September 30, 2003 2,912,000 $ 146,000 $13,145,000 $(13,647,000) $ 344,000 $ (12,000)
========= ========= =========== ============ ============= ===========
See accompanying notes to consolidated financial statements.
6
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (NOTE 2)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
---- ----
Net loss $ (190,000) $ (2,007,000)
Adjustments to reconcile net loss
to cash provided (used) by operations:
Depreciation and amortization 674,000 791,000
Decrease (increase) in assets 397,000 1,323,000
Increase (decrease) in liabilities (1,052,000) 278,000
------------ ------------
Net cash provided (used) by operating activities (171,000) 385,000
Cash flows from investing activities:
Purchase of equipment (38,000) (105,000)
Capitalized product development costs (98,000) (321,000)
------------ ------------
Net cash used by investing activities (136,000) (426,000)
------------ ------------
Cash flows from financing activities:
Debt repayments - (350,000)
------------ ------------
Net cash used by financing activities - (350,000)
------------ ------------
Decrease in cash and cash equivalents (307,000) (391,000)
Cash and cash equivalents at beginning of period 864,000 675,000
------------ ------------
Cash and cash equivalents at end of period $ 557,000 $ 284,000
============ ============
See accompanying notes to consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL NOTES:
Certain notes to the December 31, 2002 audited consolidated financial
statements filed with Form 10-K are applicable to the unaudited
consolidated financial statements for the nine months ended September
30, 2003. Accordingly, reference should be made to the audited
consolidated financial statements at December 31, 2002.
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, 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 September 30, 2003 contain all adjustments (including
normal recurring adjustments) 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 nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the full year.
New Accounting Standard. In May 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Management does not
expect the adoption of SFAS No. 150 to have a significant impact on the
Company as the Company has not issued any financial instruments falling
within the scope of SFAS No. 150.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company paid interest of $56,000 and $186,000 during the nine
months ended September 30, 2003 and 2002, respectively. Net income
taxes of $31,000 and $126,000 were paid during the same respective
periods.
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.
8
Set forth below is certain condensed financial information presented
with respect to the operational segments that shall carry forward in
2003, 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. Comparative information for the prior
year has been restated to conform to the new segment definitions.
In Thousands
S E G M E N T S
---------------
QUARTER ENDED EUROPE / AFRICA PACIFIC
SEPTEMBER 30, 2003 AMERICAS / MIDDLE EAST RIM TOTALS
------------------ -------- --------------- ------- ------
Revenues $1,063 $ 174 $ 1,731 $ 2,968
Contribution Margin.................... $ 251 $ (16) $ 991 $ 1,226
Reconciling items not allocated to
operating segments:
Corporate administration, sales and
technology expense................... (903)
Other income (expense)............... (27)
-------
Income before income taxes........... $ 296
=======
Total assets........................... $ 3,880
S E G M E N T S
---------------
QUARTER ENDED EUROPE / AFRICA PACIFIC
SEPTEMBER 30, 2002 AMERICAS / MIDDLE EAST RIM TOTALS
------------------ -------- --------------- ------- ------
Revenues............................... $ 1,471 $ 79 $ 136 $ 1,686
Contribution Margin.................... $ 399 $ (100) $ (248) $ 51
Reconciling items not allocated to
operating segments:
Corporate administration, sales and
technology expense.................. (1,161)
Other income (expense).............. (97)
-------
Loss before income taxes............ $(1,207)
=======
Total assets........................... $ 5,025
9
Information on segments and a reconciliation to income before taxes for
the nine months ended September 30, 2003 and 2002 are as follows:
S E G M E N T S
---------------
NINE MONTHS ENDED EUROPE / AFRICA PACIFIC
SEPTEMBER 30, 2003 AMERICAS / MIDDLE EAST RIM TOTALS
------------------ -------- --------------- ------- ------
Revenues $ 3,989 $ 551 $ 3,594 $ 8,134
Contribution Margin.................... $ 1,250 $ (53) $ 1,687 $ 2,884
Reconciling items not allocated to
operating segments:
Corporate administration, sales and
technology expense................... (2,981)
Other income (expense)............... (60)
-------
Loss before income taxes............. $ (157)
=======
Total assets........................... $ 3,880
S E G M E N T S
---------------
NINE MONTHS ENDED EUROPE / AFRICA PACIFIC
SEPTEMBER 30, 2002 AMERICAS / MIDDLE EAST RIM TOTALS
------------------ -------- --------------- ------- ------
Revenues............................... $ 6,083 $ 1,021 $ 1,665 $ 8,769
Contribution Margin.................... $ 2,274 $ 227 $ 81 $ 2,582
Reconciling items not allocated to
operating segments:
Corporate administration, sales and
technology expense................... (4,261)
Other income (expense)............... (208)
-------
Loss before income taxes............. $(1,887)
=======
Total assets........................... $ 5,025
4. 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 income (loss) was $252,000 and $(1,276,000) for the
quarters ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002, comprehensive loss was
$(72,000) and $(2,073,000), respectively.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS. MPSI reported a net income of $279,000 or $.10
per share on revenues of $2.9 million for the three months ended September 30,
2003 compared with a net loss of $1,222,000 or $.42 per share on revenues of
$1.7 million for the comparable quarter ended September 30, 2002. The 2003 third
quarter's positive results also represent a four-fold improvement over the
preceding quarter ended June 30, 2003 (net income of $55,000 or $.02 per share
with comparable revenues), despite continuing negative effects of (1) generally
poor retail petroleum margins affecting many multi-national oil company clients
and (2) poor economic performance in the US economy, both of which have plagued
the Company for the last eighteen months. These negative economic factors may be
easing somewhat as indicated by 2003 revenue trends which have reflected modest
growth each quarter, although quarterly revenues are still generally lower than
the average quarterly revenue in 2002. With the cost reduction measures
undertaken in March 2003 and the improving operating results subsequent to the
first fiscal quarter then ended, management believes the Company's present cost
base to be properly aligned with revenue expectations. The cost reductions
implemented at that time, coupled with an upturn in quarterly revenue, played a
significant role in the improved quarterly and nine-month results through
September 30, 2003.
Consolidated revenues of $2.9 million for the September 2003 quarter
reflected a continuing but modest improvement from the June 2003 revenues, but
were significantly higher than the $1.7 million revenue reported for the
September 2002 quarter. Despite the September 2003 quarterly revenue
improvement, depressed economic factors noted above resulted in nine-month
revenues for 2003 being only 93% of revenues experienced in the first nine
months of 2002. As discussed in more detail under SEGMENT OPERATIONS, the
comparative shortfall in North America and to a lesser extent in Europe is
offset by resurgent revenue from Asia.
Consolidated gross profit for the September 2003 quarter ($1.7 million)
improved as a percent of revenues to 56% compared with 54% for the nine months
of 2003 and 2002. Such margins continue to reflect what in management's opinion
is a positive attribute - fixed staffing costs declined and, where necessary,
were supplanted with variable third-party resources. This decline in fixed costs
is part of the general cost reductions undertaken in March 2003 and discussed in
previous reports. Variable survey costs for the quarter ($298,000) and nine
months ($902,000) are consistent with improved production project turnover and
the uplift in revenue.
Comparison of consolidated operating expenses for either the quarter or
nine months ended September 30, 2003 with similar prior periods of 2002 must
take into account certain restructuring expenses in 2002 which did not recur in
2003. These measures included closure of certain foreign offices and reduced
staffing in the 2002 comparative periods, which resulted in accrued expenses of
$326,000 and $717,000 in the June 2002 quarter and the nine months ended
September 2003, respectively. Similarly in September 2003 the Company accrued
severance costs of $124,000 associated with its decision not to recall most
employees furloughed in March 2003. Such expenses have been factored out of the
following discussion of ongoing operating expense fluctuations. Consolidated
operating expenses were $1,215,000 for the quarter ended September 30, 2003 as
compared with $1,758,000 during the comparable quarter last fiscal year and
$1,448,000 incurred in the second quarter ended June 2003. The net reduction of
$233,000 (16%) versus the second quarter of 2003 reflects the benefit of force
reduction and office closure actions taken in late March 2003. Those cost saving
measures are expected to save the Company approximately $1.5 million annually
(approximately $300,000 per quarter in 2003). These measures were taken mainly
in areas of the Company with excess capacity and, accordingly, resulted in no
loss of technology or customer support capabilities. A similar comparison of
consolidated operating expenses with the September 2002 quarter reflects a
decrease of $543,000 (31%), most of which is again related to cost reduction
measures initiated after June 2002 that were necessary to continue re-alignment
of the Company's cost base with revenue trends.
Ongoing consolidated general and administrative expenses for the
quarter ended September 30, 2003 were down $154,000 or 32% as compared to the
previous quarter of 2003, and were down $136,000 or 30% compared with the third
fiscal quarter of last year. The primary contributor to the decrease versus
quarterly and nine-month comparative periods was reduced staffing costs.
11
Consolidated marketing and client service expenses for the quarter
ended September 30, 2003 were down 4% as compared to the second fiscal quarter
of 2003, due primarily to internally imposed travel constraints, and were down
$265,000 (29%) compared with the third fiscal quarter of last year, primarily
due to the 2002 closure of certain foreign offices. Marketing expenses for the
nine months ended September 30, 2003 declined $679,000 (24%) compared with the
nine months ended September 30, 2002 for the same reasons.
Consolidated research and development expenses (excluding amounts
capitalized for product development as discussed under Financial Condition and
Liquidity below) for the quarter ended September 30, 2003, were down $54,000 as
compared with the second fiscal quarter of 2003, were down $142,000 as compared
with the September 2002 quarter, and were down $175,000 for the comparative
nine-month periods ended September 30, 2003 and 2002. This decline reflects both
staffing reductions and fluctuation in the number of software development
resources dedicated to new capitalized software technology as discussed
hereinafter.
Other income and expenses reflect interest and foreign exchange
transactions. Interest expense was $45,000 for the September 2003 quarter
compared with $41,000 in the September 2002 quarter ($56,000 and $186,000 for
the nine-month periods ended September 30, 2003 and 2002, respectively).
Declines reflect bank debt that was outstanding in 2002 until the final $550,000
was liquidated in November of that year. The interest costs in the September
2003 quarter and the nine months then ended are principally related to supplier
financing arrangements.
The Company's operations and contract methods can result in periodic
foreign exchange gains and losses. 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 US Dollar
relative to the respective foreign currencies. The Company experienced exchange
gains of $18,000 during the September 2003 quarter ($6,000 for the nine months
then ended) compared with exchange losses in the September 2002 quarter of
$57,000 ($38,000 for the nine months then ended). Although MPSI anticipates
continuing exposure to exchange fluctuations from these sources, 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 its foreign currency risks.
Income taxes were $17,000 for the quarter ended September 30, 2003 as
compared to $15,000 during the comparable quarter last year ($33,000 and
$120,000 for the respective nine-month periods). The changes in income tax are
primarily due to foreign taxes withheld at the source by customers and are
therefore subject to significant fluctuation from quarter to quarter depending
upon the timing of customer payments from abroad.
SEGMENT OPERATIONS. With the latest cost control measures and related
restructuring in March 2003, the focus of management is more directly associated
with geographic regional operations. Accordingly, the financial information
about operating segments is presented relative to three general spheres of
operations: the Americas Region, the Europe/Africa/Middle East Region, and the
Pacific Rim Region. Set forth below are commentaries concerning the principal
operations of the three operating segments:
- - AMERICAS REGION. This operating region encompasses activities in North
America and Latin America. Although MPSI enjoyed an upsurge in revenue
and gross margin from customers in Central America earlier in fiscal
2003, most of the revenue and profit potential for this region centers
on activities in the US. Poor economic performance by the US economy
and lower retail margins by many of MPSI's traditional petroleum
company customers has resulted in very conservative retail investment
over the last twelve months. As a result, MPSI's revenue and
contribution margin in this segment dropped approximately 28% and 37%,
respectively during the September 2003 quarter compared with the
September 2002 quarter, despite reductions in fixed operating expenses.
The revenue fall-off has correspondingly decreased the Company's
opportunity to leverage fixed production costs across the customer base
resulting in lower contribution margin in this segment. Thus, the
quarter decline continues earlier trends and is reflected in revenue
and contribution margin decreases of $2,094,000 (34%) and $1,024,000
(45%), respectively, when the nine-month period ended September 30,
2003 is compared to the nine months ended September 30, 2002. Large
petroleum retailers, historically MPSI's mainstay customers, are
exploring alternative ways to "retail," including expanded dealer
organizations and third-party operators. While it is not true across
the board, these tactics suggest that retail decision-making may
ultimately shift more in favor of smaller, more nimble petroleum /
convenience retailers, which is a customer segment that MPSI has
traditionally served only passively. As noted
12
above, organizational recognition of this dynamic has been given by
management as some sales, marketing and technology resources have been
shifted to focus on this new and potentially significant customer
segment. Those customers who intend to stay in company-operated
retailing are seeking empirical methods of optimizing their networks.
MPSI has developed an optimization technology and consulting services
and recently undertaken initial projects in North America. Client
feedback has been very favorable as MPSI has been able to assist client
retail experts in determining how to save millions of capital
investment dollars while maximizing their return on investment.
- - EUROPE/AFRICA/MIDDLE EAST REGION. This operating region encompasses
MPSI activities in Europe, Western Asia, Africa and the Middle East. At
present, most activity is concentrated in Eastern Europe and South
Africa. As is the case in the US, MPSI's traditional multi-national
petroleum retail customers in Europe have been increasingly
conservative with their investment dollar. Some customers have chosen
to reduce their retail networks via sell-off. Smaller regional or
country specific petroleum retailers are taking up the slack and these
"new customers" are now searching for technological assistance
necessary to manage larger networks. Here again, MPSI has restructured
its sales force to more directly target the alternative retailer while
maintaining its existing multi-national customer network. However, as
such restructuring and targeting efforts are recent, they have not yet
been reflected in operating results for this segment, which experienced
a modest revenue and contribution margin improvement of $95,000 (120%)
and $84,000 (84%) for the quarter ended September 30, 2003 compared
with the comparable quarter last year. Nine-month results still lag
behind the comparable period last year with revenue lower by $470,000
or 46% resulting in a negative contribution margin of $53,000 compared
with a positive contribution last year of $227,000. This segment is
rebounding of late with increased leverageable activities in South
Africa leading the way, but is likely not going to contribute to
consolidated results on par with the other two operating segments this
year.
- - PACIFIC RIM REGION. This operating region encompasses MPSI activities
in Japan, Eastern Asia (including India), Southeast Asia and
Australia/New Zealand. This operating segment has experienced the least
fluctuation from world economic events. Additionally, although MPSI has
traditionally undertaken services in favor of multi-national petroleum
retailers in this region, more of MPSI's 2003 activities have centered
on the large national and regional petroleum retailers in certain key
countries of the region. Hence, MPSI has enjoyed a significant increase
in revenue ($1,595,000) and contribution margins ($1,239,000) for the
quarter ended September 30, 2003 compared with the quarter ended
September 30, 2002. The nine-month results for this segment reflect
revenue improvement of $1,929,000 (116%) and a contribution margin
increase of $1,606,000 as compared with the first nine months last
year. This is principally due to customer interest in the region for
highly leverageable national databases in several countries. Based
largely on the coupling of web-enabled modeling technology with
national databases, the Company has been able to improve results in
Japan and elsewhere in this region. These projects maximize the
Company's resources and at the same time provide the customer with a
considerably broader perspective on their national markets.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary measure of liquidity, working capital, was a
deficit of $(1,161,000) at September 30, 2003 as compared with $(1,537,000) at
June 30, 2003 and $(1,786,000) at September 30, 2002. MPSI generated slightly
negative cash flow from operations during the September 2003 quarter ($58,000
deficit versus $72,000 deficit for the comparable quarter last year). Cash
reserves at September 30, 2003 of $557,000 are down 12% compared with June 30,
2003, and were $307,000 (36%) lower than at the beginning of the 2003 fiscal
year. Accounts payable and accrued liabilities are comparable between September
30, 2003 and December 31, 2002. The principal reason for the drop in operating
cash is that the Company successfully worked off its deferred revenue obligation
to several customers who had made significant prepayments to MPSI at December
31, 2002. The Company is satisfactorily meeting its ongoing operating liquidity
needs overall, despite an occasional cash pinch.
The increase in working capital (decrease in the deficit) during the
September 2003 quarter and the nine-months then ended is attributable to the
successful production and delivery of prepaid customer projects, principally in
Asia. Further, sales order patterns through the nine months ended September 30,
2003 have been erratic and have contributed recently to lower accounts
receivable and deferred revenue input. The combination of these events has had
the effect of reducing deferred revenue by $628,000 and $902,000 during the
quarter and nine months ended September 30, 2003, respectively. Deferred revenue
represents customer prepayments required under product delivery or service
contracts for which services have not yet been provided. Despite the deferred
revenue reduction, MPSI's backlog of market studies at September 30, 2003 in the
13
amount of approximately $5.0 million, ($5.5 million at June 30, 2002) is still
substantial. Backlog contains a substantial number of recurring studies under
multi-year client commitments. Of the September 30, 2003 backlog amount, the
Company expects to turn over approximately $1.5 million during the remaining
quarter of 2003. 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. MPSI's present backlog is indicative of
long-standing customer relationships that are very important to achievement of
the Company's 2003 business plan.
Liquidity remains a principal focus of management looking forward in
2003. The revenue trends of the last several years and the rise of competitors
in certain regional service areas have challenged management to continually
re-evaluate business strategies, resource allocations, and cost structure.
Management has responded by re-engineering products to be more flexible in
meeting the needs of a more diverse customer base. Management has also acted to
conserve liquidity by closing certain foreign offices, reducing employee costs
and controlling research and development expenditures. In late March 2003,
management implemented a further reduction in force in order to better match
capacity with revenue levels (see previous discussion of $1.8 million cost
saving package). These measures were taken to give the Company time to ramp up
revenue from both traditional and new customer targets. In order to position the
Company to increase its revenues, management reorganized a portion of its sales
force to target new customer segments within the retail petroleum sector, which
customer segments had only been served passively by the Company heretofore.
Although the average unit sale from the new target customers will likely be
smaller, the number of potential customers far exceeds the multi-national market
sector the Company has relied on. This partial shift in customer focus should
not require any substantial product re-tooling. Management's plan is intended to
produce 2003 revenues approximating a level comparable to 2002, while cutting
costs significantly with the objective of returning MPSI to profitability.
Achievement of these plan objectives depends on the accomplishment of matters
both within and outside MPSI's control, including the strength of the US economy
and the timing of customer decisions. There is risk that adverse economic
conditions could persist to the point where management's plan cannot overturn
the recent trends.
In view of liquidity constraints, capital expenditures have been
limited for equipment ($10,000 during the September 2003 quarter compared with
$24,000 during the September 2002 quarter) and capitalized product development
expenditures ($9,000 for the quarter ended September 30 2003 versus $55,000 in
the quarter ended September 30, 2002). The lower product development
expenditures in the September 2003 quarter and for the nine months then ended,
compared with similar 2002 periods, reflect the completion of new development
primarily related to web-enabling certain MPSI modeling capabilities. The
Company believes its present REX, Pricing, and Internet retail planning
technology far surpass competitive technology.
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
(herein after 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.
14
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 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 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 of revenue to the various
15
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 uncollectable. 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.
- - 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.
16
- - 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-K, 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 - No material items.
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
32.2 Restated MPSI Systems Inc. Matching Investment
Plan, effective January 1, 2003
(b) Reports on Form 8-K - None
17
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 November 13, 2003 By /s/ Ronald G. Harper
-----------------------------------
Ronald G. Harper, President
(Chief Executive Officer) and
Director
Date November 13, 2003 By /s/ James C. Auten
-----------------------------------
James C. Auten
Vice President
(Chief Financial Officer)
18
INDEX TO EXHIBITS
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.
99.1 Restated MPSI Systems Inc. Matching Investment Plan, effective
January 1, 2003.
19