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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 June 30, 2002 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 .
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Number of shares of common stock outstanding at June 30, 2002 - 2,911,781
----------------
1
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION:
Financial Statements:
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 ......... 3
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2002 and 2001 ......................................... 5
Consolidated Statement of Stockholders' Equity - Six Months
Ended June 30, 2002 .................................................. 6
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 2002 and 2001 .............................. 7
Notes To Consolidated Financial Statements ................................ 8
Management's Discussion and Analysis of Financial Condition and
Quarterly Results of Operations ........................................... 11
Part II. OTHER INFORMATION .......................................................... 14
SIGNATURES ...................................................................... 16
2
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents $ 435,000 $ 675,000
Short-term investments, at cost -- 3,000
Receivables:
Trade, net 1,740,000 3,011,000
Current portion of long-term receivables, net of
unamortized discount 419,000 381,000
Work in process inventory 33,000 36,000
Prepayments 73,000 71,000
------------- -------------
Total current assets 2,700,000 4,177,000
Long-term receivables, net of current portion
and unamortized discount 442,000 530,000
Property and equipment, net of accumulated depreciation
And amortization 841,000 939,000
Capitalized product development costs, net 1,276,000 1,366,000
Other assets 147,000 153,000
------------- -------------
Total assets (Note 3) $ 5,406,000 $ 7,165,000
============= =============
See accompanying notes to consolidated financial statements.
3
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED) (UNAUDITED)
Current liabilities:
Note payable to bank (Note 3) $ 550,000 $ 900,000
Accounts payable 616,000 630,000
Accrued liabilities 1,408,000 993,000
Deferred revenue 809,000 1,819,000
-------------- --------------
Total current liabilities 3,383,000 4,342,000
Noncurrent deferred revenue 609,000 583,000
Noncurrent deferred income taxes 116,000 115,000
Other noncurrent liabilities -- 30,000
-------------- --------------
Total liabilities 4,108,000 5,070,000
-------------- --------------
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
June 30, 2002 and December 31, 2001 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 (12,353,000) (11,568,000)
Other accumulated comprehensive income 360,000 372,000
-------------- --------------
Total stockholders' equity 1,298,000 2,095,000
-------------- --------------
Total liabilities and stockholders' equity $ 5,406,000 $ 7,165,000
============== ==============
See accompanying notes to consolidated financial statements.
4
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Revenues:
Information services and software maintenance $ 3,035,000 $ 3,475,000 $ 7,034,000 $ 7,314,000
Software licensing 25,000 30,000 49,000 62,000
-------------- -------------- -------------- --------------
Total revenues 3,060,000 3,505,000 7,083,000 7,376,000
-------------- -------------- -------------- --------------
Cost of sales:
Information services and software maintenance 1,222,000 1,360,000 2,798,000 2,857,000
Software licensing 74,000 159,000 158,000 325,000
-------------- -------------- -------------- --------------
Total cost of sales 1,296,000 1,519,000 2,956,000 3,182,000
-------------- -------------- -------------- --------------
Gross profit 1,764,000 1,986,000 4,127,000 4,194,000
Operating expenses:
General and administrative 1,076,000 719,000 2,103,000 1,463,000
Marketing and client services 943,000 1,362,000 1,872,000 2,689,000
Research and development 357,000 271,000 721,000 606,000
-------------- -------------- -------------- --------------
Total operating expenses 2,376,000 2,352,000 4,696,000 4,758,000
-------------- -------------- -------------- --------------
Operating loss (612,000) (366,000) (569,000) (564,000)
Other income (expense):
Interest income 10,000 20,000 16,000 45,000
Interest expense (21,000) (80,000) (145,000) (255,000)
Gain (loss) on foreign exchange 10,000 (25,000) 19,000 (41,000)
Other, net (2,000) 1,000 (1,000) 12,000
-------------- -------------- -------------- --------------
Loss before income taxes (615,000) (450,000) (680,000) (803,000)
Provision for income taxes 44,000 23,000 105,000 46,000
-------------- -------------- -------------- --------------
Net loss $ (659,000) $ (473,000) $ (785,000) $ (849,000)
============== ============== ============== ==============
Per share:
Basic income (loss) $ (.23) $ (.16) $ (.27) $ (.29)
Diluted income (loss) $ (.23) $ (.16) $ (.27) $ (.29)
Shares Outstanding:
Basic 2,912,000 2,912,000 2,912,000 2,912,000
Diluted 2,912,000 2,912,000 2,912,000 2,912,000
See accompanying notes to consolidated financial statements.
5
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
OTHER
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------------- PAID-IN COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
------------- ------------- ------------- ------------- ------------- -------------
Balance,
December 31, 2001 2,912,000 $ 146,000 $ 13,145,000 $ (11,568,000) $ 372,000 $ 2,095,000
Net loss -- -- -- (785,000) -- (785,000)
Other accumulated
comprehensive
income:
Foreign currency
translation adjustment -- -- -- -- (12,000) (12,000)
-------------
Total comprehensive loss $ (797,000)
------------- ------------- ------------- ------------- ------------- -------------
Balance,
June 30, 2002 2,912,000 $ 146,000 $ 13,145,000 $ (12,353,000) $ 360,000 $ 1,298,000
============= ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
6
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (NOTE 2)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2002 2001
-------------- --------------
Loss from operations $ (785,000) $ (849,000)
Adjustments to reconcile net income (loss) from operations to cash provided by
operations:
Depreciation and amortization of property and equipment 179,000 155,000
Amortization of product development costs 356,000 521,000
Changes in assets and liabilities:
Decrease (increase) in assets:
Receivables 1,316,000 2,070,000
Inventories 3,000 28,000
Other assets 7,000 (26,000)
Increase (decrease) in liabilities:
Trade payables and accruals 371,000 (404,000)
Taxes payable (6,000) (21,000)
Deferred revenue (984,000) (136,000)
-------------- --------------
Net cash provided by operating activities 457,000 1,338,000
-------------- --------------
Cash flows from investing activities
Purchase equipment (81,000) (97,000)
Software developed for internal use -- (98,000)
Capitalized product development costs (266,000) (365,000)
-------------- --------------
Net cash used by investing activities (347,000) (560,000)
-------------- --------------
Cash flows from financing activities:
Debt repayments (350,000) (740,000)
-------------- --------------
Net cash used by financing activities (350,000) (740,000)
-------------- --------------
Increase (decrease) in cash and cash equivalents (240,000) 38,000
Cash and cash equivalents at beginning of period 675,000 1,152,000
-------------- --------------
Cash and cash equivalents at end of period $ 435,000 $ 1,190,000
============== ==============
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL NOTES:
Certain notes to the September 30, 2001 audited consolidated financial
statements filed with Form 10-K are applicable to the unaudited
consolidated financial statements for the six months ended June 30, 2002.
Accordingly, reference should be made to the audited financial statements
at September 30, 2001.
Effective October 22, 2001, the Board of Directors of the Company
authorized a change in fiscal year end principally in an effort to align
the Company's operating cycle with that of the majority of its main
customers. As a result, MPSI filed a Form 10-QT for the period October 1,
2001 to December 31, 2001. This report on Form 10-Q for the six months
ended June 30, 2002 represents the second fiscal quarter of the new fiscal
year ending December 31, 2002. Accordingly, the information for the three
months ended June 30, 2001 (designated at time of original SEC reporting
as the third fiscal quarter) is included herein for comparative purposes.
Management believes that no adjustments of comparative information were
required simply because of the change in fiscal year end.
In the opinion of the Company, the unaudited consolidated financial
statements as of June 30, 2002 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 June 30, 2002 are not necessarily indicative of the
results to be expected for the full year.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company paid interest of $145,000 and $255,000 during the six months
ended June 30, 2002 and 2001, respectively. Net income taxes of $105,000
and $78,000 were paid during the same respective periods.
3. NOTE PAYABLE TO BANK:
At June 30, 2002, the Company owed $550,000 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 7% (11.75%
at June 30, 2002). The weighted average interest rates were 12.06% for the
six months ended June 30, 2002 and 13.48% for the six months ended June
30, 2001.
Bank of America and MPSI executed a loan extension effective January 6,
2002 concurrent 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 was
required on or before April 1, 2002 and was made by MPSI prior to that
date bringing the outstanding balance down to $550,000. 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 prior to the
extension. Henceforth, the Company was 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 11.75%
presently). Additionally, the extension agreement eliminated subjective
acceleration clauses from the original agreements
As the result of the $785,000 net loss for the six months ended June 30,
2002, the Company was $402,000 below the minimum net worth under the loan
agreement with its Bank. 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 of
October 1, 2002. If this were to occur, the Company would likely 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, and would likely not generate
sufficient cash to pay the Bank's note in full in the short term. The Bank
has taken no actions on the covenant default nor has it indicated any
intention to accelerate the note.
8
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 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 June 30, 2002 disclosure format. Information on segments
and a reconciliation to income (loss) before taxes for the quarters ended
June 30, 2002 and 2001 are as follows:
------------------------------------------------------
SEGMENTS
------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
------------ ------------ ------------ ------------
QUARTER ENDED JUNE 30, 2002
Revenues:
Information services and
software maintenance .......... $ 2,469,000 $ 428,000 $ 138,000 $ 3,035,000
Software licensing ............... 25,000 -- -- 25,000
------------ ------------ ------------ ------------
Total revenues .............. $ 2,494,000 $ 428,000 $ 138,000 $ 3,060,000
============ ============ ============ ============
Operating loss .................. $ (325,000) $ (171,000) $ (116,000) $ (612,000)
============ ============ ============
Other income (expense) .......... (3,000)
------------
Loss before income tax .......... $ (615,000)
Amortization of capitalized
product development ........ $ 39,000 $ 29,000 $ 6,000 $ 74,000
Amortization of U.S.
geographic database ........ -- -- 99,000 99,000
Depreciation .................... 75,000 14,000 5,000 94,000
Identifiable assets ............. 5,406,000 -- -- 5,406,000
Additions to long-lived assets .. 50,000 -- -- 50,000
QUARTER ENDED JUNE 30, 2001
Revenues:
Information services and
software maintenance ......... $ 2,922,000 $ 457,000 $ 96,000 $ 3,475,000
Software licensing .............. 28,000 -- 2,000 30,000
------------ ------------ ------------ ------------
Total revenues ............. $ 2,950,000 $ 457,000 $ 98,000 $ 3,505,000
============ ============ ============ ============
Operating loss .................. $ (37,000) $ (120,000) $ (209,000) $ (366,000)
============ ============ ============
Other income (expense) .......... (84,000)
------------
Loss before income tax .......... $ (450,000)
Amortization of capitalized
product development ........ $ 129,000 $ -- $ 29,000 $ 158,000
Amortization of U.S.
geographic database ........ -- -- 99,000 99,000
Depreciation .................... 56,000 11,000 4,000 71,000
Identifiable assets ............. 7,539,000 -- -- 7,539,000
Additions to long-lived assets .. 114,000 -- -- 114,000
9
Information on segments and a reconciliation to income before taxes for
the six months ended June 30, 2002 and 2001 are as follows:
--------------------------------------------------------------
SEGMENTS
--------------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
-------------- -------------- -------------- --------------
SIX MONTHS ENDED JUNE 30, 2002
Revenues:
Information services and
software maintenance ......... $ 5,696,000 $ 1,094,000 $ 244,000 $ 7,034,000
Software licensing .............. 49,000 -- -- 49,000
-------------- -------------- -------------- --------------
Total revenues ............. $ 5,745,000 $ 1,094,000 $ 244,000 $ 7,083,000
============== ============== ============== ==============
Operating income (loss) ......... $ (123,000) $ (175,000) $ (271,000) $ (569,000)
============== ============== ==============
Other income (expense) .......... (111,000)
--------------
Loss before income tax .......... $ (680,000)
==============
Amortization of capitalized
product development ........ $ 74,000 $ 58,000 $ 26,000 $ 158,000
Amortization of U.S.
geographic database ........ -- -- 198,000 198,000
Depreciation .................... 143,000 27,000 9,000 179,000
Identifiable assets ............. 5,406,000 -- -- 5,406,000
Additions to long-lived assets .. 81,000 -- -- 81,000
SIX MONTHS ENDED JUNE 30, 2001
Revenues:
Information services and
software maintenance ......... $ 6,102,000 $ 972,000 $ 240,000 $ 7,314,000
Software licensing .............. 57,000 -- 5,000 62,000
-------------- -------------- -------------- --------------
Total revenues ............. $ 6,159,000 $ 972,000 $ 245,000 $ 7,376,000
============== ============== ============== ==============
Operating income (loss) ......... $ (35,000) $ (196,000) $ (333,000) $ (564,000)
============== ============== ==============
Other income (expense) .......... (239,000)
--------------
Loss before income tax .......... $ (803,000)
==============
Amortization of capitalized
product development ........ $ 182,000 $ -- $ 58,000 $ 240,000
Amortization of U.S.
geographic database ........ -- -- 198,000 198,000
Depreciation .................... 123,000 24,000 8,000 155,000
Identifiable assets ............. 7,539,000 -- -- 7,539,000
Additions to long-lived assets .. 97,000 -- -- 97,000
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 $(647,000) and $(466,000) for the quarters ended
June 30, 2002 and 2001, respectively. For the six months ended June 30,
2002 and 2001, comprehensive income (loss) was $(797,000) and $(843,000),
respectively.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND QUARTERLY 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.
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS. MPSI reported a net quarterly loss of $659,000 or
$.23 per share on revenues of $3.1 million for the three months ended June 30,
2002 compared with a net loss of $473,000 or $.16 per share on revenues of $3.5
million for the comparable quarter ended June 30, 2001. For the six months ended
June 30, 2002, MPSI reported a net loss of $785,000 or $.27 per share on
revenues of $7.1 million. This compared with a net loss of $849,000 or $.29 per
share on revenues of $7.4 million for the comparable six months of last fiscal
year. The results for the six months ended June 30, 2002 reflect accrual of
estimated severance costs for staff reductions in the home office ($325,000) and
severance / shutdown costs associated with the closure of certain foreign
offices ($392,000). The total accrual for reorganization costs of approximately
$717,000 represents a net increase of approximately $476,000 over normal
operating expenses had staff and offices been maintained. As the full effects of
the recent downsizing activities are realized, the Company's future financial
reports should reflect significant reductions in operating expenses.
CONVENIENCE RETAILING SEGMENT. This business unit accounted for revenues of
$2,494,000 and $2,950,000 for the fiscal quarters ended June 30, 2002 and 2001,
respectively, with corresponding operating losses of $325,000 and $37,000. The
decline in revenues ($456,000) and profitability ($288,000) for the second
fiscal quarter of 2002 as compared with 2001 is primarily attributable to a
general downturn in the current economy and the implementation of price
reductions brought about by competitive pressures. Revenues for the six months
ended June 30, 2002 and 2001 were $5,745,000 and $6,159,000, respectively. The
operating loss for the six months ended June 30, 2002 was $123,000 as compared
to an operating loss of $35,000 for the comparable fiscal period last year. The
revenue decline of $414,000, for the reasons noted herein, had a significant
impact on operation income, which decreased $88,000. The Company continues to
experience increased interest in its product offerings from new customers, but
management expects the negative aspects of the U.S. global economies to soften
revenue opportunities through the remainder of 2002. Accordingly, results of
operations for the next several quarters will likely reflect greater exposure to
quarterly volatility and potentially continuing net losses unless major customer
proposals now in progress come to fruition. If these potential new orders are
delivered in accordance with client timelines, management expects the resulting
beneficial growth in revenue volume will begin to overshadow the negative
effects of price reductions. The timing of new perpetual software license
agreements, and the retail market information orders that often accompany them,
can have a substantial impact upon reported revenues and net income between
accounting periods.
PRICING SEGMENT. Revenues of $428,000 for the quarter ended June 30, 2002,
as compared to $457,000 during the same quarter last fiscal year, are down
$29,000 primarily due to the timing of orders. This segment experienced an
operating loss of $171,000 (including all corporate overhead allocations) for
the quarter ended June 30, 2002 compared to an operating loss of $120,000 during
the comparable quarter last year. The increase in the operating loss is
primarily a result of decreased revenues. Excluding corporate overhead charges,
this segment generated contribution margins of $55,000 and $35,000 in the
quarters ended June 30, 2002 and 2001, respectively.
Revenues for the six months ended June 30, 2002 were $1,094,000 as compared
to $972,000 reported for the six months ended June 30, 2001. This segment
reported an operating loss of $175,000 for the six months ended June 30, 2002 as
compared to an operating loss of $196,000 for the comparable period last year.
Excluding corporate overhead charges, this segment generated contribution
margins of $227,000 and $316,000 for the six months ended June 30, 2002 and
2001, respectively. 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.
11
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 $138,000
during the fiscal quarter ended June 30, 2002 as compared with $98,000 during
the comparable period last fiscal year. Business Development incurred an
operating loss of $116,000 for the quarter ended June 30, 2002 as compared with
an operating loss of $209,000 during the same fiscal quarter last year. The
marginal improvement in operating income is directly related to the increase in
revenues. Costs within this group are primarily fixed in nature and therefore do
not significantly fluctuate with revenue volume. For the six months ended June
30, 2002 and 2001, respectively, Business Development generated revenues of
$244,000 and $245,000 with related operating losses of $271,000 and $333,000.
One of the major costs associated with this segment is the amortization and
maintenance of the U.S. geographic database used to generate the unit's product
offerings. Amortization of this database of $99,000 per quarter will continue
throughout fiscal 2002. Until this unit achieves critical mass and the
substantial original product development costs are fully amortized, operating
results are likely to be negative during fiscal 2002.
CONSOLIDATED OPERATING EXPENSES. Consolidated operating expenses were
$2,376,000 for the quarter ended June 30, 2002 as compared with $2,352,000
during the same quarter last fiscal year. This net increase of $24,000 is
primarily a result of additional reorganization costs accrued during the second
quarter. For the six months ended June 30, 2002, consolidated operating expenses
were $4,696,000 as compared with $4,758,000 for the same period last fiscal
year. The overall reductions are a direct result of downsizing, which occurred
during the end of fiscal 2000 and the first quarter of fiscal 2001, offset by
related accruals in 2002.
Consolidated general and administrative expenses for the quarter ended June
30, 2002 were up $357,000 (50%) as compared to the same fiscal quarter of last
year. Excluding the effect of the corporate downsizing costs of approximately
$391,000 (which are all reflected in general and administrative expense),
expenses for the quarter ended June 30, 2002 were down approximately $34,000.
General and administrative expenses for the six months ended June 30, 2002 were
up approximately $640,000 (44%) as compared to the same period last fiscal year.
This increase includes the total of accrued downsizing costs of approximately
$717,000 for the six months ended June 30, 2002. Adjusting for accrued
downsizing costs, there is a net decline in expense for the six months ended
June 30, 2002 of approximately $77,000 as compared with the same period last
fiscal year. This decline relates to lower accounting and legal fees, which were
abnormally high in 2001 and related to the Company's deferral of certain
financial reporting during that year.
Consolidated marketing and client service expenses for the quarter ended
June 30, 2002 were down $419,000 (31%) as compared to the same fiscal quarter of
last year. For the six months ended June 30, 2002, expenses were down
approximately $817,000 (30%) as compared with the same fiscal period last year.
Consolidated marketing expenses have been reduced as a result of (1) increased
reliance on value-added resellers to service smaller customers, (2) reduction of
marketing personnel and related office requirements in Tulsa, Bristol, Singapore
and Brazil and, (3) a shift in client service resources from client support
(marketing expense) to revenue-based projects resulting in a shift of dollars to
cost of goods sold.
Consolidated research and development expenses (excluding amounts
capitalized for product development as discussed under Financial Condition and
Liquidity below) for the quarter ended June 30, 2002, were up $86,000 as
compared with the same fiscal period last year. For the six months ended June
30, 2002, expenses were up approximately $115,000 as compared with the same
fiscal period last year. The increase for the quarter and six months ended June
30, 2002 are a result of the mix of activities as between capital development
and pure research / maintenance (which costs are expensed). Total costs,
including amounts capitalized for product development and maintenance of
existing products, but excluding outside programming for the web project, are
comparable between the two periods presented. The Company continues to focus on
cost reductions through new technologies 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 $21,000 for the quarter ended
June 30, 2002 was down from $80,000 for the comparable quarter ended June 30,
2001. For the six months ended June 30, 2002, interest expense was $145,000 as
compared with $255,000 for the same period last fiscal year. The Company's bank
debt of $550,000 at June 30, 2002 ($1,200,000 at June 30, 2001), which is the
primary source of interest expense, was reduced from $900,000 at December 31,
2001. Additionally, the effective management of the Company's cash flow from
operations allowed for more timely payments of recurring obligations which
resulted in reduced carrying costs.
12
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 an exchange gain of approximately $10,000
for the quarter ended June 30, 2002 as compared to an exchange loss of $25,000
during the comparable quarter last fiscal year. For the six months ended June
30, 2002 the Company experienced an exchange gain of $19,000 as compared to an
exchange loss of $41,000 for the comparable period last 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 were $44,000 and $105,000 for the quarter and six
months ended June 30, 2002, respectively, as compared to $23,000 and $46,000
during the same respective periods last fiscal year. The changes in income tax
are primarily due to foreign taxes withheld at the source by customers. 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
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 pressured to liquidate or move its line of credit. 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. The latest extension by Bank of
America, effective January 5, 2002, was granted concurrently with a $200,000 pay
down by the Company and set the maturity date at October 1, 2002 on the
remaining $700,000 outstanding balance. 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.
Subsequent to that extension, MPSI has made further debt payments of $150,000
bringing the outstanding balance down to $550,000 at June 30, 2002 (see Note 3
to the Consolidated Financial Statements and Item 3 of Part II for further
information relating to bank debt).
The loan pay downs have continually pressured MPSI's operating liquidity
and prevented accumulation of additional cash reserves even though the Company
generated positive cash flow from operations of more than $450,000 during the
six months ended June 30, 2002. The year-to-date loss has reduced MPSI's equity
below the Bank's $1.7 million threshold. The Bank has taken no actions regarding
this deficiency ($402,000). In the absence of an alternative banking solution
that provided some measure of working capital capability, MPSI continues to deal
with peaks and valleys in cash flow by adjusting payments to suppliers and other
creditors as required.
Working capital, the Company's primary measure of liquidity, was a deficit
of $683,000 at June 30, 2002 as compared with a deficit of $165,000 at December
31, 2001. The decrease in working capital is primarily a result of accrued
shutdown expenses related to downsizing in Tulsa and the closure of certain
foreign sales offices as previously discussed. Generally, the decrease in
liquidity was partially offset by (a) reduced operating expenses related to
previous reorganizations, and (b) reductions in production costs associated with
the REX software and the related databases. Cash receipts generated from
operations were utilized to reduce the bank debt by $350,000 during the six
months ended June 30, 2002. Net short-term receivables decreased $1,233,000 as a
result of cash collections exceeding orders received and invoices prepared
during the six months ended June 30, 2002.
Although accounts payable and accrued liabilities increased by $401,000
during the six months ended June 30, 2002, this increase includes the accrual
for downsizing. Deferred revenue decreased by $1,010,000 as compared to December
31, 2001. This decrease is a result of revenues on active projects exceeding
advance billings to clients.
Capitalized product development expenditures for the six months ended June
30, 2002 were $266,000 compared with $463,000 in the same period last year. The
reduction in capitalized development costs during fiscal year 2002 principally
reflects the slowing down of new development as the Company believes its present
REX and Pricing technology far surpasses competitive technology.
13
MPSI's backlog of market studies at June 30, 2002 in the amount of
approximately $6.1 million, ($9.1 million at December 31, 2001), 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 2002 and, due to the softness of new orders particularly in the June 2002
quarter, MPSI has been operating primarily off its backlog of projects. New
orders subsequent to June 30, 2002 are encouraging. 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.
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings - No material items.
Item 2 -- Changes in Securities - None.
Item 3 -- Defaults Upon Senior Securities -
As the result of the $785,000 net loss for the six months
ended June 30, 2002, the Company was $402,000 below the minimum net
worth under the loan agreement with its bank. 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 would likely 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, and would likely
not generate sufficient cash to pay the Bank's note in full in the
short term. The Bank has taken no actions on the covenant default nor
has it indicated any intention to accelerate the note.
Item 4 -- Submission of Matters to a Vote of Security Holders -
The Company's Annual Meeting of Stockholders was held on June
20, 2002. The following proposals were approved by the votes as
tabulated below:
1. The six directors were re-elected
DIRECTOR VOTES FOR VOTES WITHHELD
-------- --------- --------------
Ronald G. Harper 2,284,935 11,868
John C. Bumgarner, Jr. 2,284,937 11,866
David L. Huff 2,281,949 14,854
Joseph C. McNay 2,284,987 11,816
John J. McQueen 2,282,962 13,841
Bryan D. Porto 2,284,987 11,816
2. Ratification of Tullius Taylor Sartain & Sartain LLP as the
independent certified public accountants for the fiscal year ending
December 31, 2002:
Votes For 2,283,880
Votes Against 3,734
Votes Abstained 9,189
14
Item 5 -- Other Information - None
Item 6 -- Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Earnings per share computation
99.1 CEO/CFO Certifications
(b) Reports on Form 8-K -
April 19, 2002 - Removal of Ernst & Young LLP as auditors
of the Company.
May 1, 2002 - Appointment of Tullius Taylor Sartain &
Sartain LLP as auditors of the Company.
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 August 14, 2002 By /s/ Ronald G. Harper
------------------- ------------------------------------
Ronald G. Harper, President
(Chief Executive Officer) and
Director
Date August 14, 2002 By /s/ James C. Auten
------------------- ------------------------------------
James C. Auten
Vice President
(Chief Financial Officer)
16
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
11.1 Earnings Per Share Computation
99.1 CEO/CFO Certifications