U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
COMMISSION FILE NUMBER 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
(Exact name of small business issuer as specified in its charter)
Delaware 68-0195770
(State or other jurisdiction of (IRS Employer Identification No.)
Icorporation or organization)
629 J Street, Sacramento, CA 95814
(Address of principal executive offices)
(916) 325-9370
(Issuer's telephone number)
(Former address if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No _
Number of shares of common stock outstanding as of October 31, 1997:
25,812,787
<PAGE>2
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 40,750
Accounts receivable, net 298,690
Other current assets 59,735
-------------
Total current assets 399,175
PROPERTY AND EQUIPMENT:
Equipment 18,407
Furniture and fixtures 148,445
------------
166,852
Accumulated depreciation and amortization (157,798)
------------
Property and equipment, net 9,054
$ 408,229
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable to stockholders 3,080,262
Accounts payable to stockholders 380,973
Accounts payable 193,620
Accrued payroll and related expenses 287,865
Accrued preferred stock dividends 398,125
Other current liabilities 73,341
Other notes payable 11,567
-----------
Total current liabilities 4,425,753
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $6.00 par value - 1,200,000
shares authorized, 204,167 Series D shares
issued and outstanding; liquidation preference
value of $1,623,127 1,225,002
Common stock, $0.01 par value - 100,000,000 shares
authorized, 25,812,787 shares issued and outstanding 258,128
Unearned compensation (42,188)
Additional paid-in capital 28,760,541
Accumulated deficit (34,219,007)
-------------
Total stockholders' deficit (4,017,524)
-------------
$ 408,229
=============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months
ENDED SEPTEMBER 30,
1997 1996
CONTRACT PROGRAMMING:
Contract programming revenue $ 921,742 $ 360,929
Programmer costs (709,925) (287,226)
Start-up and other costs (157,489) (57,498)
------------ ------------
Contract programming gross profit 54,328 16,205
------------ ------------
SYSTEM SERVICE:
Service revenue - 93,734
Cost of service - (63,087)
----------- -----------
System service gross profit - 30,647
----------- -----------
Selling, general and administrative (333,785) (212,253)
------------ -----------
Loss from operations (279,457) (165,401)
Other income (expense):
Interest expense (83,664) (47,232)
Other, net - 4,663
---------- ----------
(83,664) (42,569)
Net loss $ (363,121) $ (207,970)
=========== ============
Preferred stock dividends in arrears (30,625) (30,625)
---------- -----------
Net loss applicable to common stockholders $ (393,746) $ (238,595)
=========== ===========
Net loss per share $ (0.02) $ (0.01)
Shares used in per share calculations 25,325,408 25,218,887
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
Net cash used in operating activities $ (322,569) $ (155,000)
Cash flows from investing activities:
Sale of property and equipment - 6,165
------------ -----------
Net cash provided by investing activities - 6,165
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 22,548 1,077
Proceeds from notes payable to stockholders 293,000 173,000
Payments on notes payable and capital leases (11,972) (15,444)
------------ -----------
Net cash provided by financing activities 303,576 158,633
------------ -----------
Net (decrease) increase in cash (18,993) 9,798
Cash at beginning of period 59,743 52,106
------------ -----------
Cash at end of period $ 40,750 $ 61,904
============ ===========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended June 30, 1997.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments considered necessary to present fairly the
Company's financial position at September 30, 1997, results of operations
for the three month periods ended September 30, 1997 and 1996, and cash
flows for the three months ended September 30, 1997 and 1996. The results
for the period ended September 30, 1997 are not necessarily indicative of
the results to be expected for the entire fiscal year ending June 30, 1998.
The financial statements and notes thereto also include the effect of a
one-for-ten consolidation of the Company's outstanding Common Stock, par
value $0.01 per share, which became effective on December 2, 1996. In
addition, effective on December 2, 1996, the Company changed its name from
3Net Systems, Inc., to Alternative Technology Resources, Inc., and the
number of authorized shares of Common Stock was reduced from 200,000,000 to
100,000,000.
Certain amounts for the three months ended September 30, 1996 have been
reclassified to conform with the September 30, 1997 presentation.
The report of independent auditors on the Company's June 30, 1997 financial
statements includes an explanatory paragraph indicating there is
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern. Based on
the recent steps the Company has taken to reduce its expenses and refocus
its operations, the Company believes that it has developed a viable plan to
address the Company's ability to continue as a going concern and that this
plan will enable the Company to continue as a going concern through the end
of fiscal year 1998. However, considering, among other things, the
Company's historical operating losses and its short history in the contract
computer programming industry, there can be no assurance that this plan
will be successfully implemented.
NOTE 2 - FINANCING ARRANGEMENTS
See Part I, Item 2 "Management's Discussion and Analysis and Results of
Operations -- Liquidity and Capital Resources."
<PAGE>6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion provides information to facilitate the
understanding and assessment of significant changes in trends related to
the financial condition of the Company and its results of operations. It
should be read in conjunction with the Company's financial statements and
the notes thereto and other financial information included elsewhere in the
10-KSB for the fiscal year ended June 30, 1997. Dollar amounts reported
have been rounded to the nearest thousand.
OVERVIEW
The Company was founded in 1989 to develop and sell computer integrated
laboratory systems ("LIS"). The Company operated under the name 3Net
Systems, Inc. and was never successful in the LIS market. Therefore, in
fiscal 1996, the Company stopped new system development and later decided
to exit LIS entirely.
During fiscal 1997, the Company changed its name to Alternative Technology
Resources, Inc. ("ATR") and focused its efforts to develop its computer
programmer placement business. During fiscal years 1995 and 1996, the
Company developed and implemented a program whereby it recruits
experienced, qualified computer programmers primarily from the former
Soviet Union, obtains necessary visas, and places them for assignment in
the United States. The Company started this process to support its former
LIS business and the needs of a customer that was developing medical
administrative systems. ATR soon discovered an encouraging demand for
these programmers from others and began its present business on a limited
basis. Initial success placing programmers and increasing expressions of
demand have encouraged ATR to focus entirely upon growing its niche in the
contract programming marketplace.
RESULTS OF OPERATION
CONTRACT PROGRAMMING
CONTRACT PROGRAMMING REVENUE. Contract programming revenue results
primarily from sales of programmer services. During fiscal 1997, sales of
custom programming and software development and acting as an intermediary
in providing such services are also included in Contract Programming
Revenue. These sales are immaterial in fiscal 1998.
Revenues increased $561,000 or 155% in the quarter ended September 30,
1997, compared to the quarter ended September 30, 1996. The increased
revenue in the first quarter of fiscal 1998 resulted from having an average
of 58 programming personnel working at customer sites during the quarter
ended September 30, 1997, compared to an average of 28 programmers working
during the first quarter of fiscal 1997 and from increased billing rates in
the first quarter of fiscal 1998. This increase was partially offset by a
decrease of $49,000 in revenues from providing contract system
enhancements programming for LIS customers, a service ATR no longer
provides.
PROGRAMMER COSTS. Programmer costs are the salary, other wage and benefit
costs of ATR's programmer employees. This cost increased 147% for the three
months ended September 30, 1997, compared to the same period last year. This
<PAGE>7
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Result of Operations
increase is primarily due to more than doubling the average number of
programmers working at customer sites in the current quarter compared to the
comparable period.
START-UP AND OTHER COSTS. Start-up and other costs primarily represent the
costs of recruiting, training, and travel for programmer employees coming
to the United States from the Former Soviet Union for the first time,
relocation costs within the United States, and legal and other costs
related to obtaining and maintaining compliance with required visas,
postings and notifications.
Also included in this category of costs are wage, other salary, and benefit
costs incurred by ATR whenever programmer employees are hired and enter the
United States or are relocated once in the United States but before these
programmers begin working at a customer's work site. There are sometimes
periods of up to several days when under immigration law, ATR, as employer,
must pay a programmer employee prevailing wages for his or her specialty
even when the programmer is not placed.
ATR expenses start-up and other costs as incurred, which results in timing
differences between the incurring of expense and recognition of resulting
revenue. Such differences may be particularly evident in ATR's case
because of its relatively small revenue base and rapid growth. The affect
may be particularly noticeable whenever the timing of placement of
employees is such that the major start-up costs occur late in one reporting
period and the revenues appear in subsequent periods.
Start-up and other costs increased $100,000 or 174% in the quarter ended
September 30, 1997, as compared to the same quarter in fiscal 1997. This
increase is due to placing or relocating 16 programmers during the first
quarter of fiscal 1998 compared to placing or relocating 9 programmers
during the first quarter of fiscal 1997. In addition, the Company
experienced increased costs in the current period associated with expanding
recruiting and training efforts overseas.
CONTRACT PROGRAMMING GROSS PROFIT. The gross profit on contract
programming revenue was 6% for the three months ended September 30, 1997,
compared to 4% in the same quarter of fiscal 1997. This increase is
primarily due to the increase in the total number of programmers generating
revenues at higher billing rates during fiscal 1998 compared to fiscal
1997.
SYSTEM SERVICE
In fiscal 1997, the Company phased out all LIS software support and
hardware services. As a result, there are no revenues or costs from system
service in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A expenses
increased $122,000 or 57% for the three months ended September 30, 1997
compared to the same quarter of fiscal 1997. This increase is primarily
due to almost doubling the average number of employees currently assigned
to administrative functions during the quarter ended September 30, 1997
compared to September 30, 1996.
<PAGE>8
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
OTHER INCOME (EXPENSE)
INTEREST EXPENSE. Interest expense increased $36,000 in the three months
ended September 30, 1997 compared to the same period in fiscal 1997 due to
a net increase in notes payable and other debt of $1.2 million since
September 30, 1996.
INCOME TAXES
As of June 30, 1997, the Company had a net operating loss carryforward for
federal and state income tax purposes of $24 million and $12 million,
respectively. The federal net operating loss carryforward expires in the
years 2006 through 2012 and the state net operating loss carryforward
expires in 1998 through 2002. The Company expects that annual limitations
on the use of loss carryforwards generated before September 13, 1993 will
result in $3.6 million of net operating loss carryovers which may not be
utilized prior to the expiration of the carryover period.
NET LOSS
Net loss increased $155,000 or 75% for the three months ended September 30,
1997 compared to the same quarter in fiscal 1997.
NET LOSS PER SHARE
The Company's net loss per share has been computed by dividing net loss
after deducting Preferred Stock dividends ($30,625 in each of the three
months ended September 30, 1997 and 1996) by the weighted average number of
shares of Common Stock outstanding during the quarters presented, including
Common Stock to be issued, after giving effect to the Company's one-for-ten
consolidation of Common Stock approved by the stockholders on November 21,
1996, and effective December 2, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund operations and finance accounts
receivable. The Company expects to generate positive cash flow from
operations during fiscal 1998, but not at levels sufficient to pay off
current obligations and fund rapid growth of its contract computer
programming and consulting services; therefore the Company contemplates
needing to raise additional financing during fiscal 1998.
The report of independent auditors on the Company's June 30, 1997 financial
statements includes an explanatory paragraph indicating there is
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern. Based on
the steps the Company has taken to reduce its expenses and refocus its
operations, the Company believes that it has developed a viable plan to
address the Company's ability to continue as a going concern and that this
plan will enable the Company to continue as a going concern through the end
of fiscal year 1998. However, considering, among other things, the
<PAGE>9
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
Company's historical operating losses and its short history in the contract
computer programming industry, there can be no assurance that this plan
will be successfully implemented.
The Company received short-term financing in the form of notes payable of
$1.0 million during fiscal 1997 and $0.7 million during fiscal 1996 from
two stockholders, James W. Cameron, Jr. ("Cameron") and Dr. Max Negri
("Negri"), to fund its operations. The Company borrowed another $0.3
million from these stockholders during the first quarter ended September
30, 1997. These notes mature on December 31, 1997 and bear interest at
10.25%. The Company must obtain additional funds during fiscal 1998 in
order to meet its obligations while attempting to grow revenues to a level
necessary to generate cash from operations. Although the Company has not
entered into any written agreement with Cameron or Negri, management
believes, based on discussions with these two individuals, that these two
stockholders will continue to finance the Company's operations during
fiscal 1998. In December 1996, Cameron and Negri extended the maturity
date on all notes payable currently maturing from December 31, 1996, to the
earlier of December 31, 1997, or such time as the Company obtains equity
financing. Although the Company has not entered into any written agreement
with Cameron or Negri, management believes, based on discussions with these
two individuals, that Cameron and Negri will continue to fund operations
and extend the maturity dates of the various notes payable until at least
June 30, 1998, or until such time as the Company can repay the notes.
However, there can be no assurance that events may arise which may affect
these stockholders' ability to finance the Company or that the Company may
experience significant and unanticipated cash flow problems which may cause
these two stockholders to reconsider their investment. Further, if the
Company experiences significant cash flow problems, the Company may be
required to reduce the level of its operating activities or be forced into
seeking protection under federal bankruptcy laws.
On April 21, 1997, the Company issued a note payable (the "Straight Note")
to Cameron for $1,000,000 in accordance with a Reimbursement Agreement the
Company signed on February 28, 1994. Terms of the note provide for an
interest rate of 9.5% and monthly interest payments. No maturity date is
stated in the note; however, under the terms of the Reimbursement
Agreement, upon written demand by Cameron, the Straight Note will be
replaced by a convertible note (the "Convertible Note") in a principal
amount equal to the Straight Note and bearing interest at the same rate.
The conversion ratio of the Convertible Note is equal to 20% multiplied by
the average trading price of the Company's Common Stock over the period of
ten trading days ending on the trading day next preceding the date of
issuance of such Convertible Note.
EFFECTS OF INFLATION
The Company's most significant cost is personnel. To the extent personnel
costs increase, management of the Company believes that customer billing
rates can be increased to cover such personnel increases.
PART II.OTHER INFORMATION
Items 1, 2, 3, 4, 5 and 6
None
<PAGE>10
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
(Registrant)
Dated: November 14, 1997 W. ROBERT KEEN
W. Robert Keen
Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 1997 EDWARD L. LAMMERDING
Edward L. Lammerding
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1997, FOR ALTERNATIVE TECHNOLOGY RESOURCES,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 40,750
<SECURITIES> 0
<RECEIVABLES> 298,690
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 399,175
<PP&E> 166,852
<DEPRECIATION> 157,798
<TOTAL-ASSETS> 408,229
<CURRENT-LIABILITIES> 4,425,753
<BONDS> 0
0
1,225,002
<COMMON> 258,128
<OTHER-SE> 28,760,541
<TOTAL-LIABILITY-AND-EQUITY> 408,229
<SALES> 0
<TOTAL-REVENUES> 921,742
<CGS> 0
<TOTAL-COSTS> 1,201,199
<OTHER-EXPENSES> 83,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,664
<INCOME-PRETAX> (363,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (363,121)
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<NET-INCOME> (363,121)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
