**UNITEDSTATES**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, D.C.   20549

** **

**FORM10-QSB**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**COMMISSION FILE NUMBER 0-13111**

 

**ANALYTICALSURVEYS, INC.**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **COLORADO**                                                     | ** ** | **84-0846389**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (IRS  Employer  Identification Number) |
|                                                             |       |                                   |
| **9725 DATAPOINT  DRIVE, SUITE 300B, SAN ANTONIO, TEXAS 78229**  |
| (Address  of principal executive offices)                        |
|                                                             |       |                                   |
| **(210) 657-1500**                                               |
| (Registrant’s  telephone number, including area code)       |

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BYSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURINGTHE PAST TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WASREQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILINGREQUIREMENTS FOR THE PAST NINETY (90) DAYS.  YES Ý  NO o

 

INDICATEBY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED INRULE 12b-2 OF THE EXCHANGE ACT).  YES o  NO Ý

 

THE NUMBER OF SHARESOF COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2005, WAS 2,869,272.

 

 

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**TABLE OF CONTENTS**

 
| PART  1.   | FINANCIAL  INFORMATION                                                                      | 3      |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |   |
| Item  1.   | Financial  Statements                                                                       | 3      |
|       |                                                                                        |   |
| Item 2.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 16     |
|       |                                                                                        |   |
| Item 3.    | Quantitative and Qualitative  Disclosures About Market Risk                                 | 25     |
|       |                                                                                        |   |
| Item 4.    | Controls and Procedures                                                                     | 25     |
|       |                                                                                        |   |
| PART 2.    | OTHER INFORMATION                                                                           | 26     |
|       |                                                                                        |   |
| Item 1.    | Legal Proceedings                                                                           | 26     |
|       |                                                                                        |   |
| Item 2.    | Unregistered Sales of  Securities and Use of Proceeds                                       | 26     |
|       |                                                                                        |   |
| Item 3.    | Defaults Upon Senior  Securities                                                            | 26     |
|       |                                                                                        |   |
| Item 4.    | Submissions of Matters to a  Vote of Security Holders                                       | 26     |
|       |                                                                                        |   |
| Item 5.    | Other Information                                                                           | 26     |
|       |                                                                                        |   |
| Item 6.    | Exhibits                                                                                    | 26     |
|       |                                                                                        |   |
| SIGNATURES | 27                                                                                          |

 

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**Part I**

**Financial Information**

 

**Item 1. Financial Statements**

 

**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands****)******
| ** **                                                                                                                                                                                             | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **              | ** ** |
| **Assets**                                                                                                                                                                                             |       |               |       |                    |       |
| Current assets:                                                                                                                                                                                        |       |               |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                              |       | $                  | 783        |                    | $          | 867 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $54 at June 30, 2005 and September 30, 2004                                                                                            |       | 1,232              |       | 3,431                   |       |
| Revenue earned in excess of billings                                                                                                                                                                   |       | 2,458              |       | 3,006                   |       |
| Prepaid expenses and other                                                                                                                                                                             |       | 74                 |       | 183                     |       |
| Total current assets                                                                                                                                                                                   |       | 4,547              |       | 7,487                   |       |
| Equipment and leasehold improvements, at  cost:                                                                                                                                                        |       |               |       |                    |       |
| Equipment                                                                                                                                                                                              |       | 3,892              |       | 4,751                   |       |
| Furniture and fixtures                                                                                                                                                                                 |       | 363                |       | 484                     |       |
| Leasehold improvements                                                                                                                                                                                 |       | 75                 |       | 267                     |       |
| Vehicles                                                                                                                                                                                               |       | 32                 |       | 32                      |       |
|                                                                                                                                                                                                   |       | 4,362              |       | 5,534                   |       |
| Less accumulated depreciation and  amortization                                                                                                                                                        |       | (4,216             | )          | (5,274                  | )          |
| Net equipment and leasehold improvements                                                                                                                                                               |       | 146                |       | 260                     |       |
| Total assets                                                                                                                                                                                           |       | $                  | 4,693      |                    | $          | 7,747 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                         |       |               |       |                    |       |
| Current liabilities:                                                                                                                                                                                   |       |               |       |                    |       |
| Current portion of long-term debt                                                                                                                                                                      |       | $                  | —     |                    | $          | 53 |   |
| Billings in excess of revenue earned                                                                                                                                                                   |       | 376                |       | 468                     |       |
| Accounts payable                                                                                                                                                                                       |       | 416                |       | 882                     |       |
| Accrued interest – related party                                                                                                                                                                  |       | —             |       | 78                      |       |
| Accrued liabilities                                                                                                                                                                                    |       | 180                |       | 479                     |       |
| Accrued payroll and related benefits                                                                                                                                                                   |       | 481                |       | 678                     |       |
| Redeemable preferred stock – current  portion                                                                                                                                                     |       | —             |       | 129                     |       |
| Fair value of derivative feature – related  party                                                                                                                                                 |       | —             |       | 122                     |       |
| Total current liabilities                                                                                                                                                                              |       | 1,453              |       | 2,889                   |       |
| Long-term liabilities:                                                                                                                                                                                 |       |               |       |                    |       |
| Long-term debt – related party                                                                                                                                                                    |       | —             |       | 1,601                   |       |
| Redeemable preferred stock, no par value;  authorized 2,500 shares;166 and 259 shares issued and outstanding at June 30,  2005 and September 30, 2004, (liquidation value $266 and $362), respectively |       | 235                |       | 190                     |       |
| Total long-term liabilities                                                                                                                                                                            |       | 235                |       | 1,791                   |       |
| Total liabilities                                                                                                                                                                                      |       | 1,688              |       | 4,680                   |       |
| Commitments and contingencies                                                                                                                                                                          |       | —             |       | —                  |       |
| Stockholders’ equity:                                                                                                                                                                             |       |               |       |                    |       |
| Common stock, no par value; authorized  10,000 shares; 2,869 and 1,104 shares issued and outstanding at June 30, 2005  and September 30, 2004, respectively                                            |       | 35,312             |       | 33,410                  |       |
| Accumulated deficit                                                                                                                                                                                    |       | (32,307            | )          | (30,343                 | )          |
| Total stockholders’ equity                                                                                                                                                                        |       | 3,005              |       | 3,067                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                                        |       | $                  | 4,693      |                    | $          | 7,747 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(****Inthousands, except per share amounts)(Unaudited****)**

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **June 30,**           | ** ** | **June 30,**          | ** ** |
| ** **                                                                 | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                   |       | $1,363                 |       | $3,340                |       | $4,935 |   | $9,569 |   |
| ** **                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Costs and expenses:                                                        |       |                   |       |                  |       |   |   |   |   |
| Salaries, wages and benefits                                               |       | 1,206                  |       | 1,444                 |       | 4,054 |   | 4,840 |   |
| Subcontractor costs                                                        |       | 395                    |       | 975                   |       | 1,206 |   | 3,053 |   |
| Other general and administrative                                           |       | 506                    |       | 948                   |       | 1,325 |   | 3,188 |   |
| Depreciation and amortization                                              |       | 39                     |       | 61                    |       | 142 |   | 216 |   |
| Severance and related costs                                                |       | —                 |       | 27                    |       | 67 |   | 164 |   |
| Total operating costs                                                      |       | 2,146                  |       | 3,455                 |       | 6,794 |   | 11,461 |   |
| Loss from operations                                                       |       | (783                   | )          | (115                  | )          | (1,859 | ) | (1,892 | ) |
| Other income (expense):                                                    |       |                   |       |                  |       |   |   |   |   |
| Interest expense, net                                                      |       | (12                    | )          | (185                  | )          | (64 | ) | (615 | ) |
| Other income (expense), net                                                |       | —                 |       | 75                    |       | (41 | ) | 79 |   |
| Gain on early extinguishment of debt                                       |       | —                 |       | 1,475                 |       | — |   | 1,475 |   |
| Total other income (expense), net                                          |       | (12                    | )          | 1,365                 |       | (105 | ) | 939 |   |
| Earnings (loss) before income taxes                                        |       | (795                   | )          | 1,250                 |       | (1,964 | ) | (953 | ) |
| Provision for income taxes                                                 |       | —                 |       | —                |       | — |   | — |   |
| Net earnings (loss) available to common  stockholders                      |       | $(795                  | )          | $1,250                |       | $(1,964 | ) | $(953 | ) |
|                                                                       |       |                   |       |                  |       |   |   |   |   |
| Basic earnings (loss) per common share  available to common stockholders   |       | $(0.28                 | )          | $1.15                 |       | $(0.76 | ) | $(0.99 | ) |
|                                                                       |       |                   |       |                  |       |   |   |   |   |
| Diluted earnings (loss) per common share  available to common stockholders |       | $(0.28                 | )          | $0.67                 |       | $(0.76 | ) | $(0.99 | ) |
|                                                                       |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares:                                            |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                      |       | 2,869                  |       | 1,089                 |       | 2,568 |   | 964 |   |
| Diluted                                                                    |       | 2,869                  |       | 1,866                 |       | 2,568 |   | 964 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**For the Nine Months Ended June 30, 2005**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------------------|------------|---------------------------------------|------------|
| **Common Stock**                                                                                |
| **Shares**                                                                                      | ** ** | **Amount** |
| Balances at September 30, 2004                                                                  |       | 1,104      |       | $          | 33,410     |                     | $          | (30,343                               | )          | $ | 3,067 |   |
| Net loss                                                                                        |       | —     |       | —     |       | (1,964                   | )          | (1,964                                | )          |
| Common stock issued pursuant to conversion  of senior secured convertible note, net of expenses |       | 1,701      |       | 1,788      |       | —                   |       | 1,788                                 |       |
| Issuance of inducement stock options                                                            |       | —     |       | 22         |       | —                   |       | 22                                    |       |
| Common stock issued pursuant to exercise of  stock options                                      |       | 64         |       | 92         |       | —                   |       | 92                                    |       |
| Balances at June 30, 2005                                                                       |       | 2,869      |       | $          | 35,312     |                     | $          | (32,307                               | )          | $ | 3,005 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **June 30,**          | ** ** |
| ** **                                                                                                           | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                                                |       |                  |       |   |   |
| Net loss                                                                                                             |       | $                     | (1,964     | ) | $ | (953 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:                                     |       |                  |       |   |   |
| Depreciation and amortization                                                                                        |       | 142                   |       | 216 |   |
| Issuance of inducement stock options                                                                                 |       | 22                    |       | 27 |   |
| Gain on extinguishment of debt                                                                                       |       | —                |       | (1,475 | ) |
| Accretion of interest expense on preferred  stock                                                                    |       | 44                    |       | 385 |   |
| Accretion of interest expense on  convertible debt – related party                                              |       | 9                     |       | 84 |   |
| Change in fair value of derivative  instrument or carrying value of premium on convertible debt – related party |       | (12                   | )          | (78 | ) |
| Loss on disposal of assets                                                                                           |       | 53                    |       | 8 |   |
| Changes in operating assets and  liabilities:                                                                        |       |                  |       |   |   |
| Accounts receivable                                                                                                  |       | 2,199                 |       | (980 | ) |
| Revenue earned in excess of billings                                                                                 |       | 548                   |       | 2,616 |   |
| Prepaid expenses and other                                                                                           |       | 108                   |       | (21 | ) |
| Billings in excess of revenue earned                                                                                 |       | (92                   | )          | 375 |   |
| Accounts payable and other accrued  liabilities                                                                      |       | (755                  | )          | (842 | ) |
| Accrued payroll and related benefits                                                                                 |       | (197                  | )          | (22 | ) |
| Net cash provided by (used in) operating  activities                                                                 |       | 105                   |       | (660 | ) |
|                                                                                                                 |       |                  |       |   |   |
| Cash flows from investing activities:                                                                                |       |                  |       |   |   |
| Purchase of equipment and leasehold  improvements                                                                    |       | (81                   | )          | (7 | ) |
| Net cash used in investing activities                                                                                |       | (81                   | )          | (7 | ) |
|                                                                                                                 |       |                  |       |   |   |
| Cash flows from financing activities:                                                                                |       |                  |       |   |   |
| Principal payments on long-term debt                                                                                 |       | (53                   | )          | (56 | ) |
| Redemption of preferred stock                                                                                        |       | (129                  | )          | (251 | ) |
| Fees associated with issuance of common  stock                                                                       |       | (18                   | )          | — |   |
| Proceeds from common stock issued pursuant  to exercise of options                                                   |       | 92                    |       | 4 |   |
| Net cash used in financing activities                                                                                |       | (108                  | )          | (303 | ) |
|                                                                                                                 |       |                  |       |   |   |
| Net decrease in cash                                                                                                 |       | (84                   | )          | (970 | ) |
|                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents at beginning of  period                                                                    |       | 867                   |       | 1,952 |   |
|                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents at end of period                                                                           |       | $                     | 783        |   | $ | 982 |   |
|                                                                                                                 |       |                  |       |   |   |
| Supplemental disclosures of cash flow  information:                                                                  |       |                  |       |   |   |
| Cash paid for interest                                                                                               |       | $                     | 2          |   | $ | 6 |   |
| Non-cash financing activities:                                                                                       |       |                  |       |   |   |
| Issuance of common stock pursuant to  conversion of debt—related party                                          |       | $                     | 1,806      |   | $ | 324 |   |
| Capital contribution pursuant to  restructured note                                                                  |       | $                     | —     |   | $ | 180 |   |
| Accretion of interest on preferred stock                                                                             |       | $                     | 44         |   | $ | 385 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

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**ANALYTICAL SURVEYS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2005**

**(Unaudited)**

 

**1.**         Summary ofSignificant Accounting Policies

 

Theaccompanying interim consolidated financial statements have been prepared bymanagement without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission, in accordance with the accounting policiesdescribed in our Annual Report on Form 10-K for the year ended September 30,2004, and reflect all adjustments which are, in the opinion of management,necessary to present a fair statement of the results for the interim period ona basis consistent with the annual audited consolidated financial statements.  All such adjustments are of a normalrecurring nature.  The consolidatedfinancial statements include the accounts of Analytical Surveys, Inc. (“ASI”, “we”,“our” or the “Company”) and its subsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation.  Certaininformation and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with U.S. generally acceptedaccounting principles have been omitted. These consolidated financial statements should be read in conjunctionwith the audited consolidated financial statements and related notes includedin our Annual Report on Form 10-K for the year ended September 30, 2004.  All amounts contained herein are presented inthousands unless indicated.

 

The accompanying consolidatedfinancial statements have been prepared on a going concern basis, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business. During the fiscal years of 2000 through 2004,and continuing into fiscal 2005, we have experienced significant operatinglosses with corresponding reductions in working capital and net worth,excluding the impact of debt forgiveness. We do not currently have any external financing in place to supportoperating cash flow requirements. Our revenues and backlog have also decreasedsubstantially during the same period.  If we do not have the cash flownecessary to meet our operating and capital requirements, we will be forced torestrict capital and operating expenditures to match available resources orseek additional financing, which if available, may be available only atunfavorable interest rates, if at all.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.

 

To address the going concernissue, management implemented financial and operational restructuring plansdesigned to improve operating efficiencies, reduce and eliminate cash losses,and position us for profitable operations. We reduced our occupancy expenses infiscal 2005 related to our corporate headquarters relocation providing for amore efficient and appropriate facilities. Financial steps included the retirement of 84% of our preferred stockfor 12% of its redemption value and accrued dividends, which also reducedfuture interest expense incurred on the preferred stock.  We restructured our convertible debt byissuing the Restructured Note to cure an event of default and reduced the totalinterest payable thereon.  The conversionof the Restructured Note by Tonga in November 2004 reduced our debt by$1,696,000, eliminated future related interest expense and improved our debt toequity ratio.  We have reduced ourgeneral and administrative expenses by reducing occupancy costs andstreamlining our executive, senior and middle management teams.  Ongoing viability as a business compels us toact swiftly and decisively regarding new business

 

7

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pursuits and, as such, we haveinitiated a program to revitalize our business development organization andstrategic direction.

 

The financial statements do notinclude any adjustments relating to the recoverability of assets and theclassifications of liabilities that might be necessary should we be unable tocontinue as a going concern. However, we believe that our continued turnaroundefforts, if successful, will improve operations and generate sufficient cash tomeet our obligations in a timely manner.

 

Revenue Recognition.  We recognize revenue using the percentage ofcompletion method of accounting on a cost-to-cost basis. For eachcontract, an estimate of total production costs is determined and theseestimates are reevaluated monthly. Production costs consist of internal costs,primarily salaries and wages, and external costs, primarily subcontractorcosts. Internal and external production costs may vary considerably amongprojects and during the course of completion of each project. At eachaccounting period, the percentage of completion is based on production costsincurred to date as a percentage of total estimated production costs for eachof our contracts. This percentage is then multiplied by the contract’s totalvalue to calculate the sales revenue to be recognized.  The percentage of completion is affected bymany factors that influence either the estimate of future productivity or theproduction cost per hour used to determine future costs.  We recognize losses on contracts in theperiod such loss is determined.  Salesand marketing expenses associated with obtaining contracts are expensed asincurred.

 

StockBased Compensation.  As permitted by Statement of FinancialAccounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation,”we account for our stock-based compensation utilizing the intrinsic-valuemethod in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. No stock-basedemployee compensation expense related to our stock option plans is reflected innet loss, as all options granted under those plans had an exercise price equalto the market value of the underlying common stock on the date of grant.  Pro forma information regarding net loss andnet loss per share is required by SFAS No. 148 “Accounting for Stock-BasedCompensation—Transition and Disclosures.” This information has been estimated at the date of grant using the fairvalue method.

 

We granted inducement stock options (“Option”)to our former Chief Executive Officer (“CEO”) on March 22, 2004.  The Option was not issued pursuant to ourstock option plans, and would have vested at the end of a twelve-monthperiod.  The Option originally providedfor the purchase of 75,000 shares of****common stock at an exercise price equal to$1.50 per share, which was below the market value of $2.82 on the date ofgrant.  Upon his resignation onDecember 20, 2004, we accelerated his vesting rights on 56,250 shares, with amarket value of $1.93 per share, and cancelled his right to purchase theremaining 18,750 shares.  The intrinsicvalue of the vested shares totaled approximately $24,000. Mr. Fuquay exercisedhis rights under the Option on December 28, 2004, and purchased 56,250 sharesof our common stock.  Compensationexpense for the three and nine months ended June 30, 2005, includes $22,173related to the original grant of the Options as well as the remeasured value ofthe accelerated Options.  During thequarter ended June 30, 2005, 30,000 options were granted to our new Presidentand Chief Operating Officer. During the nine months ended June 30, 2005, 40,000options were granted to our two new directors, and 100,000 options were grantedto three members of the management team, including 40,000 options to our CEO. Had compensation costs for our stock basedcompensation been determined at the grant date consistent

 

8

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with the provisionsof SFAS No. 123, our net loss and net loss per share would have increased tothe pro forma amounts indicated below:

 
| ** **                                                            | ** ** | **Three Months Ended**                        | ** ** | **Nine Months Ended**                         | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                                  | ** ** | **June 30,**                                  | ** ** |
| ** **                                                            | ** ** | **2005**                                      | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(in thousands except  per share earnings)** | ** ** | **(in thousands except  per share earnings)** | ** ** |
| Net earnings (loss) available to common stockholders  as reported     |       | $                                             | (795       | )                                             | $          | 1,250 |   | $ | (1,964 | ) | $ | (953 | ) |
| Add: Stock-based employee compensation  included in reported net loss |       | —                                        |       | —                                        |       | 22 |   | — |   |
| Less: Capital Stock-based compensation  based on fair value           |       | (7                                            | )          | (14                                           | )          | (47 | ) | (44 | ) |
| Pro forma net earnings (loss)                                         |       | $                                             | (802       | )                                             | $          | 1,236 |   | $ | (1,989 | ) | $ | (997 | ) |
|                                                                  |       |                                          |       |                                          |       |   |   |   |   |
| Basic net earnings (loss) per share, as  reported                     |       | $                                             | (0.28      | )                                             | $          | 1.15 |   | $ | (0.76 | ) | $ | (0.99 | ) |
| Less: Pro forma option expense                                        |       | —                                        |       | (0.01                                         | )          | (0.01 | ) | (0.04 | ) |
| Pro forma basic net earnings (loss) per  share                        |       | $                                             | (0.28      | )                                             | $          | 1.14 |   | $ | (0.77 | ) | $ | (1.03 | ) |
|                                                                  |       |                                          |       |                                          |       |   |   |   |   |
| Diluted net earnings (loss) per share, as  reported                   |       | $                                             | (0.28      | )                                             | $          | 0.67 |   | $ | (0.76 | ) | $ | (0.99 | ) |
| Less: Pro forma option expense                                        |       | —                                        |       | (0.01                                         | )          | (0.01 | ) | (0.04 | ) |
| Pro forma diluted net earnings (loss) per  share                      |       | $                                             | (0.28      | )                                             | $          | 0.66 |   | $ | (0.77 | ) | $ | (1.03 | ) |

 

**2.****      ****Earnings Per Share**

 

Basic net earnings (loss) per shareis computed by dividing earnings available to common stockholders by theweighted average number of common shares outstanding for the period.  Diluted net earnings (loss) per share includethe effects of the potential dilution of outstanding options and warrantsdetermined using the treasury stock method, as well as convertible debt on ourcommon stock, determined using the if-converted method. We do not presentdiluted net earnings (loss) per share for periods in which we incurred losses,as the effect of potentially dilutive shares is anti-dilutive.  Net earnings (loss) per share for the threeand nine month periods ended June 30, 2005 and 2004 is provided below:

 
| ** **                                                        | ** ** | **Three Months Ended**                        | ** ** | **Nine Months Ended**                         | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**                                  | ** ** | **June 30,**                                  | ** ** |
| ** **                                                        | ** ** | **2005**                                      | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **(in thousands except  per share earnings)** | ** ** | **(in thousands except  per share earnings)** | ** ** |
| **Basic**                                                         |       |                                          |       |                                          |       |   |   |   |   |
| Earnings (loss)  available to common shareholders                 |       | $                                             | (795       | )                                             | $          | 1,250 |   | $ | (1,964 | ) | $ | (953 | ) |
| Weighted average  shares                                          |       | 2,869                                         |       | 1,089                                         |       | 2,568 |   | 964 |   |
| Net earnings  (loss) per share available to common shareholders   |       | $                                             | (0.28      | )                                             | $          | 1.15 |   | $ | (0.76 | ) | $ | (0.99 | ) |
| **Diluted**                                                       |       |                                          |       |                                          |       |   |   |   |   |
| Earnings (loss)  available to common shareholders                 |       | $                                             | (795       | )                                             | $          | 1,250 |   | $ | (1,964 | ) | $ | (953 | ) |
| Effect of  dilutive securities:                                   |       |                                          |       |                                          |       |   |   |   |   |
| Interest on  convertible debenture                                |       | —                                        |       | 49                                            |       | — |   | — |   |
| Compensation  expense                                             |       | —                                        |       | 24                                            |       | — |   | — |   |
| Change in fair  value of derivative features                      |       | —                                        |       | (75                                           | )          | — |   | — |   |
| Net earnings  (loss) available to common shareholders as adjusted |       | $                                             | (795       | )                                             | $          | 1,249 |   | $ | (1,964 | ) | $ | (953 | ) |

 

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| ** **                                                                             | ** ** | **(in thousands except  per share earnings)** | ** ** | **(in thousands except  per share earnings)** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
|                                                                                   |       |                                          |       |                                          |       |   |   |   |   |
| Weighted average  shares – basic                                                  |       | 2,869                                         |       | 1,089                                         |       | 2,568 |   | 964 |   |
| Potential  dilutive securities:                                                        |       |                                          |       |                                          |       |   |   |   |   |
| Assumed  conversion of debt—related party                                         |       | —                                        |       | 714                                           |       | — |   | — |   |
| Assumed exercise  of stock options                                                     |       | —                                        |       | 63                                            |       | — |   | — |   |
|                                                                                   |       | 2,869                                         |       | 1,866                                         |       | 2,568 |   | 964 |   |
| Net earnings  (loss) per share available to common shareholders                        |       | $                                             | (0.28      | )                                             | $          | 0.67 |   | $ | (0.76 | ) | $ | (0.99 | ) |
|                                                                                   |       |                                          |       |                                          |       |   |   |   |   |
| Securities  excluded from the computation of diluted earnings (loss) per common share: |       |                                          |       |                                          |       |   |   |   |   |
| Options (1)                                                                            |       |                                          |       | 142                                           |       |   |   | 202 |   |
| Warrant (1)                                                                            |       |                                          |       | —                                        |       |   |   | 500 |   |
| Common shares  issuable upon conversion debt - related party (2)                       |       |                                          |       | —                                        |       |   |   | 1,755 |   |
| Total                                                                                  |       |                                          |       | 142                                           |       |   |   | 2,457 |   |
|                                                                                        |            |                                               |            |                                               |            |  |  |  |  |  |  |  |  |

 

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(1)           These securities havebeen excluded from the diluted earnings (loss) per common share calculationeither because the respective exercise prices are greater than the averagemarket value of the underlying stock or their inclusion would have beenanti-dilutive.

(2)           The listed securitiesrepresent the number of shares issuable if the debt had been converted at thebeginning of the period.

 

**3.****    ****Impact Of RecentlyIssued Accounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) publishedrevisions to SFAS No. 123.  The revisedSFAS No. 123 (“SFAS No. 123R”) requires companies to account for share-basedpayment transactions using a fair-value based method, thereby eliminating thedisclosure-only provisions of SFAS No. 123. SFAS No. 123R is effective for all small business public entities as ofthe beginning of the first interim reporting period for fiscal years beginningafter December 15, 2005.  We arecurrently evaluating the impact on our financial condition and the results ofoperations.  We currently elect the disclosure-onlyprovisions of Statement SFAS No. 123.

 

InDecember 2004, the FASB issued SFAS No. 153, “Accounting for Non-monetaryTransactions” (“SFAS 153”).  SFAS 153requires non-monetary exchanges to be accounted for at fair value, recognizingany gain or loss, if the transactions meet a commercial-substance criterion andfair value is determinable.  SFAS No. 153is effective for non-monetary transactions occurring in fiscal years beginningafter June 15, 2005.  The Companybelieves that the implementation of this standard will not have a materialeffect on the Company’s consolidated financial position or results ofoperations.

 

In May2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS154”), “*Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*.”  This statement changes the requirements forthe accounting for and reporting of a change in accounting principle.  This statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  This statement is effectivefor

 

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fiscalyears beginning after December 15, 2005 and is not expected to have a materialimpact on the Company’s consolidated financial statements.

 

**4.****    ****Accrued Payrolland Related Benefits**

 

Ouraccrued payroll and related benefits are summarized as follows.

 
| ** **                           | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------|------------|--------------------|------------|-------------------------|------------|
|                                 |       |               |       |                    |       |
| Accrued payroll                      |       | $                  | 244        |                    | $          | 358 |   |
| Accrued health benefits              |       | 75                 |       | 130                     |       |
| Accrued vacation                     |       | 162                |       | 190                     |       |
| Accrued payroll and related benefits |       | $                  | 481        |                    | $          | 678 |   |

 

**5.****    ****Debt**

 

**The components of debt are summarizedas follows.**

 
| **Long-Term Debt**                                  | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
|                                                |       |               |       |                    |       |
| Senior secured convertible note—related  party |       | $                  | —     |                    | $          | 1,601 |   |
| Other                                               |       | —             |       | 53                      |       |
| Redeemable preferred stock (See Note 6)             |       | 235                |       | 319                     |       |
|                                                |       | 235                |       | 1,973                   |       |
| Less current portion                                |       | (—            | )          | (182                    | )          |
|                                                |       | $                  | 235        |                    | $          | 1,791 |   |

 

On April 2, 2002, we completed the sale of a $2.0million senior secured convertible note (“Old Note”) and a warrant (“Warrant”)to purchase 500,000 of our common stock (“Common Stock”) to Tonga Partners LP (“Tonga”).

 

The Old Note, which carried a face value of $2million, had a maturity date of April 2, 2005, and accrued interest at anannual rate of 5.00%.  Accrued interestwas not payable in cash but was to be converted into Common Stock upon the OldNote’s voluntary conversion date or maturity. We recorded the Old Note at $1.664 million reflecting a discount aftergiving effect to the $200,000 and $136,000 estimated fair value of the Warrantand the conversion feature, respectively (“derivative features”), which wererecorded as current liabilities.

 

On October 29, 2003, we received a notice ofconversion from Tonga for $300,000 in principal of the Old Note.  On November 6, 2003, we issued 241,936 sharesat a conversion price equal to $1.24, which represented 90% of the averageclosing bid prices for the three trading days having the lowest closing bidprice during the 20 trading days immediately prior to October 29, 2003.  We also issued 19,522 shares at the sameconversion price for $24,208 of accrued interest on the convertedprincipal.  The Old Note was exchangedfor the shares and a $1.7 million debenture (“Second Note”) bearing the sameterms.  The newly issued shares increasedour total common shares outstanding from 823,965 to 1,085,423.  Tonga owned 24% of our outstanding sharesimmediately after the partial

 

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conversion. The carrying value of the Second Note was accreted to its face value aswe recorded interest expense over its three-year term at a rate of $28,000 perquarter.  The effective rate of intereston the Second Note was 12.5%.  Therelated $336,000 current liability was increased or decreased to reflect thefair value of the derivative at the end of each quarter.

 

On May 28, 2004, an event of default was triggeredunder the Second Note when our Registration Statement on Form S-3 filed withthe SEC on December 30, 2003 to register shares of our Common Stock that wereissued or are issuable pursuant to the Old Note, the Second Note, and theWarrant was not declared effective by the SEC.

 

On June 30, 2004, the event of default was curedwhen we restructured the Second Note. The restructured $1.7 million senior secured convertible promissory note(the “Restructured Note”) bore interest at a rate of 5% per annum with suchinterest accruing beginning on November 4, 2003.  The principal amount of the RestructuredNote, together with accrued and unpaid interest, was due and payable at Tonga’soption in cash or shares of our Common Stock on January 2, 2006.  Tonga retained the right to convert theRestructured Note for shares of our Common Stock at any time.  Tonga waived accrued interest on the SecondNote through November 3, 2003, which totaled $134,000.  Tonga also waived its rights to assessliquidated damages pursuant to the Second Note, relinquished its rights underthe Warrant and canceled the Warrant.

 

The carrying value of the Second Note immediatelyprior to execution of the Restructured Note was $1.616 million, which reflectedthe $1.7 million face value less the $84,000 unamortized discount.  Additionally, immediately prior to theexecution of the Restructured Note, the fair value of the Warrant totaledapproximately $67,000, and the fair value of the conversion feature of theSecond Note totaled approximately $62,000. As a result of the extended term of the Restructured Note, the estimatedfair value of the conversion feature increased to approximately $119,000.  We recorded the Restructured Note at $1.581million reflecting a discount for the $119,000 estimated fair value of theconversion feature, which was recorded as a current liability.  This transaction resulted in a net decreasein total liabilities of approximately $179,000. The decrease consisted of $134,000 of waived interest, the $67,000 fairvalue of the canceled Warrant, and a $35,000 decrease in the carrying value ofthe Restructured Note, offset by a $57,000 increase in the fair value of theconversion feature.  We recorded the$179,000 decrease in liabilities as a capital contribution pursuant to StaffAccounting Bulletin Topic 1:B.

 

The $1.581 million carrying value of theRestructured Note was being accreted to its face value as we recorded interestexpense over its eighteen-month term at a rate of approximately $20,000 perquarter.  The effective interest rate ofthe Restructured Note was 12.14%.  OnSeptember 7, 2004, our amended Registration Statement on Form S-3/A wasdeclared effective by the SEC.  On thatdate, the derivative was extinguished and its fair value, consisting of theconversion feature, was revalued and reclassified as a conversion premium (“Premium”)to be amortized to income over the remaining term of the RestructuredNote.  At September 30, 2004, accruedinterest on the Restructured Note totaled approximately $78,000, and thecarrying value of the unamortized Premium totaled approximately $122,000.

 

OnNovember 11, 2004, we received a notice of conversion (“Conversion”) datedNovember 10, 2004, from Tonga to convert the outstanding principal of theRestructured Note and the related

 

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accruedinterest into our Common Stock at the conversion price set forth in theRestructured Note.  The conversion pricewas $1.05, and was equal to 90% of the average closing bid prices for the threetrading days having the lowest closing bid price during the 20 trading daysimmediately prior to November 10, 2004. The newly issued shares increased our total common shares outstandingfrom 1,104,173 to 2,805,522.  Tonga owned67% of our outstanding shares immediately after the Conversion.  According to filings made by Tonga underSection 16 of the Exchange Act, Tonga liquidated its holdings of our CommonStock by November 15, 2004.

 

On November 10, 2004, the carrying value of theRestructured Note and accrued interest thereon totaled approximately $1,719,420($1.7 million less unamortized discount of $90,857, plus unamortized Premium of$110,277) and $86,417, respectively.  TheConversion resulted in a decrease in related party debt consisting of thecarrying value of the Restructured Note and the related accrued interest,totaling $1,805,837, and a corresponding increase in stockholders’ equity.

 

We were generally restricted from issuing additionalequity securities without Tonga’s consent, and Tonga had a right of firstrefusal as to certain subsequent financings. TheRestructured Note was secured by all of our assets.  Aspart of the transaction, for a period of three years from the date of the OldNote, Tonga had the right to appoint a majority of our board of directors.  Tonga appointed three members to the Boardand as a result, controlled ASI.  However, the conversion of the Restructured Note released the securityinterest in all of our assets.  UponTonga’s disposal of its holdings of our Common Stock, Tonga relinquished itsright to appoint directors.  In December2004, we appointed two new independent directors in conjunction with theresignation of the three Tonga-appointed directors.  As a result, Tonga relinquished control ofASI.

 

**6.****      ****RedeemablePreferred Stock**

 

On December 28, 2001, we issued 1.6 million sharesof no par value Series A Preferred Stock (“Preferred Stock”) with a face valueof $3.2 million, pursuant to the extinguishment of a bank credit agreement (“Agreement”).  We recorded this Preferred Stock at a fairmarket value of $300,000 as described below. In June 2004, we redeemed 1,341,100 shares of our Preferred Stock (“Shares”),or 84%, of the outstanding Shares.  Wepaid the holders of the Shares $251,456 to redeem the Shares, which, on theredemption dates, were carried at approximately $1,535,000 plus accrueddividends totaling approximately $191,000, resulting in a gain of approximately$1,475,000.  The early redemption reducedthe number of preferred shares outstanding to 258,900 shares and reduced amandatory redemption payment, which was classified as a current liability, from$800,000 to $129,450.  We paid thisobligation in December 2004 and redeemed 92,465 shares of Preferred Stock at$1.40 per share.

 

**At June 30,2005, 166,435 shares of Preferred Stock are outstanding which are redeemable onor before December 28, 2006.  UntilDecember 27, 2005, we are entitled to redeem these shares at $1.60 per share,or $266,296.  The redemption priceincreases by $0.20 per year to $1.80 on December 28, 2005 ($299,583), and to$2.00 on December 28, 2006 ($332,870). We must redeem the Preferred Stock on or before December 28, 2006.**

 

**The PreferredStock earns a dividend at the annual rate of 5.00% of the then applicable redemptionprice on a cumulative, non-participating basis and has a liquidation preferenceequal to the then applicable redemption value of shares outstanding at the timeof liquidation.  Since its issuance, we**

 

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**have accrued butnot declared or paid dividends on the Preferred Stock.   Accrued dividends at June 30, 2005, totaledapproximately $53,000.**

 

**The carrying value for theoutstanding Preferred Stock is approximately $235,000 at June 30, 2005.  The carrying value represents the estimatedfair 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 dateof issuance and the redemption value at the mandatory redemption dates.  The fair market value was based on thepresent value of required cash flows using a discount rate of 80%.  We selected the discount rate based ondiscussions with third parties that factored in market conditions for similarsecurities, the current economic climate and our financial condition andperformance.  The accretion of thePreferred Stock is classified as interest expense.**

 

**7.****      ****SegmentInformation**

 

We historically evaluated operations and made keystrategic and resource decisions based on operating results of our individualproduction centers.  Segment dataincludes revenue, operating income, including allocated costs charged to eachof the operating segments, equipment investment and project investment, whichincludes net accounts receivables and revenue earned in excess ofbillings.  Recent management changes andrealignment of organization structure have altered the business pursuit anddecision making process such that traditional segment reporting is no longermeaningful.  Prospectively, segmentinformation will no longer be reported.

 

We have not allocated interest expense and othernon-segment specific expenses to individual segments to determine ourperformance measure.  Non-segment assetsto reconcile to total assets consist of corporate assets including cash,prepaid expenses and deferred taxes.

 
| ** **                           | ** ** | **Location****A** | ** ** | **Location****B** | ** ** | **Total**  | ** ** | **Non-  Segment** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|-------------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|
| **Three months ended June 30, 2005** | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Operations                           |       |              |       |              |       |       |       |              |       |       |       |
| Revenues                             |       | $                 | 129        |              | $          | 1,234      |       | $                 | 1,363      |       | $          | — |   | $ | 1,363 |   |
| Income (loss)  from operations       |       | (932              | )          | 149               |       | (783       | )          | —            |       | (783       | )          |
| Interest expense,  net               |       | —            |       | —            |       | —     |       | (12               | )          | (12        | )          |
| Other                                |       | —            |       | —            |       | —     |       | —            |       | —     |       |
|                                 |       |              |       |              |       |       |       |              |       |       |       |
| Net loss                             |       |              |       |              |       |       |       |              |       | $          | (795       | ) |
|                                 |       |              |       |              |       |       |       |              |       |       |       |
| **Nine months ended June 30, 2005**  |       |              |       |              |       |       |       |              |       |       |       |
| Operations                           |       |              |       |              |       |       |       |              |       |       |       |
| Revenues                             |       | $                 | 1,193      |              | $          | 3,742      |       | $                 | 4,935      |       | $          | — |   | $ | 4,935 |   |
| Income (loss)  from operations       |       | (2,046            | )          | 187               |       | (1,859     | )          | —            |       | (1,859     | )          |
| Interest expense,  net               |       | —            |       | —            |       | —     |       | (64               | )          | (64        | )          |
| Other                                |       | —            |       | —            |       | —     |       | (41               | )          | (41        | )          |
|                                 |       |              |       |              |       |       |       |              |       |       |       |
| Net loss                             |       |              |       |              |       |       |       |              |       | $          | (1,964     | ) |
|                                 |       |              |       |              |       |       |       |              |       |       |       |
| Assets at June  30, 2005             |       |              |       |              |       |       |       |              |       |       |       |
| Segment assets                       |       | $                 | 2,566      |              | $          | 1,094      |       | $                 | 3,660      |       | $          | — |   | $ | 3,660 |   |
| Non-segment  assets                  |       | —            |       | —            |       | —     |       | 1,033             |       | 1,033      |       |
| Consolidated  assets                 |       |              |       |              |       |       |       |              |       | $          | 4,693      |   |

 

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| ** **                            | ** ** | **Location****A** | ** ** | **Location****B** | ** ** | **Total**  | ** ** | **Non-  Segment** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|-------------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|
| **Three months ended June 30, 2004**  | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Operations                            |       |              |       |              |       |       |       |              |       |       |       |
| Revenues                              |       | $                 | 1,942      |              | $          | 1,398      |       | $                 | 3,340      |       | $          | — |   | $ | 3,340 |   |
| Income (loss)  from operations        |       | (333              | )          | 218               |       | (115       | )          | —            |       | (115       | )          |
| Interest expense,  net                |       | —            |       | —            |       | —     |       | (185              | )          | (185       | )          |
| Other                                 |       | —            |       | —            |       | —     |       | 75                |       | 75         |       |
| Gain on early extinguishment  of debt |       | —            |       | —            |       | —     |       | 1,475             |       | 1,475      |       |
| Net earnings                          |       |              |       |              |       |       |       |              |       | $          | 1,250      |   |
|                                  |       |              |       |              |       |       |       |              |       |       |       |
| **Nine months ended June 30, 2004**   |       |              |       |              |       |       |       |              |       |       |       |
| Operations                            |       |              |       |              |       |       |       |              |       |       |       |
| Revenues                              |       | $                 | 5,801      |              | $          | 3,768      |       | $                 | 9,569      |       | $          | — |   | $ | 9,569 |   |
| Income (loss)  from operations        |       | (2,293            | )          | 401               |       | (1,892     | )          | —            |       | (1,892     | )          |
| Interest expense,  net                |       | —            |       | —            |       | —     |       | (615              | )          | (615       | )          |
| Other                                 |       | —            |       | —            |       | —     |       | 79                |       | 79         |       |
| Gain on early extinguishment  of debt |       | —            |       | —            |       | —     |       | 1,475             |       | 1,475      |       |
| Net loss                              |       |              |       |              |       |       |       |              |       | $          | (953       | ) |
|                                  |       |              |       |              |       |       |       |              |       |       |       |
| Assets at June  30, 2004              |       |              |       |              |       |       |       |              |       |       |       |
| Segment assets                        |       | $                 | 5,308      |              | $          | 2,235      |       | $                 | 7,543      |       | $          | — |   | $ | 7,543 |   |
| Non-segment  assets                   |       | —            |       | —            |       | —     |       | 1,435             |       | 1,435      |       |
| Consolidated  assets                  |       |              |       |              |       |       |       |              |       | $          | 8,978      |   |

 

**8.****      ****Litigation**

 

On June 26, 2002, two of ourstockholders, the Epner Family Limited Partnership and the Braverman FamilyLimited Partnership, (“Claimants”), initiated arbitration proceedings againstus.  They alleged that certainrepresentations and warranties which we made in connection with our acquisitionof

 

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Cartotech, Inc., in June1998 were false because our financial condition allegedly was worse thandepicted in our financial statements for 1997 and the unaudited reports for thefirst two quarters of fiscal 1998.   InDecember 2003, an American Arbitration Association panel ruled in our favor,awarding zero damages to the Claimants and ordering each side to bear its ownattorneys’ fees.  The Claimants alsofiled suit against four of our former officers for alleged violation of Texasand Indiana securities laws in connection with our acquisition ofCartotech.  The case was dismissed onJanuary 30, 2004.  Our insurer reimbursed$1.8 million of the defense costs which totaled approximately $2.1 million.

 

RobertMontgomery, a former officer of ASI, filed suit in Hamilton County SuperiorCourt, State of Indiana, on July 19, 2002, seeking recovery of unpaidcommissions pursuant to the Indiana Wage Payment statute.  Mr. Montgomery seeks recovery of $67,611 inunpaid commissions, treble damages, costs interest and attorney’s fees.  We have responded to the lawsuit and we arevigorously defending this action.

 

Weare also subject to various other routine litigation incidental to ourbusiness.  Management does not believethat any of these routine legal proceedings would have a material adverseeffect on our financial condition or results of operations.

** **

**9.**       Concentrationof Credit Risk

** **

At June 30, 2005, we had multiple contracts with four customers, theaggregate of which accounted for 73% of our consolidated revenues for the threemonths ended June 30, 2005 (World Wide Services, and Intergraph (“WWS”), 7%;Michigan Consolidated Gas Company (“MichCon”), 21%; British TelecommunicationsPLC (“BT”), 27%; and MWH Americas, Inc. (“MWH”), 18%).  One of these customers, WWS, accounted for72% of our total accounts receivable and revenue in excess of billings at June30, 2005.   Four customers accounted for71% of our consolidated revenues for the nine months ended June 30, 2005 (WWS,18%; BT, 21%; MWH, 17% and MichCon, 15%, respectively) of total revenue.  Two customers accounted for 69% of totalaccounts receivable and revenue in excess of billings at September 30, 2004(WWS, 58% and KeySpan Corporate Services, LLC, 11%).  Billing terms are negotiated in a competitiveenvironment and are based on reaching project milestones.  We anticipate that sufficient billing milestonesor contract completion will be achieved during fiscal 2005 such that asignificant portion of revenue in excess of billings for these customercontracts will be billed.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**.

 

THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OFTHE COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATEDFINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM10-QSB. THIS FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKSAND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-QSB THAT ARE NOTPURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED INTHIS FORM 10-QSB, OR IN THE DOCUMENTS INCORPORATED BY

 

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REFERENCE INTO THIS FORM 10-QSB, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE,”“INTEND” AND “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCHFORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUTLIMITATION, THE STATEMENTS REGARDING THE COMPANY’S STRATEGY, FUTURE SALES,FUTURE EXPENSES, FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKINGSTATEMENTS IN THIS FORM 10-QSB ARE BASED UPON INFORMATION AVAILABLE TO THECOMPANY ON THE DATE OF THIS FORM 10-QSB, AND THE COMPANY ASSUMES NO OBLIGATIONTO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULDDIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-QSB. FACTORS THAT COULDCAUSE OR CONTRIBUTE TO SUCH DIFFERENCES (“CAUTIONARY STATEMENTS”) INCLUDE, BUTARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS—“RISK FACTORS” ANDELSEWHERE IN THE COMPANY’S ANNUAL REPORT ON FORM 10-K, WHICH ARE INCORPORATEDBY REFERENCE HEREIN AND IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLETO THE COMPANY, OR PERSONS ACTING ON THE COMPANY’S BEHALF, ARE EXPRESSLYQUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

 

**Overview**

 

Founded in 1981, we are aprovider of data conversion and digital mapping services to users of customizedgeographic information systems.

 

Our independent auditors, PannellKerr Forster of Texas, P.C., issued a going concern qualification on ourfinancial statements for the fiscal year ended September 30, 2004.  The going-concern qualification, whichexpressed substantial doubt about our ability to continue as a going concern,is based on the significant operating losses reported in fiscal 2004 and 2003,and a lack of external financing.  Ourformer independent auditors, KPMG, LLP, issued a going concern qualification onour financial statements for the fiscal years ended September 30, 2003, 2002, 2001,and 2000, based on the significant operating losses reported in those fiscalyears and a lack of external financing to fund working capital and debtrequirements.

 

We experience yearly andquarterly fluctuations in production costs, salaries, wages and relatedbenefits and subcontractor costs. These costs may vary as a percentage of salesfrom period to period.  In September2004, our five-year exclusive supply agreement with InfoTech Enterprises, Ltd.,an India-based company, to provide production capacity for data conversion andother related services expired.  Weutilized InfoTech to provide more than 90% of our offshore subcontractorservices (this work constitutes less than 10% of our total production costs).  We have continued to utilize InfoTech foroffshore conversion capacity but may also engage alternate sources of offshoresubcontractor services in India.  Thismay increase our cost of offshore services in the short term as we train a newsupplier.  We intend to continue toutilize offshore subcontractors for a large percentage of certain data entryproduction work for the near term to reduce production costs and develop newservices until a more cost effective alternative can be identified.

 

Backlog increases when newcontracts are signed and decreases as revenues are recognized.  As of June 30, 2005, our backlog was $4.6million, $2.0 million of which we expect to earn during the

 

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remaining three months of fiscal2005.  Backlog totaled $6.5 million atSeptember 30, 2004.   We believe backloglevels reflect changes in macroeconomic and industry market conditions.

 

Wehave been awarded several projects that are greater than $1 million or longerthan two years in duration, which can increase our risk due to inflation, aswell as changes in schedule, customer expectations and funding availability.Our contracts are generally terminable on short notice, and while in ourexperience such termination is rare, there is no assurance that we will receiveall of the revenue anticipated under signed contracts.

 

We engagein research and development activities; however, associated expenses are notsignificant and represent less than $100,000 per year, or less than 5% of ourtotal operating expense.  The majority ofthese activities occur as we develop software or design a product for aparticular contract.  These efforts aretypically included as an integral part of our services for the particularproject and, accordingly, the associated costs are charged to that project.Such custom-designed software can often be applied to projects for othercustomers, since we retain ownership of such proprietary software or products.

 

We streamlined our operations throughoutfiscal year 2003 and 2004, and consolidated our four main production centers totwo solution centers in Texas and Wisconsin. Beginning in 2003 and through fiscal 2004, we reduced the number ofcorporate and administrative staff by 40%, including a reduction in the numberof highly compensated administrative personnel. We have made several changes to our management team that are designed tostrengthen our focus on operations and future strategies.  On December 20, 2004, Wayne Fuquay resignedas director and Chief Executive Officer. Simultaneously, Lori Jones, who has served as our Chief FinancialOfficer, was appointed Chief Executive Officer. Our controller, Mr. Barry Golko, will serve as Chief AccountingOfficer.  During this past quarter,additional executive changes occurred as follows:  Senior Vice President, Hamid Akhavan,resigned from the company to pursue other business opportunities; Brian Morrowjoined the Company as President and Chief Operating Officer.  Consolidation of these executive functionsmay result in further reductions to compensation expense in the final threemonths of fiscal 2005.  We currentlyemploy approximately 100 full-time employees. While we have reduced our legal and professional fees as we settledlitigation against the Company and completed our obligations under the RestructuredNote, we anticipate that compliance with the requirements of Sarbanes-Oxleywill require substantial financial and management resources and result inadditional expenses.

 

**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, selected consolidatedstatements of operations data expressed as a percentage of sales:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **June 30**            | ** ** | **June 30**           | ** ** |
| ** **                              | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Percentage of Revenues:**             |       |                   |       |                  |       |   |   |   |   |
| Revenues                                |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Costs and  expenses                     |       |                   |       |                  |       |   |   |   |   |
| Salaries, wages and related benefits    |       | 88.5                   |       | 43.2                  |       | 82.1 |   | 50.6 |   |
| Subcontractor costs                     |       | 29.0                   |       | 29.2                  |       | 24.4 |   | 31.9 |   |
| Other general and administrative        |       | 37.1                   |       | 28.4                  |       | 26.8 |   | 33.3 |   |
| Depreciation and amortization           |       | 2.9                    |       | 1.8                   |       | 2.9 |   | 2.3 |   |
| Severance and related costs             |       | 0.0                    |       | 0.8                   |       | 1.4 |   | 1.7 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Loss from operations                    |       | (57.5                  | )          | (3.4                  | )          | (37.6 | ) | (19.8 | ) |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Other income (expense), net             |       | (0.8                   | )          | 40.8                  |       | (2.2 | ) | 9.8 |   |
|                                    |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) before income taxes     |       | (58.3                  | )          | 37.4                  |       | (39.8 | ) | (10.0 | ) |
| Provision for income taxes              |       | —                 |       | —                |       | — |   | — |   |
| Net earnings (loss) available to common |       |                   |       |                  |       |   |   |   |   |
| stockholders                            |       | (58.3                  | )%         | 37.4                  | %          | (39.8 | )% | (10.0 | )% |

 

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**Three and Nine Months Ended June 30, 2005 and 2004**

 

**Revenues**.  Werecognize revenues as services are performed. Our revenues decreased 59.2% forthe three months ended June 30, 2005, and totaled $1,363,000 as compared to$3,340,000 for the same period in fiscal 2004, a decrease of approximately$1,977,000.  Our revenuesdecreased 48.4% for the nine-month period ended June 30, 2005, and totaled$4,935,000 as compared to $9,569,000 for the same period in fiscal 2004, adecrease of $4,634,000. The decrease inrevenues is due to a lower number of active contracts in the fiscal 2005 andschedule extension on existing field operations which served to increase costto complete and thereby lower revenue recognized related to these operations.  The level of new contract signings in recentfiscal years, including fiscal 2003 and 2004, was lower than in previous yearsand, as a result, revenues have decreased as well.  We believe this decrease in contract signingsis attributable to lower demand for and reduced spending levels for dataconversion services both in general and specific to the GIS industry.

 

**Salaries,Wages and Benefits.**  Salaries, wages and benefits include employeecompensation for production, marketing, selling, and administrative andexecutive employees. Salaries, wages and benefits decreased $238,000 and$786,000 for the three and nine-month periods ended June 30, 2005,respectively, as compared to the same periods in fiscal 2004.  Thedecrease was a result of reductions in our workforce related to reduced revenuevolume, our decision to subcontract a portion of our production work tooffshore subcontractors, and our use of domestic subcontractors to managefluctuating labor needs.

 

**SubcontractorCosts.**  Subcontractor costs include production costsincurred through the use of third parties for production tasks such as dataconversion services to meet contract requirements, and field survey services.The use of domestic subcontractors enables us to better manage the fluctuationsin labor requirements as we complete and begin new projects as well as duringthe various phases of contracts.  Subcontractorcosts decreased $580,000 and $1,847,000 for the three and nine-month periodsended June 30, 2005, as compared to the same periods in fiscal 2004 due to the completion of several contracts in fiscal2005 that have not been replaced with new contracts.

 

**OtherGeneral and Administrative. **Other general and administrative costsinclude rent, maintenance, travel, supplies, utilities, insurance andprofessional services.  Such costsdecreased $442,000 and $1,863,000 for the three and nine-month periods endedJune 30, 2005, respectively, as compared to the same periods in fiscal2004.  The decrease was a result of the implementation of cost controls, thereduced cost related to fewer general and administrative employees, and lowerprofessional fee expenses.

 

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**Depreciationand Amortization. **Depreciation and amortization decreased $22,000and $74,000 for the three and nine-month periods ended June 30, 2005,respectively, as compared to the same periods in fiscal 2004 due to someequipment becoming fully depreciated.  The replacement cost on computer equipment issignificantly lower than the cost of the replaced items.  Additionally, we have extended the life ofexisting equipment and elected to postpone investment in new equipment.  Accordingly, depreciation and amortizationexpense has decreased in recent periods.

 

**Severanceand Related Costs.**  We incurred severance expense of $0and $67,000 for the three and nine-month periods ended June 30, 2005, ascompared to $27,000 and $164,000 for the same periods in fiscal 2004.  Theexpense in fiscal 2005 was incurred as a result of the termination of our ChiefExecutive Officer’s employment contract that provided for payment of thecontract through March 21, 2005.

 

**InterestExpense, Net.**  We incurred interest expense totaling $12,000in the quarter ended June 30, 2005 as compared to $185,000 in the quarter endedJune 30, 2004.  For the nine months endedJune 30, 2005, interest expense totaled $64,000 as compared to $615,000 for thecorresponding prior year period.  Thedecrease, which totaled $173,000 in the quarter and $551,000 for the ninemonths ended June 30, 2005, was a result of the lower levels of debtoutstanding during the quarter and nine months ended June 30, 2005, effected bythe conversion of the Restructured Note on November 10, 2004 and the earlyredemption of our Preferred Stock in June 2004. See Notes 5 and 6 to the ConsolidatedFinancial Statements.

 

**OtherIncome (Expense).** Other income or expense is principally aresult of the change in fair value of the derivative features of the SecondNote or Restructured Note, and subsequent to the reclassification of thederivative features, amortization of the Premium on the Restructured Note.  The Premium was amortized to other incomeuntil the Conversion date and the unamortized balance was reclassified tostockholders’ equity upon Conversion of the Restructured Note on November 10,2004.  Accordingly, we recorded otherincome totaling $0 and $12,000 for the three and nine-month periods ended June30, 2005. The fair value of the derivative features totaled $119,000, $204,000,and $207,000 as of June 30, 2004, March 31, 2004, and September 30, 2003,respectively.  Accordingly, we recordedother income totaling $75,000 and $78,000 for the three and nine-month periodsended June 30, 2004.  Additionally, werecorded $53,000 in other expense during the nine-month period ended June 30,2005 related to the disposition of assets when we relocated.

 

**IncomeTaxes**.  Federal income tax expense for fiscal year2005 is projected to be zero. Accordingly, an effective federal income tax rate of 0% was recorded forthe three and nine months ended June 30, 2005. As a result of the uncertainty that sufficient future taxable income canbe recognized to realize additional deferred tax assets, no income tax benefithas been recognized for the three and nine months ended June 30, 2005 and 2004.

 

**Net Loss.  **We recorded a net loss of $795,000 in the third quarter of fiscal 2005as compared to net earnings of $1,250,000 in the same quarter of fiscal2004.  The variances are attributable tothe $1.475 million gain on the early extinguishment of debt included in the2004 fiscal periods and lower revenues in the fiscal 2005 periods as comparedto the 2004 periods.  Our net lossof $1,964,000 in the first nine months of fiscal 2005 was $1,011,000 or 106.1%greater than the $953,000 net loss incurred during the corresponding nine-monthperiod in 2004.

 

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**Liquidity and Capital Resources**

 

**Table of Contractual Obligations.**  Belowis a schedule (by period due) of the future payments that we are obligated tomake over the next five years based on agreements in place as of June 30, 2005.

 
| ** **                 | ** ** | **Fiscal Year Ending September 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2005**                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Total** | ** ** |
| Operating leases           |       | $                                    | 50         |   | 107 |   | — |   | — |   | — |   | $ | 157 |   |
| Financing leases           |       | 1                                    |       | 4 |   | 4 |   | 2 |   | — |   | 11 |   |
| Debt                       |       | —                               |       | — |   | — |   | — |   | — |   | — |   |
| Preferred stock redemption |       | —                               |       | — |   | 300 |   | — |   | — |   | 300 |   |
| Total                      |       | $                                    | 51         |   | 111 |   | 304 |   | 2 |   | — |   | $ | 468 |   |

 

**Historically,the principal source of our liquidity consisted of cash flow from operationssupplemented by secured lines-of-credit and other borrowings.  At June 30, 2005, related contractualobligations included redeemable preferred stock with a redemption value ofapproximately $266,000. We do not have a line of credit and there is noassurance that we will be able to obtain additional borrowings should we seekto do so.**

 

Our debt is summarized as follows.

 
| ** **                                          | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
|                                                |       |               |       |                    |       |
| **Long-Term Debt**                                  |       |               |       |                    |       |
| Senior secured convertible note—related  party |       | $                  | —     |                    | $          | 1,601 |   |
| Other                                               |       | —             |       | 53                      |       |
| Redeemable preferred stock                          |       | 235                |       | 319                     |       |
|                                                |       | 235                |       | 1,973                   |       |
| Less current portion                                |       | —             |       | (182                    | )          |
|                                                |       | $                  | 235        |                    | $          | 1,791 |   |

 

On April 2, 2002, we completed the sale of a $2.0million senior secured convertible note (“Old Note”) and a warrant (“Warrant”)to purchase 500,000 of our common stock (“Common Stock”) to Tonga.  The Old Note, which carried a face value of$2 million, had a maturity date of April 2, 2005, and accrued interest at anannual rate of 5.00%.  Accrued interestwas not payable in cash but was to be converted into Common Stock upon the OldNote’s voluntary conversion date or maturity.

 

On October 29, 2003, we received a notice ofconversion from Tonga for $300,000 in principal of the Old Note.  On November 6, 2003, we issued 241,936 sharesat a conversion price equal to $1.24, which represented 90% of the averageclosing bid prices for the three trading days having the lowest closing bidprice during the 20 trading days immediately prior to October 29, 2003.  We also issued 19,522 shares at the same conversionprice for $24,208 of accrued interest on the converted principal.  The Old Note was exchanged for the shares anda $1.7 million debenture (“Second Note”) bearing the same terms.  The newly issued shares increased our totalcommon shares outstanding from 823,965 to 1,085,423.  Tonga owned 24% of our outstanding sharesimmediately after the partial conversion.

 

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On May 28, 2004, an event of default was triggeredunder the Second Note when our Registration Statement on Form S-3 filed with theSEC on December 30, 2003 to register shares of our Common Stock that wereissued or are issuable pursuant to the Old Note, the Second Note, and theWarrant was not declared effective by the SEC.

 

On June 30, 2004, the event of default was curedwhen we restructured the Second Note. The restructured $1.7 million senior secured convertible promissory note(the “Restructured Note”) bore interest at a rate of 5% per annum with suchinterest accruing beginning on November 4, 2003.  The principal amount of the RestructuredNote, together with accrued and unpaid interest, was due and payable at Tonga’soption in cash or shares of our Common Stock on January 2, 2006.  Tonga retained the right to convert theRestructured Note for shares of our Common Stock at any time.  Tonga waived accrued interest on the SecondNote through November 3, 2003, which totaled $134,000.  Tonga also waived its rights to assessliquidated damages pursuant to the Second Note, relinquished its rights underthe Warrant and canceled the Warrant.

 

The carrying value of the Second Note immediatelyprior to execution of the Restructured Note was $1.616 million, which reflectedthe $1.7 million face value less the $84,000 unamortized discount.  Additionally, immediately prior to theexecution of the Restructured Note, the fair value of the Warrant totaledapproximately $67,000, and the fair value of the conversion feature of theSecond Note totaled approximately $62,000. As a result of the extended term of the Restructured Note, the estimatedfair value of the conversion feature increased to approximately $119,000.  We recorded the Restructured Note at $1.581million reflecting a discount for the $119,000 estimated fair value of theconversion feature, which was recorded as a current liability.  This transaction resulted in a net decrease intotal liabilities of approximately $179,000. The decrease consisted of $134,000 of waived interest, the $67,000 fairvalue of the canceled Warrant, and a $35,000 decrease in the carrying value ofthe Restructured Note, offset by a $57,000 increase in the fair value of theconversion feature.  We recorded the$179,000 decrease in liabilities as a capital contribution pursuant to StaffAccounting Bulletin Topic 1:B.

 

The $1.581 million carrying value of the RestructuredNote was being accreted to its face value as we recorded interest expense overits eighteen-month term at a rate of approximately $20,000 per quarter.  The effective interest rate of theRestructured Note was 12.14%.  OnSeptember 7, 2004, our amended Registration Statement on Form S-3/A wasdeclared effective by the SEC.  On thatdate, the derivative was extinguished and its fair value, consisting of theconversion feature, was revalued and reclassified as a conversion premium (“Premium”)to be amortized to income over the remaining term of the RestructuredNote.  At September 30, 2004, accruedinterest on the Restructured Note totaled approximately $78,000, and thecarrying value of the unamortized Premium totaled approximately $122,000.

 

On November 11, 2004, we received a notice ofconversion (“Conversion”) dated November 10, 2004, from Tonga to convert theoutstanding principal of the Restructured Note and the related accrued interestinto our Common Stock at the conversion price set forth in the RestructuredNote.  The conversion price was $1.05,and was equal to 90% of the average closing bid prices for the three tradingdays having the lowest closing bid price during the 20 trading days immediatelyprior to November 10, 2004.  The newlyissued shares increased our total common shares outstanding from 1,104,173 to2,805,522.  Tonga owned 67% of ouroutstanding shares immediately after the

 

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Conversion. According to filings made by Tonga under Section 16 of the Exchange Act,Tonga liquidated its holdings of our Common Stock by November 15, 2004.

 

On November 10, 2004, the carrying value of theRestructured Note and accrued interest thereon totaled approximately $1,719,420($1.7 million less unamortized discount of $90,857, plus unamortized Premium of$110,277) and $86,417, respectively.  TheConversion resulted in a decrease in related party debt consisting of thecarrying value of the Restructured Note and the related accrued interest,totaling $1,805,837, and a corresponding increase in stockholders’ equity.

 

We were generally restricted from issuing additionalequity securities without Tonga’s consent, and Tonga had a right of firstrefusal as to certain subsequent financings. TheRestructured Note was secured by all of our assets.  Aspart of the transaction, for a period of three years from the date of the OldNote, Tonga had the right to appoint a majority of our board of directors.  Tonga appointed three members to the Boardand as a result, controlled ASI.  However, the conversion of the Restructured Note released the securityinterest in all of our assets.  UponTonga’s disposal of its holdings of our Common Stock, Tonga relinquished itsright to appoint directors.  In December2004, we appointed two new independent directors in conjunction with theresignation of the three Tonga-appointed directors.  As a result, Tonga relinquished control ofASI.

 

AtSeptember 30, 2004, 258,900 shares of Preferred Stock were outstanding,  which are redeemable on or before December28, 2006.  In December 2004, we redeemed92,465 shares pursuant to the terms of the Preferred Stock, which provided fora mandatory redemption payment on December 28, 2004.  We paid the holder of the Preferred Stock$129,450 and redeemed the shares at $1.40 per share.  The redemption price increases by $0.20 peryear to $1.80 on December 28, 2005 ($299,583), and to $2.00 on December 28,2006 ($332,870).  We must redeem thePreferred Stock on or before December 28, 2006.

** **

ThePreferred Stock earns a dividend at the annual rate of 5.00% of the thenapplicable redemption price on a cumulative, non-participating basis and has aliquidation preference equal to the then applicable redemption value of sharesoutstanding at the time of liquidation. Since its issuance, we have accrued but not declared or paid dividendson the Preferred Stock.  Accrueddividends at June 30, 2005, totaled approximately $53,000.

 

Theaccompanying financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. Since fiscal 2000, we have experienced significant operating losses withcorresponding reductions in working capital. Our revenues and backlog decreased significantly during that time.  These factors, among others, have resulted inour independent auditors issuing an audit opinion on the September 30, 2004,financial statements that expressed substantial doubt about our ability tocontinue as a going concern.

 

To address the going concern issue,management implemented financial and operational restructuring plans designedto improve operating efficiencies, reduce and eliminate cash losses, andposition us for profitable operations.****Financialsteps included the retirement of 84% of our preferred stock for 12% of itsredemption value and accrued dividends, which also reduced future interestexpense incurred on the preferred stock. We restructured our convertible debt by issuing the Restructured Note tocure an event of default and reduced the total interest payable thereon.  The conversion of the

 

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Restructured Note by Tonga inNovember 2004 reduced our debt by $1,696,000, eliminated future relatedinterest expense and improved our debt to equity ratio.  We have reduced our general andadministrative expenses by reducing occupancy costs and streamlining ourexecutive, senior and middle management teams. We reduced our occupancy expenses in fiscal 2005related to our corporate headquarters relocation providing for more efficientand appropriate facilities.

** **

**Thefinancial statements do not include any adjustments relating to therecoverability of assets and the classifications of liabilities that might benecessary should we be unable to continue as a going concern.  However, we believe that our turnaroundefforts, if successful, will improve operations and generate sufficient cash tomeet our obligations in a timely manner.**

 

**In the absence of a line of creditand because of our inability to secure debt on terms that would be consideredreasonable based on our recent operating history, we depend on internal cashflow to sustain operations.  Internalcash flow is significantly affected by customer contract terms and progressachieved on projects.  Fluctuations ininternal cash flow are reflected in three contract-related accounts:accounts receivable; revenue earned in excess of billings; and billings inexcess of revenue earned. Under the percentage of completion method ofaccounting:**

 

•      “Accounts receivable” is created when an amount becomes due from acustomer, which typically occurs when an event specified in the contracttriggers a billing.

•      “Revenue earned in excess of billings” occur when we have performedunder a contract even though a billing event has not been triggered.

•      “Billings in excess of revenue earned” (unearned revenues) occur whenwe receive an advance or deposit against work yet to be performed.

 

These accounts, which represent a significant investment by us in ourbusiness, affect our cash flow as projects are signed, performed, billed andcollected.  At June 30, 2005, we hadmultiple contracts with four customers, the aggregate of which accounted for73% of our consolidated revenues for the three months ended June 30, 2005(Worldwide Services, Inc, and Intergraph (“WWS”), 7%; Michigan Consolidated GasCompany (“MichCon”), 21%; British Telecommunications PLC (“BT”), 27%; and MWHAmericas, Inc. (“MWH”), 18%.)  One ofthese customers, WWS, accounted for 72% of our total accounts receivable andrevenue in excess of billings at June 30, 2005. Four customers accounted for 71% of our consolidated revenues for thenine months ended June 30, 2005 (WWS, 18%; BT, 21%; MWH, 17% and MichCon, 15%,respectively) of total revenue.  Twocustomers accounted for 69% of total accounts receivable and revenue in excessof billings at September 30, 2004 (WWS, 58% and KeySpan Corporate Services,LLC, 11%).  Billing terms are negotiatedin a competitive environment and are based on reaching project milestones.  We anticipate that sufficient billingmilestones or contract completion will be achieved during fiscal 2005 and 2006 such that asignificant portion of revenue in excess of billings for these customercontracts will be billed.

 

In order to meet our short-term cash requirements we must collect morecash from our customers than we pay to our employees and suppliers.  To meet our short and long-term cashrequirements, we must complete certain projects in fiscal 2005 and 2006 thatare related to the balance of revenue earned in excess of billings at June 30,2005, in order to generate sufficient cash flow to fund operations andexpenditures.  We expect that we will beable to complete a majority of these contracts by December 31, 2005, but therecan be no assurance that market conditions or other

 

24

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factors may prevent us from doing so or that the cash generated will beequal to the amount that we currently anticipate.  If we are unable to complete the contractsand generate cash by earning and collecting our unearned revenues, we will beforced to obtain additional financing and/or restrict capital and operatingexpenditures to match available resources.

 

**Our operating activities provided $105,000 and used$660,000 of cash during the nine months ended June 30, 2005 and 2004,respectively.  The decrease in cash usedby operations resulted primarily from the collection of contract relatedaccounts during the nine months ended June 30, 2005.  Our operating loss totaled $1,964,000 for thenine months ended June 30, 2005 as compared to $953,000 for the nine monthsended June 30, 2004.  Contract-relatedaccounts provided $2,655,000 of operating cash flow for the nine months endedJune 30, 2005 compared to $2,011,000 in the corresponding prior year.**

 

**We purchased equipment and leasehold improvements totaling$81,000 and $7,000, during the nine months ended June 30, 2005 and 2004.  We paid $129,450 in accordance with themandatory redemption terms of our preferred stock and redeemed 92,465 shares inDecember 2004.**

** **

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

We may from time to time employ riskmanagement techniques such as interest rate swaps and foreign currency hedgingtransactions. None of these techniques are used for speculative or tradingpurposes and the amounts involved are not considered material. We did notutilize any such techniques during the current reporting period, but may employsuch techniques in future periods.

 

**Item 4.  Controls andProcedures**

 

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officer,President and Chief Operating Officer, and Chief Accounting Officer, of theeffectiveness of our disclosure controls and procedures (as defined in rules13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer,President and Chief Operating Officer, and Chief Accounting Officer haveconcluded that the disclosure controls and procedures are effective in alertingthem on a timely basis to material information relating to the Company(including our consolidated subsidiaries) that is required to be included inour periodic filings under the Exchange Act.

 

There has been no change inour internal control over financial reporting (as defined in Rules 13(a)-13(f)and 15(d)-15(f) under the Exchange Act) that occurred during the period coveredby this quarterly report that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**Part II**

**Other Information**

 

**Item 1.  Legal Proceedings**.

 

Information regarding ourlegal proceedings can be found under Note 8, “Litigation”, to the ConsolidatedFinancial Statements.

 

**Item 2.   Unregistered Sales of Securities and Use ofProceeds.**

 

None.

 

**Item 3.   Defaults Upon Senior Securities.**

 

None.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

None.

 

**Item 5.  OtherInformation.**

 

None.

 

**Item 6. Exhibits.**

 

**Exhibits:**

 

31.1         Section 302 Certification of Chief ExecutiveOfficer

 

31.2         Section 302 Certification of Chief AccountingOfficer

 

32.1         Section 906 Certification of Chief ExecutiveOfficer

 

32.2         Section 906 Certification of Chief AccountingOfficer

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                             |   |   | Analytical Surveys, Inc.  |
|----------------------------------|--------|--------|---------------------------|
|                             |   |   | (Registrant)              |
|                             |   |   |                      |
|                             |   |   |                      |
| Date:  August 15, 2005 |   |   | /s/  Lori A. Jones   |   |
|                             |   |   | Lori  A. Jones            |
|                             |   |   | Chief  Executive Officer  |
|                             |   |   |                      |
|                             |   |   |                      |
| Date:  August 15, 2005 |   |   | /s/  Barry Golko     |   |
|                             |   |   | Barry  Golko              |
|                             |   |   | Chief  Accounting Officer |
|                                  |        |        |                           |  |  |

 

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