10-Q 1 c69483e10-q.txt QUARTERLY REPORT 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 MARCH 31, 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.) 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 May 15, 2002 was 7,385,933. PART I ITEM 1. FINANCIAL STATEMENTS ANALYTICAL SURVEYS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, SEPTEMBER 30, 2002 2001 ---- ---- (UNAUDITED) ASSETS Current assets: Cash $ 380 1,351 Accounts receivable, net of allowance for doubtful accounts of $526 and $2,070 2,595 6,110 Revenue in excess of billings 10,703 10,567 Income tax receivable 1,122 20 Prepaid expenses and other 317 619 -------- -------- Total current assets 15,117 18,667 -------- -------- Equipment and leasehold improvements, at cost: Equipment 6,824 7,202 Furniture and fixtures 533 594 Leasehold improvements 375 429 -------- -------- 7,732 8,225 Less accumulated depreciation and amortization (6,698) (6,750) -------- -------- Net equipment and leasehold improvements 1,034 1,475 -------- -------- Goodwill, net of accumulated amortization of $5,216 -- 3,557 Investment securities 626 120 -------- -------- Total assets $ 16,777 23,819 ======== ========
2 ANALYTICAL SURVEYS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, SEPTEMBER 30, 2002 2001 ---- ---- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines-of-credit $ -- 4,400 Current portion of long-term debt 3,258 10,366 Billings in excess of revenue 138 244 Accounts payable and other accrued liabilities 3,950 4,445 Accrued payroll and related benefits 1,764 1,960 -------- -------- Total current liabilities 9,110 21,415 Long-term debt, less current portion 143 200 -------- -------- Total liabilities 9,253 21,615 -------- -------- Redeemable preferred stock; no par value. Authorized 2,500 shares; and 1,600 shares issued and outstanding at March 31 (liquidation value $1,600) 400 -- -------- -------- Stockholders' equity: Common stock; no par value. Authorized 100,000 shares; 7,386 and 6,978 shares issued and outstanding at March 31, and September 30, respectively 32,402 32,191 Accumulated other comprehensive income (loss) 253 (253) Retained earnings (accumulated deficit) (25,531) (29,734) -------- -------- Total stockholders' equity 7,124 2,204 -------- -------- Total liabilities and stockholders' equity $ 16,777 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 2002 2001 ---- ---- ---- ---- Revenues $ 4,968 11,849 10,604 26,589 Costs and expenses Salaries, wages and related benefits 3,526 7,470 7,632 15,158 Subcontractor costs 806 2,680 1,886 5,833 Other general and administrative 1,313 3,499 3,298 6,645 Depreciation and amortization 252 792 546 1,643 Severance and related costs -- 210 -- 210 -------- -------- -------- -------- 5,897 14,651 13,362 29,489 -------- -------- -------- -------- Loss from operations (929) (2,802) (2,758) (2,900) -------- -------- -------- -------- Other income (expense) Interest expense, net (52) (672) (226) (1,351) Litigation settlement costs -- (748) -- (748) Other (3) (35) 21 6 -------- -------- -------- -------- (55) (1,455) (205) (2,093) -------- -------- -------- -------- Loss before income taxes (984) (4,257) (2,963) (4,993) Income tax benefit 1,240 -- 1,240 -- -------- -------- -------- -------- Earnings (loss) before extraordinary item and cumulative effect of a change in accounting principle 256 (4,257) (1,723) (4,993) Extraordinary gain on extinguishment of debt, net of tax of $0 -- -- 9,583 -- -------- -------- -------- -------- Earnings (loss) before cumulative effect of a change in accounting principle 256 (4,257) 7,860 (4,993) Cumulative effect of a change in accounting principle -- -- (3,557) -- -------- -------- -------- -------- Net earnings (loss) 256 (4,257) 4,303 (4,993) Accretion of discount on preferred shares (100) -- (100) -- -------- -------- -------- -------- Net earnings (loss) available to common shareholders $ 156 (4,257) 4,203 (4,993) ======== ======== ======== ======== Basic and diluted earnings (loss) per common share: Earnings (loss) available to common shareholders before extraordinary item and cumulative effect of a change in accounting principle $ 0.02 (0.61) (0.22) (0.72) Extraordinary gain $ -- -- 1.35 -- Cumulative effect of a change in accounting principle $ -- -- (0.50) -- -------- -------- -------- -------- Net earnings (loss) available to common shareholders $ 0.02 (0.61) 0.59 (0.72) ======== ======== ======== ======== Weighted average common shares: Basic 7,245 6,978 7,112 6,978 ======== ======== ======== ======== Diluted 7,246 6,983 7,112 6,983 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE GAIN (LOSS) FOR THE SIX MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED ACCUM- OTHER COMMON STOCK 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 -- -- 4,303 -- 4,303 Unrealized change in investment securities, net of tax -- -- -- 506 506 ------- Total comprehensive earnings 4,809 Issuance of common shares in litigation settlement 408 211 -- -- 211 Accretion of discount on preferred shares -- -- (100) -- (100) ------- ------- ------- ------- ------- Balances at March 31, 2002 7,386 $32,402 (25,531) 253 7,124 ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 5 ANALYTICAL SURVEYS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Cash flow from operating activities: Net earnings (loss) $ 4,303 (4,993) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain on extinguishment of debt (9,583) -- Cumulative effect of change in accounting principle 3,557 -- Depreciation and amortization 546 1,643 Deferred income tax benefit -- (294) Changes in operating assets and liabilities: Accounts receivable, net 3,515 2,701 Revenue in excess of billings (136) 2,493 Income taxes receivable (1,102) 3,110 Prepaid expenses and other 302 82 Billings in excess of revenue (106) (968) Accounts payable and other accrued liabilities (284) (1,729) Accrued payroll and related benefits (196) (4) ------- ------- Net cash provided by operating activities 816 2,041 ------- ------- Cash flows from investing activities: Purchase of equipment and leasehold improvements (105) (293) ------- ------- Net cash used in investing activities (105) (293) ------- ------- Cash flows from financing activities: Net borrowings under lines-of-credit -- 1,210 Principal payments on long-term debt (1,682) (4,681) Proceeds from exercise of stock options -- 6 ------- ------- Net cash used in financing activities (1,682) (3,465) ------- ------- Net decrease in cash (971) (1,717) Cash at beginning of period 1,351 2,825 ------- ------- Cash at end of period $ 380 1,108 ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest $ 195 1,371 ======= ======= Refunds of income taxes $ 15 2,816 ======= ======= Issuance of preferred stock to retire debt $ 300 -- ======= ======= Issuance of common stock in litigation settlement $ 211 -- ======= =======
See accompanying notes to financial statements. 6 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 March 31, 2002 and the results of their operations and cash flows for the three months and six months ended March 31, 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): 7
Three Months Ended Six Months Ended March 31, March 31, 2001 2001 (Pro Forma) (Pro Forma) ----------- ----------- Revenues $ 8,144 19,159 Net loss $(4,306) (5,806) Weighted average shares outstanding: Basic 6,978 6,978 Diluted 6,983 6,983 Net loss per common share: Basic $ (0.62) (0.83) Diluted $ (0.62) (0.83)
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. 8
THREE MONTHS ENDED MARCH 31: 2002 2001 ---- ---- (In thousands except for per share amounts) Net earnings (loss) available to common shareholders $ 156 (4,257) Add back: Goodwill amortization -- 75 ------- -------- Adjusted net earnings (loss) available to common shareholders $ 156 (4,182) ======= ======== Basic and diluted earnings (loss) for common share: Net earnings (loss) available to common shareholders $ 0.02 (0.61) Goodwill amortization -- 0.01 ------- -------- Adjusted net earnings (loss) available to common shareholders $ 0.02 (0.60) ======= ======== SIX MONTHS ENDED MARCH 31: 2002 2001 ---- ---- (In thousands except for per share amounts) Net earnings (loss) available to common shareholders $ 4,203 (4,993) Add back: Goodwill amortization -- 154 ------- -------- Adjusted net earnings (loss) available to common shareholders $ 4,203 (4,839) ======= ======== Basic and diluted earnings (loss) for common share: Net earnings (loss) available to common shareholders $ 0.59 (0.72) Goodwill amortization -- 0.02 ------- -------- Adjusted net earnings (loss) available to common shareholders $ 0.59 (0.70) ======= ========
4. DEBT The line-of-credit, note payable and capital lease obligation represent the three components of a debt facility with the Company's senior lenders and are summarized as follows (in thousands).
March 31, September 30, 2002 2001 ---- ---- SHORT-TERM DEBT Line-of-credit $ -- 4,400 ======== ======== LONG-TERM DEBT Note payable $ 3,000 9,733 Capital lease obligation 197 596 Other 204 237 -------- -------- 3,401 10,566 Less current portion (3,258) (10,366) -------- -------- $ 143 200 ======== ========
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 its senior lenders. Under the Agreement, senior lenders waived all existing financial covenant defaults, the loan maturity dates were changed, and the principal prepayment incentives were continued. Under the Agreement, senior lenders accepted a cash payment of $1.25 million and non-convertible 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 9 (which is the maturity date); if payment was made after March 31, 2002 (later amended to April 2, 2002), the entire remaining balance must be paid. As more fully addressed in Note 11, the $3 million note payable was paid off on April 2, 2002. The agreement with senior lenders resulted in an extraordinary gain on extinguishment of debt in the quarter ended December 31, 2001, which is calculated as follows (in thousands):
Outstanding debt: Line-of-credit $ 4,400 Note payable 9,733 -------- Total 14,133 -------- Less: Cash paid (1,250) Fair value preferred stock (See Note 5) (300) Remaining note payable (3,000) -------- Extraordinary gain on extinguishment of debt $ 9,583 ========
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. The carrying value for Preferred Stock is $400,000 and $300,000 at March 31, 2002 and December 31, 2001, respectively. 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. 10 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).
Utilities Land Non-Segment Total --------- ---- ----------- ----- THREE MONTHS ENDED MARCH 31, 2002 Operations Revenues $ 4,543 425 -- 4,968 Loss from operations (308) (621) -- (929) Interest expense, net -- -- (52) (52) Other -- -- (103) (103) Income tax benefit -- -- 1,240 1,240 Extraordinary gain on extinguishment of debt -- -- -- -- Cumulative change in accounting principle -- -- -- -- -------- Net earnings available to common shareholders 156 ======== SIX MONTHS ENDED MARCH 31, 2002 Operations Revenues $ 9,509 1,095 -- 10,604 Loss from operations (1,421) (1,337) -- (2,758) Interest expense, net -- -- (226) (226) Other -- -- (79) (79) Income tax benefit -- -- 1,240 1,240 Extraordinary gain on extinguishment of debt -- -- 9,583 9,583 Cumulative change in accounting principle (3,557) -- -- (3,557) -------- Net earnings available to common shareholders 4,203 ======== Assets at March 31, 2002 Segment assets $ 13,273 1,059 -- 14,332 Non-segment assets -- -- 2,445 2,445 -------- Consolidated Assets 16,777 ========
11
THREE MONTHS ENDED MARCH 31, 2001 Operations Revenues $ 7,666 4,183 -- 11,849 Loss from Operations (1,688) (1,114) -- (2,802) Interest expense, net -- -- (672) (672) Litigation settlement costs -- -- (748) (748) Other -- -- (35) (35) -------- Net loss available to common shareholders (4,257) ======== SIX MONTHS ENDED MARCH 31, 2001 Operations Revenues $ 17,919 8,670 -- 26,589 Loss from operations (1,774) (1,126) -- (2,900) Interest expense, net -- -- (1,351) (1,351) Litigation settlement costs -- -- (748) (748) Other -- -- 6 6 -------- Net loss available to common shareholders (4,993) ======== Assets at September 30, 2001 Segment assets $ 19,644 2,065 -- 21,709 Non-segment assets -- -- 2,110 2,110 -------- Consolidated Assets 23,819 ========
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 12 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. 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. A trial date of November 13, 2001 was postponed and a new date has not been set. It is impossible to evaluate what the impact of this action, or any future, related actions, may have on the Company. However, it is reasonably possible that an unfavorable outcome in the present litigation, or in any related future actions, could have a material adverse impact on the Company's financial condition or results of operations in one or more future reporting periods. The Company intends to defend itself vigorously in this action. 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 have thirty days in which to file an amended complaint. The Company has not been named a party to the suit, but the plaintiffs and another former Cartotech shareholder, Albert Naumann, III (a former officer of ASI and is now employed by a competitor to the Company), have threatened to bring claims against the Company. The Company intends to challenge any such claims. 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 13 certain individuals and groups for defense and other costs in connection with this investigation. 9. CONCENTRATION OF CREDIT RISK At March 31, 2002, the Company had multiple contracts with three customers that represented 60% (31%, 15% and 14%, 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 March 31, 2002 were 42% (15%, 14% and 13%, 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 by December 31, 2002 such that revenue in excess of billings for these customer contracts will begin to decline. 10. INCOME TAX BENEFIT The Company has 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. 11. SUBSEQUENT EVENT On April 2, 2002, the Company completed the sale of a $2 million senior secured convertible promissory 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 million note payable outstanding at March 31, 2002. As a result, the Company will recognize a $2,125,000 extraordinary gain on extinguishment of debt in April, 2002. The $175,000 unsecured promissory note matures on March 31, 2003 and bears interest at prime rate plus one percent. The $2 million senior secured convertible promissory note matures April 2, 2005, bears interest at an annual rate of five percent and is secured by substantially all assets of the Company. The purchaser of the convertible note and warrants will own a majority of the Company's common stock if the note is fully converted and the warrants are exercised. 14 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, a provider of data conversion and digital mapping services to users of customized geographic information systems, was founded in 1981. 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 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 15 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 utilized InfoTech Enterprises Ltd., an India-based company, for a significant percentage of its production services in fiscal 2000 and 2001 and expects to continue the use of its services in fiscal 2002. The Company continued to streamline operations throughout the fiscal quarter, announcing and completing the consolidation of its Cary, North Carolina facility into the Texas and Wisconsin service centers. The principal activity of the North Carolina facility has been cadastral and photogrammetric mapping. ASI currently employs approximately 225 full-time employees. 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 March 31, 2002, backlog was $15.1 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. In the fiscal quarter ending March 31, 2002, backlog was reduced by $2 million to reflect the reduction in contract value of three projects. In one case, ASI was serving as a subcontractor, but the project was cancelled due to the prime contractor's inability to perform. The other projects related to the North Carolina facility, one of which ASI assigned to another vendor, and the other involved a customer electing to reduce the scope of their project. 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. 16 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 March 31, 2002, the Company had multiple contracts with three customers that represented 60% (31%, 15% and 14%, 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 by December 31, 2002 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 $816,000 for the first six months of fiscal 2002, compared to net cash of $2.0 million used in the same period in fiscal 2001. Cash used by investing activities for the first six months of fiscal year 2002 was $105,000 and $293,000 in the same period in fiscal 2001. Such investing activities principally consisted of payments for purchases of equipment and leasehold improvements. Cash used by financing activities for the first six months of fiscal year 2002 was $1.7 million as compared to $3.5 million used by financing activities for the first six 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. ITEM 3. 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 $3.0 million was outstanding as of March 31, 2002. Assuming March 31, 2002 debt levels, an increase or decrease in 23 interest rates of one percentage point would impact the Company's annual interest expense by $30,000. 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 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. 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. A trial date of November 13, 2001 was postponed and a new date has not been set. It is impossible to evaluate what the impact of this action, or any future, related actions, may have on the Company. However, it is reasonably possible that an unfavorable outcome in the present litigation, or in any related future actions, could have a material adverse impact on the Company's financial condition or results of operations in one or more future reporting periods. The Company intends to defend itself vigorously in this action. 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 24 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 have thirty days in which to file an amended complaint. The Company has not been named a party to the suit, but the plaintiffs and another former Cartotech shareholder, Albert Naumann, III (a former officer of ASI and is now employed by a competitor to the Company), have threatened to bring claims against the Company. The Company intends to challenge any such claims. 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. The following exhibits have been incorporated by reference on Form 8-K dated March 22, 2002 and filed on March 22, 2002. EXHIBIT NUMBER EXHIBIT ------ ------- 4.1 Note and Warrant Purchase Agreement dated as of March 21, 2002 by and between Analytical Surveys, Inc., and Tonga Partners, L.P. (the "Purchaser") (material exhibits provided below; remaining exhibits omitted). 4.2 Form of Senior Secured Convertible Promissory Note of Analytical Surveys, Inc. 4.3 Form of Warrant to Purchase Shares of Common Stock of Analytical Surveys, Inc. 4.4 Form of Registration Rights Agreement by and between Analytical Surveys, Inc. and the Purchaser. 4.5 Form of Security Agreement by and between Analytical Surveys, Inc. and the Purchaser. Forms 8-K filed during the quarter ended March 31, 2002: Form 8-K dated January 2, 2002 was filed pursuant to Item 5 on January 2, 2002. Form 8-K dated February 25, 2002 was filed pursuant to Item 5 on February 25, 2002. Form 8-K dated March 22, 2002 was filed pursuant to Item 1 on March 22, 2002. 25 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: May 15, 2002 /s/ J. Norman Rokosh ------------------------------------- J. Norman Rokosh President and Chief Executive Officer Date: May 15, 2002 /s/ Michael A. Renninger ------------------------------------- Michael A. Renninger Chief Financial Officer 26