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-----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, Gz/xhcxReGgnvabo5xv2iSIz7G+7fjgD6Xf1MYnYusWnwztcKbYQLUU7bvR6/IpL Gcy8duHj867XWCphu57HHQ== 0001035704-03-000118.txt : 20030214 0001035704-03-000118.hdr.sgml : 20030214 20030214151029 ACCESSION NUMBER: 0001035704-03-000118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13111 FILM NUMBER: 03566929 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-Q 1 d03237e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		Quarterly Report Pursuant to Section 13 or 15(d)
		of the Securities Exchange Act of 1934

		For the quarterly period ended
		December 31, 2002
		or
o		Transition Report Pursuant to Section 13 or 15(d)
		of the Securities Exchange Act of 1934
		Commission File Number 0-13111

ANALYTICAL SURVEYS, INC.

(Exact name of registrant as specified in its charter)


Colorado (State of Incorporation)		84-0846389 (IRS Employer Identification Number)

11900 Crownpoint Drive San Antonio, Texas (Address of Principal Executive Offices)		78233 (Zip Code)

(210) 657-1500
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of common stock outstanding as of February 10, 2003 was 823,965.

TABLE OF CONTENTS


Part I
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls and Procedures.
Part II
	Item 1. Legal Proceedings.
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
CERTIFICATIONS
Employment Agreement - Lori A. Jones

Part I

Item 1. Financial Statements

ANALYTICAL SURVEYS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)


			December 31,			September 30,
			2002			2002
			(Unaudited)
Assets
Current assets:
	Cash		$	2,846			3,114
	Accounts receivable, net of allowance for doubtful accounts of $100 and $479			3,120			2,444
	Revenue in excess of billings			7,184			8,915
	Prepaid expenses and other			260			184

		Total current assets		13,410			14,657

Equipment and leasehold improvements, at cost:
	Equipment			6,405			6,296
	Furniture and fixtures			484			484
	Leasehold improvements			267			267

				7,156			7,047
	Less accumulated depreciation and amortization			(6,347	)		(6,201	)

		Net equipment and leasehold improvements		809			846

		Total assets	$	14,219			15,503

ANALYTICAL SURVEYS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)


			December 31,			September 30,
			2002			2002
			(Unaudited)
Liabilities and Stockholders’ Equity
Current liabilities:
	Current portion of long-term debt		$	245			270
	Billings in excess of revenue			961			887
	Accounts payable and other accrued liabilities			1,698			2,214
	Accrued payroll and related benefits			1,377			1,576

		Total current liabilities		4,281			4,947
Long-term debt, less current portion				1,959			1,960

		Total liabilities		6,240			6,907

Redeemable preferred stock; no par value. Authorized 2,500 shares; and 1,600 shares issued and outstanding at December 31 and September 30 (liquidation value $1,920 and $1,600 respectively)				1,000			800

Stockholders’ equity:
	Common stock; no par value. Authorized 10,000 shares; 824 shares issued and outstanding at December 31 and September 30			33,039			33,039
	Accumulated deficit			(26,060	)		(25,243	)

		Total stockholders’ equity		6,979			7,796

		Total liabilities and stockholders’ equity	$	14,219			15,503

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)


			Three Months Ended
			December 31,
			2002			2001

Revenues			$	4,285			5,635
Costs and expenses:
	Salaries, wages and related benefits			2,596			4,106
	Subcontractor costs			621			1,080
	Other general and administrative			1,257			1,985
	Depreciation			145			293
	Severance and related costs			253			—

				4,872			7,464

		Loss from operations		(587	)		(1,829	)

Other income (expense)
	Interest expense, net			(50	)		(174	)
	Other			40			24
	Gain on extinguishment of debt			—			9,583

				(10	)		9,433

		Income (loss) before income taxes		(597	)		7,604
Income taxes				—			—

Earnings (loss) before cumulative effect of a change in accounting principle				(597	)		7,604
Cumulative effect of a change in accounting principle				—			(3,557	)

	Net earnings (loss)			(597	)		4,047
Accretion of discount and dividends on preferred shares				(220	)		—

	Net earnings (loss) available to common shareholders		$	(817	)		4,047

Basic and diluted earnings (loss) per common share:
Income (loss) before cumulative effect of a change in accounting principle			$	(.99	)		10.90
Cumulative effect of a change in accounting principle			$	—			(5.10	)

Net earnings (loss)			$	(.99	)		5.80

Weighted average outstanding common shares:
	Basic			824			698
	Diluted			824			698

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended December 31, 2002
(In thousands)
(Unaudited)


		Common Stock				Accumulated
		Shares		Amount		Deficit			Total

Balances at September 30, 2002			824	$	33,039		(25,243	)		7,796
	Net loss		—		—		(597	)		(597	)
	Accretion of discount and dividends on preferred shares		—		—		(220	)		(220	)

Balances at December 31, 2002			824	$	33,039		(26,060	)		6,979

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)


					Three Months Ended
					December 31,
					2002			2001

Cash flow from operating activities:
	Net earnings (loss)				$	(597	)		4,047
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Gain on extinguishment of debt				—			(9,583	)
		Cumulative effect of change in accounting principle				—			3,557
		Depreciation				145			293
		Changes in operating assets and liabilities:
			Accounts receivable, net			(676	)		2,931
			Revenue in excess of billings			1,731			250
			Income taxes			—			20
			Prepaid expenses and other			(76	)		267
			Billings in excess of revenue			74			73
			Accounts payable and other accrued liabilities			(536	)		(545	)
			Accrued payroll and related benefits			(199	)		(85	)

				Net cash provided by (used in) operating activities		(134	)		1,225

Cash flows from investing activities:
	Purchase of equipment and leasehold improvements					(108	)		(28	)

Cash flows from financing activities:
	Principal payments on long-term debt					(26	)		(1,499	)

Net decrease in cash						(268	)		(302	)
Cash at beginning of period						3,114			1,351

Cash at end of period					$	2,846			1,049

Supplemental disclosure of cash flow information:
Cash paid for interest					$	21			185

Cash paid for (refunds of) income taxes					$	24			(20	)

Issuance of preferred stock to retire debt					$	—			300

See accompanying notes to financial statements.

Notes to Consolidated Financial Statements
(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with the accounting policies described in our annual report for the year ended September 30, 2002. The consolidated financial statements include the accounts of ASI and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2002.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position of Analytical Surveys, Inc., and subsidiaries at December 31, 2002 and the results of their operations and cash flows for the three months ended December 31, 2002 and 2001.

All shares and per share amounts have been adjusted to reflect the Company’s one-for-ten reverse stock split effected in October 2002.

2. Earnings Per Share

Basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on the Company’s common stock, determined using the treasury stock method.

Potential dilutive common shares under the warrant agreement and stock option plans were not included in the calculation of diluted earnings per share as these shares were antidilutive. In addition, the conversion of 1,128,000 shares under the senior convertible debt agreement were antidilutive for the period they are outstanding. Basic and diluted weighted average outstanding common shares are the same at both December 31, 2002 and 2001. Accordingly, basic and diluted earnings per share are the same.

3. Comprehensive Income

The following are the components of comprehensive income (loss):


	Three Months Ended
	December 31,			December 31,
	2002			2001

Net earnings (loss)	$	(597	)	$	4,047
Unrealized change in investment security		—			306

	$	(597	)	$	4,353

4. Impact of Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, “Business Combinations”. SFAS 141 is effective for all business combinations completed after June 30, 2001. The Company does not believe the adoption of this standard will have a material impact on its financial statements.

In July 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this standard will have a material impact on its financial statements.

In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not believe the adoption of this standard will have a material impact on its financial statements.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS

145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS 145 related to lease modifications is effective for transactions occurring after May 15, 2002. Earlier application is encouraged. The Company does not believe the adoption of this standard will have a material impact on its financial statements other than the reclassification of debt extinguishment in the period ended December 31, 2001.

In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of this standard will have a material impact on its financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an Amendment of SFAS 123”. SFAS No. 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, “Accounting for Stock Based Compensation”. Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. We intend to adopt SFAS No. 148 on April 1, 2003. We do not expect to change to using the fair value based method of accounting for stock-based employee compensation; and therefore, adoption of SFAS No. 148 is expected to impact only the future disclosures, not the financial results of ASI.

5. Goodwill Impairment

We elected early adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets. As a result of this election, we tested the carrying value of goodwill for impairment under the provisions of FASB No. 142 as of October 1, 2001. We determined the goodwill recorded at October 1, 2001 was primarily associated with indefinite lived intangible assets resulting from the acquisitions in the Utilities Division. The Company used the quoted market value of its stock on October 1, 2001 at a discounted value to reflect the lack of float in available shares and the going-concern issues at that date to determine the fair value of ASI as a whole. The fair value of the reporting units (i.e. individual offices) in the Utilities Division was determined by allocating the fair value of ASI by each reporting unit’s respective portion of our contract assets (i.e. accounts receivables and revenue in excess of billings). The fair value of each reporting unit was then compared to the net assets of the respective reporting unit (including allocated Corporate net assets) to determine if reporting unit level goodwill was impaired. We determined that impairment had occurred in each of the respective reporting units and that an impairment loss of $3.6 million should be reflected as a Cumulative Effect of a Change in Accounting Principle at October 1, 2001.

6. Debt

The Company’s debt is summarized as follows (in thousands).


	December 31,			September 30,
	2002			2002

Long-Term Debt
Note payable	$	175		$	175
Senior secured convertible note		1,850			1,833
Capital lease obligation		—			27
Other		179			195

		2,204			2,230
Less current portion		(245	)		(270	)

	$	1,959		$	1,960

On December 28, 2001, we completed a Waiver Agreement and Amendment No. 12 to Credit Agreement and Other Loan and Lease Documents (the “Agreement”) with our senior lenders providing our line-of-credit, note payable and capital lease obligation. Under the Agreement, these senior lenders accepted a cash payment of $1.25 million and non-convertible redeemable preferred stock with a face value of $3.2 million in payment of the $4.4 million line-of-credit and all but $3.0 million of the note payable. The Agreement provided for the remaining $3.0 million note payable to be reduced to zero with a cash payment of up to $875,000 by March 31, 2002 (later amended to April 2, 2002).

On April 2, 2002, we completed the sale of a $2.0 million senior secured convertible note and warrants to purchase common stock. We used the proceeds to repay $700,000 to senior lenders, pay transaction expenses of approximately $95,000 and fund operations. Senior lenders accepted the $700,000 cash payment and a $175,000 unsecured promissory note in full satisfaction of the $3.0 million note payable outstanding at March 31, 2002.

The $175,000 unsecured promissory note matures on March 31, 2003 and bears annual interest at prime rate plus one percent (5.25% at December 31, 2002). The senior secured convertible note matures April 2, 2005, bears interest at an annual rate of five percent, but interest is not payable until maturity or may be converted to Common Stock as described below.

The senior secured convertible note has a face value of $2.0 million and is convertible at any time into common stock of ASI (Common Stock) at a price equal to the least of (i) $4.00, (ii) 90% of the average closing bid prices of the Common Stock for the 90 trading days ending the trading date immediately preceding the closing date, and (iii) 90% of the average closing bid prices for the 3 trading days having the lowest closing bid price during the 20 trading days immediately prior to the conversion date, but under any event, the number of shares issuable upon full conversion of the note must constitute at least 38% of the issued and outstanding shares, on a fully diluted basis, as of the date of full conversion. Assuming a conversion price of $4.00 per share, ASI would issue 500,000 shares of Common Stock if the note were fully

converted. At the time of conversion, any unpaid interest is to be paid in shares of Common Stock. The note is subject to mandatory conversion in three years and is secured by all of the assets of ASI. For illustration only, if the note had been converted on December 31, 2002, the conversion price would have been $0.77 and 2,694,545 shares of common stock would have been issued to the note holder.

The holder of the senior secured convertible note (Holder) also received warrants to purchase an additional 500,000 shares of Common Stock (subject to adjustment). One whole warrant entitles the Holder to acquire an additional share of Common Stock at an exercise price equal to 115% of the conversion price of the note. Assuming an exercise price of $4.60 per share (115% of $4.00), the aggregate exercise price for the warrants would be $2.3 million for the issuance of 500,000 shares of Common Stock, but the shares issuable upon conversion of the note and exercise of warrants are to be no less than 55% of the outstanding Common Stock (unless the Holder exercises the warrants in a cashless exercise where the Holder uses the value of some of the warrants to pay the exercise price for other warrants).

If, at the time of conversion of the note, the price of the Common Stock has dropped below $4.00 per share, the number of shares of Common Stock issuable upon conversion of the note and upon exercise of the warrants would increase. Similarly, if ASI issues shares of Common Stock at a price of less than $4.00 per share, the conversion price and the exercise price decrease to that lower price, and the number of shares issuable under the note and the warrants would therefore increase. For illustration only, if the warrant had been exercised on December 31, 2002, the exercise price would have been adjusted to $0.8855 per share for a total exercise price of $442,750 for all shares.

Under the terms of the note and related purchase agreement, we are required to register the shares underlying the note and warrants by February 28, 2003. We have requested an extension of the date from the holder of the note. Also, ASI is generally restricted from issuing additional equity securities without the Holder’s consent, and the Holder has a right of first refusal as to certain subsequent financings.

As part of the transaction, the Holder effectively was granted the opportunity to appoint a majority of ASI’s board of directors and, as a result, controls ASI. In addition, upon exercise of the warrants and conversion of the note, the Holder will own a majority of the Common Stock, thereby giving the Holder additional control over ASI. The carrying value of the senior secured convertible note is $1.85 million at December 31, 2002 and represents the cash received of $2.0 million less the estimated fair value of the warrants of $200,000 which was recorded in common stock. The carrying value of the senior secured convertible note is being accreted to the face amount by charges to interest expense through the maturity date.

The agreement with senior lenders resulted in a gain on extinguishment of debt in the three months ended December 31, 2001, which is calculated as follows (in thousands):


Outstanding debt:
	Line-of-credit		$	4,400
	Note payable			9,733

		Total		14,133

Less:
	Cash paid			(1,250	)
	Fair value preferred stock (See Note 4)			(300	)
	Remaining note payable			(3,000	)

Gain on extinguishment of debt			$	9,583

Total tax expense for fiscal year 2002 was projected to be zero and accordingly, no income taxes have been recorded related to the results from operations.

7. Redeemable Preferred Stock

Pursuant to the agreement with senior lenders described in Note 5, on December 28, 2001, we issued preferred stock in the form of 1.6 million shares of no par value Series A Preferred Stock, at an original issue price of $2.00 per share. Until December 28, 2003, we are entitled to redeem the shares at $1.20 per share ($1.8 million), and the redemption price increases $.20 per year until the fifth anniversary, or December 28, 2006, at which time the shares must be redeemed at a price of $2.00 per share. The Agreement calls for a mandatory payment toward the redemption price of $800,000 on December 28, 2004. The preferred stock earns a dividend at the annual rate of 5.00% of the then applicable redemption price on a cumulative, non-participating basis and has a liquidation preference equal to the then applicable redemption value of shares outstanding at the time of liquidation.

The carrying value for Preferred Stock is $1 million at December 31, 2002. The carrying value represents the estimated fair market value of the stock on the date of issuance plus issuance costs, adjusted for accretion of the difference between fair market value at the date of issuance and the redemption value at the mandatory redemption dates. The fair market value was based on the present value of required cash flows using a discount rate of 80%. We selected the discount rate based on discussions with third parties that took into account market conditions for similar securities, the current economic climate and our financial condition and performance as major factors. Accretion is effected by a charge to retained earnings, and the rate of accretion approximates the interest method.

8. Segment Information

Management evaluates operations and makes key strategic and resource decisions based on operating results of its individual production centers. In previous years, we made these decisions based on its two different operating segments: the Utilities Division which uses its industry expertise and proprietary GIS systems for data conversion for electric, gas and water

management utility customers; and the Land Division which creates land base maps using techniques in both general cartography and specialized photogrammetric mapping. We have completed a majority of our contracts in the land division and our primary focus is now on our utilities division operations. Segment data includes revenue, operating income, including allocated costs charged to each of the operating segments, equipment investment and project investment, which includes net accounts receivables and revenue earned in excess of billings. We have presented segment data for fiscal year 2002 for comparative purposes.

We have not allocated interest expense and other non-segment specific expenses to individual segments to determine our performance measure. Non-segment assets to reconcile to total assets consist of corporate assets including cash, prepaid expenses and deferred taxes (in thousands).


	Utilities			Utilities		Utilities			Total						Non-
	Location			Location		Location			Utilities			Land			Segment			Total

	A			B		C
Three months ended
December 31, 2002
Operations
Revenues	$	2,367			1,874		104			4,285			—			—			4,285
Loss from operations		(516	)		197		(15	)		(334	)		(253	)		—			(587	)
Interest expense, net		—			—		—			—			—			(50	)		(50	)
Other		—			—		—			—			—			40			40

Net loss																			(597	)

Assets at December 31, 2002
Segment assets	$	9,379			1,613		87			11,079			—			—			11,079
Non-segment assets		—			—		—			—			—			—			3,140

Consolidated assets																			14,219


	Utilities			Utilities		Utilities			Total						Non-
	Location			Location		Location			Utilities			Land			Segment			Total

	A			B		C
Three months ended December 31, 2001
Operations
Revenues	$	2,607			2,108		550			5,265			370			—			5,635
Loss from operations		(500	)		17		(630	)		(1,113	)		(716	)		—			(1,829	)
Interest expense, net		—			—		—			—			—			(174	)		(174	)
Other		—			—		—			—			—			9,604			9,604
Cumulative effect of a change in accounting principle		—			—		—			—			—			(3,557	)		(3,557	)

Net earnings																			4,047

Assets at September 30, 2002
Segment assets	$	9,185			2,858		118			12,161			—			—			12,161
Non-segment assets		—			—		—			—			—			3,342			3,342

Consolidated assets																			15,503

9. Litigation and Other Contingencies

We have been named with certain former directors, as defendants in an action that was filed on September 20, 2000, by Sidney V. Corder, the former President, Chief Executive Officer and Director of the Company. The suit claimed that ASI violated the Colorado Wage Claim Act and breached contractual obligations. The suit also claimed that ASI has breached an obligation to indemnify Mr. Corder in connection with a previous securities lawsuit against ASI and other defendants, including Mr. Corder. On July 23, 2002, we entered into a Settlement Agreement and Mutual General Release to settle the lawsuit. The settlement provided for, among other things, the payment of approximately $200,000 to Mr. Corder by ASI and its insurance carrier, the mutual release of present or future actions, suits or claims, and a waiver by Mr. Corder of any claims for indemnification for any present or future actions, suits or claims arising out of his employment. Pursuant to the settlement, the litigation has been dismissed.

Sage, Chief Operations Officer; and John Dillon, Chief Administrative Officer. The plaintiffs claimed that the former officers violated Texas and Indiana securities laws and other provisions of Texas law in connection with our acquisition of Cartotech, Inc., in June 1998. The four defendants have sent to us written demands for indemnification. We have no further obligation to indemnify Mr. Corder as specified in the Settlement Agreement described above. We have notified our insurance carrier of these claims and have requested coverage. In response, the insurance carrier has reserved its rights to deny or limit coverage. Recently the court denied defendants’ motions to dismiss. We expect some or all of the defendants intend to seek a stay of this litigation pending an outcome in the arbitration between ASI and the plaintiffs described in the following paragraph.

On June 26, 2002, The Epner Family Limited Partnership and the Braverman Limited Partnership (“Claimants”) initiated arbitration proceedings against ASI. As set forth in the preceding paragraph, the Claimants are the plaintiffs in related Indiana state court litigation against former officers of ASI. In the Statement of Claim they filed with the American Arbitration Association, Claimants allege that certain representations and warranties made by ASI in the Cartotech merger agreement were false because our financial condition allegedly was worse than depicted in our financial statements for 1997 and the unaudited reports for the first two quarters of fiscal 1998. They allege that the restatement of our financial statements for fiscal year 1999 should have included the financial statements referenced in the merger agreement. Claimants assert that we violated the Texas Securities Act and the Indiana Securities Act. They also allege that we breached warranties in the merger agreement. The Claimants seek “recission or damages” in the “principal amount” of “approximately $5,546,533,” which allegedly is the net loss in value of the Company stock they received in the merger, and attorneys’ fees. We have filed a response to the Claimants’ Statement of Claim denying its material allegations and intend to vigorously assert defenses. The arbitration hearing is presently scheduled to occur in September, 2003.

Robert Montgomery, a former officer of ASI, filed suit in Hamilton County Superior Court, State of Indiana, on July 19, 2002, seeking recovery of unpaid commissions pursuant to the Indiana Wage Payment statute. Mr. Montgomery seeks recovery of $67,611 in unpaid commissions, treble damages, costs, interest and attorneys’ fees. We have responded to the lawsuit and deny all claims in the action. The parties have not yet begun discovery. We intend to vigorously defend this lawsuit.

On January 23, 2002, we announced that the Securities and Exchange Commission has commenced a formal investigation of ASI, certain of our former officers, directors and others in connection with our accounting policies, procedures, disclosures and system of internal controls relating to the period from October 1998 through March 2000. On March 7, 2000, we restated earnings for the fiscal year ended September 30, 1999. We continue to cooperate fully with the SEC in this investigation.

We are also subject to various other routine litigation incidental to our business. Management does not believe that any of these routine legal proceedings would have a material adverse effect on our financial condition or results of operations.

10. Concentration of Credit Risk

At December 31, 2002, we had multiple contracts with three customers that represented 70% (49%, 11% and 10%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. Revenues from these three customers for the fiscal quarter ended December 31, 2002 were 37% (16%, 6% and 15%, respectively) of total revenue. Additionally, for the quarter ended December 31, 2002, two other customers comprised another 26% of total revenues. At September 30, 2002, these customers represented 72% (43%, 17% and 12%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. Billing terms are negotiated in a competitive environment and are based on reaching project milestones. We anticipate that sufficient billing milestones will be achieved during fiscal 2003 such that revenue in excess of billings for these customer contracts will begin to decline.

11. Liquidity

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the fiscal years of 2000 through 2002, we experienced significant operating losses with corresponding reductions in working capital and net worth, excluding the impact of debt forgiveness, and does not currently have a line of credit in place to support operating cash flow requirements. Our revenues and backlog have also decreased substantially during the same period. Our senior secured convertible note also has certain immediate call provisions that are outside of our control, which if triggered and exercised, would make it difficult for us to meet these debt payments. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.

To address the going concern issue, management has implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses and position ASI for profitable operations. Financial steps included restructuring our bank debt through the issuance of preferred stock and convertible debt, subsequent collection of a federal income tax refund and sale of non-core assets. Operational steps included the consolidation of production services to two solution centers, reduction of corporate and non-core spending activities, outsourcing certain components of projects and deploying a new sales and marketing team.

The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern. However, management believes that its continued turnaround efforts, if successful, will improve operations and generate sufficient cash to meet its obligations in a timely manner.

12. Nasdaq Delisting

On December 27, 2002, we were notified by Nasdaq that our common stock has not maintained a minimum market value of publicly held shares of $1,000,000 as required for continued inclusion on the Nasdaq SmallCap Market by Marketplace Rule 4310(c)(7). We have been provided until March 27, 2003, to regain compliance. If, at any time before March 27, 2003, the market value of our publicly held shares is $1,000,000 or more for a minimum of 10 consecutive trading days, we will regain compliance. If compliance cannot be demonstrated by March 27, 2003, our securities will be delisted. At that time, we may appeal Nasdaq’s determination to a Listing Qualifications Panel. However, there can be no assurance the Panel would grant our request for continued listing.

Additionally on February 3, 2002 we were notified by Nasdaq that our stock price has fallen below Nasdaq’s minimum bid price of $1.00. We have 180 days or until August 4, 2003 to regain compliance. If, at anytime before August 4, 2003, the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days we will regain compliance with the minimum bid price requirements. If compliance cannot be demonstrated by March 27, 2003, our securities will be delisted. At that time, we may appeal Nasdaq’s determination to a Listing Qualifications Panel. However, there can be no assurance the Panel would grant our request for continued listing.

On January 17, 2003, Tonga partners, L.P., the Company’s controlling beneficial shareholder, has waived its right to accelerate ASI’s obligations under the senior secured convertible note payable to Tonga in the event that ASI’s Nasdaq listing is not maintained. (See Note 6)

Item 2. Management’s Discussion and Analysis and Results of Operations.

THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED IN THIS FORM 10-Q, OR IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-Q, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “INTEND” AND “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE STATEMENTS REGARDING THE COMPANY’S STRATEGY, FUTURE SALES, FUTURE EXPENSES AND FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE BASED UPON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF

THIS FORM 10-Q, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-Q. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES (“CAUTIONARY STATEMENTS”) INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS—“RISK FACTORS” AND ELSEWHERE IN THE COMPANY’S ANNUAL REPORT ON FORM 10-K, WHICH ARE INCORPORATED BY REFERENCE HEREIN AND IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

OVERVIEW

ASI, founded in 1981, is a provider of data conversion and digital mapping services to users of customized geographic information systems.

We recognize revenue using the percentage of completion method of accounting on a cost-to-cost basis. For each contract, an estimate of total production costs is determined and these estimates are reevaluated monthly. Production costs consist of internal costs, primarily salaries and wages, and external costs, primarily subcontractor costs. Internal and external production costs may vary considerably among projects and during the course of completion of each project. At each accounting period, the percentage of completion is based on production costs incurred to date as a percentage of total estimated production costs for each of our contracts. This percentage is then multiplied by the contract’s total value to calculate the sales revenue to be recognized. The percentage of completion is affected by any factors which influence either the estimate of future productivity or the production cost per hour used to determine future costs. We recognize losses on contracts in the period such loss is determined. Sales and marketing expenses associated with obtaining contracts are expensed as incurred.

We experience annual and quarterly fluctuations in production costs, salaries, wages and related benefits and subcontractor costs. These costs may vary as a percentage of sales from period to period. We utilize InfoTech Enterprises Ltd., an India-based company, for a significant percentage of our production services.

Backlog increases when new contracts are signed and decreases as revenues are recognized. Changes in macroeconomic and industry market conditions first encountered in fiscal 2000 and have continued through fiscal 2002 and into 2003, and have resulted in a reduction of timely order flow. As of December 31, 2002, our backlog was $17.4 million as compared with $19.5 million at September 30, 2002. We believe these adverse market conditions were and continue to be primarily caused by the recessionary economic climate, consolidation in the utility industry, our adverse financial results for fiscal years 2001 and 2002 and increased competition from companies with offshore operations.

We have been awarded several projects that are greater than $2 million or longer than two years in duration, which can increase our risk due to inflation, as well as changes in customer expectations and funding availability. Our contracts are generally terminable on short notice, and while in our experience such termination is rare, there is no assurance that we will receive all of the revenue anticipated under signed contracts.

We engage in research and development activities. The majority of these activities occur as we develop software or design a product for a particular contract. These efforts are typically included as an integral part of our services for the particular project and, accordingly, the associated costs are charged to that project. Such custom-designed software can often be applied to projects for other customers. These amounts are not included in research and development expenses but are expensed as incurred as part of contract costs. We retain ownership of such proprietary software or products.

We continued to streamline our operations throughout fiscal year 2002. We reduced our four main production centers to two centers. In the quarter ending March 31, 2002, we completed the consolidation of our Cary, North Carolina, facility into our Texas and Wisconsin solution centers. The principal activity of the North Carolina facility had been cadastral and photogrammetric mapping. In the quarter ending September 30, 2002, we completed the consolidation and relocation of our Indiana staff to smaller, lower cost facilities. Finally, on January 2, 2003, we relocated our headquarters to our facility in San Antonio, Texas. We currently employ approximately 200 full-time employees.

Results of Operations

The following table sets forth, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of sales:


		Three Months Ended
		December 31
		2002			2001

PERCENTAGE OF REVENUES:
Revenues			100.0	%		100.0	%
Costs and expenses
	Salaries, wages and related benefits		60.6			72.9
	Subcontractor costs		14.5			19.1
	Other general and administrative		29.3			35.2
	Depreciation and amortization		3.4			5.2
	Severance and related costs		5.9			—

Loss from operations			(13.7	)		(32.4	)
Other expense, net			(0.2	)		(2.7	)
Gain on extinguishment of debt			—			170.0

Loss before income taxes			(13.9	)		134.4
Income tax benefit			—			—

Income (loss) before cumulative change in accounting principle			(13.9	)		134.9
Cumulative effect of change in accounting principle			—			(63.1	)

Net earnings (loss)			(13.9	)		71.8
Accretion of discount and dividends on preferred shares			(5.2	)		—

Net earnings (loss) available to common shareholders			(19.1	)%		71.8	%

THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001

REVENUES. We recognize revenues as services are performed. Revenues decreased $1.3 million to $4.3 million for the first three months of fiscal 2003 from $5.6 million for the first three months of fiscal 2002 as a result of a lower level of new contract signings during fiscal 2002. We believe this decrease in contract signings is attributable to lower demand for and reduced spending levels in information technology products and services both in general and specific to the GIS industry.

SALARIES, WAGES AND RELATED BENEFITS. Salaries, wages and related benefits includes employee compensation for production, marketing, selling, administrative and executive employees. Salaries, wages and related benefits decreased 36.8% to $2.6 million for the first three months of fiscal 2003 from $4.1 million for the first three months of fiscal 2002, as a result of reductions in our workforce. The reductions in the workforce were a result of reduced anticipated revenue volume and our decision to subcontract a portion of our production work to offshore subcontractors. As a percentage of revenues, salaries, wages and related benefits decreased to 60.6% for the first three months of fiscal 2003 from 72.9% for the first three months of fiscal 2002. We anticipate we will be able to realize additional efficiencies in labor costs with the relocation of our corporate headquarters to San Antonio.

SUBCONTRACTOR COSTS. Subcontractor costs includes production costs incurred through the use of third parties for production tasks, such as data conversion services to meet contract requirements, aerial photography and ground and airborne survey services. Subcontractor costs decreased 42.5% to $621,000 for the first three months of fiscal 2003 from $1.1 million for the first three months of fiscal 2002. This decrease was due to a decline in the number and size of customer contracts and completing backlog that utilized subcontractor labor. Subcontractor costs decreased as a percentage of revenues to 14.5% for the first three months of fiscal 2003 from 19.1% for the first three months of fiscal 2002.

OTHER GENERAL AND ADMINISTRATIVE COSTS. Other general and administrative costs includes rent, maintenance, travel, supplies, utilities, insurance and professional services. Such costs decreased 36.7% to $1.3 million for the first three months of fiscal 2003 from $2.0 million for the first three months of fiscal 2002, as a result of reductions in workforce and general cost cutting measures. As a percentage of revenues, other general and administrative costs decreased to 29.3% for the first three months of fiscal 2003 from 35.2% for the first three months of fiscal 2002. We anticipate we will be able to achieve additional reductions in general and administrative costs as a result of the relocation of our corporate headquarters to San Antonio.

DEPRECIATION. Depreciation decreased $148,000 to $145,000 from $293,000 for the first three months of fiscal 2002 due to older equipment becoming fully depreciated. As a percentage of revenues, depreciation decreased to 3.4% for the first three months of fiscal 2003 from 5.2% in the first three months of fiscal 2002.

SEVERANCE AND RELATED COSTS. We incurred severance expense of $253,000 in the three month period ended December 31, 2002, the majority of which we paid in cash in 2003. There was no comparable charge in the same period of fiscal 2001. We anticipate we will incur severance expense approximating $100,000 in fiscal 2003 in relation to one specific non-executive officer’s contract.

OTHER EXPENSE, NET. Other expense, net, is comprised primarily of net interest expense. Net interest expense decreased 71.3% to $50,000 for the first three months of fiscal 2003 from

$174,000 for the first three months of fiscal 2002, as a result of decreased borrowings outstanding and lower interest rates.

INCOME TAXES. Total tax expense for fiscal year 2003 is projected to be zero and based on this an effective tax rate of 0% was recorded for the three months ended December 31, 2002. Also, as a result of the uncertainty that sufficient future taxable income can be recognized to realize additional deferred tax assets, no income tax benefit has been recognized for the three months ended December 31, 2002 and for the same period ending December 31, 2001.

GAIN ON EXTINGUISHMENT OF DEBT. The gain of $9.6 million in the first three months of fiscal 2002 represents the debt forgiveness related to a $1.25 million cash payment and the issuance of a non-convertible preferred stock with a fair value of $300,000 to fully retire debt of $11.1 million under our debt agreement in place as of December 28, 2001.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. We elected early adoption of FASB Statement No. 142, Accounting for Goodwill and Other Intangible Assets, as of October 1, 2001. We determined that goodwill had been significantly impaired under the provisions of FASB 142 and we consequently recognized a loss of $3.6 million as the cumulative effect of this change in accounting principle during the first three months of fiscal 2002.

NET EARNINGS (LOSS). Net loss of $597,000 in the first three months of fiscal 2003 is a decrease of $4.6 million compared to the $4.0 million net earnings from the same period of fiscal 2002. As discussed above, non-operational items including the $9.6 million extraordinary gain in the first three months of fiscal 2002 accounted for a substantial portion of the variance.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the principal source of our liquidity has consisted of cash flow from operations supplemented by secured lines-of-credit and other borrowings. Though we did not have a working capital line-of-credit as of December 31, 2002, other borrowings consisted of a $1.85 million senior secured convertible note and $175,000 unsecured promissory note.

The $175,000 unsecured promissory note matures on March 31, 2003 and bears interest at prime rate plus one percent (5.25% at December 31, 2002). The $1.85 million senior secured convertible note, which has a face value of $2.0 million maturing April 2, 2005, bears interest at an annual rate of five percent, but interest is not payable until maturity or may be converted to Common Stock as described below.

The senior secured convertible note is convertible at any time into common stock of ASI (Common Stock) at a price equal to the least of (i) $4.00, (ii) 90% of the average closing bid prices of the Common Stock for the 90 trading days ending the trading date immediately preceding the closing date, and (iii) 90% of the average closing bid prices for the 3 trading days having the lowest closing bid price during the 20 trading days immediately prior to the

conversion date, but under any event, the number of shares issuable upon full conversion of the note must constitute at least 38% of the issued and outstanding shares, on a fully diluted basis, as of the date of full conversion. Assuming a conversion price of $4.00 per share, ASI would issue 500,000 shares of Common Stock if the note were fully converted. At the time of conversion, any unpaid interest is to be paid in shares of Common Stock. The note is subject to mandatory conversion in three years and is secured by all of the assets of ASI. For illustration only, if the note had been converted on December 31, 2002, the conversion price would have been $0.77 and 2,694,545 shares of common stock would have been issued to the note holder.

If at the time of conversion of the note, the price of the Common Stock has dropped below $4.00 per share, the number of shares of Common Stock issuable upon conversion of the note and upon exercise of the warrants would increase. Similarly, if ASI issues shares of Common Stock at a price of less than $4.00 per share, the conversion price and the exercise price decrease to that lower price, and the number of shares issuable under the note and the warrants would therefore increase. For illustration only, if the warrant had been exercised on December 31, 2002, the exercise price would have been adjusted to $0.8855 per share for a total redemption price of $442,750 for all shares.

Under the terms of the note and related purchase agreement, we are required to register the shares underlying the note and warrants by February 28, 2003. We are in discussions with the note holder to extend or waive this requirement. Also, we are generally restricted from issuing additional equity securities without the Holder’s consent, and the Holder has a right of first refusal as to certain subsequent financings.

As part of the transaction, the Holder effectively was granted the opportunity to appoint a majority of our board of directors and, as a result, controls ASI. In addition, upon exercise of the warrants and conversion of the note, the Holder will own a majority of the Common Stock, thereby giving the Holder additional control over ASI.

On December 28, 2001, we issued 1.6 million shares of no par value Series A Preferred Stock, at an original issue price of $2.00 per share. We are entitled to redeem the shares within one year of issuance at $1.00 per share ($1.6 million), and the redemption price increases $.20 per year until the fifth anniversary, at which time the shares must be redeemed at a price of $2.00 per share. The agreement calls for a mandatory payment of $800,000 by the third anniversary. The

preferred stock earns a dividend at the annual rate of 5.00% of the then redemption price on a cumulative, non-participating basis and has a liquidation preference equal to the then redemption value of shares outstanding at the time of such liquidation.

To address the going concern issue, management has implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses and position the Company for profitable operations. In 2002, we restructured our bank debt through the issuance of preferred stock and convertible debt, collected a federal income tax refund and sold the Colorado based facility. We consolidated our production operations to two solution centers, reduced corporate and non-core spending activities, and outsourced certain components of projects. We deployed a new sales and marketing team and relocated the corporate headquarters to our San Antonio, Texas, facility.

The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern. However, we believe that our turnaround efforts, if successful, will improve operations and generate sufficient cash to meet its obligations in a timely manner.

Our cash flow is significantly affected by customer contract terms and progress achieved on projects. Fluctuations in cash flow from operations are reflected in three contract-related accounts: accounts receivable; revenues in excess of billings; and billings in excess of revenues. Under the percentage of completion method of accounting, an “account receivable” is created when an amount becomes due from a customer, which typically occurs when an event specified in the contract triggers a billing. “Revenues in excess of billings” occur when we perform under a contract even though a billing event has not been triggered. “Billings in excess of revenues” occur when we receive an advance or deposit against work yet to be performed. These accounts, which represent a significant investment by ASI in its business, affect our cash flow as projects are signed, performed, billed and collected. At December 31, 2002, we had multiple contracts with three customers that represented 70% (49%, 11% and 10%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. At September 30, 2002, these customers represented 72% (43%, 17% and 12%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. Billing terms are negotiated in a competitive environment and, as stated above, are based on reaching project milestones. We anticipate that sufficient billing milestones will be achieved during fiscal 2003 such that revenue in excess of billings for these customer contracts will begin to decline.

Net cash used by our operating activities was $134,000 for the first three months of fiscal 2003, compared to net cash of $1.2 million provided in the same period in fiscal 2002. We collected a significant amount of cash related to accounts receivable in the fiscal 2002 quarter.

Cash used by investing activities for the first three months of fiscal year 2003 was $108,000 and $28,000 in the same period in fiscal 2002. Such investing activities principally consisted of payments for purchases of equipment and leasehold improvements.

Cash used by financing activities for the first three months of fiscal year 2003 was $26,000 as compared to $1.5 million used by financing activities for the first three months of fiscal 2002. 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.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION. We recognize revenue using the percentage of completion method of accounting on a cost-to-cost basis. For each contract, an estimate of total production costs is determined and these estimates are reevaluated monthly. The estimation process requires significant subjective judgments on the costs over the life of the contract, which are in advertently uncertain. The duration of the contracts and the technical challenges included in certain contracts affect our ability to estimate costs precisely. Production costs consist of internal costs, primarily salaries and wages, and external costs, primarily subcontractor costs. Internal and external production costs may vary considerably among projects and during the course of completion of each project. At each accounting period, the percentage of completion is based on production costs incurred to date as a percentage of total estimated production costs for each of the our contracts. This percentage is then multiplied by the contract’s total value to calculate the sales revenue to be recognized. The percentage of completion is affected by many factors which influence either the estimate of future productivity or the production cost per hour used to determine future costs. The Company recognizes losses on contracts in the period such loss is determined. Sales and marketing expenses associated with obtaining contracts are expensed as incurred. If we underestimate the total cost to complete a project we would recognize a disproportionately high amount of revenue in the earlier stages of the contract, which would result in a disproportionately high profit margins in the same period. This could also result in the recognition of losses in the final stages of the contract. Conversely, if we overestimate the cost to complete a project, a disproportionately low amount of revenue would be recognized in the early stages of a contract.

VALUATION OF ACCOUNTS RECEIVABLE. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We routinely assess the financial condition of our customers and the markets in which these customers participate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. This could negatively affect our operating results.

LITIGATION. We are subject to various claims, lawsuits and administrative proceedings. Liabilities and costs associated with these matters require estimates and judgment based on professional knowledge and experience of management and our legal counsel. When the estimates of our exposure for claims or pending or threatened litigation matters meet the criteria of SFAS 5, amounts are recorded as charges to net earnings. The ultimate resolution of exposure to ASI may change as further facts and circumstances become known.

INCOME TAXES. The year 2002 was the first year out of the last three in which we have reported net income (and taxable income). These prior year losses generated a sizeable federal tax net operating loss, or NOL, carryforward of approximately $16.7 million as of September 30, 2002.

Generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that we will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to our recent history of unprofitable operations and to the continuing uncertainties surrounding our future operations as discussed above, we have not recognized any of this net deferred tax asset. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) for current income.

It is possible, however, that we could be profitable in the future at levels which might cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates, which would approximate 40% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL is utilized.

TABLE OF CONTRACTUAL OBLIGATIONS

Below is a schedule (by period due) of the future payments that we are obligated to make based on agreements in place as of December 31, 2002, (in thousands):


	Nine months
	Ending
	September 30				Fiscal year ending September, 30
	2003		2004		2005		2006		2007		Total

Operating Leases	$	279	$	28	$	1		—		—	$	308
Debt		225		74		2,053		—		—		2,352
Preferred Stock Redemption		—		—		800		—		1,851		2,651

Total	$	504	$	102	$	2,854		—		1,851	$	5,311

LITIGATION

We are a party to various litigation matters which are described in detail in Note 8 to our Financial Statement included herein and in Part II, Item 1 of this quarterly report on Form 10-Q. We have incurred significant expenses and expect to incur additional expenses related to these matters. We have recorded expenses we have incurred to date in the accompanying financial statements. The outcome of these matters cannot currently be determined nor can we forecast an estimate of the financial impact of any outcome. Further, we may be entitled to recover a portion of our expenses, as well as a portion of any damages or judgments that may ultimately be imposed against us, from our insurance carriers, although we cannot assure that such coverage will be provided.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We may from time to time employ risk management techniques such as interest rate swaps and foreign currency hedging transactions. None of these techniques are used for speculative or trading purposes and the amounts involved are not considered material. We did not utilize any such techniques during the current reporting period, but may employ such techniques in future periods.

Item 4. Controls and Procedures.

Within the 90 days prior to the date of this report, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of ASI’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))

and have concluded that the disclosure controls and procedures were adequate and designed to ensure that material information relating to ASI which is required to be included in our periodic Securities and Exchange Commission filings would be made known to them by others within those entities. There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of this evaluation, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions.

Part II

Item 1. Legal Proceedings.

Two shareholders of ASI, the Epner Family Limited Partnership and the Braverman Family Limited Partnership, filed suit in Indiana state court (Hamilton County Superior Court, State of Indiana) against four former officers of the Company on May 8, 2001. The former officers are: Sidney Corder, Chief Executive Officer; Scott Benger, Senior Vice President of Finance; Randy Sage, Chief Operations Officer; and John Dillon, Chief Administrative Officer. The plaintiffs claimed that the former officers violated Texas and Indiana securities laws and other provisions of Texas law in connection with our acquisition of Cartotech, Inc., in June 1998. The four defendants have sent to us written demands for indemnification. We have no further obligation to indemnify Mr. Corder as specified in the Settlement Agreement described above. We have notified our insurance carrier of these claims and have requested coverage. In response, the insurance carrier has reserved its rights to deny or limit coverage. Recently the court denied defendants’ motions to dismiss. We expect some or all of the defendants intend to seek a stay of this litigation pending an outcome in the arbitration between ASI and the plaintiffs descended in the following paragraph.

against former officers of ASI. In the Statement of Claim they filed with the American Arbitration Association, Claimants allege that certain representations and warranties made by ASI in the Cartotech merger agreement were false because our financial condition allegedly was worse than depicted in our financial statements for 1997 and the unaudited reports for the first two quarters of fiscal 1998. They allege that the restatement of our financial statements for fiscal year 1999 should have included the financial statements referenced in the merger agreement. Claimants assert that we violated the Texas Securities Act and the Indiana Securities Act. They also allege that we breached warranties in the merger agreement. The Claimants seek “recission or damages” in the “principal amount” of “approximately $5,546,533,” which allegedly is the net loss in value of the Company stock they received in the merger, and attorneys’ fees. We have filed a response to the Claimants’ Statement of Claim denying its material allegations and intend to vigorously assert defenses. The arbitration hearing is presently scheduled to occur in September 2003.

Robert Montgomery, a former officer of ASI, filed suit in Hamilton County Superior Court, State of Indiana, on July 19, 2002 seeking recovery of unpaid commissions pursuant to the Indiana Wage Payment statute. Mr. Montgomery seeks recovery of $67,611 in unpaid commissions, treble damages, costs, interest and attorneys’ fees. We have responded to the lawsuit and deny all claims in the action. The parties have not yet begun discovery. We intend to vigorously defend this lawsuit.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:


10.		Employment Agreement dated January 20, 2003, by and between Analytical Surveys, Inc. and Lori Jones.

(b) Reports on Forms 8-K:

Current Report on Form 8-K filed on November 25, 2002 announcing the Company’s relocation of its corporate headquarters

Current Report on Form 8-K filed on December 19, 2002 furnishing the certification required under 18.U.S.C.1350 from the Company’s Chief Executive Office and Chief Financial Officer

Current Report on Form 8-K filed on December 20, 2002 announcing the Company’s Fourth Quarter and Year End Results

Current Report on Form 8-K filed on December 31, 2002 announcing the Company’s receipt of notice of potential delisting from Nasdaq.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Analytical Surveys, Inc. (Registrant)

Date:	February 14, 2003	/s/ J. Norman Rokosh

		J. Norman Rokosh
		President and Chief Executive Officer

Date:	February 14, 2003	/s/ Lori A. Jones

		Lori A. Jones
		Chief Financial Officer

CERTIFICATIONS

I, Lori A. Jones, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Analytical Surveys, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and the registrant’s have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 14, 2003

/s/ Lori A. Jones
Lori A. Jones
Chief Financial Officer

CERTIFICATIONS

I, J. Norman Rokosh, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Analytical Surveys, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 14, 2003

/s/ J. Norman Rokosh
J. Norman Rokosh
President and CEO

Exhibit Index

36 EX-10 3 d03237exv10.txt EMPLOYMENT AGREEMENT - LORI A. JONES EXHIBIT 10 EMPLOYMENT AGREEMENT (CHIEF FINANCIAL OFFICER) This employment agreement (this "Agreement"), dated as of January 20, 2003 (the "Effective Date"), is between Analytical Surveys, Inc., a Colorado corporation whose principal executive offices are located in San Antonio, Texas ("Employer"), and Lori A. Jones ("Officer") and is being executed January 20, 2003. RECITALS A. Employer wishes to retain the services of Officer, and Employer and Officer wish to formalize the terms and conditions of their agreements and understandings. B. Officer's employment by Employer, the mutual covenants stated in this Agreement, and other valuable consideration, the receipt of which are acknowledged by Officer, are sufficient consideration for this Agreement. AGREEMENT The parties agree as follows: 1. Employment. As of the Effective Date, Employer is retaining officer to be its Chief Financial Officer. 2. Term of Employment. This Agreement will commence on the Effective Date and will continue until March 31, 2005 (the "Initial Term"). The parties agree to give each other notice as to their desire to renew this Agreement at least 30 days prior to the end of the Initial Term. 3. Actions of Employer. All actions by and decisions of Employer contemplated in this Agreement will be made by Employer's President/Chief Executive Officer and/or Employer's Board of Directors. 4. Duties of Officer. Officer's principal duties on behalf of Employer as of the date of this Agreement are as Chief Financial Officer of Employer and Corporate Secretary. In accepting employment by Employer, Officer will undertake and assume the responsibility of performing for and on behalf of Employer whatever duties are necessary and required in the position of Chief Financial Officer and of Corporate Secretary of Employer. Officer will devote substantially Officer's full time and energies and best effort to the performance of such duties, to the exclusion of all other business activities that conflict in any material way with Officer's duties under this Agreement. Officer will be permitted to participate in civic and charitable activities so long as such activities do not materially interfere with Officer's duties under this Agreement. 5. Location of Employment. Officer will perform the above duties at Employer's principal executive offices, currently in San Antonio, Texas. If the location of Employer's principal executive offices changes subsequent to the date upon which this Agreement is executed, Officer agrees to continue to perform the duties prescribed above at the changed location, if requested to do so by Employer. If Officer is required to move her principal residence to the changed location, Employer will pay all of the reasonable costs of moving the personal property of Officer to the changed location, temporary accommodations, and airline tickets, up to an aggregate limit of $30,000, subject to the submission to Employer of such receipts and other evidence of the incurrence of such expenses as is reasonably requested by Employer. Employer will use reasonable efforts to accommodate the personal and family needs of Officer by providing as much advance notice as is reasonably feasible concerning any requested move of Officer's principal residence, and in any event will not require Officer to move her principal residence without giving Officer at least 180 days' notice. 6. Compensation. (a) Salary. Employer will pay to Officer $5,192.31 every other Friday (beginning January 31, 2003) as salary ("Base Salary"), subject to customary withholding. Officer's first paycheck is subject to further reduction due to her being employed for a partial pay period. The intent of the parties is to establish 26 pay periods per 12-month period so that Officer receives a total of $135,000 in Base Salary per 12-month period. (b) Stock Options. Officer will be given an opportunity to participate in the Employer's future stock option plan, whose terms will be determined at the discretion of the President/CEO and the Employer's Board of Directors. (c) Bonuses. Employer will pay a bonus to Officer in accordance with the bonus provisions set forth in EXHIBIT 1. (d) Vacations. Officer will be entitled to vacations of not less than 4 weeks per 12-months of employment, in accordance with the procedures prescribed by Employer's regular vacation policies established for senior executives. Officer will be permitted to take a paid vacation the week of February 23, 2003. Officer may accrue any unused vacation time from year to year (up to a limit of 5 weeks of unused vacation, with any unused vacation in excess of 5 weeks to be paid in cash at or promptly after the end of any 12-month period, based on Officer's then current Base Salary for the year in which such excess vacation accrued), and Employer will compensate Officer upon termination of employment for any unused vacation time based on Officer's then current Base Salary. Any specific vacation of more than 2 weeks' duration is subject to the advance approval of Employer, which approval is to be sought from the President/Chief Executive Officer. In addition, Officer agrees to give the President/Chief Executive Officer notice in advance concerning any vacation time to be taken, and will confirm with the President/Chief Executive Officer the actual taking of vacation time promptly after such vacation time is taken. (e) Additional Benefits. Officer will be entitled to benefits (which may include hospitalization, medical, disability, profit sharing and retirement plan benefits) in accordance with Employer's policies for persons holding similar executive positions with Employer, as they may be modified by Employer from time to time, as determined by Employer in its sole discretion. (f) Reimbursement of Business Expenses. Employer will reimburse all reasonable expenses incurred by Officer on behalf of Employer in connection with Officer's performance of duties under this Agreement, subject in each case to compliance by Officer with any reasonable requirements imposed by Employer (by written Employer policy or by written notice to Officer) concerning submission of invoices, prior approval, tax deductibility of expenses, and similar matters. (g) Disability. "Disability" and "Disabled" are defined as set forth in the disability insurance policy of Employer or, if no such policy covers Officer, then "Disability" and "Disabled" are defined as the inability to perform customary functions for up to 90 days in any 12-month period. If Officer becomes Disabled, Disability benefits, if any, will be in the amounts provided in Employer's Employee Handbook or, if not provided for executive officers in the Employee Handbook, then as otherwise provided to executive officers, as such benefits may be modified by Employer from time to time, as determined by Employer's Board of Directors in its sole discretion. (h) Death. In the case of Officer's death, benefits, if any, will be limited to the amounts paid to Officer (or Officer's designated beneficiary) by reason of Employer's group life insurance plan, if any, and any separate life insurance policy that is assigned to Officer or as to which Employer grants to Officer the right to designate the beneficiary. 7. Legal Expenses. Officer may seek advice, at no cost to Officer, directly from Employer's Company counsel concerning the following, and any matters reasonably related to the following, for the purpose of assisting Officer and Employer's other officers and directors: (a) Compliance with Rule 144 of the Securities Act of 1933, including the filing of Form 144, calculation of holding periods and volume limitations, consequences under Rule 144 of gift transactions and transfers to family members, and other technical aspects of Rule 144; (b) Compliance with Section 16(a) and 16(b) of the Securities Exchange Act of 1934, as amended, or any successor statute (the "Exchange Act"), relating to reporting of transactions under Form 4 and Form 5 and avoidance of liability for short-swing profits; (c) Compliance with Rule l0b-5 of the Exchange Act and insider trading prohibitions generally; (d) Exercising stock options and resale of securities acquired under stock options, including advice on mechanical aspects of exercising options under the plans, general tax advice, and securities law advice; (e) Non-adversarial aspects of public offerings, including execution of registration statements, questionnaires, powers of attorney, underwriting agreements (as selling shareholder), lock-up agreements, and the like; and (f) Any other matters incidental to Officer's administration of Employer's operations that would not be reportable as income to Officer on IRS Form 1099 or as compensation to Officer under Item 402 of Regulation S-K of the Securities Act of 1933 and the Exchange Act. 8. Termination and Severance Pay. (a) If Officer terminates employment for Good Reason or if Employer terminates Officer's employment without Cause, (i) Officer will receive all earned Base Salary under Section 6(a) and benefits under Section 6(d) and (e) only through the last day of Officer's employment with Employer (as well as reimbursement of expenses incurred through the last day of Officer's employment); and (ii) For each of the 6 successive months immediately following Officer's last day of employment with Employer, Employer will pay to Officer, as severance pay, an amount equal to 100% of Officer's Base Salary then in effect, payable every other Monday, beginning on the first Monday immediately following Officer's last day of employment with Employer on which Officer otherwise would have been paid had Officer's employment not terminated. (b) If Employer terminates Officer's employment for Cause or if Officer terminates employment voluntarily, (i) Officer will receive all earned Base Salary under Section 6(a) and benefits under Section 6(d) and (e) only through the last day of Officer's employment with Employer (as well as reimbursement of expenses incurred through the last day of Officer's employment); and (ii) Officer will receive no severance pay. Employer may terminate Officer's employment with Employer at any time, for Cause, upon notice to Officer. "Cause" means (1) any fraud, theft or intentional misappropriation perpetrated by Officer against Employer; (2) conviction of Officer of a felony; (3) a material and willful breach of this Agreement by Officer, if Officer does not correct such breach within a reasonable period after Employer gives notice to Officer (with such notice to specify in reasonable detail the action or inaction that constitutes such breach); (4) willful or gross misconduct in any material manner by Officer in the performance of duties under this Agreement; or (5) the chronic, repeated, or persistent failure of Officer in any material respect to perform Officer's obligations as an executive officer of Employer (other than by reason of a disability as determined under common law or any pertinent statutory provision, including without limitation the Americans With Disabilities Act), if Officer does not correct such failure within a reasonable period after Employer gives notice to Officer (with such notice to specify in reasonable detail the action or inaction that constitutes such failure). Employer and Officer agree that the provisions of (5) are not intended to provide grounds for a termination for Cause merely because of a failure on the part of Officer to satisfy performance goals set by Employer as long as Officer is performing services in a manner reasonably expected of an executive officer. "Good Reason" means (w) any material reduction in the scope of Officer's responsibilities (measured from the date of this Agreement; any demotion in title from that of Chief Financial Officer; or the imposition of any requirement that Officer report, on a general basis, to any person other than Employer's President and Chief Executive Officer as a whole; (x) the occurrence of a material breach of this Agreement by Employer, which breach remains uncured for 45 days after Officer gives Employer notice of such breach (describing the breach in reasonable detail); (y) any material reduction in the benefits afforded to Officer as provided for in Employer's Employee Handbook, as measured from the date of this Agreement; or (z) the occurrence of a Change in Control and (1) the expiration of 90 days or (2) the termination of Officer's employment without Cause after or upon such Change in Control, whichever of (1) and (2) occurs first. 9. Change in Control. (a) For purposes of this Agreement, and except as set forth in Section 9(b), a "Change in Control" of Employer will be deemed to occur if (i) the Board of Directors recommends to the shareholders of Employer that all or substantially all of the assets of Employer be sold, or that Employer be merged with or into, or consolidated with, a person (as such term is used in Sections 13(d) and 14 (d) of the Securities Exchange Act of 1934), (ii) the shareholders of Employer approve such transaction, and (iii) such transaction actually is consummated. (b) No Change in Control will be deemed to have occurred for any merger or consolidation with a subsidiary of Employer, or the creation of a holding company structure where no material change in beneficial ownership occurs, or any such transaction where only the state of incorporation of Employer changes. A Change in Control also will not be deemed to occur with respect to Officer if, after the purchase of assets or the merger or consolidation, a majority of the then combined voting power of the then outstanding voting securities (or voting equity interests) of the surviving corporation or of the corporation (or other entity) acquiring all or substantially all of the assets of Employer are beneficially owned, directly or indirectly, by Officer or by a group, acting in concert, that includes Officer. A Change in Control will not be deemed to have occurred solely by reason of a change in the composition of Employer's Board of Directors. 10. Confidential Information, Trade Secrets and Inventions. (a) Confidential Information. Officer acknowledges that information, observations, and data obtained by Officer, both prior to the Effective Date while Officer was employed by Employer (or any predecessor whose stock or assets have been acquired by Employer, if applicable) and after the Effective Date, concerning the business or affairs of Employer (or any such predecessor, as the case may be) constitute confidential information, are trade secrets, are the property of Employer, and are essential and confidential components of Employer's business. For as long as Officer is employed by Employer and for a period of two years thereafter, Officer will not directly or indirectly disclose to any person or use any of such information, observations or data, except in the course of Officer's employment with Employer, and except to the extent that: (i) the information was within the public domain at the time it was provided to Officer; (ii) the information was published or otherwise became part of the public domain after it was provided to Officer through no fault of Officer; (iii) the information already was in Officer's possession at the time Employer (or a predecessor) disclosed it to Officer, was not acquired by Officer directly or indirectly from anyone with a duty of confidentiality to Employer (or any predecessor), and was not acquired by Officer under circumstances in which Officer already was an employee of or a consultant to Employer (or any predecessor), or had a duty of confidentiality to Employer (or any predecessor); (iv) the information after the Effective Date becomes available to Officer from a source other than Employer (or any predecessor), which source did not acquire the information directly or indirectly from anyone with a duty of confidentiality to Employer (or any predecessor); or (v) the information is required to be disclosed (A) by any federal or state law rule or regulation, (B) by any applicable judgment, order, or decree of any court, governmental agency or arbitrator having or purporting to have jurisdiction in the matter, or (C) pursuant to any subpoena or other discovery request in any litigation, arbitration or other proceeding, but if Officer proposes to disclose the information in accordance with (A), (B), or (C), Officer will first give Employer reasonable prior notice of the proposed disclosure of any such information so as to provide Employer an opportunity to consult with Officer as to the applicability of such law, rule, or regulation or to appear before any court, governmental agency, or arbitrator in order to contest the disclosure, as the case may be, and prior to any such disclosure will redact such information to the maximum extent permissible. The foregoing provisions regarding the disclosure and use of confidential information are not intended to have the effect of binding Officer to a covenant against competition after the term of this Agreement (as Officer has not agreed to be bound by a covenant against competition after the term of this Agreement). Accordingly, the foregoing confidentiality and non-use provisions are to be interpreted in such a manner that Officer will not be prohibited from utilizing general information and know-how that Officer gained in the course of providing services to Employer and that thereby became a part of Officer's base of knowledge and experience, but will be prohibited from using specific confidential information (such as information concerning pricing or structure of customer contracts that Employer, salary and benefits information, know-how that was developed by Employer and relates to specific projects, or the like) in a manner that would be unfair to Employer and to which competitors of Employer would not lawfully be able to obtain access. (b) Inventions. For purposes of this Section 10, "Invention" means any invention, improvement, discovery or idea (whether patentable or not, and including those which may be subject to copyright protection) generated, conceived or reduced to practice by Officer alone or in conjunction with others and which relates to any substantial degree to the business conducted by Employer, during or after normal business hours, whether prior to Effective Date while Officer was an employee of Employer (or any predecessor) or during the term of this Agreement, and all associated rights to patents, copyrights and applications for such rights. "Invention" does not mean any invention, improvement, discovery or idea (whether patentable or not, and including those which may be subject to copyright protection) generated, conceived, or reduced to practice by Officer alone or in conjunction with others, after normal business hours, which would not be used or useful in the business of Employer. Officer will promptly disclose to Employer in writing all Inventions. All Inventions are the exclusive property of Employer and are deemed assigned to Employer. For as long as Officer is employed by Employer and for a period of two years thereafter, Officer will, at Employer's reasonable expense, provide Employer with all assistance it requires to protect, perfect and use its rights to and its interest in Inventions anywhere in the world and to vest in Employer such rights and interest. (c) Return of Documents, Etc. Immediately upon termination of Officer's employment with Employer or at any time upon notice to Officer from Employer, Officer will deliver to Employer all memoranda, notes, plans, records, reports, and other documents and information provided to Officer by Employer or created by Officer in connection with Officer's employment, and all copies of all such documents in any tangible form which Officer may then possess or have under Officer's control, and will destroy all of such information in intangible form which is in Officer's possession or under Officer's control. (d) Survival of Obligations Upon Officer's Termination. The obligations of Officer in this Section 10 will survive the termination of Officer's employment with Employer for the periods specified above, whether such termination is for any reason whatsoever or for no reason, and whether initiated by Officer or by Employer, and will continue for such periods until Employer consents in writing to the release of Officer's obligations under this Agreement. (e) Remedy for Breach. Both Officer and Employer expressly acknowledge that the subject matter of this Agreement is unique, and that any breach of Officer's obligations under this Section 10 is likely to result in irreparable injury to Employer, and the parties therefore expressly agree that either party will be entitled to obtain specific performance of this Agreement through injunctive relief and such ancillary remedies of an equitable nature as a court may deem appropriate. Such equitable relief will be in addition to, and the availability of such equitable relief will not preclude, any legal remedies or other remedies which might be available to such party. If Officer breaches any provisions in this Section 10, Employer is entitled to apply for equitable relief in any court of competent jurisdiction prior to initiation of arbitration. Employer's application for temporary injunctive relief will not limit Employer from pursuing any other available remedies for such breach. However, if Employer seeks temporary injunctive relief, the merits of the underlying dispute will be decided in arbitration, as provided in Section 19. 11. Severability. Each provision of this Agreement, including particularly, but not solely, the provisions of Section 10, is intended to be severable, and if any portion of this Agreement is held invalid, illegal, unenforceable or void for any reason, the remainder of this Agreement will nonetheless remain in full force and effect. Any portion held to be invalid, unenforceable, or void will, if possible, be deemed amended or reduced in scope, but such amendment or reduction in scope will be made only to the minimum extent required for purposes of maximizing the validity and enforceability of this Agreement. 12. General Acknowledgments. Officer and Employer expressly agree that the restrictions on Officer's activities imposed under Section 10 are reasonable and necessary to protect the trade secrets of Employer. The parties expressly agree that (i) Officer is benefited by these restrictions, insofar as other persons in similar managerial positions with Employer have entered or will enter into similar agreements with Employer, and (ii) these restrictions are reasonable and necessary to protect Employer and its subsidiaries from loss of property rights and from competing efforts. The parties further expressly agree that, if any court of competent jurisdiction determines that any provision of Section 10 is unreasonable, the court will not declare the provision invalid, but rather will reform and modify the provision, and enforce the provision, to the maximum extent permitted by law. The existence of any claim or cause of action of Officer against Employer, whether predicated on this Agreement or otherwise, will not constitute a defense to the enforcement by Employer of the provisions of Section 10. 13. Non-Waiver. The failure to enforce any right arising under this Agreement or any similar agreement on one or more occasions will not be deemed or construed to be a waiver of that right under this Agreement or any other agreement on any other occasion, or of any other right on that occasion or any other occasion. 14. Officer Warranties. Officer warrants to Employer that, as of the Effective Date, (a) Officer is not employed and is not a party to another employment contract, express or implied; (b) Officer has no other obligation, contractual or otherwise, which would prevent Officer from entering into this Agreement and from complying with its provisions; (c) Officer does not possess, and will not utilize during Officer's employment with Employer, any confidential information obtained by Officer through or in connection with any prior employment, relating to any prior employer's business, products, services, techniques, methods, systems, plans, policies, prices, customers, prospective customers, or employees; and (d) Officer has given Employer timely written notice of any of Officer's prior employment agreements or patent rights that might conflict with any interest of Employer and has provided Employer with a copy of such agreements or patent rights, including any applications for such rights. 15. Successors and Assigns. This Agreement is binding upon, and will inure to the benefit of, Employer and Officer, and their respective heirs, personal and legal representatives, successors, and assigns and is binding upon and will inure to the benefit of any person or entity succeeding Employer, by merger, consolidation, purchase of assets or stock, or otherwise, but the interests of Officer under this Agreement are not subject to the claims of Officer's creditors, and may not be voluntarily or involuntarily assigned, alienated or encumbered, except as required by law. 16. Integration Clause and Modification. This Agreement is the complete and exclusive statement of the agreement between the parties and supersedes all proposals, prior agreements, and all other communications between the parties, oral or in writing, relating to the subject matter of this Agreement. This Agreement may be amended or superseded only by an agreement in writing, signed by Officer and an executive officer of Employer. 17. Notices. All notices, requests, demands, claims, and other communications under this Agreement must be in writing. Any notice, request, demand, claim, or other communication under this Agreement will be deemed duly given only if it is sent by registered or certified mail, return receipt requested, postage prepaid, or by courier, or by telecopy or facsimile, and must be addressed to the intended recipient as follows: If to Employer, to: Analytical Surveys, Inc. 11900 Crownpoint Drive, Suite 100 San Antonio, Texas 78233-5355 Attention: Chief Executive Officer with a copy to: Chair of Compensation Committee of Board of Directors At the address of such person to which the Company normally sends communications relating to the Board of Directors and with a copy to: James B. Smith, Jr., Esq. Cox & Smith Incorporated 112 E. Pecan Street, Suite 1800 San Antonio, Texas 78205 If to Officer: to Officer's residence, as shown on Employer's records. Notices will be deemed given and received three days after mailing if sent by certified mail, when delivered if sent by courier, and one business day after receipt of confirmation by person or machine if sent by telecopy or facsimile transmission. Either party may change the address to which notices, requests, demands, claims and other communications under this Agreement are to be delivered by giving the other party notice in the manner set forth above. 18. Governing Law and Forum. Employer and Officer acknowledge and agree that the State of Texas has a substantial connection with this Agreement. This Agreement will therefore be governed by and construed according to the internal laws of the State of Texas, without regard to conflict of law principles, and shall be deemed performable in San Antonio, Bexar County, Texas. 19. Dispute Resolution. Subject to the availability of temporary equitable relief under Section 10, any and. all claims, disputes, or controversies between Officer and Employer, any business affiliated with Employer, or any of their respective directors, officers, managers, employees or agents, including but not limited to those arising out of or related to this Agreement, will be resolved by arbitration in San Antonio, Texas. Except as so provided in Section 10, by signing this Agreement, Officer and Employer voluntarily, knowingly, and intelligently waive any right that either of them may otherwise have to seek remedies in a court of law or other forums, including the right to a jury trial. The Federal Arbitration Act, 9 U.S.C. Section 1 et seq. ("FAA"), as amended, will govern the arbitrability of all claims, if they are enforceable under the FAA. If the FAA does not govern, the Texas Arbitration Act, Tex. Civ. Prac. & Rem. Code Section 171.001 et seq., will apply. Additionally, the substantive law of Texas will apply to any common law claims. A single arbitrator engaged in the practice of law will conduct the arbitration. The parties will select the arbitrator, but if the parties are unable to do so, they will obtain from the Federal Mediation and Conciliation Service, or other mutually agreeable arbitration panel service, a panel of five possible arbitrators who meet the requirements of this Section 19, and will alternatively strike names (the party raising the claim, dispute, or controversy will have the first strike) until one remains. Other than as set forth in this Section 19, the arbitrator will have no authority to add to, detract from, change, amend, or modify the provisions of this Agreement, any other agreement between Employer and Officer, or existing law, but will have the authority to award any and all relief that would otherwise be available to a party in a court. Any and all requirements for the exhaustion of administrative remedies and other legal prerequisites to the filing of a claim in court will continue to apply to the claim if the claim is raised by a party in the arbitration. All arbitration proceedings, including settlements and awards, arising out of this Agreement will be confidential. The arbitrator's decision and award will be final and binding as to all claims which were, or could have been, raised in the arbitration, and judgment upon the award rendered by the arbitrator may be entered into any court having jurisdiction of the matter. If any party files a judicial or administrative action asserting claims subject to this arbitration provision, and another party successfully stays such action or compels arbitration of such claims, the party filing the judicial or administrative action will pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. 20. Acknowledgment by Officer. Officer has been afforded the opportunity to read, reflect upon and consider the terms of this Agreement, has been afforded the opportunity to discuss this Agreement with Officer's attorney or other advisor or counselor, has read this entire Agreement, fully understands its terms, has voluntarily executed this Agreement, and has retained one executed copy of this Agreement for Officer's records. ACCEPTED AND AGREED: ACCEPTED AND AGREED: ANALYTICAL SURVEYS, INC. By: /s/ Norman Rokosh /s/ Lori A. Jones --------------------------- --------------------- Norman Rokosh, President Lori A. Jones and Chief Executive Officer EXHIBIT 1 BONUS PROVISIONS Employer will pay to Officer a bonus in the amounts and at the times set forth below: (1) First Six Month Performance Bonus. Employer will pay Officer a bonus of up to $12,500, depending on Officer's satisfaction of operational and financial goals for the first six months of Officer's employment, said operational and financial goals to be articulated by the President/CEO in his sole discretion, after consultation with Officer. (2) Second Six Month Performance Bonus. Employer will pay Officer a bonus of up to $12,500, depending on Officer's satisfaction of operational and financial goals for the second six months of Officer's employment, said operational and financial goals to be articulated by the President/CEO in his sole discretion, after consultation with Officer. (3) Third Sixth Month Performance Bonus. Employer will pay Officer a bonus of up to $12,500, depending on Officer's satisfaction of operational and financial goals for the third six months of Officer's employment, said operational and financial goals to be articulated by the President/CEO in his sole discretion, after consultation with Officer. (4) Fourth Six Month Performance Bonus. Employer will pay Officer a bonus of up to $12,500, depending on Officer's satisfaction of operational and financial goals for the fourth six months of Officer's employment, said operational and financial goals to be articulated by the President/CEO in his sole discretion, after consultation with Officer. Officer must be employed by Employer throughout the six months in order to receive the bonus payment with respect to such six month period, except that, if Employer terminates Officer's employment without cause during any half of the year during the term of this Agreement or if Officer terminates employment with Employer for Good Reason during any six-month period during the term of this Agreement, then the bonus for the six-month period will be payable to Officer as long as the operational and financial goals established for such six-month period are satisfied (notwithstanding that Officer was not employed throughout such six-month period). Employer's Board of Directors (which will receive the recommendation of the President/CEO) will make all determinations as to eligibility for and the amount of any performance bonuses. Employer will cause all such determinations to be made promptly after the financial results for the pertinent six-month become available and in any event not later than 30 days after the end of the six-month period. Payments of performance bonuses with respect to any six-month period will be made in full on the first pay period that occurs after the bonus for such six-month period is determined. -----END PRIVACY-ENHANCED MESSAGE-----

Exhibit

Description

Employment Agreement dated January 20, 2003, by and between Analytical Surveys, Inc. and Lori Jones.