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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 nine months ended September 30, 2002 Commission file no. 0-11527
MPSI SYSTEMS INC.
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(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 September 30, 2002 - 2,911,781
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1
INDEX
Page No.
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Part I. FINANCIAL INFORMATION:
Financial Statements:
Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 ...... 3
Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2002 and 2001 ...................................... 5
Consolidated Statement of Stockholders' Equity - Nine Months
Ended September 30, 2002 ............................................... 6
Consolidated Statements of Cash Flow -
Nine Months Ended September 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
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents $ 284,000 $ 675,000
Short-term investments, at cost -- 3,000
Receivables:
Trade, net 1,439,000 3,011,000
Current portion of long-term receivables, net of
unamortized discount 381,000 381,000
Work in process inventory 159,000 36,000
Prepayments 146,000 71,000
---------- ----------
Total current assets 2,409,000 4,177,000
Long-term receivables, net of current portion
and unamortized discount 555,000 530,000
Property and equipment, net of accumulated depreciation
And amortization 787,000 939,000
Capitalized product development costs, net 1,153,000 1,366,000
Other assets 121,000 153,000
---------- ----------
Total assets (Note 3) $5,025,000 $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
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED) (UNAUDITED)
Current liabilities:
Note payable to bank (Note 3) $ 550,000 $ 900,000
Accounts payable 918,000 630,000
Accrued liabilities 1,095,000 993,000
Deferred revenue 1,632,000 1,819,000
------------ ------------
Total current liabilities 4,195,000 4,342,000
Noncurrent deferred revenue 693,000 583,000
Noncurrent deferred income taxes 115,000 115,000
Other noncurrent liabilities -- 30,000
------------ ------------
Total liabilities 5,003,000 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
September 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 (13,575,000) (11,568,000)
Other accumulated comprehensive income 306,000 372,000
------------ ------------
Total stockholders' equity 22,000 2,095,000
------------ ------------
Total liabilities and stockholders' equity $ 5,025,000 $ 7,165,000
============ ============
See accompanying notes to consolidated financial statements.
4
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Information services and software maintenance $ 1,573,000 $ 3,932,000 $ 8,607,000 $11,246,000
Software licensing 113,000 16,000 162,000 78,000
----------- ----------- ----------- -----------
Total revenues 1,686,000 3,948,000 8,769,000 11,324,000
----------- ----------- ----------- -----------
Cost of sales:
Information services and software maintenance 959,000 1,648,000 3,757,000 4,505,000
Software licensing 79,000 -- 237,000 325,000
----------- ----------- ----------- -----------
Total cost of sales 1,038,000 1,648,000 3,994,000 4,830,000
----------- ----------- ----------- -----------
Gross profit 648,000 2,300,000 4,775,000 6,494,000
Operating expenses:
General and administrative 457,000 812,000 2,560,000 2,275,000
Marketing and client services 908,000 1,266,000 2,780,000 3,955,000
Research and development 393,000 380,000 1,114,000 986,000
----------- ----------- ----------- -----------
Total operating expenses 1,758,000 2,458,000 6,454,000 7,216,000
----------- ----------- ----------- -----------
Operating loss (1,110,000) (158,000) (1,679,000) (722,000)
Other income (expense):
Interest income 1,000 19,000 17,000 64,000
Interest expense (41,000) (68,000) (186,000) (323,000)
Gain (loss) on foreign exchange (57,000) (97,000) (38,000) (138,000)
Other, net -- 2,000 (1,000) 14,000
----------- ----------- ----------- -----------
Loss before income taxes (1,207,000) (302,000) (1,887,000) (1,105,000)
Provision for income taxes 15,000 63,000 120,000 109,000
----------- ----------- ----------- -----------
Net loss $(1,222,000) $ (365,000) $(2,007,000) $(1,214,000)
=========== =========== =========== ===========
Per share:
Basic income (loss) $ (.42) $ (.13) $ (.69) $ (.42)
Diluted income (loss) $ (.42) $ (.13) $ (.69) $ (.42)
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
NINE MONTHS ENDED SEPTEMBER 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 -- -- -- (2,007,000) -- (2,007,000)
Other accumulated
comprehensive income:
Foreign currency
translation adjustment -- -- -- -- (66,000) (66,000)
-------------
Total comprehensive loss $ (2,073,000)
--------- ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 2,912,000 $ 146,000 $ 13,145,000 $(13,575,000) $ 306,000 $ 22,000
========= ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
6
MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (NOTE 2)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
----------- -----------
Loss from operations $(2,007,000) $(1,214,000)
Adjustments to reconcile net loss from operations
to cash provided by operations:
Depreciation and amortization of property and equipment 257,000 225,000
Amortization of product development costs 534,000 620,000
Changes in assets and liabilities:
Decrease (increase) in assets:
Receivables 1,541,000 2,247,000
Inventories (123,000) (14,000)
Other assets (43,000) (45,000)
Increase (decrease) in liabilities:
Trade payables and accruals 309,000 (306,000)
Taxes payable (6,000) 11,000
Deferred revenue (77,000) (49,000)
----------- -----------
Net cash provided by operating activities 385,000 1,475,000
----------- -----------
Cash flows from investing activities
Purchase of equipment (105,000) (130,000)
Software developed for internal use -- (117,000)
Capitalized product development costs (321,000) (435,000)
----------- -----------
Net cash used by investing activities (426,000) (682,000)
----------- -----------
Cash flows from financing activities:
Debt repayments (350,000) (1,040,000)
----------- -----------
Net cash used by financing activities (350,000) (1,040,000)
----------- -----------
Increase (decrease) in cash and cash equivalents (391,000) (247,000)
Cash and cash equivalents at beginning of period 675,000 1,152,000
----------- -----------
Cash and cash equivalents at end of period $ 284,000 $ 905,000
=========== ===========
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 nine months ended September 30,
2002. Accordingly, reference should be made to the audited consolidated
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 nine months
ended September 30, 2002 represents the third fiscal quarter of the new
fiscal year ending December 31, 2002. Accordingly, the information for the
three months ended September 30, 2001 (designated at time of original SEC
reporting as the fourth 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 September 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 nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
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2. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company paid interest of $186,000 and $323,000 during the nine months
ended September 30, 2002 and 2001, respectively. Net income taxes of
$126,000 and $105,000 were paid during the same respective periods.
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3. NOTE PAYABLE TO BANK:
At September 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 September 30, 2002). The weighted average interest rates were 12.03%
for the nine months ended September 30, 2002 and 12.75% for the nine
months ended September 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 a result of the $2,007,000 net loss for the nine months ended September
30, 2002, the Company was $1,678,000 below the minimum net worth under the
loan agreement with its Bank. As a result, the Bank could call the note at
any time. The Bank has taken no actions on the covenant default nor has it
indicated any intention to accelerate the note. On October 31, 2002, the
Company received substantial signed orders, the proceeds of which shall be
used for the liquidation of its remaining debt to Bank of America,
performance of the orders requirements and to catch up with suppliers.
8
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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 September 30, 2002 disclosure format. Information on
segments and a reconciliation to income (loss) before taxes for the
quarters ended September 30, 2002 and 2001 are as follows:
SEGMENTS
--------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
----------- ----------- ----------- -----------
QUARTER ENDED SEPTEMBER 30, 2002
Revenues:
Information services and
software maintenance.................. $ 1,263,000 $ 267,000 $ 43,000 $ 1,573,000
Software licensing....................... 113,000 -- -- 113,000
----------- ----------- ----------- -----------
Total revenues...................... $ 1,376,000 $ 267,000 $ 43,000 $ 1,686,000
=========== =========== =========== ===========
Operating loss........................... $ (839,000) $ (141,000) $ (130,000) $(1,110,000)
=========== =========== ===========
Other income (expense)................... (97,000)
===========
Loss before income tax................... $(1,207,000)
Amortization of capitalized
product development................. $ 43,000 $ 29,000 $ 7,000 $ 79,000
Amortization of U.S.
geographic database................. -- -- 99,000 99,000
Depreciation............................. 62,000 12,000 4,000 78,000
Identifiable assets...................... 5,025,000 -- -- 5,025,000
Additions to long-lived assets........... 24,000 -- -- 24,000
QUARTER ENDED SEPTEMBER 30, 2001
Revenues:
Information services and
software maintenance.................. $ 3,276,000 $ 576,000 $ 80,000 $ 3,932,000
Software licensing....................... 6,000 -- 10,000 16,000
----------- ----------- ----------- -----------
Total revenues...................... $ 3,282,000 $ 576,000 $ 90,000 $ 3,948,000
=========== =========== =========== ===========
Operating loss........................... $ 256,000 $ (210,000) $ (204,000) $ (158,000)
=========== =========== ===========
Other income (expense)................... (144,000)
===========
Loss before income tax................... $ (302,000)
Amortization of capitalized
product development................. $ 14,000 $ 48,000 $ 21,000 $ 83,000
Amortization of U.S.
geographic database................. -- -- 99,000 99,000
Depreciation............................. 80,000 15,000 5,000 100,000
Identifiable assets...................... 7,165,000 -- -- 7,165,000
Additions to long-lived assets........... 33,000 -- -- 33,000
9
Information on segments and a reconciliation to income before taxes for the
nine months ended September 30, 2002 and 2001 are as follows:
SEGMENTS
------------------------------------------------------------
CONVENIENCE BUSINESS
RETAILING PRICING DEVELOPMENT TOTAL
------------ ------------ ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues:
Information services and
software maintenance...................... $ 6,959,000 $ 1,361,000 $ 287,000 $ 8,607,000
Software licensing........................... 162,000 -- -- 162,000
------------ ------------ ------------ ------------
Total revenues.......................... $ 7,121,000 $ 1,361,000 $ 287,000 $ 8,769,000
============ ============ ============ ============
Operating income (loss)...................... $ (962,000) $ (316,000) $ (401,000) $ (1,679,000)
============ ============ ============
Other income (expense)....................... (208,000)
------------
Loss before income tax....................... $ (1,887,000)
============
Amortization of capitalized
product development..................... $ 117,000 $ 87,000 $ 33,000 $ 237,000
Amortization of U.S.
geographic database..................... -- -- 297,000 297,000
Depreciation................................. 205,000 39,000 13,000 257,000
Identifiable assets.......................... 5,025,000 -- -- 5,025,000
Additions to long-lived assets............... 105,000 -- -- 105,000
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues:
Information services and
software maintenance...................... $ 9,378,000 $ 1,548,000 $ 320,000 $ 11,246,000
Software licensing........................... 63,000 -- 15,000 78,000
------------ ------------ ------------ ------------
Total revenues.......................... $ 9,441,000 $ 1,548,000 $ 335,000 $ 11,324,000
============ ============ ============ ============
Operating income (loss)...................... $ 221,000 $ (406,000) $ (537,000) $ (722,000)
============ ============ ============
Other income (expense)....................... (383,000)
------------
Loss before income tax....................... $ (1,105,000)
============
Amortization of capitalized
product development..................... $ 196,000 $ 48,000 $ 79,000 $ 323,000
Amortization of U.S.
geographic database..................... -- -- 297,000 297,000
Depreciation................................. 179,000 34,000 12,000 225,000
Identifiable assets.......................... 7,165,000 -- -- 7,165,000
Additions to long-lived assets............... 130,000 -- -- 130,000
- --------------------------------------------------------------------------------
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 $(1,276,000) and $(408,000) for the quarters ended
September 30, 2002 and 2001, respectively. For the nine months ended
September 30, 2002 and 2001, comprehensive loss was $(2,073,000) and
$(1,251,000), 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 $1,222,000
or $.42 per share on revenues of $1.7 million for the three months ended
September 30, 2002 compared with a net loss of $365,000 or $.13 per share on
revenues of $3.9 million for the comparable quarter ended September 30, 2001.
For the nine months ended September 30, 2002, MPSI reported a net loss of
$2,007,000 or $.69 per share on revenues of $8.8 million. This compared with a
net loss of $1,214,000 or $.42 per share on revenues of $11.3 million for the
comparable nine months of last fiscal year. Although the Company has undertaken
to significantly reduce its cost base over the last two years, a corresponding
downward trend in orders and revenues from MPSI's traditional oil company
customers, due to margin pressures in their downstream retail operations over
that same period, has precluded MPSI from attaining its profitability targets.
The revenue decline became even more pronounced during the last six months as
the effects of depressed orders in 2001 and early 2002 provided less backlog
turnover in the June and September quarters of 2002. The recent revenue decline
is most notable in Pacific Rim operations where petroleum deregulation
exacerbates the oil company margins issue in key target countries resulting in
delayed retail capital decisions and corresponding MPSI study orders. Further
pressures have been felt in U.S. operations where substantial economic
uncertainties and concerns about corporate governance has depressed the
businesses of MPSI's petroleum-oriented convenience retailers.
Management expects the global economic uncertainties to extend the domestic
revenue trend through at least the rest of fiscal 2002. The return to MPSI of a
major historical customer who left MPSI to explore alternative technologies last
year portends a potential turnaround in the U.S. for 2003, and recent orders of
more than $4 million, mostly from foreign sources, indicate that perhaps those
negative implications to MPSI's business may also be relaxing.
The results for the nine months ended September 30, 2002 reflect estimated
severance costs for staff reductions in the home office ($325,000) and
severance/shutdown costs associated with the closure of certain foreign offices
($304,000). The total accrual for reorganization costs of approximately $629,000
reflects a third quarter reduction of $88,000 for the Brazil office, based on
the most current estimates of remaining expenditures. As a result of these
measures, aggregate costs of approximately $1.3 million (including
pre-termination operating expenses and closedown costs) occurred during the nine
months ended September 30, 2002 but would not recur in fiscal 2003.
CONVENIENCE RETAILING SEGMENT. This business unit accounted for revenues of
$1,376,000, and $3,282,000 for the fiscal quarters ended September 30, 2002 and
2001, respectively. For the quarter ended September 30, 2002, this unit incurred
an operating loss of $839,000 as compared to an operating income of $256,000 for
the comparable period last fiscal year. The decline in revenues ($1,906,000) and
profitability ($1,095,000) for the third fiscal quarter of 2002, as compared
with 2001, is primarily attributable to the above described uncertainties in
some target economies and the implementation of price reductions brought about
by competitive pressures. Revenues for the nine months ended September 30, 2002
and 2001 were $7,121,000 and $9,441,000, respectively. The operating loss for
the nine months ended September 30, 2002 was $962,000 as compared to an
operating income of $221,000 for the comparable fiscal period last year. The
revenue decline of $2,320,000, for the reasons noted herein, had a significant
impact on operation income, which decreased $1,183,000. Although domestic
activity has declined, particularly during the last six months, the Company
continues to experience interest in its product offerings from new customers
overseas and has experienced increased orders subsequent to September 30, 2002.
As these orders are delivered in accordance with client timelines, management
expects the beneficial growth in revenue volume will begin to overshadow the
effects of price reductions going into fiscal 2003. Market economics to date in
2002 have introduced greater exposure to quarterly volatility. The timing of new
perpetual software license agreements, and the normally attendant retail market
information orders, can have a substantial impact upon reported revenues and net
income between accounting periods.
11
PRICING SEGMENT. Revenues of $267,000 for the quarter ended September 30,
2002, as compared to $576,000 during the same quarter last fiscal year are down
$309,000 for many of the same economic reasons discussed above. In spite of the
revenue fall-off, this segment experienced a lower operating loss of $141,000
(including all corporate overhead allocations) for the quarter ended September
30, 2002 compared to an operating loss of $210,000 during the comparable quarter
last year. The decrease in the operating loss is primarily a result of decreased
expenses associated with staff reductions during the second fiscal quarter of
2002. Excluding corporate overhead charges, this segment generated contribution
margins of $10,000 and ($35,000) in the quarters ended September 30, 2002 and
2001, respectively.
Revenues for the nine months ended September 30, 2002 were $1,361,000 as
compared to $1,548,000 reported for the nine months ended September 30, 2001.
This segment reported an operating loss of $316,000 for the nine months ended
September 30, 2002 as compared to an operating loss of $406,000 for the
comparable period last year. Excluding corporate overhead charges, this segment
generated contribution margins of $237,000 and $90,000 for the nine months ended
September 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. Several key pilot tests are
presently under way.
BUSINESS DEVELOPMENT SEGMENT. This unit (which markets mapping products
under the DataMetrix brand, internet software/data solutions and is charged with
new industry penetration) generated revenues of $43,000 during the fiscal
quarter ended September 30, 2002 as compared with $90,000 during the comparable
period last fiscal year. Business Development incurred an operating loss of
$130,000 for the quarter ended September 30, 2002 as compared with an operating
loss of $204,000 during the same fiscal quarter last year. The marginal
improvement in operating income is related to cost savings and personnel
utilization associated with the corporate reorganization during the second
fiscal quarter of 2002. Costs within this group are primarily fixed in nature
and therefore do not significantly fluctuate with revenue volume. For the nine
months ended September 30, 2002 and 2001, Business Development generated
revenues of $287,000 and $335,000 with related operating losses of $401,000 and
$537,000, respectively.
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 through new
industry penetration and the substantial original product development costs are
fully amortized, operating results are likely to remain negative. MPSI expects
to allocate additional resources to the diversification effort as internal
funding allows in 2003. The Company's objective through this segment is to
develop new revenue sources such that within five years revenues from
petroleum-oriented convenience retailers, while growing, will represent less
than 60% of consolidated revenues.
CONSOLIDATED OPERATING EXPENSES. Consolidated operating expenses were
$1,758,000 for the quarter ended September 30, 2002 as compared with $2,458,000
during the same quarter last fiscal year representing a decrease of $700,000
(28%). For the nine months ended September 30, 2002, consolidated operating
expenses were $6,454,000 as compared with $7,216,000 for the same period last
fiscal year representing a reduction of $762,000 (11%). These decreased costs
are primarily a result of cost savings associated with the reorganization during
the first two quarters of fiscal 2002.
Consolidated general and administrative expenses for the quarter ended
September 30, 2002 were down $355,000 (43%) as compared to the same fiscal
quarter of last year. This reduction is primarily associated with personnel
related costs associated with the corporate downsizing which occurred during the
first two fiscal quarters of 2002. General and administrative expenses for the
nine months ended September 30, 2002 were up approximately $285,000 (13%) as
compared to the same period last fiscal year. This increase includes the total
of accrued downsizing costs of approximately $629,000 for the nine months ended
September 30, 2002 (compared to $93,000 in 2001). Adjusting for accrued
downsizing costs in both fiscal periods, there was a net decline in expense for
the nine months ended September 30, 2002 of approximately $251,000 due to staff
reductions, personnel realignment and a decrease in management incentive plans
given the financial results to date in fiscal 2002.
Consolidated marketing and client service expenses for the quarter ended
September 30, 2002 were down $358,000 (28%) as compared to the same fiscal
quarter of last year. For the nine months ended September 30, 2002, expenses
were down approximately $1,175,000 (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
12
of marketing personnel and related foreign office closures in response to shifts
in the geography of international clients, and, (3) a reallocation of personnel
resources from client support to revenue-based projects which shifted dollars
from marketing expense 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 September 30, 2002 were up $13,000 as
compared with the same fiscal period last year. For the nine months ended
September 30, 2002 expenses were up approximately $128,000 as compared with the
same fiscal period last year. The increase for the quarter and nine months ended
September 30, 2002 are a result of less capital development activity (which is
capitalized) and more 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 web
projects, are comparable between the two periods presented. The Company
continues to focus on cost reductions through new technologies which seek to
produce modular products that 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 $41,000 for the quarter
ended September 30, 2002 was down from $68,000 for the comparable quarter ended
September 30, 2001. For the nine months ended September 30, 2002, interest
expense was $186,000 as compared with $323,000 for the same period last fiscal
year. The Company's bank debt of $550,000 at September 30, 2002, which is the
primary source of interest expense, was reduced from $900,000 at September 30,
2001 and December 31, 2001. Additionally, the effective management of the
Company's cash flow from operations allowed for more timely payments of
recurring vendor obligations which resulted in reduced carrying costs.
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 loss of approximately $57,000
for the quarter ended September 30, 2002 as compared to an exchange loss of
$97,000 during the comparable quarter last fiscal year. The quarterly loss is
primarily attributable to certain foreign transactions associated with the
closure of the Brazil office. For the nine months ended September 30, 2002, the
Company experienced an exchange loss of $38,000 as compared to an exchange loss
of $138,000 for the comparable period last year. Although MPSI anticipates
continuing exposure to exchange fluctuations, no material adverse fluctuations
are 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 $15,000 and $120,000 for the quarter and
nine months ended September 30, 2002, respectively, as compared to $63,000 and
$109,000 during the same 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
Working capital, the Company's primary measure of liquidity, was a deficit
of $1,786,000 at September 30, 2002 as compared with a deficit of $165,000 at
December 31, 2001. The decrease in working capital is a result of accrued
shutdown expenses related to previously discussed headquarters downsizing, the
closure of certain foreign sales offices, and the effects of recent revenue
trends. Net short-term receivables decreased $1,572,000 as a result of cash
collections exceeding orders received during the nine months ended September 30,
2002. Although accounts payable and accrued liabilities increased by $390,000
during the nine months ended September 30, 2002, this increase includes the
remaining accrual for downsizing of approximately $137,000. Deferred revenue
decreased by $187,000 as compared to December 31, 2001 as revenue on active
projects in process exceeded amounts invoiced. Subsequent to September 30, 2002,
new orders position MPSI to bring its suppliers current and pay off its bank
debt (see below). In the absence of a working capital lending facility, MPSI
continues to deal with peaks and valleys in cash flow by adjusting payments to
suppliers and other creditors as required to match remittances from customers.
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
13
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 was 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 paydown 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 bringing the outstanding balance
down to $550,000 at September 30, 2002 (see Note 3 to the Consolidated Financial
Statements for further information relating to bank debt). Further, subsequent
to September 30, 2002, cash generated from new orders will be sufficient for
MPSI to finally liquidate its bank debt. Achievement of this objective, which
was initiated two years ago, is expected to ease the pressure on MPSI's
liquidity going into 2003.
Capitalized product development expenditures for the nine months ended
September 30, 2002 were $321,000 compared with $552,000 in the same period last
year. The reduction in capitalized development costs during fiscal year 2002
principally reflects the slow down of new development as the Company believes
its present REX and Pricing technology far surpasses competitive technology.
MPSI's backlog of market studies (approximately $6.0 million at September
30, 2002 and $9.1 million at December 31, 2001), contained recurring studies
under multi-year client commitments. Such studies represent a significant amount
of the estimated revenues for subsequent periods. Due to the softness of new
orders in 2002 and particularly during the last six months, MPSI has been
operating primarily from the backlog of projects. New orders subsequent to
September 30, 2002 are encouraging, and management expects to replenish backlog
by December 31, 2002. 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. The decline has positive implications to annual
profitability although backlog is declining.
CONTROLS AND PROCEDURES
The Company'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-14(c) and 15d-14(c) 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 the Company (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 in 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.
14
Item 3 - Defaults Upon Senior Securities -
As a result of the $2,007,000 net loss for the nine months ended September
30, 2002, the Company was $1,678,000 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 at any time. The Bank has taken
no actions on the covenant default nor has it indicated any intention to
accelerate the note. On October 31, 2002, the Company received substantial
signed orders, the proceeds of which shall be used for the liquidation of
its remaining debt to Bank of America, performance of the orders
requirements and to catch up with suppliers.
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:
11.1 Earnings per share computation
99.1 CEO/CFO Certifications
(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 November 14, 2002 By /s/ Ronald G. Harper
------------------- -------------------------------------
Ronald G. Harper, President
(Chief Executive Officer) and
Director
Date November 14, 2002 By /s/ James C. Auten
------------------- -------------------------------------
James C. Auten
Vice President
(Chief Financial Officer)
16
CERTIFICATIONS
I, Ronald G. Harper, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MPSI Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Ronald G. Harper
------------------------------------
Ronald G. Harper
Chief Executive Officer
17
I, James C. Auten, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MPSI Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ James C. Auten
------------------------------------
James C. Auten,
Chief Financial Officer
18
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
11.1 Earnings Per Share Computation
99.1 CEO/CFO Certifications
19