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, 1999
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.)
941 NORTH MERIDIAN STREET INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices) (Zip Code)
(317) 634-1000
(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 10, 1999 was
6,931,554.
PART I ITEM 1.
ANALYTICAL SURVEYS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
Sept. 30, June 30,
1998 1999
----------- -----------
ASSETS
Current assets:
Cash $ 2,243 2,909
Accounts receivable, net of allowance for doubtful
accounts of $161 and $111 in 1998 and 1999, respectively 17,501 19,974
Revenue in excess of billings 39,316 45,143
Prepaid expenses and other 659 1,263
Deferred income taxes 557 297
Income taxes receivable 675 --
----------- ---------
Total current assets 60,951 69,586
----------- ---------
Equipment and leasehold improvements, at cost:
Equipment 13,015 15,412
Furniture and fixtures 1,594 1,835
Leasehold improvements 817 1,019
----------- ---------
15,426 18,266
Less accumulated depreciation and amortization (7,470) (9,507)
----------- ---------
7,956 8,759
----------- ---------
Goodwill, net of accumulated amortization of $1,654
and $2,987 in 1998 and 1999, respectively 25,272 23,698
Other assets, net of accumulated amortization of
$549 and $850 in 1998 and 1999, respectively 227 12
Deferred income taxes 134 289
----------- ---------
Total assets $ 94,540 102,344
----------- ---------
----------- ---------
ANALYTICAL SURVEYS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(In Thousands)
(Unaudited)
Sept. 30, June 30,
1998 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,594 6,968
Billings in excess of revenue 1,232 2,642
Accounts payable and other accrued expenses 8,229 5,019
Income taxes payable -- 1,235
Accrued payroll and related benefits 5,910 4,857
---------- ---------
Total current liabilities 19,965 20,721
Long-term debt, less current portion 29,920 26,258
Deferred compensation payable 192 85
---------- ---------
Total liabilities 50,077 47,064
---------- ---------
Stockholders' equity:
Preferred stock-authorized 2,500 shares of no par value;
no shares issued or outstanding
Common stock-authorized 100,000 shares of no par value;
issued and outstanding 6,732 shares at September 30,
1998 and 6,918 shares at June 30, 1999 28,670 31,617
Retained earnings 15,793 23,663
---------- ---------
Total stockholders' equity 44,463 55,280
---------- ---------
Total liabilities and stockholders' equity $ 94,540 102,344
---------- ---------
---------- ---------
ANALYTICAL SURVEYS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
Sales $ 22,752 31,167 60,105 88,563
--------- ------ ------ ------
Costs and expenses
Salaries, wages and benefits 10,553 14,965 28,958 43,927
Subcontractor costs 3,750 4,507 8,096 11,886
Other general and administrative 3,931 4,594 10,531 13,495
Depreciation and amortization 905 1,484 2,513 4,229
--------- ------ ------ ------
19,139 25,550 50,098 73,537
--------- ------ ------ ------
Earnings from operations 3,613 5,617 10,007 15,026
--------- ------ ------ ------
Other income (expense)
Interest expense (541) (677) (1,425) (2,065)
Other income, net 84 70 115 230
--------- ------ ------ ------
(457) (607) (1,310) (1,835)
--------- ------ ------ ------
Earnings before income taxes 3,156 5,010 8,697 13,191
Income tax expenses 1,271 1,992 3,455 5,321
--------- ------ ------ ------
Net earnings $ 1,885 3,018 5,242 7,870
--------- ------ ------ ------
--------- ------ ------ ------
Basic earnings per share $ 0.30 .44 0.84 1.16
--------- ------ ------ ------
--------- ------ ------ ------
Diluted earnings per share $ 0.28 .42 0.78 1.10
--------- ------ ------ ------
--------- ------ ------ ------
Weighted average shares outstanding
Basic 6,345 6,917 6,224 6,739
--------- ------ ------ ------
--------- ------ ------ ------
Diluted 6,819 7,191 6,720 7,128
--------- ------ ------ ------
--------- ------ ------ ------
ANALYTICAL SURVEYS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
June 30,
1998 1999
---------- --------
Cash flows from (used by) operating activities:
Net earnings $ 5,242 7,870
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,513 4,229
Gain on the sale of assets (15) --
Deferred income tax benefits (290) 105
Tax benefit relating to exercise of stock options 2,902 1,156
Changes in operating assets and liabilities, net
of effect of business combinations:
Accounts receivable, net (4,362) (2,473)
Revenue in excess of billings (14,425) (5,827)
Prepaid expenses and other (235) (638)
Other (53) --
Income taxes receivable (1,316) 675
Billings in excess of revenue 265 1,410
Accounts payable and other accrued expenses 2,492 (3,210)
Income taxes payable -- 1,236
Accrued payroll and related benefits 1,288 (1,160)
---------- --------
Net cash provided (used) by operating activities (5,994) 3,373
---------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (2,668) (3,085)
Proceeds from the sale of equipment 22 391
Payments for net assets acquired in business
combinations, net of cash acquired (8,305) --
---------- --------
Net cash used by investing activities (10,951) (2,694)
---------- --------
Cash flows from financing activities:
Net borrowings (payments) under lines-of-credit with bank 5,347 (1,275)
Proceeds from issuance of long-term debt 11,501 3,468
Principal payments of long-term debt (1,481) (3,481)
Proceeds from exercise of stock options 1,590 1,275
---------- --------
Net cash/(used) by financing activities 16,957 (13)
---------- --------
Net increase/(decrease) in cash and cash equivalents 12 666
---------- --------
Cash at beginning of period 1,559 2,243
---------- --------
Cash at end of period $ 1,571 2,909
---------- --------
---------- --------
Interest paid $ 887 2,081
---------- --------
---------- --------
Income taxes paid $ 1,042 2,295
---------- --------
---------- --------
Common Stock issued for net assets acquired
in business combinations $ 8,270 514
---------- --------
---------- --------
ANALYTICAL SURVEYS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Quarterly Report on Form 10-Q
June 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements as of
June 30, 1999 and for the nine months ended June 30, 1998 and 1999 have been
prepared by management in accordance with the accounting policies described
in the Company's Annual Report for the year ended September 30, 1998. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. The financial statements have not been
audited by independent auditors. 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,
1998.
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, 1999 and its
results of operations for the three months and nine months ended June 30,
1998 and 1999, and its cash flows for the nine months ended June 30, 1998 and
1999. All such adjustments are of a normal recurring nature.
2. STOCK OPTIONS
The following table summarizes stock option transactions under the Company's
four non-qualified stock option plans (in thousands except per share amounts):
Shares Under Option Average Exercise
Price Per Share
Outstanding at September 30, 1998 1,773 21.94
Granted 257 24.03
Exercised (164) 7.80
Cancelled (4) 21.90
Outstanding June 30, 1999 1,861 20.63
Options Exercisable at June 30, 1999 1,015 17.32
Available for Grant at June 30, 1999 61
PART I ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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
RISK 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,
YEAR 2000 COMPLIANCE, 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 BELOW, AND IN ITEM 1.
BUSINESS--"RISK FACTORS" AND ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K.
ANY STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q RELATED TO THE
YEAR 2000 ARE HEREBY DENOMINTED AS "YEAR 2000 STATEMENTS" WITHIN THE MEANING
OF THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
OVERVIEW
ASI, a leading provider of data conversion and digital mapping services to
users of customized geographic information systems, was founded in 1981 by
John A. Thorpe. From 1981 to 1990, the Company experienced steady growth in
revenues with periodic fluctuations in financial results. After the hiring of
the Company's current Chief Executive Officer and Chief Financial Officer in
1990, the Company implemented a controlled growth strategy, including
improving and standardizing operating controls and procedures, investing in
infrastructure, upgrading the Company's proprietary software and establishing
capital sources.
In 1995, the Company embarked on a more aggressive growth strategy, including
consolidation of the fragmented GIS services industry. The Company's recent
acquisitions are summarized in the following table:
Date Company Location Employees
- ---- ------- -------- ---------
12/95 Intelligraphics Wisconsin 200
7/96 Westinghouse Landmark North Carolina 105
7/97 MSE Corporation Indiana 325
6/98 Cartotech Texas 270
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. At each accounting period and for each of the
Company's contracts, the percentage of completion is based on production
costs incurred to date as a percentage of total estimated production costs.
This percentage is then multiplied by the contract's total value to calculate
the sales revenue to be recognized.
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. As a result, the Company experiences yearly
and quarterly fluctuations in production costs, in salaries, wages and
related benefits and in subcontractor costs. These costs may vary as a
percentage of sales from period to period. The following table illustrates
the relationship of salaries, wages and related benefits and subcontractor
costs:
Year Nine Months
Ended September 30, Ended June 30,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
PERCENTAGE OF SALES:
Salaries, wages and related benefits 46.3% 48.5% 48.7% 48.2% 49.6%
Subcontractor costs 17.2 14.5 13.6 13.5 13.4
Total production costs 63.5% 63.0% 62.3% 61.7% 63.0%
In June 1999 ASI and Infotech Enterprises Limited of Hyderabad, India
announced preliminary terms of an agreement under which Infotech will expand
its role as a key subcontractor for production services in India. The
agreement is subject to regulatory approvals in India and both parties hope
to have the agreement finalized by September 30, 1999. Under the terms of the
agreement, Infotech will purchase ASI's existing production facility in
Mumbai, India, as well as licenses to certain of ASI's production software
for use exclusively on ASI's projects. The final agreement is also expected
to include mutual commitments to production volumes and pricing over the next
five years.
In June 1999 the Company sold its 60% owned subsidiary, Phillips Design Group
for $392,000 cash. Phillips Design Group specializes in multi-media
presentations with annual sales of approximately $750,000. This sale did not
have a material affect on the June 1999 financial results.
The Company recognizes losses on contracts in the period such loss is
determined. From the beginning of fiscal 1995 through the end of the first
nine months of fiscal 1999, the Company has recognized aggregate losses on
contracts of approximately $1.7 million. Over the same period, the Company
recognized sales of $253.8 million. Sales and marketing expenses associated
with obtaining contracts are expensed as incurred.
Backlog increases when new contracts are signed and decreases as revenue is
recognized. As of June 30, 1999, backlog was approximately $87 million. The
value of contracts signed during the three months ended June 30, 1999 fell
below internal targets due to delays in finalizing several major contracts.
These delays were caused by a variety of factors including
slower-than-expected implementation of outside platform software by the
potential customers. The Company expects the contracts to be finalized in the
near future. Recently, the number of large projects awarded to the Company
has increased. Contracts for larger projects generally 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, so that the costs of such efforts are included as
an integral part of the Company's services. 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, although the Company retains
ownership of such proprietary software or products. The Company, through its
Advanced Technology Division, also engages in research and development
activities independently of the Company's work on particular customer
projects. For the nine months ended June 30, 1998 and 1999, the Company
expended $190,479 and $192,335, respectively on such independent research and
development activities in the Advanced Technology Division.
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,
1998 1999 1998 1999
---- ---- ---- ----
PERCENTAGE OF SALES:
Sales 100.0% 100% 100.0% 100.0%
Costs and expenses
Salaries, wages and related benefits 46.4 48.0 48.2 49.6
Subcontractor costs 16.4 14.5 13.5 13.4
Other general and administrative 17.3 14.7 17.5 15.2
Depreciation and amortization 4.0 4.8 4.2 4.8
----- ----- ----- -----
Earnings from operations 15.9 18.0 16.6 17.0
Other expense, net 2.0 1.9 2.2 2.1
----- ----- ----- -----
Earnings before income taxes 13.9 16.1 14.4 14.9
Income tax expense 5.6 6.4 5.7 6.0
----- ----- ----- -----
Net earnings 8.3 9.7 8.7 8.9
----- ----- ----- -----
----- ----- ----- -----
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
SALES. The Company's sales consist of revenue recognized for services
performed. Sales increased 37% to $31.2 million for the three months ended
June 30, 1999 from $22.8 million for the same period in fiscal 1998. This
increase was due to an increase in the number and size of customer contracts
with the Company as well as the impact of the acquisition of Cartotech in
June 1998. Prior to its acquisition by the Company, Cartotech's sales for the
three months ended June 30, 1998 were approximately $3.7 million.
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
increased 41.8% to $15.0 million for the three months ended June 30, 1999
from $10.6 million for the three months ended June 30, 1998. This increase
was primarily due to the addition of over 270 employees as a result of the
Cartotech acquisition in June 1998, as well as the hiring of additional
employees to support the Company's increased business. As a percentage of
sales, salaries, wages and related benefits increased to 48.0% for the three
months ended June 30, 1999 from 46.4% for the three months ended June 30,
1998.
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 increased 20.2% to $4.5 million
for the three months ended June 30, 1999 from $3.8 million for the three
months ended June 30, 1998, but decreased as a percentage of sales to 14.5%
for the three months ended June 30, 1999 from 16.4% for the three months
ended June 30, 1998.
Subcontractor costs declined as a percentage of sales because a greater
proportion of production work was performed by employees in the three months
ended June 30, 1999 than in the same period of 1998.
OTHER GENERAL AND ADMINISTRATIVE COSTS. Other general and administrative
costs includes rent, maintenance, travel, supplies, utilities, insurance and
professional services. Such costs increased 16.9% to $4.6 million for the
three months ended June 30, 1999 from $3.9 million for the three months ended
June 30, 1998, primarily due to the acquisition of Cartotech. As a percentage
of sales, other general and administrative costs decreased to 14.7% for the
three months ended June 30, 1999 from 17.3% for the three months ended June
30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization 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 three months ended June 30, 1999, depreciation and
amortization increased 64% to $1.5 million from $905,000 for the three months
ended June 30, 1998. This increase was primarily attributable to the
increased goodwill recorded as a result of the Cartotech acquisitions. As a
percentage of sales, depreciation and amortization increased to 4.8% for the
three months ended June 30, 1999 from 4.0% for the same period of fiscal 1998.
OTHER EXPENSE, NET. Other expense, net is comprised primarily of net interest
expense. Net interest expense increased 25.1% to $677,000 for the three
months ended June 30, 1999 from $541,000 for the three months ended June 30,
1998. This increase was primarily due to increased term debt incurred in
connection with the acquisition of Cartotech in June 1998 and increased
utilization of the Company's lines of credit for working capital.
INCOME TAX EXPENSE. Income tax expense was $2.0 million for the three months
ended June 30, 1999 compared to $1.3 million for the three months ended June
30, 1998. The Company's effective income tax rate for the three months ended
June 30, 1999 was 39.8%, a decrease from 40.3% for the three months ended
June 30, 1998, due to changes in state income tax structure.
NET EARNINGS. Due to the factors discussed above, net earnings increased
60.1% to $3.0 million for the three months ended June 30, 1999 from $1.9
million for the three months ended June 30, 1998.
NINE MONTHS ENDED JUNE 30, 1998 AND 1999
SALES. Sales increased 47.3% to $88.6 million for the nine months ended June
30, 1999 from $60.1 million for the nine months ended June 30, 1998. This
increase was due to an increase in the number and size of customer contracts
with the Company (including Cartotech) as well as the impact of the
acquisition of Cartotech in June 1998. Prior to its acquisition by the
Company, Cartotech's sales for the nine months ended June 30, 1998 were
approximately $11.4 million.
SALARIES, WAGES AND RELATED BENEFITS. Salaries, wages and related benefits
increased 51.7% to $43.9 million for the nine months ended June 30, 1999 from
$29.0 million for the nine months ended June 30, 1998. This increase was
primarily due to the addition of over 270 employees as a result of the
Cartotech acquisition in June 1998, as well as the hiring of additional
employees to support the Company's increased business. As a percentage of
sales, salaries, wages and related benefits increased to 49.6% for the nine
months ended June 30, 1999 from 48.2% for the nine months ended June 30, 1998.
SUBCONTRACTOR COSTS. Subcontractor costs increased 46.8% to $11.9 million for
the nine months ended June 30, 1999 from $8.1 million for the nine months
ended June 30, 1998, and decreased as a percentage of sales to 13.4% for the
nine months ended June 30, 1999 from 13.5% for the nine months ended June 30,
1998.
Subcontractor costs declined as a percentage of sales because a greater
proportion of production work was performed by employees in 1999 than in the
same period of 1998.
OTHER GENERAL AND ADMINISTRATIVE COSTS. Other general and administrative
increased 28.1% to $13.5 million for the nine months ended June 30, 1999 from
$10.5 million for the nine months ended June 30, 1998, primarily due to the
acquisition of Cartotech. As a percentage of sales, other general and
administrative costs decreased to 15.2% for the nine months ended June 30,
1999 from 17.5% for the nine months ended June 30, 1998.
DEPRECIATION AND AMORTIZATION. For the nine months ended June 30, 1999,
depreciation and amortization increased 68.3% to $4.2 million from $2.5
million for the nine months ended June 30, 1998. This increase was primarily
attributable to the increased goodwill recorded as a result of the Cartotech
acquisitions. As a percentage of sales, depreciation and amortization
increased to 4.8% for the nine months ended June 30, 1999 from 4.2% for same
period of fiscal 1998.
OTHER EXPENSE, NET. Other expense, net is comprised primarily of net interest
expense. Net interest expense increased 44.9% to $2.1 million for the nine
months ended June 30, 1999 from $1.4 million for the nine months ended June
30, 1998. This increase was primarily due to increased term debt incurred in
connection with the acquisition of Cartotech in June 1998 and increased
utilization of the Company's lines of credit for working capital.
INCOME TAX EXPENSE. Income tax expense was $5.3 million for the nine months
ended June 30, 1999 compared to $3.5 million for the nine months ended June
30, 1998. The Company's effective income tax rate for the nine months ended
June 30, 1999 was 40.3%, an increase from 39.7% for the nine months ended
June 30, 1998, due to increases in state income taxes and nondeductible
goodwill relating to the Cartotech acquisition.
NET EARNINGS. Due to the factors discussed above, net earnings increased
50.1% to $7.9 million for the nine months ended June 30, 1999 from 5.2
million for the nine months ended June 30, 1998.
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. As of June
30, 1999, the Company's outstanding balance on its lines of credit was $4.5
million. During 1998, the Company replaced its existing lines of credit with
a three-year, $21.0 million secured working capital line of credit and the
Company refinanced $25.4 million of term debt. Borrowings under the new
credit facilities bear interest at a rate per annum equal to, at the
Company's option, (i) the agent bank's prime rate or (ii) an adjusted London
Interbank Offering Rate (LIBOR) plus a margin ranging from 1.25% to 1.75%.
The effective borrowing rate was 6.1675% on June 30, 1999.
The Company's cash flow is significantly affected by 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.
Net cash provided by operations was $3.4 million for the nine months ended
June 30, 1999. Net cash used by the Company's operating activities was ($6.0)
million for the nine months ended June 30 1998. The change in operating cash
flows is primarily attributable to normal fluctuations in the
contract-related accounts described in the previous paragraph. At June 30,
1999, the working capital in contract-related accounts was equivalent to 182
days sales
outstanding, down from 194 days at June 30, 1998. The Company believes that
this level of investment is consistent with its normal operating range of
days sales outstanding.
Cash used by investing activities for the first nine months of fiscal years
1999 and 1998 was ($2.7) million and ($11.0) million respectively. Such
investing activities in fiscal year 1999 principally consisted of payments
for purchases of equipment. Investing activities in fiscal year 1998 included
the acquisition of Cartotech.
Cash provided by financing activities for the first nine months of fiscal
years 1999 and 1998 was ($13,000) and $17.0 million respectively. 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.
The Company believes that funds available under its lending arrangements and
cash flow from operations are adequate to finance its operations for at least
the next 18 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This statement requires that changes
in comprehensive income be shown in a financial statement that is displayed
with the same prominence as other financial statements. The statement will be
effective for fiscal years beginning after December 15, 1997 (the Company's
fiscal year beginning October 1, 1998). Reclassification for earlier periods
is required for comparative purposes. The Company adopted this statement
beginning October 1, 1998 with no effect on its financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for fiscal years beginning after December 15,
1997 (the Company's fiscal year beginning October 1, 1998). Presentation of
segment information for earlier periods is required, unless impracticable,
for comparative purposes. The Company adopted this statement beginning
October 1, 1998 with no effect on its financial statements, as the Company
operates in one business segment.
In addition, the Company believes the adoption of FASB Statements No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits",
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" will not have a material affect on its financial statements.
YEAR 2000 ISSUES
GENERAL
The "Year 2000" issue is the result of computer programs using two digits,
rather than four, to define the applicable year. The failure of such programs
to recognize the Year 2000 as such could result in system failures and
miscalculations or errors causing disruptions of operations or other business
problems, including among others a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company and the third parties with which it does business rely on
numerous computer programs in their daily operations.
During the first quarter of fiscal 1999, the Company conducted an informal
survey of its material information technology ("IT") and operating systems;
non-information technology systems (such as buildings, plant, equipment and
other infrastructure systems that may contain embedded micro controller
technology), including its proprietary production software; and the Year 2000
readiness of the Company's major vendors and material service providers and
subcontractors. During the fiscal 1999 first quarter, the Company established
a formal Year 2000 program to address in detail the Year 2000 issue with
respect to all of the Company's IT and non-IT systems, which was established
during the beginning of the second fiscal 1999 quarter. The formal program
consists of four major phases: inventory; validation; renovation; and
implementation/testing.
The inventory phase involved an initial inventory of all hardware, software,
and infrastructure as well as material vendors and service providers,
including subcontractors and clients to identify all of the areas in the
Company's and such third parties' operations where the Year 2000 issue may
arise to assess the items identified as potentially having a Year 2000 issue.
The Company completed the inventory phase of its Year 2000 program during the
second quarter although the Company expects to continue monitoring activity
in an effort to ensure that unforeseen Year 2000 critical items will be
discovered.
The validation phase involves the performance of tasks to identify potential
Year 2000 issues and to determine the action, if any, required to mitigate
the risks to the Company. The Company has completed the validation phase with
respect to its IT-hardware and non-information technology systems (such as
buildings, plant, equipment and other infrastructure systems that may contain
imbedded micro controllers). The Company has not identified any material Year
2000 issues with respect to its IT-hardware. With respect to its non-IT
technology systems, the Company has identified that its voicemail systems in
its Wisconsin, North Carolina and Indianapolis offices and its basic
telephone switch in its Indianapolis office are not Year 2000 compliant. The
Company is currently determining whether to upgrade or replace those systems
or develop "work arounds", although the Company believes that these items
will continue to operate in 2000. The Company is in the process of
identifying its vendors, suppliers and subcontractors and customers whose
Year 2000 readiness may impact its business. The Company has completed
gathering information from these parties and expects to complete its
assessment of their readiness by October 1, 1999. With respect to its
proprietary production software, the Company is undertaking the validation
and renovation phase concurrently. It is conducting a line-by-line review of
the code of all of its proprietary software and correcting any such code as
it is reviewed. The Company expects to complete this process by November 1,
1999.
The renovation phase is intended to ensure that the appropriate items as
identified in the validation phase as having Year 2000 issues are upgraded or
procedures put in place to meet Year 2000 compliance criteria. This may
include software updates, hardware updates, development of new processes or
"work-arounds," new business practices and training programs. While
completion of the various elements of this phase is tied to corresponding
elements within the inventory and validation phase, the Company anticipates
that the material repairs, replacements and renovations will be substantially
complete within the fourth quarter of fiscal year 1999 for systems under the
direct control of the Company.
The implementation/testing/full compliancy phase involves verifying and
testing the critical business processes and systems and infrastructure to
ensure Year 2000 issues will not cause major disruption in the ongoing
operation of the Company's business. The Company expects that the
implementation/testing phase will be performed by its internal Year 2000 team
following the completion of the repair and renovation phase and will be
substantially complete by November 1, 1999.
STATE OF READINESS
The Company has completed its formal risk assessment of the Year 2000 issue
within the Company. However, based on the Company's preliminary assessment of
its most critical systems, its proprietary operations software, and its IT
and non-IT systems, it believes that no material Year 2000 issues have arisen
in the formal assessment. In addition,
although the Company cannot evaluate its total risk regarding the Year 2000
issue because of the uncertainty of the readiness of third party suppliers,
vendors and subcontractors, and of the Company's customers, based on
preliminary information concerning certain vendors, suppliers and
subcontractors, the Company does not believe that its significant vendors,
suppliers and subcontractors are or are likely to present any significant
exposure due to Year 2000 issues. The Company's customer contracts specify
database designs, including date fields, and the Company's delivery of data
conforms to such specifications. Accordingly, the Company has not formally
evaluated and does not anticipate evaluating the Year 2000 issue as it
relates to the computer systems used by its customers and potential
customers. Although the renovation and implementation/testing phases have
just commenced, the Company anticipates that these phases will proceed along
the schedule that is identified in the program described above.
COSTS
The Company expects to utilize internal resources to perform the work
required to address the Year 2000 issue. To date, these costs have not been
material and involve the temporary reallocation of existing resources.
Although the Company believes that the remaining cost of the Year 2000
modifications for its internal systems will not be material, there can be no
assurance that upon completion of the validation phase, a Year 2000
compliance issue will arise that could result in material expenditures or
that could have an adverse effect on the Company's business, operating
results or financial position.
RISKS
In a reasonably likely worst-case scenario, the failure to correct a material
Year 2000 problem in the Company's internal IT and non-IT systems could
result in an interruption in or failure of certain normal business activities
or operations, including operations that are essential to the provision of
the Company's services. In addition, the Company also faces risks that its
vendors, suppliers and subcontractors will not be able to remedy their Year
2000 issues since the Company has not completed its assessment of these
parties' Year 2000 readiness. The Company cannot determine the present risks
to the Company of such failures. Under a reasonably likely worst-case
scenario, if such vendors were not Year 2000 compliant and other vendors,
suppliers or subcontractors could not be readily substituted for them, such
failures could have a material adverse effect on the Company's operations.
The Company currently believes that its most reasonably likely worst-case
scenario would occur if the Company's present or future customers, which are
primarily utilities, local and state governments, would fail to achieve Year
2000 compliance. If the Company's customers are not Year 2000 compliant, they
may be unable to pay the Company's invoices for some period of time or
postpone, delay or cancel work on the Company's contracts. In addition, they
may expend material costs to remedy problems or they may face litigation
expenses. As a result, Year 2000 issues could reduce or eliminate customers'
budgets for purchases of the Company's services even if those customers
currently believe they are Year 2000 compliant. Depending on the number of
customers that experience these problems, these events could have a material
adverse effect on the Company's business, operating results and financial
condition.
CONTINGENCY PLANS
The Company has not yet begun a formal analysis of possible contingency
plans, but expects to do so following the completion of the repair and
renovation phases of its Year 2000 program, which is expected to be complete
by November 1, 1999. If the Company identifies significant risks related to
Year 2000 compliance or its progress deviates from the anticipated schedule,
the Company will develop contingency plans as necessary.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may from time to time employ risk management techniques such as
interest rate swaps and foreign currency hedging transactions. None of these
techniques are used for speculative or trading purposes and the amounts
involved are not considered material.
Short-term interest rate changes can impact the Company's interest expense on
its variable interest rate debt. Variable interest rate debt of $27.5 million
was outstanding as of June 30, 1999. Assuming June 30, 1999 debt levels, an
increase or decrease in interest rates of one percentage point would impact
the Company's interest expense by $275,000.
PART II. OTHER INFORMATION
Item 2. Legal Proceedings
The Company is not a party to any material pending legal proceeding nor is
its property the subject of a pending legal proceeding. The Company is
involved in routine litigation from time to time, which is incidental to the
business and the outcome of which is not expected to have a material effect
on the Company.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended June 30, 1999.
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 11, 1999 /s/ Sidney V. Corder
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Sidney V, Corder, Chairman
and Chief Executive Officer
Date: August 11, 1999 /s/ Scott C. Benger
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Scott C. Benger, Secretary/Treasurer
(principal financial officer and
principal accounting officer)
Date: August 11, 1999 /s/ Brian J. Yates
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Brian J. Yates, Controller