-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D8Ham2NyDeV/yEBtsohvsSYKzP8nBQ93cdC5miNw7YOr4Z3lmakdNv3XgshiuiFV UVdzNnfFtbX0HBdyd5EGPA== 0000950137-00-000844.txt : 20000308 0000950137-00-000844.hdr.sgml : 20000308 ACCESSION NUMBER: 0000950137-00-000844 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANALYTICAL SURVEYS INC CENTRAL INDEX KEY: 0000753048 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 840846389 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-13111 FILM NUMBER: 562220 BUSINESS ADDRESS: STREET 1: 941 MERIDIAN STREET STREET 2: SUITE 100 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176341000 MAIL ADDRESS: STREET 1: 941 MERIDIAN STREET STREET 2: SUITE 100 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K405/A 1 AMENDMENT #2 TO FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) (Amendment No. 2) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ COMMISSION FILE NUMBER 0-13111 ANALYTICAL SURVEYS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0846389 ------------------------------ ---------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 941 Meridian Street, Indianapolis, IN 46204 - -------------------------------------------------------------------------------- (Address or principal executive offices) (Zip Code) Registrant's telephone number, including area code (317) 634-1000 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------------------------------------------------------------- Securities registered pursuant to section 12(g) of the Act: Common Stock ------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $68,921,072, based on the closing price of the Common Stock on December 28, 1999. The number of shares outstanding of the registrant's Common Stock, as of December 28, 1999, was 6,953,190. DOCUMENTS INCORPORATED BY REFERENCE: None 2 TABLE OF CONTENTS
Page ---- PART I. Item 1. Business....................................................................................1 Item 3. Legal Proceedings...........................................................................9 PART II. Item 6. Selected Financial Data....................................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......11 Item 8. Financial Statements and Supplementary Data................................................18 PART III. Item 10. Directors and Executive Officers of the Registrant.........................................35 Item 12. Security Ownership of Other Beneficial Owners and Management...............................37 Item 13. Certain Relationships and Related Transactions.............................................39 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................39
3 PART I. ITEM 1. BUSINESS. OVERVIEW Analytical Surveys, Inc. ("ASI" or the "Company") is a leading provider of customized data conversion, digital mapping services, spatial data management and technical services for the geographic information systems market. A geographic information system ("GIS") is an "intelligent map" that allows users to input, update, query, analyze and display detailed information about a geographic area. ASI helps customers by transforming raw, often confusing information from multiple sources (maps, blueprints, databases, aerial photography, satellite imagery, etc.) into a high-resolution, large-scale, richly detailed digital and visual representation that organizations can rely on to make better decisions with speed and confidence. The Company has historically targeted utilities and state and local governments, and is implementing strategies to expand the number of markets targeted and the range of GIS-related spatial data management and technical services offered. Its current customers include but are not limited to the New York City Department of the Environment, Florida Power & Light, Niagara Mohawk Power Company, Entergy, Michigan Consolidated Gas, U S WEST and FirstEnergy Corp. The Company believes that the market for geographic information systems is experiencing growth due to numerous factors, including: growing awareness of the benefits of GIS technology; significant reductions in computer hardware prices; increased capability and reliability of hardware and software; deregulation and consolidation in the utility industry; and increased demand for geographic information systems in growing communities. In addition, the Company believes that GIS users are increasingly outsourcing their data conversion and other GIS service projects to third-party providers such as ASI. The Company provides its customers with a single source for all data conversion services necessary to achieve economic value from their investments in geographic information systems. STRATEGY The Company's objective is to maintain and enhance its leadership position in the data conversion and digital mapping industry. This objective is reflected in the Company's strategy: Expand Business in New Markets. The Company believes that there is significant potential in new markets outside of its existing core markets of utilities and state and local governments. These new markets include transportation, wireless telecommunications, insurance and others. The Company intends to capitalize on these new markets by expanding its portfolio of services to include more consulting, GIS design, implementation and system operation services. The Company believes it can be successful in these new markets by making GIS more accessible to those potential customers who may be less familiar with benefits of GIS. See Risk Factors - "Risks Associated with Entry into New Markets." Expand Business in Existing Markets. The Company believes that there is significant potential within its existing customer base for expanded services and products and intends to add to the breadth of services it offers to such customers. The Company also intends to capitalize on the increasing number of GIS users in its core markets of utilities and state and local governments by marketing to new customers in these markets and increasing capacity in order to meet the demands of an expanded customer base. Expand into International Markets. In fiscal 1999, revenues from international sales represented approximately 8% of the Company's total revenues. The Company intends to increase its share of the international GIS services market by targeting international GIS users within its core markets. The Company believes that alliances with businesses or individuals with a local presence may be important to successful entry into certain international markets. The Company intends to continue to seek out such relationships and to continue to market directly to international GIS users. See "Sales and Marketing." Consolidate Industry Expertise and "Best Practices" Through Strategic Acquisitions. In 1995, ASI embarked on a strategy to acquire companies with demonstrated records of performance, proven operating methods, solid management teams and complementary technologies and customer bases. The Company completed four strategic acquisitions that expanded the Company's geographical scope, capacity, customer base, product offerings, 4 proprietary technology and operational expertise. The Company continues to seek acquisition opportunities that will contribute to its growth and expertise. See Risk Factors - "Risks Associated with Acquisition Strategy." Continue to Maintain and Develop Technological and Operational Leadership. The Company believes that its past success has been largely due to its technological expertise and operating procedures. The Company has developed and acquired proprietary software and procedures that automate portions of otherwise labor-intensive data conversion processes, enabling the Company to provide cost-effective and high-quality services on a timely basis. The Company intends to continue its efforts to develop new technology and to improve its existing technology and procedures, thereby enhancing its ability to expand into additional markets and further improve its production capacity and productivity. See "Research and Development." ASI SERVICES The Company offers a full range of services to create the digital base maps and databases of related geo-referenced information used in geographic information systems. Digital Land Base Maps. ASI uses specialized computers and internally developed proprietary software to create digital land base maps from paper maps, aerial photographs, land surveys and legal descriptions. The base maps are created using one of three technologies, depending on the needs of the customer: photogrammetric mapping, digital orthophotography or cadastral mapping. Photogrammetric Mapping. Photogrammetric mapping produces a digital land base map using data that is extracted from aerial photographs. The process uses an analytical stereoplotter (a three-dimensional viewing and data recording device), specialized computer equipment and proprietary software and operating procedures to draw, with lines, a highly precise map of visible ground features. Photogrammetric mapping may include contour and elevation information. Digital Orthophotography. Digital orthophotography is used to create richly detailed digital maps that have the appearance of, and are based on, aerial photographs. Aerial photographs are scanned into a computer, and the resulting image is corrected (orthorectified) to delete distortions in order to produce a highly precise map. Vector lines can be superimposed onto the map to enable users to determine the precise location of any particular feature or to measure distances from one feature to another. Digital orthophotographs also can be used as base maps for the layering of additional geo-referenced data. Cadastral Mapping. Cadastral maps illustrate property lines and are prepared by digitizing existing paper maps or converting the legal property descriptions into map coordinates. Other Geo-Referenced Information. Once the base map is produced, links to tabular databases are created, and other geo-referenced data, such as buildings, telephone poles and zoning restrictions, are collected, verified, converted into digital format and added to the base map to create a GIS. The Company provides an experienced field inventory staff to collect and verify information and uses computerized and manual techniques to verify and digitize data from paper sources. Once a GIS is completed, users can view the base map and any or all of the layers of data on a computer screen and can retrieve selected data concerning any desired location appearing on the screen or all data matching one or more variables. ACQUISITIONS AND DISPOSITIONS In 1995, ASI embarked on a growth strategy, which included consolidation of the fragmented GIS services industry. The Company completed four strategic acquisitions that expanded the Company's geographical scope, capacity, customer base, product offerings, proprietary technology and operational expertise. The Company acquired Intelligraphics, Inc. ("Intelligraphics") located in Wisconsin in December 1995; Westinghouse Landmark GIS, Inc. ("ASI Landmark") located in North Carolina in - 2 - 5 July 1996, MSE Corporation ("MSE") located in Indiana in July 1997 and Cartotech, Inc. ("Cartotech") located in Texas in June 1998. Initially the Company retained the core management teams (except for former owners) and most employees at its acquisitions in order to capitalize on their understanding of their respective markets and to provide continuity with existing customer relationships. In 1999 the Company has increased its efforts to promote use of the "best practices" of the acquired businesses throughout the Company in such areas as bid preparation, production processes and utilization of proprietary software. The Company also acquired the assets of Measurement Sciences, Inc. (MSI) for 21,850 shares of restricted common stock valued at approximately $514,000. MSI provides land surveying, airborne gps and high accuracy data gathering and measurement services. MSI's revenues for its most recent fiscal year preceding the purchase were $1.6 million, which included $731,000 of services purchased by ASI. As part of its efforts to further streamline its operations, the Company sold its Phillips Design Group and Mid-States Engineering subsidiaries (both acquired as parts of MSE Corporation) during 1999, as these units were not core business competencies. The Company also sold its Cartographic Sciences Group located in Mumbai, India to Infotech Enterprises, Ltd. in order to simplify management of its overseas production and to expand its available capacity in India. CUSTOMERS The Company derives its revenues primarily from two core markets, utilities and state and local governments, and also serves federal agencies and commercial businesses. From time to time, the revenues earned on a specific contract may exceed 10% of total Company revenues earned in a fiscal year. No customer accounted for more than 10% of the Company's revenues in fiscal 1998 or fiscal 1999. See "Risk Factors Dependence on Certain Customer Markets." SALES AND MARKETING The Company markets its products and services in its domestic and international markets primarily through an internal sales force. The Company augments its direct sales efforts by maintaining memberships in professional and trade associations and by actively participating in industry conferences. The Company also augments its direct sales efforts by maintaining relationships with regional businesses offering complementary services. A portion of the Company's sales is also derived from referrals, either directly or indirectly, from consultants in the GIS industry. The Company plans to improve and expand its sales and marketing efforts beyond the Company's existing core markets in fiscal 2000. These efforts include offering expanded services such as consulting, and developing marketing communications aimed at new markets such as transportation, wireless telecommunications, insurance and financial services and will require the Company to hire additional qualified sales personnel for these new markets. The Company believes that alliances with local businesses or individuals may be important to successful entry into certain international markets and intends to continue to seek out such relationships and to market directly to international customers. The Company's sales cycle is generally lengthy, as customers normally take several months to go through the bidding/planning and award phases of a GIS project. Once awarded, it generally takes 30 to 60 days until the final contract is signed. Most contracts take from six to 48 months to complete. See "Risk Factors--Dependence on Business Alliances." SUBCONTRACTORS ASI employs certain selected subcontractors for tasks outside its expertise, such as aerial photography. The Company also uses subcontractors when necessary to expand capacity, meet deadlines, reduce production costs, manage work load and encourage businesses owned by women and minorities. In May 1998, the Company acquired Interra Technologies, a 280-employee India-based company, for $438,000. In September 1999 the Company sold Interra to Infotech Enterprises, Ltd. ("Infotech"), another of its India-based subcontractors. The Company entered into a five year agreement with Infotech - 3 - 6 to assure the Company's continued exclusive access to Infotech's production capacity. Under the agreement, the Company also licensed certain of its proprietary production technology to Infotech and provided certain assurances of production volume to Infotech. As a means of reducing its production costs, the Company intends to utilize offshore subcontractors for a higher percentage of its production in fiscal 2000. See "Risk Factors--Dependence on Subcontractors", "--Dependence on Offshore Operations" and "--Personnel." RESEARCH AND DEVELOPMENT The Company believes that its past success has been largely due to its technological expertise and operating procedures. The Company has developed and acquired proprietary software and procedures that automate portions of otherwise labor-intensive data conversion processes, enabling the Company to provide cost-effective and high-quality services on a timely basis. The Company intends to continue its efforts to develop new technology and to improve its existing technology and procedures, thereby enhancing its ability to expand into additional markets and further improve its production capacity and productivity. The Company engages in several 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. Approximately 35 employees are substantially engaged in research and development efforts including three in its Advanced Technology Division. The Company expended $274,905, $255,928 and $291,073 in its Advanced Technology Division for the fiscal years ended September 30, 1997, 1998 and 1999 respectively. See "Risk Factors--Reliance on Technology; Limited Protection of Proprietary Rights." COMPETITION The GIS services business is highly competitive and highly fragmented. The Company's competitors include small regional firms, independent firms, large companies with GIS services divisions, customer in-house operations and international low-cost providers of data conversion services. Additionally, as the GIS services industry evolves, additional competitors with greater resources than the Company may enter the industry. Two large companies with substantial financial resources have launched satellites with imagery technology that provides much more detailed photographs than have been available with such technology in the past. Although current commercially available satellite imagery does not provide the degree of resolution required by most of the Company's customers, if such technology becomes commercially available, satellite companies may attempt to enter our segments of the GIS services business or could form strategic alliances with the Company's competitors, and thereby could pose a substantial competitive threat to the Company. In addition, other improvements in technology could provide competitors or customers with readily available tools to perform the services provided by the Company and lower the cost of entry into the GIS services industry. ASI seeks to compete on the basis of the quality of its products, the breadth of its services, and the accuracy, responsiveness and efficiency with which it can provide services to customers and its capacity to perform large complex projects. The Company uses its internally-developed proprietary production software as well as commercially available software to automate much of the otherwise labor-intensive GIS production process. The Company believes that its automated approach enables it to achieve more consistent quality and greater efficiencies than it could if it used more manually-intensive methods. In 1999, the Company experienced increased price competition, particularly in the utilities market. This competition came primarily from new entrants to the market, who perform their work utilizing mostly off-shore locations. In order to meet this competition, the Company has begun to utilize off-shore subcontractors for a higher percentage of its production in fiscal 2000. - 4 - 7 The Company also believes that the retention of highly qualified managers and executive officers is critical to its ability to compete in the GIS data conversion industry. See "Risk Factors--Competition" and "--Dependence on Key Personnel." PERSONNEL At September 30, 1999, ASI had approximately 1225 employees, virtually all of whom are full-time. Since September 30, 1999, the Company has reduced its workforce by approximately 300, primarily as a result of its transition to having a greater percentage of work performed by its offshore subcontractors. ASI does not have a collective bargaining agreement with any of its employees and generally considers relations with its employees to be good. RISK FACTORS In addition to the other information set forth in this Form 10-K, the issues and risks described below should be considered carefully in evaluating the Company's outlook and future. RISKS ASSOCIATED WITH CERTAIN SHAREHOLDERS' LITIGATION The Company and certain of its present and former officers and employees (the "Individual Defendants") have been named as defendants in several putative securities class actions. Plaintiffs in each of these actions allege that defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder, alleging that they misstated or omitted to state material facts concerning the Company's operations and financial results in the Company's financial statements filed with the SEC, and in press releases and other public statements, issued during the period from January 25, 1999, through January 27, 2000 (the "putative class period"). See "Item 3. Legal Proceedings" Because this litigation is at an early stage, it is impossible to evaluate the impact that the above actions, 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 and the Individual Defendants intend to defend themselves vigorously in this litigation. RISKS ASSOCIATED WITH ACQUISITION STRATEGY Acquisitions involve a number of special risks, including, but not limited to, potential adverse short-term effects on the Company's operating results, diversion of management's attention, the loss of key personnel, risks associated with the assimilation of the operations and personnel of the acquired companies, unanticipated business problems or legal liabilities and amortization of acquired intangible assets. In addition, when the Company acquires another business, it assumes the obligation to complete the acquired company's contracts that are in process. The Company's results of operations following any acquisition will depend, in part, on the ability of the Company to profitably complete such contracts, which could be adversely affected by the acquired company's underestimation of the cost or amount of work required to complete the project as well as additional costs necessary to correct problems associated with the acquired company's prior performance. There is no assurance that the Company will be able to integrate acquired businesses into the Company without substantial costs, delays or other operational or functional difficulties, or to obtain the synergies expected from such acquisitions. Some or all of these risks could have a material adverse effect on the Company. In addition, there can be no assurance that the Company will be able to identify and acquire additional strategic businesses, and, to the extent that consolidation becomes more prevalent in the GIS services industry, the prices for attractive acquisition candidates may reach unacceptably high levels. The inability of the Company to implement and manage its acquisition strategy successfully for the reasons set forth above or for other reasons would have an adverse effect on the Company. - 5 - 8 ABILITY TO MANAGE GROWTH The Company has grown substantially since 1996 and, in particular, since its acquisition of MSE in July 1997 and Cartotech in June 1998. An integral part of the Company's long-term strategy is to continue its growth, both as a result of strategic acquisitions and increased sales by the Company to new and existing clients. To the extent that the Company is able to continue to grow, its ability to manage any such growth will be critical to its success. Acquisitions require the establishment of financial controls and accounting procedures at the acquired companies and the control of acquisition-related overhead. The Company is the process of reviewing its financial controls and accounting procedures (including those at the recently acquired operations) as a result of an internal investigation into its procedures for estimating cost-of-completion on its contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Any growth will require the enhancement of operational, financial and information systems and the attraction and retention of additional management and trained personnel. There can be no assurance that the Company will be able to manage expanded operations effectively, and its failure to do so would have a material adverse effect on the Company. COMPETITION The GIS services business is highly competitive and highly fragmented. The Company's competitors include small regional firms, independent firms, large companies with GIS services divisions, customer in-house operations and international low-cost providers of data conversion services. Additionally, as the GIS services industry evolves, additional competitors with greater resources than the Company may enter the industry. Two large companies with substantial financial resources have launched satellites with imagery technology that provides much more detailed photographs than have been available with such technology in the past. Although current commercially available satellite imagery does not provide the degree of resolution required by most of the Company's customers, if such technology becomes commercially available, satellite companies may attempt to enter our segments of the GIS services business or could form strategic alliances with the Company's competitors, and thereby could pose a substantial competitive threat to the Company. In addition, other improvements in technology could provide competitors or customers with tools to perform the services provided by the Company and lower the cost of entry into the GIS services industry. In 1999, the Company experienced increased price competition, particularly in the utilities market. This competition came primarily from new entrants to the market, who perform their work utilizing mostly off-shore locations. In order to meet this competition, the Company has begun to utilize off-shore subcontractors for a higher percentage of its production in fiscal 2000. A number of the Company's competitors or potential competitors have capabilities and resources greater than those of the Company. RISKS ASSOCIATED WITH TERMS OF CUSTOMER CONTRACTS Virtually all of the Company's revenue is earned under long-term, fixed-price contracts. The Company's contractual obligations typically include large projects that will extend over one to four years. The Company's ability to estimate its costs accurately when negotiating the overall price of a project is critical to ensuring the profitability of such project. The Company must also control the costs of performance under such fixed-price contracts. As the Company increases its marketing efforts to obtain larger projects, the needs to estimate costs accurately and to control costs of performance become more important. Schedule delays resulting from a customer's lack of available funding or schedule compressions required by customers may place additional strains on management to hire and train the personnel required for project completion. The Company's contracts with its customers are generally terminable by the customer on relatively short notice, and customers may request that the Company slow down or scale back the scope of a project in order to satisfy the customer's budget or cash flow requirements. In addition, the Company could experience material contract terminations or slowdowns. Long-term, fixed-price contracts for larger projects generally increase the Company's risk due to inflation. The Company may find it more difficult in the future to negotiate change orders to take in to account scope changes that occur after initial contract signing. Contracts are generally signed with a broad outline of the scope of the work, which is reflected in the detailed specifications that are prepared after a contract is signed. In preparing the detailed specifications, customers often negotiate to include - 6 - 9 items in the original contract scope that ASI did not include when it prepared its bid. To the extent the Company is not successful in negotiating change orders to include additional work as outside the scope of the contract, the Company's profit margin on such contracts could be adversely affected. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience quarterly variations in sales and operating income as a result of many factors, including the effects of acquisitions, timing of customers' budget processes, slowdowns or acceleration of work by customers, the number of operating days in each quarter and the impact of weather conditions on the ability of subcontractors to obtain satisfactory aerial photography. In addition, the Company has in the past experienced lower sales in its first fiscal quarter (ended December 31) due to certain customers' year-end funding constraints, seasonal limitations on obtaining aerial photography and seasonal slowdowns associated with the year-end holidays. As a result of a comprehensive review of the Company's contract cost-of-completion assumptions conducted under the supervision of the Audit Committee of the Board of Directors, the Company discovered certain accounting errors that required a downward adjustment of the revenues recognized in each of the four fiscal quarters of the year ended September 30, 1999. The errors related principally to the exclusion of certain contract-related costs in the estimated costs to complete; the untimely recognition of additional anticipated costs to complete; and the inaccurate assessment of future production efficiencies and inefficiencies affecting estimated costs to complete. VOLATILITY OF STOCK PRICE The Common Stock has experienced, and is likely to continue to experience significant price and trading volume fluctuations. The trading price of the Common Stock has been and may continue to be subject to significant fluctuations in response to actual or anticipated variations in the Company's quarterly operating results and other factors, such as: the introduction of new services or technologies by the Company or its competitors; changes in other conditions in the GIS industry or in the industries of any of the Company's customers; changes in governmental regulation, government spending levels or budgetary procedures; changes in securities analysts' estimates of the future performance of the Company, its competitors or the industry generally; or general market conditions. The trading price of the Common Stock may vary without regard to the operating performance of the Company. General market price declines or market volatility in the future, or future declines or volatility in the prices of stock for companies in the GIS industry, also could affect the market price of the Common Stock. RELIANCE ON TECHNOLOGY; LIMITED PROTECTION OF PROPRIETARY RIGHTS The Company has devoted significant resources to developing and acquiring specialized data collection and conversion hardware and software. In order to remain competitive, it will be necessary for the Company to continue to select, invest in, acquire and develop new and enhanced technology on a timely basis. There can be no assurance that the Company will be successful in these efforts or in anticipating developments in data conversion technology. Although the Company believes that its operating procedures and proprietary software have been important factors in its success, the technology used by the Company in developing its proprietary software is readily available to, or could legally be duplicated by, its competitors. The Company does not have any patent protection for its products or technology. Although the Company relies to a great extent on trade secret protection for much of its technology and has obtained confidentiality agreements from most of its employees, third parties could independently develop similar technology, obtain unauthorized access to the Company's proprietary technology or misappropriate technology to which the Company has granted access. DEPENDENCE ON CERTAIN CUSTOMER MARKETS The Company derives its revenues primarily from two core markets, utilities and state and local governments, and also serves federal agencies and commercial businesses. The ongoing consolidation of the utility industry could increase competition for the GIS services projects of the utilities that remain. Also, to the extent that utilities remain regulated, legal, financial and political considerations may - 7 - 10 constrain the ability of utilities to fund geographic information systems. Many state and municipal entities are subject to legal constraints on spending, and a multi-year contract with any such entity may be subject to termination in any subsequent year if the entity does not choose to appropriate funds for such contracts in that year. Moreover, fundamental changes in the business practices or capital spending policies of any of these customers, whether due to budgetary, regulatory, technological or other developments or changes in the general economic conditions in the industries in which they operate, could cause a material reduction in demand by such customers for the services offered by the Company. Any such reduction in demand could have a material adverse effect on the Company. RISK ASSOCIATED WITH ENTRY INTO NEW MARKETS The Company's strategy is to enter into new markets for GIS and related services, such as wireless telecommunications, and provide additional services, such as consulting. The Company anticipates that these marketing efforts will require the Company to retain its existing personnel and make additional expenditures for experienced personnel, training and capital investments. To the extent the Company is unable to attract and retain a sufficient sales force to carry out these new marketing initiatives, the Company's sales could be adversely affected. To the extent that additional sales generated from these new markets do not offset the additional expenses, the Company's profitability could be adversely affected. The Company cannot predict whether current or future customers will purchase these additional services or whether the Company will be successful in penetrating these new markets. If the Company is unable to successfully penetrate these new markets, its revenues will not increase as anticipated. In addition, the focus on new markets may direct the Company's attention away from its core markets, which could cause the Company's revenues in its established markets to decline. DEPENDENCE ON INTERNAL LABOR FORCE The Company's business is labor-intensive and requires trained employees. In order to support additional growth, if any, the Company must increase production capacity by the addition of more employees. There can be no assurance that the Company will be able to continue to hire, train and retain sufficient numbers of qualified employees. A significant portion of the Company's costs consists of wages to hourly workers. An increase in hourly wages, costs of employee benefits or employment taxes could have a material adverse effect on the Company. Turnover could increase for any of several reasons, including the recent layoffs and increased competition for labor. Higher turnover among the Company's employees would increase the Company's recruiting and training costs, could affect the Company's ability to perform services and earn revenues on a timely basis and could decrease operating efficiencies and productivity. DEPENDENCE ON SUBCONTRACTORS The Company employs certain selected subcontractors for tasks outside its expertise, such as for the acquisition of aerial photography. The Company also uses subcontractors for work similar to that performed by its own employees in order to expand capacity, meet deadlines, reduce production costs, manage work load and encourage businesses owned by women and minorities. The inability to obtain the services of such qualified subcontractors when needed or at all could have a material adverse effect on the Company. As a means of reducing its production costs, the Company intends to utilize offshore subcontractors for a higher percentage of its production in fiscal 2000. However, there is no assurance that the Company's objectives will be achieved. See "Business--Subcontractors." RISKS RELATING TO INTERNATIONAL SALES In fiscal 1999, revenues from international sales represented approximately 8% of the Company's total revenues. The Company intends to continue expanding its operations outside the United States and to enter additional international markets, which will require management attention and financial resources. If foreign sales become a more significant component of the Company's net sales, the Company's business will become more vulnerable to the inherent risks of doing business internationally, including increased difficulties in collection of accounts receivable, unexpected changes in regulatory requirements, tariffs and other trade barriers, fluctuations in currency exchange rates, potentially adverse - 8 - 11 tax consequences and political instability. The existence or occurrence of any one of these factors could have a material adverse effect on the Company. Dependence on Business Alliances A portion of the Company's sales is the result of referrals derived, either directly or indirectly, from engineers, software developers and consultants in the GIS industry. The Company believes that its continued success in the GIS services market is dependent, in part, on its ability to maintain current relationships and to cultivate additional relationships with other industry participants. Such participants could acquire a GIS data collection or data conversion business or businesses or form other relationships with the Company's competitors. Furthermore, the Company's efforts to expand into new markets may adversely affect its current and future relationships with these participants. There can be no assurance that relationships with GIS consultants will continue to be a source of business for the Company. The inability of the Company to maintain such relationships or to form new relationships could have a material adverse effect on the Company. DEPENDENCE ON KEY PERSONNEL The success of the Company depends in large part upon the continued service of its executive officers and other key employees. In January 2000 the Company's Chairman and CEO, Sid Corder, retired, and in February 2000 its Chief Financial Officer, Vince Otto, resigned. The Company has appointed Sol C. Miller, the Company's largest stockholder, a director of the Company and former owner of MSE, which was acquired by the Company in July 1997, as interim CEO and John Thorpe, a director and founder of the Company, as assistant CEO while a search for a new CEO is ongoing. The Company also hired Michael Renninger who will become the Company's new Chief Financial Officer effective March 7, 2000. The Company is actively seeking a new Chief Executive Officer. The Company may be adversely affected if the management changes are not effective and if the Company is not able to recruit a new CEO and retain qualified individuals to serve in senior management positions. While the Company has employment agreements with certain of its key personnel, there is no assurance that the Company will be able to retain the services of such key personnel. The Company does not maintain any key person life insurance policies. Recent layoffs and employees' attitudes toward the future prospects of the Company may impair the Company's ability to retain and recruit key personnel. The loss of additional key personnel or the inability to obtain additional key personnel could have a material adverse effect on the Company. DEPENDENCE ON OFFSHORE OPERATIONS The Company utilizes subcontractors in India and may from time to time use subcontractors in other overseas locations to perform certain data capture tasks at lower costs than could be achieved in the United States. While the amounts paid for the performance of services overseas have not, to date, been material, the ability of the Company to perform services under some existing contracts on a profitable basis is dependent upon the continued availability of its overseas subcontractors. In the past, India has experienced significant inflation as well as civil unrest and regional conflicts. Moreover, the Indian government has exercised and continues to exercise significant influence over many aspects of the Indian economy. Events or governmental actions that would impede or prohibit the operations of the Company's subcontractors could have a material adverse effect on the Company. EFFECT OF PREFERRED STOCK PROVISIONS The Company's Articles of Incorporation allow the Board of Directors to issue up to 2,500,000 shares of preferred stock and to fix the rights, privileges and preferences of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued by the Company in the future. Although the Company has no present intention to issue any preferred stock, any such issuance could be used to discourage an unsolicited acquisition proposal by a third party. ITEM 3. LEGAL PROCEEDINGS. - 9 - 12 The Company and certain of its present and former officers and employees (the "Individual Defendants") have been named as defendants in several putative securities class actions filed in the United States District Court for the Southern District of Indiana, beginning February 2, 2000. Plaintiffs in each of the actions allege that the defendants violated Section 10(b) of the Exchange Act, and SEC Rule 10b-5 promulgated thereunder, alleging that they misstated or omitted to state material facts concerning the Company's operations and financial results in the Company's financial statements filed with the SEC, and in press releases and other public statements, issued during the period from January 25, 1999, through January 27, 2000 (the "putative class period"). Plaintiffs seek to represent themselves and a class of all public investors who purchased or otherwise acquired common stock of the Company during the putative class period and who suffered damages thereby, and seek an award of compensatory damages and attorneys' fees and costs. It is expected that the various actions will be consolidated before one judge, and that plaintiffs then will file a single, consolidated class action complaint. Because this litigation is at an early stage, it is impossible to evaluate the impact that the above actions, 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 and the Individual Defendants intend to defend themselves vigorously in this litigation. PART II. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data as of and for the fiscal years ended September 30, 1995, 1996, 1997, 1998 and 1999 are derived from consolidated financial statements of the Company which have been audited by KPMG LLP, independent accountants. The Company's historical consolidated financial statements as of September 30, 1998 and 1999 and for the years ended September 30, 1997, 1998, and 1999 are contained elsewhere in this Report. The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and the related notes thereto and with Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report.
1995 1996(1)(2) 1997(3) 1998(4) 1999 ------- ---------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales $13,538 22,669 40,799 88,155 103,254 Cost and expenses: Salaries, wages and related benefits 5,247 10,501 19,792 42,953 57,571 Subcontractor costs 3,244 3,898 5,899 11,961 15,628 Other general and administrative 2,244 3,681 7,115 14,964 18,112 Depreciation and amortization 784 1,184 1,780 3,860 5,661 ------- ------- ------ ------ ------- 11,519 19,264 34,586 73,738 96,972 ------- ------- ------ ------ ------- Earnings from operations 2,019 3,405 6,213 14,417 6,282 Other expenses, net 119 339 770 2,292 1,439 ------- ------- ------ ------ ------- Earnings before income taxes 1,900 3,066 5,443 12,125 4,843 Income tax expenses 716 1,153 2,112 4,894 2,053 ------- ------- ------ ------ ------- Net earnings $ 1,184 1,913 3,331 7,231 2,790 ======= ======= ====== ====== ======= Diluted earnings per share $ 0.27 0.38 0.60 1.06 0.39 ======= ======= ====== ====== ======= Weighted average common shares outstanding-diluted 4,408 5,033 5,562 6,819 7,177 CONSOLIDATED BALANCE SHEET DATA: Working capital $ 5,738 9,986 21,085 40,986 40,029 Total assets $10,048 21,988 50,146 94,540 89,242 Long-term debt, less current maturities $ 408 4,528 14,145 29,920 20,339 Total stockholders' equity $ 6,654 10,926 23,831 44,463 50,663
- 10 - 13 - -------------------- (1) In December 1995 the Company acquired Intelligraphics for $3.5 million in cash and 345,000 shares of restricted Common Stock valued at $891,000. (2) In July 1996 the Company acquired ASI Landmark for $2.0 million in cash. (3) In July 1997 the Company acquired MSE for $12.5 million in cash and 925,000 shares of restricted Common Stock valued at $7.3 million. (4) In June 1998 the Company acquired Cartotech for $8.1 million in cash and 354,167 shares of restricted common stock valued at $8.3 million. ITEM 7. 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-K. This Form 10-K contains forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-K 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-K, or in the documents incorporated by reference into this Form 10-K, 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 in Item 1 Business Risk Factors and statements relating to competition, future acquisitions, management of growth, international sales, 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-K are based upon information available to the Company on the date of this Form 10-K, 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-K. Factors that could cause or contribute to such differences include, but are not limited to, the resolution or outcome of the putative class action litigation, the effect of changes in management in the Company and the ability of the Company to attract a new CEO and retain qualified individuals to serve in key management positions, and those discussed below, in Item 1. Business--"Risk Factors," and elsewhere in this Form 10-K. OVERVIEW The Company, 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. 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, ASI embarked on a growth strategy which included consolidation of the fragmented GIS services industry. The Company completed four strategic acquisitions that expanded the Company's geographical scope, capacity, customer base, product offerings, proprietary technology and operational expertise. The Company acquired Intelligraphics, Inc. ("Intelligraphics") located in Wisconsin in December 1995; Westinghouse Landmark GIS, Inc. ("ASI Landmark") located in North Carolina in July 1996, MSE Corporation ("MSE") located in Indiana in July 1997 and Cartotech, Inc. ("Cartotech") located in Texas in June 1998. In conjunction with the above acquisitions, the Company has recorded goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired in business combinations. As of September 30, 1999, goodwill, net of accumulated amortization, was $22.1 million. The Company amortizes the value of the intangible assets acquired in its recent business acquisitions over a period of 15 years, representing the expected period of benefit from the acquisitions. The Company believes this amortization period to be appropriate based on the historical and forecasted operating results of the acquired businesses. Changes in market conditions were encountered in fiscal year 1999 which resulted in a reduction of timely order flow and reduced the Company's order backlog to $79.8 million at September 30, 1999. Management believes these market conditions were primarily caused by consolidation in the utility industry, year-2000 computer concerns and increased competition from companies with offshore - 11 - 14 operations. Investments in expanded market development activities combined with the reduced order backlog are expected to prevent the Company from achieving its historical range of growth during fiscal year 2000. Management continues to monitor production requirements and seeks to optimize its domestic and overseas production capacities to match actual production requirements. 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; 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 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. 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. On January 27, 2000, the Company announced that it was conducting a detailed review of its cost-of-completion assumptions related to its contracts under the supervision of the Audit Committee of the Board of Directors that might lead to a restatement of its financial results for fiscal 1999. As a result of this comprehensive review, the Company discovered certain accounting errors that required a downward adjustment of the revenues recognized in each of the four quarters of fiscal 1999. The errors related principally to the exclusion of certain contract-related costs in the estimated costs to complete; the untimely recognition of additional anticipated costs to complete; and the inaccurate assessment of future production efficiencies and inefficiencies affecting estimated costs to complete. When the Company's analysis indicated that the estimated costs to complete a specific project were based on inaccurate information or assumptions, an estimate was made of the impact on previously recognized revenues as well as timing of the error, and the appropriate fiscal 1999 quarter's operating results were restated accordingly. As a result of this review, the estimates of costs to complete for certain of the Company's contracts was increased. Since the cost estimates are used to determine the amount of revenue to be recognized, the effect of these changes in cost estimates was to reduce sales and net income for fiscal 1999 by $10.9 million and $6.5 million, respectively, from the Company's previously reported results. This reduction in revenue will be recovered over the remaining lives of the affected contracts, approximately six to fifteen months. The increase in estimated costs to complete will reduce profits, if any, to be realized on these contracts. 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 Company anticipates that, as a percentage of sales, subcontractor costs will increase with a corresponding decrease in salaries, wages and related benefits. This is due, in part, to the Company's September 1999 sale of Cartographic Sciences (formerly Interra Technologies), an India-based company, to InfoTech Enterprises Ltd. InfoTech is a provider of subcontractor services to the Company, and although there can be no assurances that it will be successful, the Company expects to utilize InfoTech for a higher percentage of its production in fiscal 2000. The following table illustrates the relationship of salaries, wages and related benefits and subcontractor costs to sales: YEAR ENDED SEPTEMBER 30, ------------------------ 1997 1998 1999 ---- ---- ---- PERCENTAGE OF SALES: Salaries, wages and related benefits 48.5% 48.7% 55.8% Subcontractor costs 14.5% 13.6% 15.1% Total production costs 63.0% 62.3% 70.9% The Company recognizes losses on contracts in the period such loss is determined. From the beginning of fiscal 1997 through the end of fiscal 1999, the Company has recognized aggregate losses on contracts of approximately $1.4 million. Over the same period, the Company recognized sales of - 12 - 15 $232.2 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 September 30, 1999, backlog was $79.8 million. A number of the projects awarded to the Company are relatively large ($2 million or greater), 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. See Item 1. Business "--Risk Factors - Risks Associated with Terms of Customer 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 fiscal 1997, 1998 and 1999, the Company expended $274,905, $255,928 and $291,073, respectively on such independent research and development activities in the Advanced Technology Division. RESULTS OF OPERATIONS The following table sets forth, for the fiscal years ended September 30 below, selected consolidated statement of operations data expressed as a percentage of sales: 1997 1998 1999 PERCENTAGE OF SALES: Sales 100.0% 100.0% 100.0% Costs and expenses: Salaries, wages and related benefits 48.5 48.7 55.8 Subcontractor costs 14.5 13.6 15.1 Other general and administrative 17.4 16.9 17.5 Depreciation and amortization 4.4 4.4 5.5 ---- ---- ---- Earnings from operations 15.2 16.4 6.1 Other expense, net 1.9 2.6 1.4 ---- ---- ---- Earnings before income taxes 13.3 13.8 4.7 Income tax expense 5.1 5.6 2.0 ---- ---- ---- Net earnings 8.2% 8.2% 2.7% ==== ==== ==== FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998 Sales. The Company's sales consist of revenue recognized for services performed. Sales increased 17.1% or $15.1 million to $103.3 million for fiscal 1999 from $88.2 million for fiscal 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 fiscal 1998 were approximately $14.6 million. Salaries, wages and related benefits. Salaries, wages and related benefits includes employee compensation for production, marketing, selling, administrative and executive employees. Salaries, - 13 - 16 wages and related benefits increased 34.0% to $57.6 million for fiscal 1999 from $43.0 million for fiscal 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 anticipated increase in business. As a percentage of sales, salaries, wages and related benefits increased to 55.8% for fiscal 1999 from 48.7% for fiscal 1998. This increase was primarily attributable to a reduction in sales volume. 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 30.7% to $15.6 million for fiscal 1999 from $12.0 million for fiscal 1998, and increased as a percentage of sales to 15.1% for fiscal 1999 from 13.6% for fiscal 1998. Other general and administrative costs. Other general and administrative costs includes rent, maintenance, travel, supplies, utilities, insurance and professional services. Such costs increased 21.0% to $18.1 million for fiscal 1999 from $15.0 million for fiscal 1998, primarily due to the acquisition of Cartotech. As a percentage of sales, other general and administrative costs increased to 17.5% for fiscal 1999 from 17.0% for fiscal 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 fiscal 1999, depreciation and amortization increased 46.7% to $5.7 million from $3.9 million for fiscal 1998. This increase was primarily attributable to the increased goodwill recorded as a result of the Cartotech acquisition. As a percentage of sales, depreciation and amortization increased to 5.5% for fiscal 1999 from 4.4% for fiscal 1998. Other expense, net. Other expense, net is comprised of net interest expense and the net gain on sale of assets. Interest expense increased 25.1% to $2.7 million for fiscal 1999 from $2.2 million in fiscal year 1998. This increase was primarily due to the full year interest expense on debt incurred in connection with the acquisition of Cartotech in June 1998. The gain on sale of assets was $1.1 million in fiscal 1999, up from $15,000 in fiscal 1998, primarily due to the gain on sale of the Cartographic Sciences unit in 1999. Income tax expense. Income tax expense was $2.1 million for fiscal 1999 compared to $4.9 million for fiscal 1998. The Company's effective income tax rate for fiscal 1999 was 42.4%, an increase from 40.4% for fiscal 1998. Fiscal Years Ended September 30, 1998 and 1997 Sales. Sales increased $47.4 million to $88.2 million for fiscal 1998 from $40.8 million for fiscal 1997. This increase was due to an increase in the number and size of customer contracts with the Company (including MSE and Cartotech) as well as the impact of the acquisition of MSE in July 1997 and Cartotech in June 1998. Prior to their acquisition by the Company, MSE's sales for fiscal 1996 were approximately $ 22.5 million and Cartotech's sales for fiscal 1997 were approximately $14.6 million. Salaries, wages and related benefits. Salaries, wages and related benefits increased 117.0% to $43.0 million for fiscal 1998 from $19.8 million for fiscal 1997. This increase was primarily due to the addition of over 325 employees as a result of the MSE acquisition in July 1997 and 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 48.7% for fiscal 1998 from 48.5% for fiscal 1997. This increase, and the corresponding decrease in subcontractor costs, was primarily attributable to the Company's increased capability to perform more tasks internally as well as a decrease in the number of projects which required subcontractor services. Subcontractor costs. Subcontractor costs increased 102.8% to $12.0 million for fiscal 1998 from $5.9 million for fiscal 1997, but decreased as a percentage of sales to 13.6% for fiscal 1998 from 14.5% for fiscal 1997. - 14 - 17 Other general and administrative costs. Other general and administrative costs increased 110.3% to $15.0 million for fiscal 1998 from $7.1 million for fiscal 1997, primarily due to the acquisition of MSE and Cartotech. As a percentage of sales, other general and administrative costs decreased to 16.9% for fiscal 1998 from 17.4% for fiscal 1997. Depreciation and amortization. Depreciation and amortization increased 116.9% to $3.9 million in fiscal 1998 from $1.8 million for fiscal 1997. This increase was primarily attributable to the increased goodwill recorded as a result of the MSE and Cartotech acquisitions. As a percentage of sales, depreciation and amortization was 4.4% for both fiscal 1998 and 1997. Other expense, net. Other expense, net is comprised primarily of net interest expense. Net interest expense increased 179.3% to $2.2 million for fiscal 1998 from $772,000 for fiscal 1997. This increase was primarily due to increased term debt incurred in connection with the acquisition of MSE in July 1997 and Cartotech in June 1998 and increased utilization of the Company's lines of credit for working capital. Income tax expense. Income tax expense was $4.9 million for fiscal 1998 compared to $2.1 million for fiscal 1997. The Company's effective income tax rate for fiscal 1998 was 40.4%, an increase from 38.8% for fiscal 1997, due to increases in state income taxes. 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 September 30, 1999, the Company had no borrowings outstanding on its working capital lines of credit and $27.6 million on its term debt. 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 Offer Rate (LIBOR) plus a margin ranging from 1.25% to 2.25%. The effective borrowing rate was 6.63% on September 30, 1999. The loan agreement contains covenants which require, among other things, the maintenance of certain financial ratios and include certain limitations on capital expenditures and dividend payments. The Company was in violation of certain of the financial ratio covenants at September 30, 1999. Subsequent to September 30, 1999, the Company received a waiver of these covenants through May 15, 2000. The loan agreement was amended on March 6, 2000 to eliminate the financial covenants that the Company had violated and established new covenants requiring the Company to maintain a minimum of $25 million in net tangible assets and to achieve a minimum level of profitability for the three remaining quarters of fiscal 2000. The amended agreement also reduced the line of credit to a maximum of $7.5 million based on eligible accounts receivable, increased the interest rate to LIBOR plus 3% and accelerated the final maturity of the balance of the term loan to February 2001. The Company's cash flow is significantly affected by customer contract terms and progress achieved on projects. Fluctuations in cash flow from operations is 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. Net cash provided by the Company's operating activities was $9.4 million for fiscal year 1999. Net cash used by the Company's operating activities was $4.4 million in 1998 and net cash provided by operating activities was $2.7 million for fiscal year 1997. The changes in the contract-related accounts described in the previous paragraph were not a significant use of cash in fiscal 1999. Accounts payable and accrued expenses decreased $2.8 million from September 30, 1998 to September 30, 1999 primarily due to lower amounts owed to subcontractors at the end of fiscal 1999. - 15 - 18 Cash used by investing activities for fiscal years 1997 and 1998 was $12.5 million and $12.2 million, respectively. Cash provided by investing activities for fiscal year 1999 was $0.28 million. Proceeds from sales of assets were $4.1 million in 1999 primarily due to the sales of the Mid-States Engineering and Cartographic Sciences units. Cash used by investing activities principally consisted of payments for net assets acquired in business combinations and purchases of equipment and leasehold improvements. Cash provided by financing activities for fiscal years 1997 and 1998 was $10.3 million and $17.3 million, respectively. Cash flows used by financing activities was $5.3 million in fiscal year 1999. 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. The Company believes that funds available under its lending arrangements and cash flows from operations are adequate to finance its operations for at least the next 18 months. RESTATED QUARTERLY FINANCIAL INFORMATION As a result of a comprehensive review of the Company's contract cost-of-completion assumptions, the Company discovered certain accounting errors that required a downward adjustment of the revenues recognized in each of the four quarters of fiscal 1999. The errors related principally to the exclusion of certain contract-related costs in the estimated costs to complete on certain projects; the untimely recognition of additional anticipated costs to complete; and the inaccurate assessment of future production efficiencies and inefficiencies affecting estimated costs to complete. When the Company's analysis indicated that the estimated costs to complete a specific project were based on inaccurate information or assumptions, an estimate was made of the impact on previously recognized revenues, as well as the timing of the error, and the appropriate fiscal 1999 quarter's operating results were restated accordingly. Since the cost estimates are used to determine the amount of revenue to be recognized, the effect of these changes in cost estimates was to reduce sales and net income for fiscal 1999 by $13.1 million and $8.2 million, respectively. Selected quarterly financial data for the years ended September 30, 1999 (as originally reported for each quarter and as restated) and 1998 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------------------------------------- -------------- --------------- ------------- ------------- -------------- 1999(Originally Reported) ------------------------- Sales $ 28,229 $ 29,166 $ 31,167 $ 24,986 $ 113,548 Income before inc. taxes 3,886 4,296 5,080 2,029 15,291 Net income 2,273 2,580 3,018 1,397 9,268 Earnings per share ------------------ Basic 0.34 0.38 0.44 0.20 1.36 Diluted 0.32 0.36 0.42 0.19 1.29 -------------------------------- -------------- --------------- -------------- ------------- -------------- 1999 Restatements ----------------- Sales $( 1,378) $ (1,963) $ (1,639) $ (5,314) $ (10,294) Income (loss) before (1,378) (1,963) (1,709) (5,398) (10,448) income taxes Net income (854) (1,217) (1,016) (3,391) (6,478) Earnings (loss) per share ------------------------- Basic (0.13) (0.18) (0.15) (0.49) (0.95) Diluted (0.12) (0.17) (0.14) (0.47) (0.90) -------------------------------- -------------- --------------- -------------- ------------- --------------
- 16 - 19 1999 (As Revised) ----------------- Sales $ 26,851 $ 27,203 $ 29,528 $ 19,672 $ 103,254 Income (loss) before 2,508 2,333 3,371 (3,369) 4,843 income taxes Net income 1,419 1,363 2,002 (1,994) 2,790 Earnings (loss) per share ------------------------- Basic 0.21 0.20 0.29 (0.29) 0.41 Diluted 0.20 0.19 0.28 (0.28) 0.39 -------------------------------- -------------- --------------- -------------- ------------- -------------- 1998 ---- Sales $ 17,402 $ 19,951 $ 22,752 $ 20,334 $ 88,155 Income before inc. taxes 2,595 2,946 3,156 3,428 12,125 Net income 1,556 1,801 1,885 1,989 7,231 Earnings per share ------------------ Basic 0.25 0.29 0.30 0.30 1.14 Diluted 0.23 0.27 0.28 0.28 1.06
YEAR 2000 ISSUES 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. As a result of the calendar year change to 2000, neither the Company nor, to the Company's knowledge any of its customers or subcontractors, have experienced any material adverse effects to their respective businesses as a result of the Year 2000 issue. - 17 - 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Analytical Surveys, Inc.: We have audited the accompanying consolidated balance sheets of Analytical Surveys, Inc. and subsidiaries as of September 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Analytical Surveys, Inc. and subsidiaries as of September 30, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999 in conformity with generally accepted accounting principles. KPMG LLP Indianapolis, Indiana December 29, 1999, except as to the last paragraph of note 4 and notes 10 and 11, which are as of March 6, 2000 - 18 - 21 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1998 and 1999 (In thousands)
ASSETS 1998 1999 ---- ---- Current assets: Cash $ 2,243 6,659 Accounts receivable, net of allowance for doubtful accounts of $161 and $138 in 1998 and 1999, respectively (notes 3 and 9) 17,501 15,074 Revenue earned in excess of billings (note 3) 39,316 30,898 Deferred income taxes (note 6) 557 402 Income taxes receivable 675 4,085 Prepaid expenses and other 659 1,066 -------- ------- Total current assets 60,951 58,184 -------- ------- Equipment and leasehold improvements, at cost: Equipment 13,015 13,916 Furniture and fixtures 1,594 1,581 Leasehold improvements 817 1,076 -------- ------- 15,426 16,573 Less accumulated depreciation and amortization (7,470) (8,740) -------- ------- Net equipment and leasehold improvements 7,956 7,833 -------- ------- Deferred income taxes 134 590 Goodwill, net of accumulated amortization of $1,654 and $3,174 in 1998 and 1999, respectively (note 2) 25,272 22,098 Other assets, net of accumulated amortization of $549 and $774 in 1998 and 1999, respectively 227 537 -------- ------- Total assets $ 94,540 89,242 ======== =======
-19- 22 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1998 and 1999 (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 ---- ---- Current liabilities: Current portion of long-term debt (note 4) $ 4,594 7,265 Billings in excess of revenue earned (note 3) 1,232 2,008 Accounts payable and other accrued liabilities 8,229 5,063 Accrued payroll and related benefits 5,910 3,819 ------- ------- Total current liabilities 19,965 18,155 Long-term debt, less current portion (note 4) 29,920 20,339 Other liabilities 192 85 ------- ------- Total liabilities 50,077 38,579 ------- ------- Stockholders' equity (note 7): Preferred stock, no par value. Authorized 2,500 shares; none issued or outstanding -- -- Common stock, no par value. Authorized 100,000 shares; 6,732 and 6,948 shares issued and outstanding in 1998 and 1999, respectively 28,670 32,080 Retained earnings 15,793 18,583 ------- ------- Total stockholders' equity 44,463 50,663 ------- ------- Commitments (note 5) Total liabilities and stockholders' equity $94,540 89,242 ======= =======
See accompanying notes to consolidated financial statements. -20- 23 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended September 30, 1997, 1998 and 1999 (In thousands, except per share amounts)
1997 1998 1999 ---- ---- ---- Sales $40,799 88,155 103,254 ------- ------ ------- Costs and expenses: Salaries, wages and benefits 19,792 42,953 57,571 Subcontractor costs 5,899 11,961 15,628 Other general and administrative 7,115 14,964 18,112 Depreciation and amortization 1,780 3,860 5,661 ------- ------ ------- 34,586 73,738 96,972 ------- ------ ------- Earnings from operations 6,213 14,417 6,282 ------- ------ ------- Other income (expense): Interest expense, net (772) (2,156) (2,698) Costs related to terminated stock offering -- (300) -- Gain on sale of subsidiaries (note 2) -- -- 1,084 Other 2 164 175 ------- ------ ------- (770) (2,292) (1,439) ------- ------ ------- Earnings before income taxes 5,443 12,125 4,843 Income tax expense (note 6) 2,112 4,894 2,053 ------- ------ ------- Net earnings $ 3,331 7,231 2,790 ======== ====== ======= Earnings per common share: Basic $ 0.64 1.14 0.41 Diluted $ 0.60 1.06 0.39 Weighted average outstanding common shares: Basic 5,244 6,349 6,833 Diluted 5,562 6,819 7,177
See accompanying notes to consolidated financial statements. -21- 24 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended September 30, 1997, 1998 and 1999 (In thousands)
COMMON STOCK ------------------ RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------ -------- ----- Balances at October 1, 1996 4,887 $ 5,695 5,231 10,926 Common stock issued in connection with business combination (note 2) 925 7,313 -- 7,313 Exercise of stock options 302 954 -- 954 Tax benefit relating to exercise of stock options -- 1,307 -- 1,307 Net earnings -- -- 3,331 3,331 ------ ------- ------ ------- Balances at September 30, 1997 6,114 15,269 8,562 23,831 Common stock issued in connection with business combination (note 2) 354 8,269 -- 8,269 Exercise of stock options 264 2,017 -- 2,017 Tax benefit relating to exercise of stock options -- 3,115 -- 3,115 Net earnings -- -- 7,231 7,231 ------ ------- ------ ------- Balances at September 30, 1998 6,732 28,670 15,793 44,463 Common stock issued in connection with business combination (note 2) 22 514 -- 514 Exercise of stock options 194 1,595 -- 1,595 Tax benefit relating to exercise of stock options -- 1,301 -- 1,301 Net earnings -- -- 2,790 2,790 ------ ------- ------ ------- Balances at September 30, 1999 6,948 $32,080 18,583 50,663 ====== ======= ====== =======
See accompanying notes to consolidated financial statements. -22- 25 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended September 30, 1997, 1998 and 1999 (In thousands)
1997 1998 1999 ------- -------- ------ Cash flows from operating activities: Net earnings $ 3,331 7,231 2,790 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 1,780 3,860 5,661 Gain on sale of subsidiaries (2) (15) (1,084) Deferred income tax benefit (55) (350) (470) Tax benefit relating to exercise of stock options 1,307 3,115 1,301 Changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable, net 951 (6,907) 1,138 Revenue earned in excess of billings (4,746) (16,213) 7,718 Income taxes receivable or payable -- (675) (3,369) Prepaid expenses and other 9 15 (336) Billings in excess of revenue earned (302) 121 866 Accounts payable and other accrued liabilities (111) 3,434 (2,835) Accrued payroll and related benefits 555 1,963 (1,956) -------- ------ ----- Net cash provided (used) by operating activities 2,717 (4,421) 9,424 -------- ------ ----- Cash flows from investing activities: Purchase of equipment and leasehold improvements (1,596) (3,888) (3,295) Cash proceeds from sales of subsidiaries 159 15 3,578 Payments for net assets acquired in business combinations, net of cash acquired (11,092) (8,337) -- -------- ------ ----- Net cash provided (used) by investing activities (12,529) (12,210) 283 -------- ------ ----- Cash flows from financing activities: Net borrowings (payments) under lines-of-credit with bank (2,027) 4,277 (5,750) Proceeds from issuance of long-term debt 12,714 29,072 4,003 Principal payments on long-term debt (1,292) (18,051) (5,139) Proceeds from exercise of stock options 954 2,017 1,595 -------- ------ ----- Net cash provided (used) by financing activities 10,349 17,315 (5,291) -------- ------ ----- Net increase in cash 537 684 4,416 Cash at beginning of year 1,022 1,559 2,243 -------- ------ ----- Cash at end of year $ 1,559 2,243 6,659 ======== ====== ===== Supplemental disclosures of cash flow information: Cash paid for interest $ 815 2,113 2,567 ======== ====== ===== Cash paid for income taxes $ 888 2,643 4,295 ======== ====== ===== Common stock issued for net assets acquired in business combinations $ 7,313 8,269 514 ======== ====== ===== Equity securities received in sale of subsidiary $ -- -- 535 ======== ====== =====
See accompanying notes to consolidated financial statements. -23- 26 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION Analytical Surveys, Inc. (ASI or the Company) is a Colorado corporation formed in 1981. ASI's primary business is the production of precision computerized maps and information files used in Geographic Information Systems (GIS). Federal, state and local government agencies and commercial companies use GIS to manage information relating to utilities, natural resources, streets, land use and property taxation. The Company operates in one business segment. The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (b) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are recorded at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: Equipment 3 to 5 years Furniture and fixtures 3 to 5 years Leasehold improvements 5 to 10 years Maintenance, repairs and renewals which do not add to the value of an asset or extend its useful life are charged to expense as incurred. (c) REVENUE RECOGNITION The Company recognizes revenue using the percentage of completion method of accounting based on the cost-to-cost method, whereby the percentage complete is based on costs incurred in relation to total estimated costs. Costs associated with obtaining contracts are expensed as incurred. The Company does not combine contracts for purposes of recognizing revenue and, generally, does not segment contracts. Revenue earned in excess of billings represents revenue related to services completed but not billed. The Company bills customers based upon the terms included in the contracts, which are generally upon delivery of certain products or information, or achievement of milestones defined in the contracts. When billed, such amounts are recorded as accounts receivable. Billings in excess of revenue earned represent billings in advance of services performed. -24- 27 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 The Company recognizes losses on contracts in the period such losses are determined. The Company does not believe warranty obligations on completed contracts are significant. (d) GOODWILL Goodwill represents the excess of the purchase price over net assets acquired in business combinations and is being amortized over a fifteen-year period using the straight-line method. (e) INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f) IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for long-lived assets under the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121) which requires that long-lived assets and certain identifiable intangibles, including goodwill, held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The recoverability of goodwill is further evaluated under the provisions of APB Opinion No. 17, Intangible Assets, based upon undiscounted cash flows. An impairment loss is recognized when estimated undiscounted future cash flows expected to be generated by an asset are less than its carrying value. Measurement of the impairment loss is based on the fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows or independent appraisal. (g) STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plans using the intrinsic value based method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (APB 25). The Company has provided pro forma disclosures of net earnings and earnings per share as if the fair value based method of accounting for the plans, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), had been applied. Pro forma disclosures include the effects of employee stock options granted subsequent to October 1, 1995. -25- 28 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 (h) RESEARCH AND DEVELOPMENT COSTS The Company expenses research and development costs as they are incurred. Research and development costs, which are included in salaries, wages and benefits expenses in the consolidated statements of operations, totaled $274,905, $255,928 and $291,073 for the years ended September 30, 1997, 1998 and 1999, respectively. (i) EARNINGS PER SHARE Earnings per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Under SFAS 128, basic earnings per share (EPS) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the effects of the potential dilution of the Company's stock options, determined using the treasury stock method. (j) FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments at September 30, 1998 and 1999 approximate estimated fair values. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments. The carrying amounts of debt approximate fair value due to the variable nature of the interest rates of these instruments. (2) BUSINESS COMBINATIONS AND SALE OF SUBSIDIARIES In September 1999, the Company sold the net assets of its Mid States Engineering, LLC subsidiary for $2,900,000 in cash. The Company recorded a gain on the sale of approximately $192,000. In September 1999, the Company sold the net assets of its Cartographic Sciences Private Limited subsidiary (formerly Interra Technologies, Inc.) for $1,000,000 in cash and 52,000 shares of common stock of the seller valued at $535,000. The Company recorded a gain on the sale of approximately $892,000. The Company had previously acquired the common stock of Interra Technologies, Inc. in May 1998 for cash of approximately $438,000. In December 1998, the Company acquired the assets of Measurement Science, Inc. for 21,850 shares of restricted common stock valued at approximately $514,000. In June 1998, the Company, through its wholly owned subsidiary, Surveys Holdings, Inc. acquired all of the issued and outstanding common stock of Cartotech, Inc. (Cartotech) for cash of approximately $8,092,000 and 354,167 shares of restricted common stock valued at approximately $8,269,000 for total consideration of approximately $16,362,000. -26- 29 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 In July 1997, the Company acquired all of the issued and outstanding common stock of MSE Corporation for cash of approximately $12,500,000 and 925,000 shares of restricted common stock valued at approximately $7,313,000, for total consideration of approximately $19,813,000. All of the acquisitions were accounted for using the purchase method of accounting and, accordingly, the accompanying consolidated financial statements include the results of operations of the acquired businesses since the date of acquisition. The aggregate purchase prices of the acquisitions were allocated based on fair values as follows (amounts in thousands):
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1997 1998 1999 -------- ------ ---- Current assets $ 13,463 3,732 -- Equipment 1,500 1,950 514 Other assets, including goodwill 10,996 14,048 -- Current liabilities (5,526) (2,930) -- Non-current liabilities (620) -- -- -------- ------ ---- $ 19,813 16,800 514 ======== ====== ===
The following unaudited pro forma information presents the results of operations of the Company as if the acquisitions had occurred on October 1, 1997 (in thousands, except per share amounts): YEAR ENDED SEPTEMBER 30, ------------------------ 1998 1999 -------- ------- Revenue $101,245 103,559 Net earnings $ 7,427 2,813 Diluted earnings per share $ 1.09 0.39 The pro forma information is based on historical results and does not necessarily reflect the actual operating results that would have occurred nor is it necessarily indicative of future results of operations of the combined enterprises. (3) ACCOUNTS RECEIVABLE, REVENUE EARNED IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF REVENUE EARNED At September 30, 1999, the estimated period to complete contracts in process ranges from one to thirty-six months, and the Company expects to collect substantially all related accounts receivable and revenue earned in excess of billings within one year. The following summarizes contracts in process at September 30 (in thousands): -27- 30 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999
1998 1999 --------- -------- Costs incurred on uncompleted contracts $ 110,185 134,563 Estimated earnings 46,779 56,449 --------- -------- 156,964 191,012 Less billings to date (118,880) (161,713) --------- -------- $ 38,084 29,299 ========= ======== Included in the accompanying consolidated balance sheets as follows: Revenue earned in excess of billings $ 39,316 31,307 Billings in excess of revenue earned (1,232) (2,008) --------- -------- $ 38,084 29,299 ========= ========
(4) DEBT Long-term debt and lines-of-credit with bank consist of the following at September 30 (in thousands):
1998 1999 ------ ------ Lines-of-credit with bank providing for total borrowings of $21,000,000, with interest at LIBOR plus applicable margins ranging from 1.25% to 1.75% (6.63% at September 30, 1999), collateralized by substantially all of the assets of the Company. No borrowings were outstanding under the line-of-credit as of September 30, 1999. $ 5,750 -- Note payable to bank due in quarterly installments with interest based on LIBOR plus applicable margins ranging from 1.25% to 1.75% or prime rate (6.63% at September 30, 1999), with final payment in October 2003, secured by substantially all assets of the Company. 25,350 21,900 Capital lease obligation under a leasing facility, bearing interest at effective rates ranging from 7.37% to 9.00%, payable in monthly installments through September 2002. 2,809 5,240 Other 605 464 ------- ------ 34,514 27,604 Less current portion (4,594) (7,265) ------- ------ $29,920 20,339 ======= ======
-28- 31 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 The loan agreement contains restrictive covenants which require, among other things, the maintenance of certain financial ratios and include certain limitations on capital expenditures and dividend payments. The Company was in violation of certain of the financial ratio covenants at September 30, 1999. Subsequent to September 30, 1999, the Company received a waiver of these covenants through May 15, 2000. The loan agreement was amended on March 6, 2000 to eliminate the financial covenants that the Company had violated and established new covenants requiring the Company to maintain a minimum of $25 million in net tangible assets and to achieve a minimum level of profitability for the three remaining quarters of fiscal 2000. The amended agreement also reduced the line of credit to a maximum of $7.5 million based on eligible accounts receivable, increased the interest rate to LIBOR plus 3% and accelerated the final maturity of the balance of the term loan to February 2001. (5) LEASES The Company leases its facilities and certain equipment under operating leases. Amounts due under noncancelable operating leases with terms of one year or more at September 30, 1999 are as follows (in thousands): Years ending September 30: 2000 $2,720 2001 2,028 2002 1,687 2003 643 2004 453 Thereafter 377 ------ Total minimum operating lease payments $7,908 ====== Rent expense totaled $1,345,310, $2,300,113 and $2,780,104 for the years ended September 30, 1997, 1998 and 1999, respectively. -29- 32 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 (6) INCOME TAXES Income tax expense (benefit) for the years ended September 30 is as follows (in thousands): 1997 1998 1999 ------ ------ ----- Current: Federal $1,847 4,244 2,177 State and local 320 1,000 346 ------ ------ ----- 2,167 5,244 2,523 ------ ------ ----- Deferred: Federal (42) (270) (400) State and local (13) (80) (70) ------ ------ ----- (55) (350) (470) ------ ------ ----- $2,112 4,894 2,053 ====== ====== ===== The exercise of non-qualified stock options results in state and federal income tax deductions to the Company related to the difference between the market price at the date of exercise and the option exercise price. The benefit of such deductions is recorded as an increase to stockholders' equity and totaled approximately $1,307,000, $3,115,000 and $1,301,000 in 1997, 1998 and 1999, respectively. Actual income tax expense differs from the amount computed using the federal statutory rate of 34% for the years ended September 30 as follows (in thousands):
1997 1998 1999 ------ ----- ----- Computed "expected" income tax expense $1,851 4,123 1,647 State income taxes, net of federal tax effect 203 607 182 Amortization of nondeductible goodwill -- 84 315 Other, net 58 80 (91) ------ ----- ----- Actual income tax expense $2,112 4,894 2,053 ====== ===== =====
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30, are as follows (in thousands): -30- 33 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999
1998 1999 ---- ---- Current deferred tax assets and liabilities: Accrued liabilities, primarily due to accrued compensated absences for financial statement purposes $543 469 Other, net 14 (67) ---- --- Total net current deferred tax asset $557 402 ==== === Noncurrent deferred tax assets: Equipment and leasehold improvements, primarily due to differences in depreciation $118 167 Goodwill amortization -- 416 Other, net 16 7 ---- --- Total noncurrent deferred tax asset $134 590 ==== ===
Management believes that it is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. (7) STOCKHOLDERS' EQUITY AND STOCK OPTIONS The Board of Directors may issue preferred stock with dividend requirements, voting rights, redemption prices, liquidation preferences and premiums, conversion rights and other terms without a vote of the shareholders. The Company currently has five nonqualified stock option plans. At September 30, 1999, approximately 88,000 shares were available for grant under the plan. The exercise price of the options is established by the Board of Directors on the date of grant. Employees may vest in their options either 100% on date of grant or 25% six months from date of grant and 25% on the anniversary dates of the grant thereafter, as determined by the Board of Directors. The options are exercisable in whole or in part for a period of up to ten years from date of grant. As discussed in note 1, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, because the Company grants its options at or above market value at date of grant, no compensation cost has been recognized under the plans. Had compensation cost for the Company's stock-based compensation plans been determined based upon the fair value of options on the grant dates, consistent with the provisions of SFAS 123, the Company's pro forma net earnings and diluted earnings per share would have been as follows: YEAR ENDED SEPTEMBER 30, ------------------------- 1997 1998 1999 ----- ----- ---- Net earnings (loss) $2,798 4,743 (4) Diluted earnings per share .50 .70 .00 -31- 34 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 The weighted average fair value of options granted during 1997, 1998 and 1999 was $5.49, $17.93 and $11.70 per share, respectively. The fair value of each option granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: no expected dividends, expected life of the options of three years, 67% volatility and a risk-free interest rate ranging from 5% to 6%. The above pro forma disclosures are not necessarily representative of the effect on the historical net earnings for future periods because options vest over several years, and additional awards are made each year. In addition, compensation cost for options granted prior to October 1, 1995, which vest after that date has not been considered. Stock option activity for the plans for the years ended September 30 are summarized as follows (shares in thousands): WEIGHTED AVERAGE NUMBER OF EERCISE PRICE OPTIONS PER SHARE --------- ------------- Balance, October 1, 1996 989 $ 4.95 Granted 641 13.06 Exercised (302) 3.16 Canceled (40) 10.64 ----- ------- Balance, September 30, 1997 1,288 9.23 Granted 753 38.67 Exercised (264) 7.65 Canceled (4) 23.58 ----- ------- Balance, September 30, 1998 1,773 21.94 Granted 257 24.03 Exercised (194) 8.24 Canceled (5) 21.90 ----- ------- Balance, September 30, 1999 1,831 $20.80 ===== ====== -32- 35 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 A summary of the range of exercise prices and the weighted-average contractual life of outstanding stock options at September 30, 1999 is as follows (shares in thousands):
NUMBER NUMBER OUTSTANDING WEIGHT- WEIGHTED EXERCISABLE AT ED AVERAGE AT WEIGHTED SEPTEMBER AVERAGE REMAINING SEPTEMBER AVERAGE RANGE OF 30, EXERCISE CONTRACTUAL 30, EXERCISE EXERCISE PRICE 1999 PRICE LIFE (YEARS) 1999 PRICE --------------- ---------- -------- ------------ ----------- --------- $ .01 - 10.00 214 $ 2.87 4 214 $ 2.87 10.01 - 20.00 616 12.53 7 471 12.38 20.01 - 40.00 956 29.06 9 357 30.76 40.01 - 44.00 45 44.00 9 23 44.00 ------- ----- ----- ------ -- ----- ------ $ .01 44.00 1,831 $20.80 7 1,065 $17.30 ======= ===== ===== ====== == ===== ======
(8) EMPLOYEE BENEFIT PLAN The Company sponsors a qualified tax deferred savings plan in accordance with the provisions of section 401(k) of the Internal Revenue Code. Employees may defer up to 15% of their compensation, subject to certain limitations. The Company matches 50% of employee contributions up to 4% of their compensation. The Company contributed $185,602, $370,814 and $660,740 to the plan in 1997, 1998 and 1999, respectively. (9) CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by Financial Accounting Standards Board's Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk, consist primarily of accounts receivable with the Company's various customers. Historically, the Company's customers have included cities, counties, engineering companies, utility companies and federal government agencies. Substantially more than 50% of revenues have historically been derived from state and local government contracts. In addition, a significant portion of the Company's revenues are generated from utility clients, both commercial and municipal. The Company's accounts receivable are primarily due from a variety of organizations throughout the United States. The Company provides for uncollectible amounts upon recognition of revenue and when specific credit and collection issues arise. Management's estimates of uncollectible amounts have been adequate in prior years, and management believes that all significant credit and collection risks have been identified and adequately provided for at September 30, 1999. -33- 36 ANALYTICAL SURVEYS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997, 1998 and 1999 (10) LITIGATION The Company has been named as a defendant in several putative securities class actions alleging a misstatement or omission of material facts concerning the Company's operations and financial results. Plaintiffs seek to represent themselves and a class of all public investors who purchased or otherwise acquired common stock of the Company and who suffered damages, and seek an award of compensatory damages and attorneys' fees and costs. Because this litigation is at an early stage, it is impossible to evaluate the impact that the above actions, 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 litigation. (1) RESTATEMENT As a result of a comprehensive review of the Company's contract cost-of-completion assumptions conducted under the supervision of the Audit Committee of the Board of Directors, the Company discovered certain accounting errors that required a downward adjustment of the revenues recognized in each of the four fiscal quarters of the year ended September 30, 1999. The errors related principally to the exclusion of certain contract-related costs in the estimated costs to complete; the untimely recognition of additional anticipated costs to complete; and the inaccurate assessment of future production efficiencies and inefficiencies affecting estimated costs to complete. When the Company's analysis indicated that the estimated costs to complete a specific project were based on erroneous information or assumptions, an estimate was made of the impact on previously recognized revenues as well as the timing of the error, and the appropriate fiscal 1999 quarter's operating results were restated accordingly. The financial statements as of and for the year ended September 30, 1999 were restated by reducing sales by $10,294,000, income before income taxes by $10,448,000, net income by $6,478,000, and basic and diluted earnings per share by $0.95 and $0.90, respectively. - 34 - 37 PART III. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS The following lists the directors of Analytical Surveys, Inc. ("ASI" or the "Company"), their birth dates, and a description of their business experience and positions held as of January 25, 1999. The Board consists of six directors. Directors are elected to a one year term. The date the present term of office expires for each director is the date of the Annual Meeting of the Company's stockholders. Willem H. J. Andersen, 58, has served as a director of the Company since October 1995. Since November 1998 he has served as CEO of Intermezzo Systems, Inc., a software development company in the hospitality industry. From February 1995 to November 1998, he was a consultant with A&S Consulting Ltd. From 1992 to February 1995, he served as President and Chief Executive Officer of Comlinear Corporation, a subsidiary of National Semiconductor Corporation. From 1970 until his retirement in 1992, Mr. Andersen held various positions with a number of divisions of Phillips N.V. of the Netherlands, including President and Chief Executive Officer of Laser Magnetic Storage International Company, a North American Phillips company. Dr. Robert H. Keeley, 59, has served as a director of the Company since December 1992. Since September 1992, Dr. Keeley has been the El Pomar Professor of Business Finance at the College of Business and Administration, University of Colorado at Colorado Springs, where he also is associated with the Colorado Institute for Technology Transfer and Implementation. Dr. Keeley also currently serves on the boards of directors of Simtek Corporation, a developer of high-performance nonvolatile semiconductor memories, and of several private companies. Richard P. MacLeod, 62, has served as a director of the Company since December 1987. From May 1985 until his retirement in April 1997, Mr. MacLeod was President of the United States Space Foundation, a private foundation. He served 24 years in the U.S. Air Force, most recently as Chief of Staff, North American Aerospace Defense Command, and as the first Air Force Space Command Chief of Staff. Sol C. Miller, 63, has served as a director of the Company since August 1997. Since January 24, 2000, Mr. Miller has served as Chief Executive Officer of the Company. He was a co-founder of MSE Corporation and was Chairman of the Board from 1960 until its acquisition by the Company in July 1997. He is the president of SCM Real Estate Development Corporation. Dr. James T. Rothe, 56, has served as a director of the Company since December 1987 and Chairman of the Board since January 24, 2000. Dr. Rothe has been a Professor of Business at the College of Business and Administration, University of Colorado at Colorado Springs since August 1986, where he served as Dean until June 1994. Since 1988, Dr. Rothe has been a principal in Phillips-Smith Specialty Retail, Inc., a venture capital firm. He is a director of Medlogic Global Corporation, which develops medical devices for the wound-management market. He is a director of NeoCone, LLC, an information technology company, and of Optika, Inc., an electronic commerce software and solutions company. He is also a trustee of the Janus Funds. John A. Thorpe, 65, the founder of ASI, has served as a director of the Company since February 1981. Since January 24, 2000, he has served as Assistant Chief Executive Officer of the Company. He served as Chairman of the Board of the Company from February 1981 until March 1997. Prior to founding the Company, Mr. Thorpe owned and operated Photosurveys (Pty.) Ltd., an aerial survey company located in Johannesburg, South Africa. From 1993 until August 1998, Mr. Thorpe also - 35 - 38 devoted part of his time as the Chief Technical Officer of the Company. Mr. Thorpe is a certified photogrammetrist and owner of Sundeer Yachts, LLC, a boat building company. DIRECTOR COMPENSATION Non-employee "outside" directors receive an annual retainer of $6,500, plus a fee of $2,000 per meeting of the Board of Directors and $1,500 for each meeting of a Committee of the Board that does not occur on the same day as a Board meeting. Chairpersons of committees receive an additional annual fee of $3,000 for serving as committee chair. Directors who are also employees of the Company do not receive any additional compensation for their service as directors. Outside directors also participate in the Analytical Surveys, Inc. 1993 Non-Qualified Stock Option Plan. Under this plan, each year for the life of the plan each outside director is granted options to purchase 9,000 shares of Company common stock at an exercise price equal to the fair market value at the date of grant. Mr. Miller also received an annual consulting fee as a consultant to the Company. In the initial agreement, such fee was $150,000 per year beginning July 1997 for one year, plus medical benefits. In July 1998, the agreement was extended to July 1999 and the fee was reduced to $100,000, plus medical benefits. In addition, the Company paid premiums on a life insurance policy payable to his designated beneficiaries. The amounts paid by the Company pursuant to these arrangements in fiscal 1999 were $84,165. Mr. Miller's consulting services were concluded with the July 1999 expiration of the agreement. DIRECTORS' MEETINGS AND COMMITTEES The Board of Directors met six times during the fiscal year. Each Director attended at least 75 percent of the aggregate number of meetings of the Board of Directors and each committee of which he is a member. The Compensation Committee is chaired by Richard P. MacLeod with Messrs. Andersen, Keeley and Rothe as members. The Compensation Committee reviews and recommends to the Board salary and incentive compensation, including bonus, stock options and restricted stock for the Chief Executive Officer; reviews and approves the salaries and incentive compensation for all corporate officers and senior executives; and advises the Board with respect to the incentive compensation to be allocated to employees. The Compensation Committee does not include any employees or former or current officers of the Company. The Compensation Committee met three times during fiscal 1999. The Audit Committee is chaired by Robert H. Keeley, with Messrs. Andersen, MacLeod and Rothe as members. The Audit Committee recommends the appointment of the Company's independent accountants; reviews the scope and results of the audit plans of the independent accountants and the internal auditors; oversees the scope and adequacy of the Company's internal accounting control and record-keeping systems; reviews non-audit services to be performed by the independent accountants; and determines the appropriateness of fees for audit and non-audit services performed by the independent accountants. The Audit Committee met once during fiscal 1999. THERE IS NO NOMINATING COMMITTEE OF THE BOARD. The Executive Committee of the Board of Directors is chaired by James T. Rothe, with Mr. Miller as a member. - 36 - 39 EXECUTIVE OFFICERS The following lists the executive officers of the Company, their birth dates, a description of their business experience and positions held with the Company as of December 12, 1999 based on information furnished by them. Information concerning Mr. Miller and Mr. Thorpe, who are also directors, is listed under the heading "Directors," above. All officers are appointed for an indefinite term, serving at the pleasure of the Board of Directors. John J. Dillon, 40 Chief Administrative Officer Mr. Dillon has been the Chief Administrative Officer of the Company since July 1997. From January 1997 until its acquisition by the Company in July 1997, Mr. Dillon was Senior Vice President of MSE Corporation. From July 1993 until January 1997, Mr. Dillon served as the Director of the Indiana State Lottery. Mr. Dillon is a director of Standard Management Company, a company that markets and administers life insurance and related products. Timothy A. Gregory, 41 Chief Marketing Officer Mr. Gregory has been Chief Marketing Officer since November 1998. From 1989 until joining the Company in November 1998 Mr. Gregory served in various marketing positions of increasing responsibility with Ernst & Young LLP, most recently as Director, National Marketing. Prior to that he held various positions with IBM Corporation between 1983 and 1989. David O. Hicks, 39 Chief Technical Officer Mr. Hicks has been Chief Technical Officer since August 1998. From 1993 until joining the Company in August 1998 Mr. Hicks served in various positions of increasing responsibility at GeoGraphix Incorporated, a developer of Unix-based software applications for the oil and gas industry, most recently as Senior Vice President, Product Development. Prior to that he held various positions with Sierra Geophysics Incorporated between 1990 and 1993 and with Exxon Company USA between 1985 and 1990. COMPLIANCE WITH SECTION 16(a) OF THE 1934 SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and any persons who own more than 10 percent of the Company's common stock, to file with the Securities and Exchange Commission ("SEC") reports of ownership and changes of ownership of the Company's common stock. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company during fiscal 1999, all such filing requirements were met. Item 12. SECURITY OWNERSHIP OF OTHER BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 1999, certain information with respect to the ownership of the common stock of the Company by (i) each person (or group of affiliated persons) known by the Company to be the beneficial owner of more than 5% of the Company's outstanding common stock (based on filings with the Securities and Exchange Commission), (ii) each director of the Company, (iii) each of the Company's named executive officers and (iv) all executive officers and directors of the Company as a group. Except as otherwise noted in the table, each person or group identified possesses sole voting and investment power with respect to such shares, subject to community property laws, where applicable, and the address of each holder of more than 5% of the Company's common stock is c/o Analytical Surveys, Inc., 941 North Meridian Street, Indianapolis, Indiana 46204. - 37 - 40 NAME OF BENEFICIAL OWNER SHARES PERCENT - ------------------------ BENEFICIALLY OF CLASS OWNED -------- ------------ Sol C. Miller 848,750(1) 12.2% John A. Thorpe 383,489(2) 5.5% Sidney V. Corder 218,400(3) 3.0% Willem H. J. Andersen 41,550(4) * Robert H. Keeley 29,250(5) * Richard P. MacLeod 67,352(6) * James T. Rothe 52,654(7) * Scott C. Benger 145,450(8) 2.0% John J. Dillon 50,437(9) * Timothy A. Gregory 12,500(10) * David O. Hicks 12,900(11) * Randal J. Sage 111,982(12) 1.6% All directors and executive officers as a 1,975,714 (13) 25.6% group (13 persons) - ----------- * Less than 1% (1) Includes 6,750 shares of common stock underlying options that are exercisable within 60 days of December 31, 1999. Includes 37,000 shares held by the SCM Family Limited Partnership of which Mr. Miller and his wife are the sole general partners. (2) Includes 43,125 shares of common stock underlying options that are exercisable within 60 days of December 31, 1999. Includes 122,249 shares of common stock held by the Thorpe Family Limited Partnership of which Mr. Thorpe and his wife are the sole general partners and 52,000 shares of common stock held by a charitable remainder trust of which Mr. Thorpe is a trustee. (3) Includes 210,000 shares of common stock underlying options that are exercisable within 60 days of December 31, 1999. (4) Includes 38,250 shares of common stock underlying options that are exercisable within 60 days of December 31, 1999. (5) Includes 24,750 shares of common stock underlying options that are exercisable within 60 days of December 31, 1999 and 4,500 shares held by Mr. Keeley's wife. (6) Includes 61,500 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (7) Includes 50,404 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (8) Includes 142,750 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (9) Includes 50,437 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. - 38 - 41 (10) Includes 12,500 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (11) Includes 12,500 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (12) Includes 111,982 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. (13) Includes 764,948 shares of common stock underlying options which are exercisable within 60 days of December 31, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Mr. Miller, a director of the company, received an annual consulting fee as a consultant to the Company. In the initial agreement, such fee was $150,000 per year beginning July 1997 for one year, plus medical benefits. In July 1998, the agreement was extended to July 1999 and the fee was reduced to $100,000, plus medical benefits. In addition, the Company paid premiums on a life insurance policy payable to his designated beneficiaries. The amounts paid by the Company pursuant to these arrangements in fiscal 1999 were $84,165. Mr. Miller's consulting services were concluded with the July 1999 expiration of the agreement. The Company's headquarters facilities are leased from MSE Realty, LLC, a company owned by Mr. Miller, under an operating lease which expires June 30, 2002. Rental expense for this lease was $1,334,160 in fiscal 1999. The Company has guaranteed the repayment of the mortgage loan that MSE Realty, LLC has on the facilities it leases to the Company. As of December 31, 1999, the mortgage was $1,073,084. Mr. Miller also owns or controls several private entities, SCM Development, SCM Group, LLC. SCM Investments, LLC, SCM Kensington Corporation, Preserve at Fall Creek, LLC, and Mill Run L.P., that have made payments to the Company in the aggregate of $289,718 in fiscal 1999 for surveying and engineering services in the ordinary course of business. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements Included in Part II of this Report: Independent Auditors' Report Consolidated Balance Sheets, September 30, 1998 and 1999 Consolidated Statements of Operations, Years Ended September 30, 1997, 1998 and 1999 Consolidated Statements of Stockholders' Equity, Years Ended September 30, 1997, 1998 and 1999 Consolidated Statements of Cash Flows, Years Ended September 30, 1997, 1998 and 1999 Notes to Consolidated Financial Statements, September 30, 1997, 1998 and 1999 (2) Financial statement schedules Included in Part IV of this report: Financial statement schedules required to be filed have been omitted because they are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. (3) Exhibits The following exhibits are filed herewith or incorporated by reference herein (according to the number assigned to them in Item 601 of Regulation S-K), as noted: - 39 - 42 3. Articles of Incorporation and By-Laws 3.1 Articles of Incorporation, as amended (incorporated by reference to ASI's Registration Statement on Form S-18, (Registration No. 2-93108-D).) 3.3 By-Laws (incorporated by reference to ASI's Registration Statement on Form S-18 (Registration No. 2-93108-D). 3.3 Amendment to By-laws (incorporated by reference to ASI's Annual Report on Form 10- K for the year ended September 30, 1998). 4. Instruments defining the rights of Security Holders including Indentures Form of Stock Certificate (incorporated by reference to ASI's Registration Statement on Form S-18 (Registration No. 2-93108-D).) 10. Material Contracts 10.1 Employment Agreement dated June 27, 1994 between ASI and Sidney V. Corder, Chief Executive Officer and President, (incorporated by reference to ASI's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994.) 10.2 Stock Option Plan dated December 17, 1987 as amended on August 31, 1992 (incorporated by reference to ASI's Annual Report on Form 10-K for the fiscal year ended September 30, 1992.) 10.3 1993 Non-Qualified Stock Option Plan dated December 11, 1992 (incorporated by reference to ASI's Proxy Statement dated January 11, 1993.) 10.4 Analytical Surveys, Inc. Incentive Bonus Plan (incorporated by reference to ASI's Annual Report on Form 10-K for fiscal year ended September 30, 1992.) 10.5 1995 Non-Qualified Stock Option Plan dated August 22, 1995 (incorporated by reference to ASI's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995.) 10.6 Real Estate Lease between MSE Realty, LLC and MSE Corporation, dated July 2, 1997 (incorporated by reference to ASI's Annual Report on Form 10-K for the fiscal year ended September 30, 1998.) 10.7 Analytical Surveys, Inc. 1997 Incentive Stock Option Plan, as amended and restated (incorporated by reference to Amendment No. 1 to ASI's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.) 10.8 Credit Agreement between ASI and Bank One, Colorado, N.A. dated June 3, 1998 (including Exhibits A-1, A-2, A-3, C D and E thereto) (incorporated by reference to ASI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.) 10.9 Amendment No. 1 to Credit Agreement between ASI and BankOne, Colorado, N.A. dated as of July 10, 1998 (incorporated by reference to ASI's Annual Report on Form 10-K for the year ended September 30, 1998). - 40 - 43 10.10 Amendment No. 2. To Credit Agreement between ASI and BankOne, Colorado, N.A. dated as of October 20, 1998 (incorporated by reference to ASI's Annual Report on Form 10-K for the year ended September 30, 1998). 10.11 Amendment No. 3 to Credit Agreement between ASI and BankOne, Colorado, N.A. dated as of November 24, 1998 (incorporated by reference to ASI's Annual Report on Form 10-K for the year ended September 30, 1998). 10.12 Registration Rights Agreement dated July 2, 1997, between ASI and Sol C. Miller (incorporated by reference to ASI's Current Report on Form 8-K dated July 16, 1997, as amended on September 9, 1997). 23. Consent of Experts and Counsel: Consent of KPMG LLP. 27. Financial Data Schedule. (b) Reports on Form 8-K filed during the quarter ended September 30, 1999: None - 41 - 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Sol C. Miller Date: March 6, 2000 --------------------------------------------- Sol C. Miller, Chief Executive Officer and Director - 42 - EX-23 2 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Analytical Surveys, Inc.: We consent to incorporation by reference in the registration statements (No. 33-24142, No. 33-33948, No. 33-53950, No. 33-59940 and No. 333-47365) on Form S-8 of Analytical Surveys, Inc. of our report dated December 29, 1999, except as to the last paragraph of note 4 and notes 10 and 11, which are as of March 6, 2000, relating to the consolidated balance sheets of Analytical Surveys, Inc. and subsidiaries as of September 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1999, which report appears in the September 30, 1999 Annual Report on Form 10-K/A of Analytical Surveys, Inc. KPMG LLP Indianapolis, Indiana March 6, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1999 OCT-1-1998 SEP-30-1999 6,659 0 46,110 138 0 58,184 16,573 8,740 89,242 18,155 0 0 0 32,080 18,583 89,242 0 103,254 0 96,972 (1,259) 0 2,698 4,843 2,053 2,790 0 0 0 2,790 0.41 0.39
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