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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 quarterly period ended March 31, 2004
    
    Commission file no. 0-11527
 MPSI SYSTEMS INC. 
  Delaware
    
    73-1064024(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4343 South 118th East Avenue, Tulsa Oklahoma 74146 
  Registrants telephone number, including area code(918) 877-6774 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YesXNo. Number of shares of common stock outstanding at March 31, 2004 -2,911,780




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INDEX Page No.PART I. FINANCIAL INFORMATION:Item 1 - Financial Statements:Condensed Consolidated Balance Sheet  March 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  Three Months Ended March 31, 2004 and 2003
    
    
    5Consolidated Statement of Stockholders Equity  Three Months Ended March 31, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2004 and 2003
    
    
    7Notes To Condensed Consolidated Financial Statements
    
    
    8Item 2 - Managements Discussion and Analysis of Financial Condition and Quarterly Results of Operations
    
    
    10Item 3  Controls and Procedures
    
    
    15PART II. OTHER INFORMATION (Including Index to Exhibits)
    
    
    15SIGNATURES
    
    
    17CEO Certification Pursuant to Section 302CFO Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1-FINANCIAL STATEMENTS 
 MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET March 31,Assets
    
    2004(Unaudited)Current assets:Cash and cash equivalents
    
    $
    276,000Receivables
    
    
    1,118,000Other current assets
    
    
    212,000Total current assets
    
    
    1,606,000Capitalized product development costs, net
    
    
    481,000Property and equipment, net of accumulated depreciation
and amortization
    
    
    305,000Other assets
    
    
    276,000Total assets (Note 3)
    
    $
    2,668,000
 See accompanying notes to condensed consolidated financial statements. 3




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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Contd) March 31,Liabilities and Stockholders' Equity
    
    2004(Unaudited)Current liabilities:Accounts payable
    
    $
    610,000Accrued liabilities
    
    
    789,000Deferred revenue
    
    
    1,404,000Total current liabilities
    
    
    2,803,000Noncurrent deferred revenue
    
    
    309,000Total liabilities
    
    
    3,112,000Commitments and contingenciesStockholders 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 atMarch 31, 2004
    
    
    146,000Junior Common Stock, $.05 par value, 500,000 shares
authorized, none issued or outstanding
    
    
    Additional paid-in capital
    
    
    13,145,000Deficit
    
    
    (14,040,000
    )Other accumulated comprehensive income
    
    
    305,000Total stockholders equity (deficiency)
    
    
    (444,000
    )Total liabilities and stockholders equity (deficiency)
    
    $
    2,668,000
 See accompanying notes to condensed consolidated financial statements. 4




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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Ended March 31,2004
    
    2003Revenues
    
    $
    2,169,000
    
    
    $
    2,239,000Cost of Sales
    
    
    1,129,000
    
    
    
    1,036,000Gross profit
    
    
    1,040,000
    
    
    
    1,203,000Operating expenses:General and administrative
    
    
    716,000
    
    
    
    540,000Marketing and client services
    
    
    651,000
    
    
    
    790,000Research and development
    
    
    235,000
    
    
    
    383,000Total operating expenses
    
    
    1,602,000
    
    
    
    1,713,000Operating income (loss)
    
    
    (562,000
    )
    
    
    (510,000
    )Other income (expense)
    
    
    (3,000
    )
    
    
    (12,000
    )Loss before income taxes
    
    
    (565,000
    )
    
    
    (522,000
    )Provision for income taxes
    
    
    19,000
    
    
    
    2,000Net loss
    
    $
    (584,000
    )
    
    $
    (524,000
    )Per Share:Basic and diluted loss per common share
    
    $
    (.20
    )
    
    $
    (.18
    )
 See accompanying notes to condensed consolidated financial statements. 5




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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited) OtherCommon stock
    
    Additional
    
    
    
    
    
    accumulated
    
    Totalpaid-in
    
    
    
    
    
    comprehensive
    
    stockholders'Shares
    
    Amount
    
    capital
    
    Deficit
    
    income
    
    equityBalance,
December 31, 2003
    
    $
    2,912,000
    
    
    $
    146,000
    
    
    $
    13,145,000
    
    
    $
    (13,456,000
    )
    
    $
    313,000
    
    
    $
    148,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (584,000
    )
    
    
    
    
    
    
    (584,000
    )Other accumulated
comprehensive
income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,000
    )
    
    
    (8,000
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (592,000
    )Balance,
March 31, 2004
    
    
    2,912,000
    
    
    $
    146,000
    
    
    $
    13,145,000
    
    
    $
    (14,040,000
    )
    
    $
    305,000
    
    
    $
    (444,000
    )
 See accompanying notes to condensed consolidated financial statements. 6




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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2)
(Unaudited) Three Months Ended March 31,2004
    
    2003Net loss
    
    $
    (584,000
    )
    
    $
    (524,000
    )Adjustments to reconcile net loss to cash
used by operating activities:Depreciation and amortization
    
    
    198,000
    
    
    
    226,000Net loss on closure of foreign subsidiaries
    
    
    
    
    
    
    28,000Decrease in assets
    
    
    27,000
    
    
    
    154,000Decrease in liabilities
    
    
    (257,000
    )
    
    
    (35,000
    )Net cash used by operating activities
    
    
    (616,000
    )
    
    
    (151,000
    )Cash flows from investing activities:Purchase equipment
    
    
    
    
    
    
    (17,000
    )Capitalized product development costs
    
    
    
    
    
    
    (73,000
    )Net cash used by investing activities
    
    
    
    
    
    
    (90,000
    )Decrease in cash
    
    
    (616,000
    )
    
    
    (241,000
    )Cash at beginning of period
    
    
    892,000
    
    
    
    864,000Cash at end of period
    
    $
    276,000
    
    
    $
    623,000
 See accompanying notes to condensed consolidated financial statements. 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    General Notes:Certain notes to the December 31, 2003 audited consolidated financial
statements filed with Form 10-KSB, as amended, are applicable to the
unaudited consolidated financial statements for the three months ended March
31, 2004. Accordingly, reference should be made to the audited consolidated
financial statements at December 31, 2003.Revenue Recognition. Effective January 1, 2003, the Company adopted a
revised method of estimating its percentage of completion for its major
consulting and technology projects. In fiscal 2002 and prior periods, the
Company aggregated all phases of a production project together
(contractually and internally) and made its percentage of completion
calculation based upon the ratio of actual costs incurred at any measurement
date to total estimated costs for the project. Effective in fiscal 2003 the
Company began to unbundle its project pricing (contractually and internally)
so that individual phases of the production process are separately priced
(and costed). Accordingly, the percentage of completion will be adjusted as
each phase is complete and the aggregation of completed phases will
represent the overall percentage of completion for the project / contract.
Management has elected to make this change because it is a more conservative
and accurate method of determining percentage of project completion and
because this method results in financial information about internal profit
centers which will be critical to performance evaluation of the production
groups and to resource allocation decisions.In the opinion of Management, the unaudited consolidated financial
statements as of March 31, 2004 contain all adjustments (including normal
recurring accruals) necessary to fairly present the financial position and
the results of operations of the Company. The timing of market study orders
and software license agreements can significantly impact quarterly results
of operations and, accordingly, the results of operations for the three
months ended March 31, 2004 are not necessarily indicative of the results to
be expected for the full year.New Accounting Standard.In January 2003, the Financial Accounting
Standards Board (FASB) issued FIN 46, Consolidation of Variable Interest
Entities, that provides guidance in determining when variable interest
entities should be consolidated in the financial statements of the primary
beneficiary. For the Company, the consolidation provisions of FIN 46, as
revised, are effective in fiscal years beginning after December 15, 2004.
The adoption of FIN 46 is not expected to have a material effect on the
Companys financial position or results of operations.2.
    
    Supplemental Cash Flow Information:The Company paid interest of $7,000 and $3,000 during the three months ended
March 31, 2004 and 2003, respectively. Income taxes of $10,000 and $14,000
were paid during the three months ended March 31, 2004 and 2003,
respectively.3.
    
    Business Segments:Prior to fiscal 2003, the Company identified its operating segments based
upon line of business, which resulted in three reportable segments:
Convenience Retailing, Pricing, and Business Development. During the first
quarter of fiscal 2003 the Company undertook a reorganization in connection
with a reduction in force aimed at reducing monthly operating costs. That
reorganization resulted in an amalgamation of resources from the three
previous segments, a change in the divisional operating responsibilities and
a different management focus based upon geographic operating differences and
resource requirements. Product offerings, consisting of decision support
modeling technology for multi-outlet convenience retailers, are essentially
equivalent across all segments. 8




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Set forth below is certain condensed financial information presented with
respect to the operational segments that shall carry forward in 2004,
together with a reconciliation to loss before income taxes. These reported
operational segments represent aggregations of certain information relative
to operations in homogenous countries within the defined geographic
segments. All revenue is from external customers as there are no
inter-segment sales. ($000)
    
    S E G M E N T SQuarter Ended March 31,
    
    
    
    
    
    Europe / Africa /
    
    Pacific2004
    
    Americas
    
    Middle East
    
    Rim
    
    TotalsRevenues
    
    $
    1,296
    
    
    $
    26
    
    
    $
    847
    
    
    $
    2,169Contribution margin
    
    $
    504
    
    
    $
    (142
    )
    
    $
    202
    
    
    $
    564Reconciling items not
allocated to operating
segments:Corporate
administration, sales
and technology expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (565
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,668
 Quarter Ended March 31,
    
    
    
    
    
    Europe / Africa /
    
    Pacific2003
    
    Americas
    
    Middle East
    
    Rim
    
    TotalsRevenues
    
    $
    1,276
    
    
    $
    262
    
    
    $
    701
    
    
    $
    2,239Contribution margin
    
    $
    264
    
    
    $
    60
    
    
    $
    337
    
    
    $
    661Reconciling items not
allocated to operating
segments:Corporate
administration, sales
and technology expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,171
    )Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (522
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,630
  4.
    
    Contingent LiabilityOn March 29, 2004 the Company received an assessment notice from the
Oklahoma Department of Labor (DOL). The DOL is requiring MPSI to pay an
additional $151,000 of separation payments to employees furloughed in March
2003 and subsequently terminated. This assessment was over and above
severance payments already made by MPSI to such employees in accordance
with MPSIs severance policy. MPSI has filed a protest and request for
hearing before an administrative law judge. A hearing date has not yet
been set, however, on the basis of the DOL assessment, the Company
has accrued an aggregate of $151,000 related to this matter. 9




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5.
    
    Comprehensive IncomeComprehensive income is net income, plus certain other items that are
recorded directly to stockholders equity, bypassing net income. The only
such items currently applicable to the Company are foreign currency
translation adjustments.Comprehensive loss was $(592,000) and $(379,000) for the quarters ended
March 31, 2004 and 2003, respectively. 
 ITEM 2 -
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS
 Results of Operations Consistent with historical results in the first fiscal quarter, MPSI
experienced sluggish results. The Company reported a net loss of $584,000 or
$.20 per share on revenues of $2.2 million for the quarter ended March 31, 2004
compared with a loss of $524,000 or $.18 per share on revenue of $2.2 million
for the comparable quarter ended March 31, 2003. Included in the March 2004
results was the recognition of approximately $151,000 of separation costs
mandated by a governmental agency in respect of the Companys March 2003
reduction in force (see note 4 to the consolidated financial statements).
Excluding the nonrecurring separation costs, the Companys modest improvement
in operating results, as reflected during the first quarter of 2004 (a loss of
$433,000 or $.15 per share) compared with the 2003 quarter, is principally the
result of positive effects of 2003 staff and other cost reduction activities as
discussed in greater detail below. Revenue for the quarters ended March 31, 2004 and 2003 were virtually
equal, although in both cases below the average quarterly results targeted by
management for the respective annual fiscal periods. To a certain extent, the
first fiscal quarter of any year is subject to sluggishness, as many of MPSIs
most significant customers are just beginning to operate under new annual cost
budgets and MPSI must overcome the sales cycle to begin tapping those budgets.
As to the March 2004 quarter, there was also another negative impact associated
with the Companys accelerated production activities during the last quarter of
fiscal 2003 which had the effect of moving revenue into fiscal year 2003 that
might otherwise have been taken up during the first quarter of fiscal 2004.
These activities in the fourth quarter of fiscal 2003 were in line with
managements attempts to capitalize on late orders in order to maximize
earnings for that fiscal year. Although the fluctuations in revenue from most MPSI product lines were
nominal between the March 2004 quarter and the comparable March 2003 quarter,
the Company did experience variances in regional revenue contributions from
certain of its geographic segments between the indicated quarters. Revenue
from Europe/South Africa was down approximately $236,000 (90%) in the March
2004 quarter compared with the March 2003 quarter, principally as the result of
customer project timing. However, the cyclical pattern of business
particularly in South Africa portends a generally lower level of revenue from
that country for fiscal 2004 as a whole. In Asia, MPSI experienced an increase
in revenue between the two indicated quarters of approximately $146,000 (20%).
National database deliveries in Japan, which production is in full swing during
the March 2004 quarter compared to being in a start-up mode during the March
2003 quarter, accounted for most of the change. National databases delivered
to customers in Japan and Korea have been a significant contributor to MPSI
revenues over the last 18 months. Beginning in the September 2004 quarter,
MPSI expects Japanese and Korean clients to sign on for another series of
database updates that will generate follow-on revenue well into 2005. Revenue
in MPSIs North American segment was virtually the same between the indicated
quarters (approximately $1.3 million). However, management is pleased that
efforts to introduce a new consulting service, Capital Optimization Solutions,
have been well received as evidenced by the revenue trend ($465,000 in the
quarter ended March 31, 2004 versus $137,000 for the comparable quarter last
year). 10




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Despite the normal sluggishness associated with first quarter activities
for the reasons noted above, management is pleased with the trend of new
orders. Orders for the quarter ended March 31, 2004 of approximately $2.9
million represented a 100% improvement over the $1.4 million of orders taken
during the quarter ended March 31, 2003. As a result, backlog was $5.1 million
at March 31, 2004. The Company expects approximately $2.6 million of the March
2004 backlog to turn over during the remainder of 2004. Although the March 31,
2004 backlog is lower than the backlog at March 31, 2003 ($6.4 million),
management attributes most of the difference to the effects of the national
database orders from Asia which were new to backlog at March 31, 2003 and most
of which have been earned through March 31, 2004. As noted above, expected
renewals by Asian clients for updates to these national databases later this
year should have the effect of substantially raising backlog to a more
comparable level. The timing of large multi-year orders such as the Asian
national databases can have a significant impact on the level of backlog at any
particular point in time. Gross margins from production activities declined to 48% during the March
2004 quarter compared with 54% achieved in the first quarter last year. This
decline reflected a change in project mix. The March 2004 quarter included
fewer multi-client, high margin projects as compared with the March 2003
quarter. Historically, as a fiscal year progresses, the opportunities for
clients to add on to already produced market model projects improve, and with
it MPSI generally experiences improved annual gross margin percentages.
Further, as to MPSIs pricing-oriented revenue stream, more of such revenues in
the March 2004 quarter were concentrated from lower margin products (pricing
surveys) as compared to pricing revenue in the March 2003 quarter which were
the result of higher margin consulting projects. Excluding the one-time accrual for additional separation costs of $151,000
(see Note 4 to Consolidated Financial Statements), operating expenses were down
$262,000 (15%) in the quarter ended March 31, 2004 as compared with the March
2003 quarter. This cost improvement is primarily due to staff and other cost
reductions implemented in late March 2003 and thereafter. With those actions,
MPSI anticipated quarterly cost savings of approximately $300,000. The
apparent shortfall for the March 2004 quarter is due to higher than normal
professional service fees associated with the Companys going-private
activities, which are expected to culminate during the June 2004 quarter. Other income and expenses relate principally to foreign exchange
transaction gains/losses, interest and income taxes. Although the Company
continues to be exposed to possible foreign exchange gains/losses due to the
fact that portions of MPSIs billings to customers are denominated in foreign
currencies, these activities had no material effect on quarterly results in
either the March 2004 or 2003 quarters. Likewise, interest expense was not a
major factor to either quarter. The Company experienced interest expense of
$7,000 for the March 2004 quarter compared with $3,000 for the quarter ended
March 31, 2003. As the Company has no outstanding debt, interest charges
generally relate to supplier financing. Income taxes of $19,000 during the
quarter ended March 31, 2004 were up from $2,000 in the March 2003 quarter.
MPSI presently experiences only nominal annual US income tax due to net
operating loss carryforwards from prior years. The recorded income taxes
relate to foreign income tax withheld at the source of customer payments,
principally in Canada and Japan, during the March 2004 quarter. Financial Condition and Liquidity The Companys working capital deficit was approximately $1,197,000 at
March 31, 2004, an improvement of 26% when compared with the deficit of
$1,616,000 at March 31, 2003. That improvement was principally associated with
cost saving measures implemented in 2003 (which resulted in lower operating
accounts payable and accrued liabilities at March 31, 2004). Further, a higher
percentage of pre-billings to customers was earned at March 31, 2004 than was
the case at March 31, 2003 (as evidenced by the relationship between accounts
receivable and the current portion of deferred revenue at the respective
measurement points). However, as compared with working capital at the end of
fiscal 2003, the Company experienced a decrease of $456,000 (62%). Working
capital in the fourth quarter of any fiscal year typically benefits from
windfall orders from customers utilizing remaining portions of the annual
operating budgets. Since December 31, 2003 and in line with typical first
quarter sluggishness, the Company has had to tap into its cash reserves and
extend payment cycles to suppliers. MPSI has no working capital debt facility
to smooth the fluctuation in cash liquidity sometimes experienced due to the
timing 11




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of new orders/billings versus fixed expenses. Management anticipates that the
relatively low liquidity situation at March 31, 2004 will improve beginning in
the June 2004 quarter. As reflected in the Statement of Cash Flows, the Companys liquidity
position has not allowed for substantial capital investment. This situation
has had no detrimental effects on operations, however, since (a) the present
product technology leads the field and should require no substantial upgrades
this fiscal year, and (b) internal computer networks were modestly upgraded in
2003 and are sufficient to meet projected 2004 operating requirements. The
Company has no present equipment acquisition commitments but will likely
undertake modest upgrades later in 2004. Likewise, certain web-oriented
product development is slated for later this year. Current and noncurrent portions of deferred revenue related to the
Companys ability to bill customers in advance for most projects. Such
increases to account receivable or cash are recorded with an offsetting entry
to deferred revenue until such time as the Company has completed each projects
earnings process (see revenue recognition policies in the Footnotes to
Consolidated Financial Statements). The noncurrent portions of deferred
revenue relate principally to multi-year software license and maintenance
contracts, which were prepaid at origination and are earned over the life of
the respective agreements. The current portion of deferred revenue relates
principally to retail consulting service projects ($1.0 million) and multi-year
software license revenues expected to turn over within the twelve months
following March 31, 2004 ($354,000). The Company anticipates that all of
current deferred service-oriented revenue and $287,000 of current deferred
software licensing revenue will turn over during the remainder of fiscal year
2004. Other than changes associated with quarterly earnings, there have been no
material variations in the equity accounts since March 31 or December 31, 2003.
The Board of Directors has authorized and management is in the process of
taking the Company private. These actions have been undertaken in response to
the increasing costs of remaining a public company versus the lack of benefits
currently associated therewith. MPSI has filed preliminary proxy materials for
review by the Securities and Exchange Commission. At the completion of that
review process, MPSI will file definitive proxy materials and distribute them
to all stockholders of record at the established record date. At the Companys
next annual meeting, expected to take place during the June 2004 quarter, a
vote on the going-private issue will take place. Assuming that vote is in
the affirmative, MPSI expects to file for de-registration shortly thereafter. Off-Balance Sheet Arrangements None. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Use of Estimates The Companys consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States (hereinafter
referred to as GAAP) and the application of GAAP requires management to make
estimates that affect the Companys reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. In many instances, the Company could have reasonably used
different accounting estimates, and in other instances changes in the
accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ significantly from the estimates made
by management. To the extent that there are material differences between these
estimates and actual results, the Companys future financial statement
presentation of its financial condition or results of operations will be
affected. On an ongoing basis, the Company evaluates its estimates, including those
related to revenue recognition, provision for doubtful accounts, recovery of
capitalized product development costs, useful lives of property and equipment,
income taxes, contingencies and litigation, among others. The Company bases
its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results 12




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of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. In addition to these estimates and assumptions that are utilized in the
preparation of historical financial statements, the inability to properly
estimate the timing and amount of future revenues could significantly impact
the Companys future operations. While the Companys software allows it to
monitor potential revenues and aids in its ability to manage the size of its
operations, management must make assumptions and estimates as to the timing and
amount of future revenue. Specifically, the Companys sales personnel monitor
the status of all proposals, including the estimated closing date and potential
dollar amount of such transactions. The Company aggregates these estimates
periodically to generate a sales pipeline and then evaluates the pipeline to
identify trends in the Companys business. This pipeline analysis and related
estimates of revenue may differ significantly from actual revenues in a
particular reporting period as the estimates and assumptions were made using
the best available data at the time, which is subject to change. Specifically,
the slowdown in the global economy and information technology spending has
caused and may continue to cause customer purchasing decisions to be delayed,
reduced in amount or canceled, all of which have reduced and could continue to
reduce the rate of conversion of the pipeline into contracts. A variation in
the pipeline or in the conversion rate of the pipeline into contracts could
cause the Company to plan or budget inaccurately and thereby could adversely
affect the Companys business, financial condition or results of operations.
In addition, because of unpredictable timing of high-dollar contracts,
management may not be able to adjust the Companys cost structure to respond to
a variation in the conversion of the pipeline in a timely manner, and thereby
the delays may adversely and materially affect the Companys business,
financial condition or results of operations. Critical Accounting Policies In addition to making critical accounting estimates, the Company must
ensure that its financial statements are properly stated in accordance with
GAAP. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require managements judgment in its
application, while in other cases, managements judgment is required in
selecting among available alternative accounting standards that allow different
accounting treatment for similar transactions (e.g., revenue recognition,
stock-based compensation, depreciation methodology, etc.). The Company
believes that the following accounting policies are critical to understanding
the Companys historical and future performance, as these policies relate to
the more significant areas involving managements judgments and estimates:
revenue recognition, stock-based compensation, the provision for doubtful
accounts, capitalized product development costs, income taxes, and foreign
currency transactions. The Companys management has reviewed its critical accounting policies,
its critical accounting estimates, and the related disclosures with its Audit
Committee. These policies, and the Companys procedures related to these
policies, are described in detail below.  
    
    Revenue Recognition:Effective January 1, 2003, the Company adopted a
revised method of estimating its percentage of completion for its major
consulting and technology projects. In fiscal 2002 and prior periods, the
Company aggregated all phases of a production project together
(contractually and internally) and made its percentage of completion
calculation based upon the ratio of actual costs incurred at any
measurement date to total estimated costs for the project. Effective for
fiscal 2003 the Company has begun to unbundle its project pricing
(contractually and internally) so that individual phases of the production
process are separately priced (and costed). Accordingly, percentage of
completion will be adjusted as each phase is complete and the aggregation
of completed phases will represent the overall percentage of completion
for the project / contract. Management has elected to make this change
because it is a more conservative and accurate method of determining
percentage of project completion and because this method results in
financial information about internal profit centers which will be critical
to performance evaluation of the production groups and to resource
allocation decisions.The Company recognizes software revenue under the provisions of the
Accounting Standards Executive Committees Statement of Position 97-2 (SOP
97-2) entitled Software Revenue Recognition (as amended by SOP 98-9).
Under the terms of SOPs 97-2 and 98-9, companies are required to defer all
revenue from multiple-element software arrangements if sufficient vendor
specific objective evidence does not exist for the allocation 13




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of revenue to the various elements of the arrangement. As a result, the
Company recognizes revenue on multi-year software license agreements ratably
over the life of the arrangement.Revenue is recognized when the Company has no remaining obligations under
the software license and maintenance contracts other than providing
post-contract customer support services related to the maintenance portion
of the contract and performance obligations under any optional and
separately priced training or consulting arrangements. Maintenance revenues
are recognized ratably over the term of the contracts as the post-contract
customer support services are provided and the related costs incurred are
recognized. Optional training and consulting represents service transaction
on which revenue and expense are recognized when the earnings process is
substantially complete.Beginning in fiscal 2001, MPSI changed its software licensing and
maintenance contracting methods. Following the change, most software
products are perpetually licensed in a fashion that mandates up-front
payment of the license fees. Maintenance is an optional annual commitment
by clients who wish to obtain future upgrades without additional cost. This
change in licensing did not materially impact fiscal 2001.
    
    Stock-Based Compensation:At December 31, 2002, the Company
has one stock-based employee compensation plan. The Company
accounts for the plan under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees,and related
Interpretations. No stock-based employee compensation cost
is reflected in net income (loss), as all options granted
under the plan had an exercise price equal to or greater than
the market value of the underlying common stock on the date
of grant.
    
    Receivables: Trade receivables are carried at original
invoice amount less an estimate made for doubtful receivables
(immaterial in the condensed statements reflected herein)
based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful
accounts by regularly evaluating individual customer
receivables and considering a customers financial condition,
credit history, and current economic conditions. Trade
receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are
recorded when received.
    
    Capitalized Product Development Costs: Cost of software held
for resale (which was either purchased with the intent to
incorporate the acquired software in MPSI products or
developed internally) is presented net of accumulated
amortization.The costs of internally developed software held for resale include
direct labor, materials and overhead, and relate to significant enhancements
to existing software or to development of new software products. All costs
incurred to establish the technological feasibility of internally developed
software are charged to research and development expense as incurred.
Royalties, which may become payable because of ongoing proprietary interests
related to third-party software imbedded in MPSI products, are charged to
cost of sales-software licensing as applicable software sales are
recognized.The annual amortization of software products is computed on a
product-by-product basis and is the greater of the amount determined using
(1) the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product or (2) the
straight-line method over the remaining economic life of the product.
Historically, the straight-line method has resulted in a greater amount of
amortization in each accounting period and has, therefore, been the basis
for amortization in the current period and in prior periods. Amortization
starts when a product is available for general release to customers and is
reflected in cost of sales  software licensing.In the event that capitalized product development costs are subsequently
determined not to be fully recoverable from future operations, the carrying
value of such software is reduced to an amount equal to its net realizable
value less costs of marketing and distribution. The reduction in carrying
value is recorded in cost of sales. 14




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
    
    Income Taxes: The Company applies the liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in the results of operations during the period that includes
the enactment date. Foreign Currency Translation: Assets and liabilities of the Companys
foreign operations are translated from the foreign operating currency to the
U.S. Dollar equivalent for consolidated reporting purposes using the applicable
exchange rates at the balance sheet date. Revenues and expenses are translated
at average rates for the year. Exchange differences from these translations are
included in other comprehensive income. Where amounts denominated in a foreign
currency are, or are expected to be, converted into dollars by remittance or
repayment, the realized exchange differences are reflected in the results of
operations.   Portions of this document may constitute forward-looking statements as defined
by federal law. Although the Company believes any such statements are based on
reasonable assumptions, there is no assurance that actual outcomes will not be
materially different. Additional information about issues that could lead to
material changes in performance is contained in the Companys annual report on
Form 10-KSB, as amended, which is filed with the Securities and Exchange
Commission. 
 ITEM 3  CONTROLS AND PROCEDURES MPSI Systems Inc.s Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of a date
within 90 days prior to the filing date of this quarterly report. Based on such
evaluation, such officers have concluded that the Companys disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to MPSI Systems Inc. (including its consolidated
subsidiaries) required to be included in the Companys periodic filings under
the Exchange Act. There have not been any significant changes to the Companys
internal controls or in other factors that could significantly affect such
controls subsequent to the date of this evaluation. 
 PART II  OTHER INFORMATION Item 1  Legal Proceedings  In March 2003, MPSI furloughed 18 employees in the United States
pending a determination of subsequent business volume, particularly as it
related to several major proposals outstanding at the time. Ultimately, the
results of those proposals were not sufficient to recall all furloughed
employees so that the Company communicated permanent severance notices to
the affected group of 10 employees in September 2003 and began paying
severance and other separation costs in accordance with company policies. The Company was notified at various times during the fourth quarter of
2003 and the first quarter of 2004 that certain of the severed employees had
filed claims for additional separation compensation with the Oklahoma
Department of Labor (DOL), Wage & Hour Division. On March 29, 2004, the
DOL provided the Company with additional assessment notices, effective March
19, 2004, for 10 former employees with the total of additional assessments
being approximately $151,000. On April 14, 2004, the Company filed a formal protest with the DOL and
is awaiting a hearing date. The Companys position is that it fully
complied with all laws applicable to the furlough/severance situations and
that all payments in accordance with Company policies have been previously
made. Management is not able to determine the ultimate outcome of these
matters. 15




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Item 2  Changes in Securities  None. Item 3  Defaults Upon Senior Securities  None. Item 4  Submission of Matters to a Vote of Security Holders  None Item 5  Other Information  None. Item 6  Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits:  31.1
    
    Chief Executive Officers Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Chief Financial Officers Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.  (b)
    
    Reports on Form 8-K  None 16




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized. MPSI SYSTEMS INC.Date  May 13, 2004
    By       /s/ Bryan D. GrossBryan D. Gross, President(Chief Executive Officer) Date  May 13, 2004
    By      /s/ James C. AutenJames C. Auten, Vice President(Chief Financial Officer) 17




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EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Chief Financial Officers Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 18