UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
----- of the Securities Exchange Act of 1934
For the quarterly period ended
JUNE 30, 2002
or
----- Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-13111
ANALYTICAL SURVEYS, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-0846389
(State of incorporation) (IRS Employer Identification No.)
11595 NORTH MERIDIAN STREET
CARMEL, INDIANA 46032
(Address of principal executive offices) (Zip Code)
(317) 571-9700
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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
ninety (90) days.
Yes X No
----- -----
The number of shares of common stock outstanding as of August 14, 2002 was
7,385,933.
PART I
------
ITEM 1. FINANCIAL STATEMENTS
ANALYTICAL SURVEYS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash $ 1,659 1,351
Accounts receivable, net of allowance for doubtful
accounts of $479 and $2,070 3,604 6,110
Revenue in excess of billings 9,787 10,567
Income tax receivable -- 20
Prepaid expenses and other 121 619
-------- --------
Total current assets 15,171 18,667
-------- --------
Equipment and leasehold improvements, at cost:
Equipment 6,101 7,202
Furniture and fixtures 484 594
Leasehold improvements 267 429
-------- --------
6,852 8,225
Less accumulated depreciation and amortization (6,046) (6,750)
-------- --------
Net equipment and leasehold improvements 806 1,475
-------- --------
Goodwill, net of accumulated amortization of $5,216 -- 3,557
Investment securities -- 120
-------- --------
Total assets $ 15,977 23,819
======== ========
2
ANALYTICAL SURVEYS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines-of-credit $ -- 4,400
Current portion of long-term debt 327 10,366
Billings in excess of revenue 387 244
Accounts payable and other accrued liabilities 2,743 4,445
Accrued payroll and related benefits 1,476 1,960
-------- --------
Total current liabilities 4,933 21,415
Long-term debt, less current portion 1,945 200
-------- --------
Total liabilities 6,878 21,615
-------- --------
Redeemable preferred stock; no par value. Authorized 2,500
shares; 1,600 shares issued and outstanding at
June 30 (liquidation value $1,600) 600 --
-------- --------
Stockholders' equity:
Common stock; no par value. Authorized 100,000 shares;
7,386 and 6,978 shares issued and outstanding
at June 30, and September 30, respectively 32,602 32,191
Accumulated other comprehensive income (loss) -- (253)
Retained earnings (accumulated deficit) (24,103) (29,734)
-------- --------
Total stockholders' equity 8,499 2,204
-------- --------
Total liabilities and stockholders' equity $ 15,977 23,819
======== ========
See accompanying notes to consolidated financial statements.
3
ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 4,304 7,751 14,907 34,340
Costs and expenses
Salaries, wages and related benefits 2,795 5,496 10,427 20,654
Subcontractor costs 835 1,550 2,721 7,383
Other general and administrative 1,003 2,327 4,300 8,971
Depreciation and amortization 208 551 754 2,195
Severance and related costs -- 20 -- 230
------- ----- ------ ------
4,841 9,944 18,202 39,433
------- ----- ------ ------
Loss from operations (537) (2,193) (3,295) (5,093)
------- ----- ------ ------
Other income (expense)
Gain on sale of Colorado assets -- 3,342 -- 3,342
Interest expense, net (38) (316) (264) (1,667)
Litigation settlement costs -- -- -- (748)
Other income, net 117 9 139 15
------- ----- ------ ------
79 3,035 (125) 942
------- ----- ------ ------
Earnings (loss) before income taxes (458) 842 (3,420) (4,151)
Income tax benefit -- -- 1,240 --
------- ----- ------ ------
Earnings (loss) before extraordinary item and
cumulative effect of a change in accounting principle (458) 842 (2,180) (4,151)
Extraordinary gain on extinguishment of debt, net of tax of $0 2,125 -- 11,708 --
------- ----- ------ ------
Earnings (loss) before cumulative effect of a change in
accounting principle 1,667 842 9,528 (4,151)
Cumulative effect of a change in accounting principle -- -- (3,557) --
------- ----- ------ ------
Net earnings (loss) 1,667 842 5,971 (4,151)
Accretion of discount and dividends on preferred shares (220) -- (340) --
------- ----- ------ ------
Net earnings (loss) available to common
shareholders $ 1,447 842 5,631 (4,151)
======= ===== ====== ======
4
ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Basic earnings (loss) per common share:
Earnings (loss) available to common shareholders before
extraordinary item and cumulative effect of a
change in accounting principle $ (0.09) 0.12 (0.35) (0.59)
Extraordinary gain 0.29 -- 1.62 --
Cumulative effect of a change in accounting principle $ -- -- (0.49) --
---------- ---- ------ -----
Net earnings (loss) available to common shareholders $ 0.20 0.12 0.78 (0.59)
========== ==== ====== =====
Diluted earnings (loss) per common share:
Earnings (loss) available to common shareholders before
extraordinary item and cumulative effect of a
change in accounting principle $ (0.04) 0.12 (0.25) (0.59)
Extraordinary gain 0.13 -- 1.16 --
Cumulative effect of a change in accounting principle -- -- (0.35) --
---------- ---- ------ -----
Net earnings (loss) available to common shareholders 0.09 0.12 0.56 (0.59)
========== ==== ====== =====
Weighted average common shares:
Basic 7,386 6,978 7,203 6,978
========== ==== ====== =====
Diluted 15,949 6,979 10,058 6,981
========== ==== ====== =====
See accompanying notes to consolidated financial statements.
5
ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE GAIN (LOSS)
FOR THE NINE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
(UNAUDITED)
COMMON STOCK
------------ ACCUMULATED
ACCUM- OTHER
ULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT GAIN (LOSS) TOTAL
------ ------ ------- ------------ -----
Balances at September 30, 2001 6,978 $32,191 (29,734) (253) 2,204
Comprehensive earnings:
Net earnings -- -- 5,971 -- 5,971
Realized change in investment
securities, net of reclassification
adjustment of $168, net of
income taxes of $0 -- -- -- 253 253
-------
Total comprehensive earnings 6,224
Issuance of common shares in
litigation settlement 408 211 -- -- 211
Accretion of discount and dividends on preferred
shares -- -- (340) -- (340)
Issuance of warrants in connection
with convertible debt -- 200 -- -- 200
------- ------- ------- ------- -------
Balances at June 30, 2002 7,386 $32,602 (24,103) -- 8,499
======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
6
ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
2002 2001
---- ----
Cash flow from operating activities:
Net earnings (loss) $ 5,971 (4,151)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt (11,708) --
Cumulative effect of change in accounting principle 3,557 --
Gain on sale of Colorado assets -- (3,342)
Depreciation and amortization 754 2,195
Deferred income tax benefit -- (294)
Changes in operating assets and liabilities:
Accounts receivable, net 2,506 1,558
Revenue in excess of billings 780 5,041
Income taxes receivable 20 3,112
Prepaid expenses and other 498 (740)
Billings in excess of revenue 143 (692)
Accounts payable and other accrued liabilities (1,531) (2,149)
Accrued payroll and related benefits (484) (804)
-------- --------
Net cash provided (used) by operating
activities 506 (266)
-------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (85) (329)
Proceeds from sales of Colorado assets -- 8,403
Proceeds from sales of assets 373 --
-------- --------
Net cash provided by investing activities 288 8,074
-------- --------
Cash flows from financing activities:
Net payments under lines-of-credit -- (1,490)
Principal payments on long-term debt (2,486) (8,282)
Proceeds from exercise of stock options -- 6
Proceeds from issuance of senior secured convertible debt 2,000 --
-------- --------
Net cash used in financing activities (486) (9,766)
-------- --------
Net increase (decrease) in cash 308 (1,958)
Cash at beginning of period 1,351 2,825
-------- --------
Cash at end of period $ 1,659 867
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 247 1,825
======== ========
Refunds of income taxes $ 1,255 2,819
======== ========
Issuance of preferred stock to retire debt $ 300 --
======== ========
Issuance of common stock in litigation settlement $ 211 --
======== ========
See accompanying notes to financial statements.
7
Notes to Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have been
prepared by management in accordance with the accounting policies described in
the Company's annual report for the year ended September 30, 2001. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2001.
The consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary to present fairly the financial position of
Analytical Surveys, Inc., and subsidiaries at June 30, 2002 and the results of
their operations and cash flows for the three months and nine months ended June
30, 2002 and 2001.
2. SALE OF COLORADO ASSETS
On April 27, 2001, the Company completed the sale of substantially all of the
assets of its Colorado Springs, Colorado-based land mapping office for an
aggregate sales price of approximately $10.1 million, including cash proceeds of
$8.6 million and the assumption of $1.5 million of certain liabilities by the
buyer. The Company transferred approximately $2.9 million of net working capital
and $2.2 million of net book value of equipment and leasehold improvements to
the buyer and recorded a gain on sale of approximately $3.5 million after
transaction and other expenses. The Company used the proceeds of the transaction
to reduce its line-of-credit, lease and term debt by a total of $6.0 million,
pay Colorado-related liabilities of approximately $1.2 million, pay transaction
expenses of approximately $700,000 and fund other operating expenses.
The following summarized pro forma unaudited information represents the
historical operating results of Analytical Surveys, Inc. assuming the sale of
the Colorado assets had occurred at the beginning of the period presented below,
adjusted to give effect to events that are directly attributable to the
transaction. The pro forma financial information presented is not necessarily
indicative of what the Company's actual operating results would have been had
the sale of the Colorado assets occurred before such periods (in thousands,
except per share amounts):
8
Three Months Nine Months
Ended June 30, Ended June 30,
2001 2001
(Pro Forma) (Pro Forma)
----------- -----------
Revenues $ 6,808 25,966
Net loss $(2,567) (8,375)
Weighted average shares outstanding:
Basic 6,978 6,978
Diluted 6,979 6,981
Net loss per common share:
Basic $ (0.37) (1.20)
Diluted $ (0.37) (1.20)
3. GOODWILL IMPAIRMENT
The Company has elected early adoption of FASB Statement No. 142, Goodwill and
Other Intangible Assets. As a result of this election, the Company tested the
carrying value of its goodwill for impairment under the provisions of FASB No.
142 as of October 1, 2001. The Company determined the goodwill recorded at
October 1, 2001 was primarily associated with indefinite lived intangible assets
resulting from the acquisitions in its Utilities Division. The Company used the
quoted market value of its stock on October 1, 2001 at a discounted value to
reflect the lack of float in available shares and the going-concern issues at
that date to determine the fair value of the Company as a whole. The fair value
of the reporting units (i.e. individual offices) in the Utilities Division was
determined by allocating the fair value of the Company by each reporting unit's
respective portion of the Company's contract assets (i.e. accounts receivables
and revenue in excess of billings). The fair value of each reporting unit was
then compared to the net assets of the respective reporting unit (including
allocated Corporate net assets) to determine if reporting unit level goodwill
was impaired. The Company determined that impairment had occurred in each of the
respective reporting units and that an impairment loss of $3.6 million should be
reflected as a Cumulative Effect of a Change in Accounting Principle at October
1, 2001.
THREE MONTHS ENDED JUNE 30: 2002 2001
(In thousands except for per share amounts) ---- ----
Net earnings available to common shareholders $ 1,447 842
Add back: Goodwill amortization -- 76
------- ------
Adjusted net earnings available to common
shareholders $ 1,447 918
======= ======
9
Basic earnings for common share:
Net earnings available to common shareholders $ 0.20 0.12
Goodwill amortization -- 0.01
------- ------
Adjusted net earnings available to common
shareholders $ 0.20 0.13
======= ======
NINE MONTHS ENDED JUNE 30: 2002 2001
(In thousands except for per share amounts) ---- ----
Net earnings (loss) available to common shareholders $ 5,631 (4,151)
Add back: Goodwill amortization -- 230
------- ------
Adjusted net earnings (loss) available to common
shareholders $ 5,631 (3,921)
======= ======
Basic earnings (loss) for common share:
Net earnings (loss) available to common shareholders $ 0.78 (0.59)
Goodwill amortization -- 0.03
------- ------
Adjusted net earnings (loss) available to common
shareholders $ 0.78 (0.56)
======= ======
4. DEBT
The Company's debt is summarized as follows (in thousands).
June 30, September 30,
2002 2002
---- ----
SHORT-TERM DEBT
Line-of-credit $ -- 4,400
======== ========
LONG-TERM DEBT
Note payable $ 175 9,733
Senior secured convertible
note 1,800 --
Capital lease obligation 83 596
Other 214 237
-------- --------
2,272 10,566
Less current portion (327) (10,366)
-------- --------
$ 1,945 200
======== ========
On December 28, 2001, the Company completed a Waiver Agreement and Amendment No.
12 to Credit Agreement and Other Loan and Lease Documents (the "Agreement") with
senior lenders providing the line-of-credit, note payable and capital lease
obligation. Under the Agreement, senior lenders accepted a cash payment of $1.25
million and non-convertible redeemable preferred stock with a face value of $3.2
million (See Note 5) in payment of the $4.4 million line-of-credit and all but
$3.0 million of the note payable. The Agreement provided for the remaining $3.0
million note payable to be reduced to zero with a cash payment of up to $875,000
by March 31, 2002 (later amended to April 2, 2002).
10
On April 2, 2002, the Company completed the sale of a $2.0 million senior
secured convertible note and warrants to purchase common stock. The Company used
the proceeds to repay $700,000 to its senior lenders, pay transaction expenses
of approximately $95,000 and fund operations. Senior lenders accepted the
$700,000 cash payment and a $175,000 unsecured promissory note in full
satisfaction of the $3.0 million note payable outstanding at March 31, 2002.
The $175,000 unsecured promissory note matures on March 31, 2003 and bears
annual interest at prime rate plus one percent (5.75% at June 30, 2002). The
senior secured convertible note matures April 2, 2005, bears interest at an
annual rate of five percent, but interest is not payable until maturity or may
be converted to Common Stock as described below.
The senior secured convertible note has a face value of $2.0 million and is
convertible at any time into common stock of ASI (Common Stock) at a price equal
to the least of (i) $0.40, (ii) 90% of the average closing bid prices of the
Common Stock for the 90 trading days ending the trading date immediately
preceding the closing date, and (iii) 90% of the average closing bid prices for
the 3 trading days having the lowest closing bid price during the 20 trading
days immediately prior to the conversion date, but under any event, the number
of shares issuable upon full conversion of the note must constitute at least 38%
of the issued and outstanding shares, on a fully diluted basis, as of the date
of full conversion. Assuming a conversion price of $0.40 per share, ASI would
issue 5.0 million shares of Common Stock if the note were fully converted. At
the time of conversion, any unpaid interest is paid in shares of Common Stock.
The note is subject to mandatory conversion in three years and is secured by all
of the assets of ASI.
The holder of the senior secured convertible note (Holder) also received
warrants to purchase an additional 5.0 million shares of Common Stock (subject
to adjustment). One whole warrant entitles the Holder to acquire an additional
share of Common Stock at an exercise price equal to 115% of the conversion price
of the note. Assuming an exercise price of $0.46 per share (115% of $0.40), the
aggregate exercise price for the warrants would be $2.3 million for the issuance
of 5.0 million shares of Common Stock, but the shares issuable upon conversion
of the note and exercise of warrants are to be no less than 55% of the
outstanding Common Stock (unless the Holder exercises the warrants in a cashless
exercise where the Holder uses the value of some of the warrants to pay the
exercise price for other warrants).
If at the time of conversion of the note, the price of the Common Stock has
dropped below $0.40 per share, the number of shares of Common Stock issuable
upon conversion of the note and upon exercise of the warrants would increase.
Similarly, if ASI issues shares of Common Stock at a price of less than $0.40
per share, the conversion price and the exercise price decrease to that lower
price, and the number of shares issuable under the note and the warrants would
therefore increase.
11
ASI is required to register the shares underlying the note and warrants. Also,
ASI is generally restricted from issuing additional equity securities without
the Holder's consent, and the Holder has a right of first refusal as to certain
subsequent financings.
As part of the transaction, the Holder was granted the opportunity to appoint a
majority of ASI's board of directors and, as a result, controls ASI. In
addition, upon exercise of the warrants and conversion of the note, the Holder
will own a majority of the Common Stock, thereby giving the Holder additional
control over ASI.
The carrying value of the senior secured convertible note is $1.8 million at
June 30, 2002 and represents the cash received of $2.0 million less the
estimated fair value of the warrants of $200,000 which was recorded in common
stock. The carrying value of the senior secured convertible note is being
accreted to the face amount by charges to interest expense through the maturity
date.
The agreement with senior lenders resulted in an extraordinary gain on
extinguishment of debt in the three months and nine months ended June 30, 2002,
which is calculated as follows (in thousands):
Three Months Nine Months
Ended Ended
June 30, 2002 June 30, 2002
------------- -------------
Outstanding debt:
Line-of-credit $ -- $ 4,400
Note payable 3,000 9,733
------ -------
Total 3,000 14,133
------ -------
Less:
Cash paid (700) (1,950)
Fair value preferred stock (See Note 5) -- (300)
Remaining note payable (175) (175)
------ -------
Extraordinary gain on extinguishment of debt $2,125 $11,708
====== =======
Total tax expense for fiscal year 2002 is projected to be zero and accordingly,
no income taxes have been recorded related to the extraordinary gain or loss
from operations.
5. REDEEMABLE PREFERRED STOCK
Pursuant to the agreement with senior lenders described in Note 4, the Company
as of December 28, 2001 issued preferred stock in the form of 1.6 million shares
of no par value Series A Preferred Stock, at an original issue price of $2.00
per share. The Company is entitled to redeem the shares within one year of
issuance at $1.00 per share ($1.6 million), and the redemption price increases
$.20 per year until the fifth anniversary, at which time the shares must be
redeemed at a price of $2.00 per share. The Agreement calls for a mandatory
payment of $800,000 by the third anniversary of the issuance of the shares. The
preferred stock earns a dividend at the annual rate of 5.00% of the then
redemption price on a cumulative, non-participating basis and has a liquidation
preference equal to the then applicable redemption value of shares outstanding
at the time of liquidation.
12
The carrying value for Preferred Stock is $600,000 at June 30, 2002. The
carrying value represents the estimated fair market value of the stock on the
date of issuance plus issuance costs, adjusted for accretion of the difference
between fair market value at the date of issuance and the redemption value at
the mandatory redemption dates. The fair market value was based on the present
value of required cash flows using a discount rate of 80%. The discount rate was
selected by the Company based on discussions with third parties that took into
account market conditions for similar securities, the current economic climate
and the Company's financial condition and performance as major factors.
Accretion is effected by a charge to retained earnings, and the rate of
accretion approximates the interest method.
6. SEGMENT INFORMATION
Management evaluates operations and makes key strategic and resource decisions
based on two different operating segments: the Utilities Division which uses its
industry expertise and proprietary GIS systems for data conversion for electric,
gas and municipal utility customers; and the Land Division which creates
cadastral maps for mainly municipal customers. Segment data includes revenue,
operating income, including allocated costs charged to each of the operating
segments, equipment investment and project investment, which includes net
accounts receivable and revenue earned in excess of billings. Segment data for
fiscal year 2001 has been presented for comparative purposes.
Interest expense and other non-segment specific expenses are not allocated to
individual segments in determining the Company's performance measure.
Non-segment assets to reconcile to total assets consist of corporate assets
including cash, prepaid expenses and deferred taxes (in thousands).
Non-
Utilities Land Segment Total
--------- ---- ------- -----
THREE MONTHS ENDED JUNE 30, 2002
Operations
----------
Revenues $ 4,240 64 -- 4,304
Loss from operations (273) (264) -- (537)
Interest expense, net -- -- (38) (38)
Other -- -- (103) (103)
Income tax benefit -- -- -- --
Extraordinary gain on
extinguishment of debt -- -- 2,125 2,125
Cumulative change in accounting
principle -- -- -- --
-------
Net earnings available to
common shareholders 1,447
=======
13
NINE MONTHS ENDED JUNE 30, 2002
Operations
----------
Revenues $ 14,148 759 -- 14,907
Loss from operations (1,728) (1,567) -- (3,295)
Interest expense, net -- -- (264) (264)
Other -- -- (201) (201)
Income tax benefit -- -- 1,240 1,240
Extraordinary gain on
extinguishment of debt -- -- 11,708 11,708
Cumulative change in accounting
principle (3,557) -- -- (3,557)
--------
Net earnings available to
common shareholders 5,631
========
Assets at June 30, 2002
-----------------------
Segment assets $ 13,126 1,071 -- 14,197
Non-segment assets -- -- 1,780 1,780
--------
Consolidated Assets 15,977
========
THREE MONTHS ENDED JUNE 30, 2001
Operations
----------
Revenues $ 6,344 1,407 -- 7,751
Loss from Operations (1,518) (675) -- (2,193)
Gain on sale of Colorado assets -- -- 3,342 3,342
Interest expense, net -- -- (316) (316)
Litigation settlement costs -- -- -- --
Other -- -- 9 9
--------
Net income available to common
shareholders 842
========
NINE MONTHS ENDED JUNE 30, 2001
Operations
----------
Revenues $ 24,263 10,077 -- 34,340
Loss from operations (3,292) (1,801) -- (5,093)
Gain on sale of Colorado assets -- -- 3,342 3,342
Interest expense, net -- -- (1,667) (1,667)
Litigation settlement costs -- -- (748) (748)
Other -- -- 15 15
--------
Net loss available to common
shareholders (4,151)
========
Assets at September 30, 2001
----------------------------
Segment assets $ 19,644 2,065 -- 21,709
Non-segment assets -- -- 2,110 2,110
--------
Consolidated Assets 23,819
========
14
7. LITIGATION
The Company was named as a defendant in a consolidated putative securities class
action alleging a misstatement or omission of material facts concerning the
Company's operations and financial results. On September 21, 2001, the United
States District Court of the Southern District of Indiana (the "Court") issued
an Order and Final Judgment ratifying the settlement terms of this lawsuit
against the Company and certain of its directors and former officers. The
settlement provides for the dismissal of the lawsuit in its entirety against all
defendants and the establishment of a settlement fund of $4.0 million, of which
the Company contributed $100,000 of cash, and approximately 1,256,000 shares of
the Company's common stock for the class. The class consisted of open market
purchasers of the Company's shares between January 25, 1999 and March 7, 2000,
inclusive. The remaining $3.9 million of cash was contributed by the Company's
insurance company. The Company's cost of this settlement, excluding legal fees,
of $748,000 was based on the cash contribution and the value of the common
shares on April 4, 2001, on the date of the agreement in principle for
settlement of the suit. This cost was included in the financial results of the
Company in the fiscal quarter ended March 31, 2001. Plaintiffs' counsel were
awarded legal fees consisting of cash and shares. As of June 30, 2002, the
Company has issued 408,000 shares to plaintiffs' counsel and approximately
848,000 shares will be issued to plaintiffs before September 30, 2002.
The Company and certain directors have been named as defendants in an action
that was filed by Sidney V. Corder, the former President, Chief Executive
Officer and Director of the Company. The suit claims that the Company violated
the Colorado Wage Claim Act and breached contractual obligations. The suit also
claims that the Company has breached an obligation to indemnify Mr. Corder in
connection with the securities lawsuit described in the preceding paragraph. As
of June 30, 2002, the parties were conducting settlement discussions. As more
fully described in Note 11, the parties reached a settlement on July 23, 2002.
Two shareholders of the Company, the Epner Family Limited Partnership and the
Braverman Family Limited Partnership, filed suit in Indiana state court
(Hamilton County Superior Court, State of Indiana, Cause No. 29001-0105 CP 289)
against four former officers of the Company on May 8, 2001. The former officers
are: Sidney Corder, Chief Executive Officer; Scott Benger, Senior Vice President
of Finance; Randy Sage, Chief Operations Officer; and John Dillon, Chief
Administrative Officer. The plaintiffs claimed that the former officers violated
Texas and Indiana securities laws and other provisions of Texas law in
connection with the Company's acquisition of Cartotech, Inc., in June 1998. The
four defendants have sent the Company written demands for indemnification. The
Company has tendered these claims to its insurer. On or about May 8, 2002, the
Court issued an Order granting motions filed by Messrs. Corder and Sage to
dismiss the Complaint for failure to state a claim and/or failure to join a
necessary party as required by trial rules and case law. Plaintiffs filed an
amended complaint on or about May 31, 2002. On June 26, 2002, the plaintiffs
filed a Demand for Arbitration against the Company, seeking damages of over $5.5
million. Another former Cartotech shareholder, Albert Naumann, III (a former
officer of ASI and is now employed by a competitor to the Company), has
threatened to bring claims against the Company. The Company intends to challenge
any such claims.
15
The Company is also subject to various routine litigation. Management does not
believe that any of these legal proceedings would have a material adverse effect
on the Company's financial condition or results of operations.
8. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On January 23, 2002, the Company announced that the Securities and Exchange
Commission has commenced a formal investigation of the Company, certain of its
former officers, directors and others in connection with the Company's
accounting policies, procedures, disclosures and system of internal controls
relating to the period from October 1998 through March 2000. On March 7, 2000,
the Company restated earnings for the fiscal year ended September 30, 1999. The
Company continues to cooperate fully with the SEC in this investigation. The
Company may have a responsibility to indemnify certain individuals and groups
for defense and other costs in connection with this investigation.
9. CONCENTRATION OF CREDIT RISK
At June 30, 2002, the Company had multiple contracts with three customers that
represented 59% (34%, 14% and 11%, respectively) of the total balance of net
accounts receivable and revenue in excess of billings. Revenues from these three
customers for the fiscal quarter ended June 30, 2002 were 50% (17%, 14% and 19%,
respectively) of total revenue. At September 30, 2001, these customers
represented 44% (18%, 14% and 12%, respectively) of the total balance of net
accounts receivable and revenue in excess of billings. Billing terms are
negotiated in a competitive environment and are based on reaching project
milestones. The Company anticipates that sufficient billing milestones will be
achieved during fiscal 2003 such that revenue in excess of billings for these
customer contracts will begin to decline.
10. INCOME TAX BENEFIT
The Company recorded an income tax benefit of $1,240,000 in the fiscal quarter
ending March 31, 2002 as a result of a recent change in federal tax regulations.
New regulations allowed the Company to claim a refund of taxes paid in prior
years by increasing the carryback period of its federal net operating loss
generated in fiscal year 2001 from two years to five years. The refund was
received by the Company in May, 2002.
11. SUBSEQUENT EVENT
On July 23, 2002, the Company entered into a Settlement Agreement and Mutual
General Release to settle a lawsuit filed by Sidney V. Corder against the
Company and certain of its former officers and directors. The settlement
provides for, among other things, the payment of certain amounts to Mr. Corder
by the Company and its insurance carrier, the mutual release of present or
future actions, suits or claims, and a waiver by Mr. Corder to
16
seek indemnification for any present or future actions, suits or claims arising
out of his employment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE
COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM
10-Q. THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED IN THIS FORM
10-Q, OR IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-Q, THE
WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND" AND "EXPECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE STATEMENTS REGARDING
THE COMPANY'S STRATEGY, FUTURE SALES, FUTURE EXPENSES AND FUTURE LIQUIDITY AND
CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE BASED
UPON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THIS FORM 10-Q, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS
FORM 10-Q. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS--"RISK FACTORS" AND
ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
OVERVIEW
The Company, founded in 1981, is a provider of data conversion and digital
mapping services to users of customized geographic information systems.
The Company recognizes revenue using the percentage of completion method of
accounting on a cost-to-cost basis. For each contract, an estimate of total
production costs is determined and these estimates are reevaluated monthly.
Production costs consist of internal costs, primarily salaries and wages, and
external costs, primarily subcontractor costs. Internal and external production
costs may vary considerably among projects and during the course of completion
of each project. At each accounting period, the percentage of completion is
based on production costs incurred to date as a percentage of total estimated
production costs for each of the Company's contracts. This percentage is then
multiplied by the contract's total value to calculate the sales revenue to be
recognized. The percentage of completion is affected by any factors which
influence
17
either the estimate of future productivity or the production cost per hour used
to determine future costs. The Company recognizes losses on contracts in the
period such loss is determined. Sales and marketing expenses associated with
obtaining contracts are expensed as incurred.
The Company experiences yearly and quarterly fluctuations in production costs,
salaries, wages and related benefits and subcontractor costs. These costs may
vary as a percentage of sales from period to period. The Company utilizes
InfoTech Enterprises Ltd., an India-based company, for a significant percentage
of its production services.
Backlog increases when new contracts are signed and decreases as revenues are
recognized. Changes in macroeconomic and industry market conditions were
encountered in fiscal 2000 and 2001 and have continued in fiscal 2002 that
resulted in a reduction of timely order flow to the Company. As of June 30,
2002, backlog was $16.1 million as compared with $22.5 million at September 30,
2001. Management believes these adverse market conditions were and continue to
be primarily caused by the recessionary economic climate, consolidation in the
utility industry, the Company's adverse financial results for fiscal years 2000
and 2001 and increased competition from companies with offshore operations.
A number of the projects awarded to the Company are greater than $2 million or
longer than two years in duration, which can increase the Company's risk due to
inflation, as well as changes in customer expectations and funding availability.
The Company's contracts are generally terminable on short notice, and while in
the Company's experience such termination is rare, there is no assurance that
the Company will receive all of the revenue anticipated under signed contracts.
The Company engages in research and development activities. The majority of
these activities occur as the Company develops software or designs a product for
a particular contract. These efforts are typically included as an integral part
of the Company's services for the particular project and, accordingly, the
associated costs are charged to that project. Such custom-designed software can
often be applied to projects for other customers. These amounts expended by the
Company are not included in research and development expenses but are expensed
as incurred as part of contract costs. The Company retains ownership of such
proprietary software or products.
At June 30, 2002, the Company had multiple contracts with three customers that
represented 50% (17%, 14% and 19%, respectively) of total revenue for the fiscal
quarter ended June 30, 2002.
The Company continued to streamline operations throughout the current fiscal
year, reducing from four main production centers to two. In the second fiscal
quarter, ASI announced and completed the consolidation of its Cary, North
Carolina facility into the Texas and Wisconsin solution centers. The principal
activity of the North Carolina facility has been cadastral and photogrammetric
mapping. In the third fiscal quarter, the Company completed the consolidation
and relocation of its Indiana staff to smaller, lower cost facilities. ASI
currently employs approximately 220 full-time employees.
18
On May 3, 2002, the Company announced the election of four new members to the
Company's Board of Directors. The appointment of three of the four directors was
in compliance with the terms and conditions of the senior secured convertible
note as described in Note 4. Four of the five long-term board members resigned
in favor of the new appointees.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected consolidated
statements of operations data expressed as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------- ------- ------- -------
PERCENTAGE OF REVENUES:
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Salaries, wages and related benefits 64.9 70.9 69.9 60.1
Subcontractor costs 19.4 20.0 18.3 21.5
Other general and administrative 23.4 30.0 28.8 26.1
Depreciation and amortization 4.8 7.1 5.1 6.4
Severance and related costs -- 0.3 -- 0.7
------- ------- ------- -------
Loss from operations (12.5) (28.3) (22.1) (14.8)
Other income (expense)
Gain on sale of Colorado assets -- 43.1 -- 9.7
Litigation settlement costs -- -- -- (2.2)
Other income (expense), net 1.8 (3.9) (0.8) (4.8)
------- ------- ------- -------
Earnings (loss) before income taxes (10.7) 10.9 (22.9) (12.1)
Income tax benefit -- -- 8.3 --
------- ------- ------- -------
Earnings (loss) before extraordinary
item and cumulative effect of a
change in accounting principle (10.7) 10.9 (14.6) (12.1)
Extraordinary gain on extinguishment
of debt 49.4 -- 78.5 --
------- ------- ------- -------
Earnings (loss) before cumulative
change in accounting principle 38.7 10.9 63.9 (12.1)
Cumulative effect of a change in
accounting principle -- -- (23.9) --
------- ------- ------- -------
Net earnings (loss) 38.7 10.9 40.0 (12.1)
19
Accretion of discount and dividends on
preferred shares (5.1) -- (2.2) --
------- ------- ------- -------
Net earnings (loss) available to common
shareholders 33.6% 10.9% 37.8% (12.1)%
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES. The Company's revenues are recognized as services are performed.
Revenues decreased $3.5 million or 44.5% to $4.3 million for the three months
ended June 30, 2002 from $7.8 million for the same three month period of fiscal
2001 as a result of a lower level of new contract signings during fiscal 2001
and continuing in fiscal 2002, and the sale of the Colorado office in April
2001. The Company reduced its operations from four primary production centers to
two in response to weaker market conditions.
SALARIES, WAGES AND RELATED BENEFITS. Salaries, wages and related benefits
includes employee compensation for production, marketing, selling,
administrative and executive employees. Salaries, wages and related benefits
decreased 49.1% to $2.8 million for the three months ended June 30, 2002 from
$5.5 million for the same three month period of fiscal 2001, as a result of
reductions in the Company's workforce in all offices and the sale of the
Colorado office. The reductions in the workforce were a result of reduced
anticipated revenue. As a percentage of revenues, salaries, wages and related
benefits decreased to 64.9% for the three months ended June 30, 2002 from 70.9%
for the same three-month period of fiscal 2001.
SUBCONTRACTOR COSTS. Subcontractor costs includes production costs incurred
through the use of third parties for production tasks, such as data conversion
services to meet contract requirements, aerial photography and ground and
airborne survey services. Subcontractor costs decreased 46.1% to $835,000 for
the three months ended June 30, 2002 from $1.6 million for the same three-month
period of fiscal 2001. This decrease was due to a decline in the number and size
of customer contracts, completing backlog that utilized subcontractor labor and
the sale of the Colorado office. Subcontractor costs decreased as a percentage
of revenues to 19.4% for the three months ended June 30, 2002 from 20.0% for the
same three-month period of fiscal 2001.
OTHER GENERAL AND ADMINISTRATIVE COSTS. Other general and administrative costs
includes rent, maintenance, travel, supplies, utilities, insurance and
professional services. Such costs decreased 56.9% to $1.0 million for the three
months ended June 30, 2002 from $2.3 million for the same three month period of
fiscal 2001, as a result of reductions in workforce in all offices, the
consolidation of the North Carolina and Indiana offices and the sale of the
Colorado office. As a percentage of revenues, other general and administrative
costs decreased to 23.4% for the three months ended June 30, 2002 from 30.0% for
the same three-month period of fiscal 2001.
20
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the three
months ended June 30, 2001 consists primarily of amortization of goodwill
incurred in connection with the Company's acquisitions, as well as depreciation
of certain of the Company's operating assets. For fiscal 2002, goodwill
amortization was discontinued due to the change in accounting principle to apply
the provisions of SFAS 142. For the three months ended June 30, 2002
depreciation decreased $343,000 to $208,000 from $551,000 for the same three
month period of fiscal 2001 due to equipment becoming fully depreciated, the
sale of the Colorado office, and the consolidation from four production centers
to two. As a percentage of revenues, depreciation and amortization was 4.8% for
the three months ended June 30, 2002 and 7.1% for the same three-month period
ending June 30, 2001.
SEVERANCE AND RELATED COSTS. The Company incurred one-time officer severance
costs of $20,000 for the three months ended June 30, 2001. Severance and related
costs represent 0.3% of revenues for the three months ended June 30, 2001. There
were no severance and related costs for the three months ended June 30, 2002.
GAIN ON SALE OF COLORADO ASSETS. On April 27, 2001, the Company completed the
sales of substantially all of the assets of its Colorado Springs, Colorado land
mapping office, resulting in a gain of approximately $3.3 million. See Footnote
2 - Sale of Colorado Assets, for additional information.
INTEREST EXPENSE, NET. Net interest expense decreased 88.0% to $38,000 for the
three months ended June 30, 2002 from $316,000 for the same three month of
fiscal 2001, as a result of decreased borrowings outstanding and lower interest
rates.
OTHER INCOME, NET. Other income, net is comprised primarily of a net gain of
$168,000 on the sale of investment securities offset by a net write-down of
approximately $98,000 for equipment and leasehold improvements related to the
relocation of the Indiana operations and corporate headquarters. There were no
related events in the same three-month period in fiscal 2001.
INCOME TAX BENEFIT. The Company continues to project zero tax expense for fiscal
2002. Also, as a result of the uncertainty that sufficient future taxable income
can be recognized to realize additional deferred tax assets, no additional
income tax benefit has been recognized for the three months ended June 30, 2002
and for the same period ending June 30, 2001.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The Company recognized an
extraordinary gain of $2.1 million in the three months ended June 30, 2002. Such
gain is a result of the debt forgiveness related to a $700,000 cash payment and
the issuance of a $175,000 unsecured promissory note in full satisfaction of the
$3 million note payable balance.
21
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES. Revenues decreased $19.4 million or 56.6% to $14.9 million for the
first nine months of fiscal 2002 from $34.3 million for the first nine months of
fiscal 2001 as a result of a lower level of new contract signings during fiscal
2001 and continuing in fiscal 2002, and the sale of the Colorado office in April
2001. The Company reduced its operations from four production centers to two in
response to weaker demand.
SALARIES, WAGES AND RELATED BENEFITS. Salaries, wages and related benefits
decreased 49.5% to $10.4 million for the first nine months of fiscal 2002 from
$20.7 million for the first nine months of fiscal 2001, as a result of
reductions in the Company's workforce in all offices and the sale of the
Colorado office in April 2001. The reductions in the workforce were a result of
reduced anticipated revenue. As a percentage of revenues, salaries, wages and
related benefits increased to 69.9% for the first nine months of fiscal 2002
from 60.1% for the first nine months of fiscal 2001.
SUBCONTRACTOR COSTS. Subcontractor costs decreased 63.1% to $2.7 million for the
first nine months of fiscal 2002 from $7.4 million for the first nine months of
fiscal 2001, and decreased as a percentage of revenues to 18.3% for the first
nine months of fiscal 2002 from 21.5% for the first nine months of fiscal 2001.
This decrease was due to a decline in the number and size of customer contracts,
completing the backlog that utilized subcontractor labor and the sale of the
Colorado office.
OTHER GENERAL AND ADMINISTRATIVE COSTS. Other general and administrative costs
decreased 52.1% to $4.3 million for the first nine months of fiscal 2002 from
$9.0 million for the first nine months of fiscal 2001, as a result of reductions
in workforce in all offices, the consolidation of the North Carolina and Indiana
offices and the sale of the Colorado office. As a percentage of revenues, other
general and administrative costs increased to 28.8% for the first nine months of
fiscal 2002 from 26.1% for the first nine months of fiscal 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the first six
months of fiscal 2001 consists primarily of amortization of goodwill incurred in
connection with the Company's acquisitions, as well as depreciation of certain
of the Company's operating assets. For the first nine months of fiscal 2002,
goodwill amortization was discontinued due to the change in accounting principle
to apply the provisions of SFAS 142. Depreciation decreased $1.2 million to
$754,000 from $2.0 million for the first nine months of fiscal 2001 due to
equipment becoming fully depreciated, the sale of the Colorado office, and the
consolidation from four production facilities to two. As a percentage of
revenues, depreciation and amortization decreased to 5.1% for the first nine
months of fiscal 2002 from 6.4% in the first nine months of fiscal 2001.
SEVERANCE AND RELATED COSTS. The Company incurred one-time officer severance
costs of $230,000 for the nine months ended June 30, 2001. Severance and related
costs represent 0.7% of revenues for the nine months ended June 30, 2001.
There were no severance and related costs for the nine months ended June 30,
2002.
22
GAIN ON SALE OF COLORADO ASSETS. On April 27, 2001, the Company completed the
sales of substantially all of the assets of its Colorado Springs, Colorado land
mapping office, resulting in a gain of approximately $3.3 million. See Footnote
2 - Sale of Colorado Assets, for additional information.
INTEREST EXPENSE, NET. Net interest expense decreased 84.2% to $264,000 for the
first nine months of fiscal 2002 from $1.7 million for the first nine months of
fiscal 2001, as a result of decreased borrowings outstanding and lower interest
rates.
LITIGATION SETTLEMENT COSTS. Litigation settlement costs of $748,000 relate to
the Company's cost to settle a consolidated putative securities class action
lawsuit against the Company and certain of its directors and former officers.
Such costs include a $100,000 cash payment and the value of 1,256,000 common
shares on the date of the agreement in principle. Litigation settlement costs
represent 2.2% of revenues for the nine months ended June 30, 2001. There were
no comparable costs for the first nine months of fiscal 2002.
OTHER INCOME, NET. Other income, net is comprised primarily of a net gain of
$168,000 on the sale of investment securities offset by a net write-down of
approximately $83,000 on the sale and disposal of equipment and leasehold
improvements related to the consolidation of the North Carolina office and the
relocation of the Indiana operations and corporate headquarters during the
nine-months ended June 30, 2002. There were no related events in the same
nine-month period in fiscal 2001.
INCOME TAX BENEFIT. The Company has recorded an income tax benefit of $1,240,000
in the first nine months of fiscal 2002 as a result of a recent change in
federal tax regulations. New regulations allowed the Company to claim a refund
of taxes paid in prior years by increasing the carryback period of its federal
net operating loss generated in fiscal year 2001 from two years to five years.
The Company continues to project zero tax expense for fiscal 2002. Also, as a
result of the uncertainty that sufficient future taxable income can be
recognized to realize additional deferred tax assets, no additional income tax
benefit has been recognized for the nine months ended June 30, 2002 and for the
same period ending June 30, 2001.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The Company recognized an
extraordinary gain of $11.7 million in fiscal 2002. Such gain is a result of the
debt forgiveness related to a $1.95 million cash payment, the issuance of a
$175,000 unsecured promissory note, and the issuance of a non-convertible
preferred stock with an original fair value of $300,000 to fully retire debt of
$14.1 million. This gain reflects net tax of $0 due to the Company's estimated
effective tax rate for the year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. The Company elected early
adoption of FASB Statement No. 142, Accounting for Goodwill and Other Intangible
Assets, as of October 1, 2001. The Company has determined that goodwill has been
significantly impaired under the provisions of FASB 142 and has
23
recognized a loss of $3.6 million as the cumulative effect of this change in
accounting principle during fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal source of liquidity has consisted of cash
flow from operations supplemented by secured lines-of-credit and other
borrowings. Though the Company did not have a working capital line-of-credit as
of June 30, 2002, other borrowings consisted of a $1.8 million senior secured
convertible note and $175,000 unsecured promissory note.
The $175,000 unsecured promissory note matures on March 31, 2003 and bears
interest at prime rate plus one percent (5.75% at June 30, 2002). The $1.8
million senior secured convertible note, which has a face value of $2.0 million
maturing April 2, 2005, bears interest at an annual rate of five percent, but
interest is not payable until maturity or may be converted to Common Stock as
described below.
The senior secured convertible note is convertible at any time into common stock
of ASI (Common Stock) at a price equal to the least of (i) $0.40, (ii) 90% of
the average closing bid prices of the Common Stock for the 90 trading days
ending the trading date immediately preceding the closing date, and (iii) 90% of
the average closing bid prices for the 3 trading days having the lowest closing
bid price during the 20 trading days immediately prior to the conversion date,
but under any event, the number of shares issuable upon full conversion of the
note must constitute at least 38% of the issued and outstanding shares, on a
fully diluted basis, as of the date of full conversion. Assuming a conversion
price of $0.40 per share, ASI would issue 5.0 million shares of Common Stock if
the note were fully converted. At the time of conversion, any unpaid interest is
paid in shares of Common Stock. The note is subject to mandatory conversion in
three years and is secured by all of the assets of ASI.
The holder of the senior secured convertible note (Holder) also received
warrants to purchase an additional 5.0 million shares of Common Stock (subject
to adjustment). One whole warrant entitles the Holder to acquire an additional
share of Common Stock at an exercise price equal to 115% of the conversion price
of the note. Assuming an exercise price of $0.46 per share (115% of $0.40), the
aggregate exercise price for the warrants would be $2.3 million for the issuance
of 5.0 million shares of Common Stock, but the shares issuable upon conversion
of the note and exercise of warrants are to be no less than 55% of the
outstanding Common Stock (unless the Holder exercises the warrants in a cashless
exercise where the Holder uses the value of some of the warrants to pay the
exercise price for other warrants).
If at the time of conversion of the note, the price of the Common Stock has
dropped below $0.40 per share, the number of shares of Common Stock issuable
upon conversion of the note and upon exercise of the warrants would increase.
Similarly, if ASI issues shares of Common Stock at a price of less than $0.40
per share, the conversion price and
24
the exercise price decrease to that lower price, and the number of shares
issuable under the note and the warrants would therefore increase.
ASI is required to register the shares underlying the note and warrants. Also,
ASI is generally restricted from issuing additional equity securities without
the Holder's consent, and the Holder has a right of first refusal as to certain
subsequent financings.
As part of the transaction, the Holder was granted the opportunity to appoint a
majority of ASI's board of directors and, as a result, controls ASI. In
addition, upon exercise of the warrants and conversion of the note, the Holder
will own a majority of the Common Stock, thereby giving the Holder additional
control over ASI.
On December 28, 2001, the Company issued 1.6 million shares of no par value
Series A Preferred Stock, at an original issue price of $2.00 per share. The
Company is entitled to redeem the shares within one year of issuance at $1.00
per share ($1.6 million), and the redemption price increases $.20 per year until
the fifth anniversary, at which time the shares must be redeemed at a price of
$2.00 per share. The agreement calls for a mandatory payment of $800,000 by the
third anniversary. The preferred stock earns a dividend at the annual rate of
5.00% of the then redemption price on a cumulative, non-participating basis and
has a liquidation preference equal to the then redemption value of shares
outstanding at the time of such liquidation.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since fiscal 2000, the Company has
experienced significant operating losses with corresponding reductions in
working capital. The Company's revenues and backlog decreased significantly
during that time. These factors among others have resulted in our independent
auditors issuing an audit opinion in the September 30, 2001 financial statements
which emphasized substantial doubt about the Company's ability to continue as a
going concern.
To address the going concern issue, management has implemented financial and
operational restructuring plans designed to improve operating efficiencies,
reduce and eliminate cash losses and position the Company for profitable
operations. Financial steps include restructuring the Company's bank debt
through the issuance of preferred stock and convertible debt, subsequent
collection of the federal income tax refund and sale of non-core assets.
Operational steps include the consolidation of production services to two
solution centers, reduction of corporate and non-core spending activities,
outsourcing certain components of projects and deploying a new sales and
marketing team.
The financial statements do not include any adjustments relating to the
recoverability of assets and the classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern. However,
management believes that its turnaround efforts, if successful, will improve
operations and generate sufficient cash to meet its obligations in a timely
manner.
25
The Company's cash flow is significantly affected by customer contract terms and
progress achieved on projects. Fluctuations in cash flow from operations are
reflected in three contract-related accounts: accounts receivable; revenues in
excess of billings; and billings in excess of revenues. Under the percentage of
completion method of accounting, an "account receivable" is created when an
amount becomes due from a customer, which typically occurs when an event
specified in the contract triggers a billing. "Revenues in excess of billings"
occur when the Company has performed under a contract even though a billing
event has not been triggered. "Billings in excess of revenues" occur when the
Company receives an advance or deposit against work yet to be performed. These
accounts, which represent a significant investment by ASI in its business,
affect the Company's cash flow as projects are signed, performed, billed and
collected. At June 30, 2002, the Company had multiple contracts with three
customers that represented 59% (34%, 14% and 11%, respectively) of the total
balance of net accounts receivable and revenue in excess of billings. At
September 30, 2001, these customers represented 44% (18%, 14% and 12%,
respectively) of the total balance of net accounts receivable and revenue in
excess of billings. Billing terms are negotiated in a competitive environment
and, as stated above, are based on reaching project milestones. The Company
anticipates that sufficient billing milestones will be achieved during fiscal
2003 such that revenue in excess of billings for these customer contracts will
begin to decline.
Net cash provided by the Company's operating activities was $506,000 for the
first nine months of fiscal 2002, compared to net cash of $266,000 used in the
same period in fiscal 2001.
Cash provided by investing activities for the first nine months of fiscal year
2002 was $288,000 and $8.1 million in the same period in fiscal 2001. Such
investing activities principally consisted of payments for purchases of
equipment and leasehold improvements. The cash provided in fiscal 2001 included
the proceeds from the sale of the Colorado assets.
Cash used by financing activities for the first nine months of fiscal year 2002
was $486,000 as compared to $9.8 million used by financing activities for the
first nine months of fiscal 2001. Financing activities consisted primarily of
net borrowings and payments under lines-of-credit for working capital purposes
and net borrowings and payments of long-term debt used for business combinations
and the purchase of equipment and leasehold improvements.
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company was named as a defendant in a consolidated putative securities class
action alleging a misstatement or omission of material facts concerning the
Company's
26
operations and financial results. On September 21, 2001, the United States
District Court of the Southern District of Indiana (the "Court") issued an Order
and Final Judgment ratifying the settlement terms of this lawsuit against the
Company and certain of its directors and former officers. The settlement
provides for the dismissal of the lawsuit in its entirety against all defendants
and the establishment of a settlement fund of $4.0 million, of which the Company
contributed $100,000 of cash, and approximately 1,256,000 shares of the
Company's common stock for the class. The class consisted of open market
purchasers of the Company's shares between January 25, 1999 and March 7, 2000,
inclusive. The remaining $3.9 million of cash was contributed by the Company's
insurance company. The Company's cost of this settlement, excluding legal fees,
of $748,000 was based on the cash contribution and the value of the common
shares on April 4, 2001, on the date of the agreement in principle for
settlement of the suit. This cost was included in the financial results of the
Company in the fiscal quarter ended March 31, 2001. Plaintiffs' counsel were
awarded legal fees consisting of cash and shares. As of June 30, 2002, the
Company has issued 408,000 shares to plaintiffs' counsel and approximately
848,000 shares will be issued to plaintiffs before September 30, 2002.
The Company and certain directors have been named as defendants in an action
that was filed by Sidney V. Corder, the former President, Chief Executive
Officer and Director of the Company. The suit claims that the Company violated
the Colorado Wage Claim Act and breached contractual obligations. The suit also
claims that the Company has breached an obligation to indemnify Mr. Corder in
connection with the securities lawsuit described in the preceding paragraph. As
of June 30, 2002, the parties were conducting settlement discussions. As more
fully described in Note 11, the parties reached a settlement on July 23, 2002.
Two shareholders of the Company, the Epner Family Limited Partnership and the
Braverman Family Limited Partnership, filed suit in Indiana state court
(Hamilton County Superior Court, State of Indiana, Cause No. 29001-0105 CP 289)
against four former officers of the Company on May 8, 2001. The former officers
are: Sidney Corder, Chief Executive Officer; Scott Benger, Senior Vice President
of Finance; Randy Sage, Chief Operations Officer; and John Dillon, Chief
Administrative Officer. The plaintiffs claimed that the former officers violated
Texas and Indiana securities laws and other provisions of Texas law in
connection with the Company's acquisition of Cartotech, Inc., in June 1998. The
four defendants have sent the Company written demands for indemnification. The
Company has tendered the defense of these claims to its insurer. On or about May
8, 2002, the Court issued an Order granting motions filed by Messrs. Corder and
Sage to dismiss the Complaint for failure to state a claim and/or failure to
join a necessary party as required by trial rules and case law. Plaintiffs filed
an amended complaint on or about May 31, 2002. On June 26, 2002, the plaintiffs
filed a Demand for Arbitration against the Company, seeking damages of over $5.5
million. Another former Cartotech shareholder, Albert Naumann, III (a former
officer of ASI and is now employed by a competitor to the Company), has
threatened to bring claims against the Company. The Company intends to challenge
any such claims.
27
The Company is also subject to various routine litigation. Management does not
believe that any of these legal proceedings would have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Analytical Surveys, Inc.
(Registrant)
Date: August 14, 2002 /s/ J. Norman Rokosh
-------------------------------------
J. Norman Rokosh
President and Chief Executive Officer
Date: August 14, 2002 /s/ Michael A. Renninger
-------------------------------------
Michael A. Renninger
Chief Financial Officer
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