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 March 31, 1998
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.)
incorporation 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 April 30, 1998:
26,120,499
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash $ 28,173
Accounts receivable, net 715,430
Other current assets 102,491
----------------
Total current assets 846,094
PROPERTY AND EQUIPMENT:
Equipment 12,908
Furniture and fixtures 148,445
----------------
161,353
Accumulated depreciation and amortization (156,512)
----------------
Property and equipment, net 4,841
----------------
$ 850,935
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholders $ 3,962,565
Accounts payable to stockholders 451,840
Accounts payable 115,957
Accrued payroll and related expenses 391,799
Accrued preferred stock dividends 459,376
Other current liabilities 63,625
----------------
Total current liabilities 5,445,162
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 $1,684,378 1,225,002
Common stock, $0.01 par value - 100,000,000 shares
authorized, 26,120,499 shares issued and outstanding 261,205
Unearned compensation (115,672)
Additional paid-in capital 28,877,316
Accumulated deficit (34,842,078)
--------------
Total stockholders' deficit (4,594,227)
--------------
$ 850,935
==============
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)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Contract programming:
Contract programming revenue $ 1,462,983 $ 587,686 $ 3,492,672 $ 1,354,944
Programmer costs (1,052,750) (510,112) (2,485,684) (1,174,632)
Start-up and other costs (272,791) (120,411) (669,248) (267,490)
------------- ------------- -------------- -------------
Contract programming gross profit 137,442 (42,837) 337,740 (87,178)
------------- ------------- -------------- -------------
SYSTEM SERVICE:
Service revenue - 63,804 - 229,690
Cost of service - (41,765) - (103,731)
------------- ------------- -------------- -------------
System service gross profit - 22,039 - 125,959
------------- ------------- -------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE (311,810) (304,357) (999,298) (855,432)
------------- ------------- -------------- -------------
LOSS FROM OPERATIONS (174,367) (325,155) (661,558) (816,651)
OTHER INCOME (EXPENSE):
Interest expense (100,608) (59,912) (324,634) (182,883)
Recovery of legal costs - 201,550 - 201,550
Other, net - (222) - (3,908)
------------- ------------ ------------- -------------
(100,608) 141,416 (324,634) 14,759
------------- ------------ ------------- -------------
NET LOSS $ (274,976) $ (183,739) $ (986,192) $ (801,892)
============= ============ ============= =============
PREFERRED STOCK DIVIDENDS IN ARREARS (30,625) (30,625) (91,875) (91,875)
------------- ------------ ------------- -------------
Net loss applicable to
common stockholders $ (305,601) $ (214,364) $ (1,078,067) $ (893,767)
============= ============ ============= =============
NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.04) $ (0.04)
============= ============ ============= =============
SHARES USED IN PER SHARE
CALCULATIONS 25,843,333 25,489,998 25,821,885 25,325,408
============= ============ ============ =============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
MARCH 31,
1998 1997
Net cash used in operating activities $ (1,235,238) $ (795,815)
Cash flows from investing activities:
Sale of property and equipment 2,061 6,165
------------- -----------
Net cash provided by investing activities 2,061 6,165
------------- -----------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 49,843 16,702
Proceeds from notes payable to stockholders 1,175,303 769,510
Payments on notes payable and capital leases (23,539) (43,404)
------------- -----------
Net cash provided by financing activities 1,201,607 742,808
------------- -----------
Net increase (decrease) in cash (31,570) (46,842)
Cash at beginning of period 59,743 52,106
------------- -----------
Cash at end of period $ 28,173 $ 5,264
============= ===========
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
March 31, 1998
(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 March 31, 1998, results of operations for
the three and nine month periods ended March 31, 1998 and 1997, and cash
flows for the nine months ended March 31, 1998 and 1997. The results for
the period ended March 31, 1998 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.
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
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 2. Management's Discussion and Analysis and Results of Operations
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"). It has since focused its efforts entirely upon
its computer programmer placement business, 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 YEAR 2000 ISSUE
ATR has made an assessment of its computer programs and has determined that
it has no Year 2000 impairment in its computer systems developed in-house
and is relying on vendor declarations that their accounting program has no
impairment related to the Year 2000 issue.
Results of Operation
Contract programming
CONTRACT PROGRAMMING REVENUE. Contract programming revenue results
primarily from sales of programmer services.
Revenue for the three and nine month periods ended March 31, 1998 increased
$875,000 or 149% and $2,138,000 or 158%, respectively, over the same
periods of the previous year. The increased revenue is a result of having
more programming personnel working at customer sites during the nine months
of fiscal 1998 compared to the same period during fiscal 1997. For the
nine months ended March 31, 1998 and 1997 there was an average of 67 and 30
programmers, respectively. For the three months ended March 31, 1998 and
1997 there was an average of 85 and 35, respectively. In addition, revenue
increased due to an increase in the average billing rates during fiscal
1998 compared to fiscal 1997.
PROGRAMMER COSTS. Programmer costs are the salary, other wage and benefit
costs of ATR's programmer employees. Costs increased 106% and 112% for the
three months and nine months ended March 31, 1998, respectively, compared to
<PAGE>7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
the same periods in fiscal 1997. This increase is due primarily to increasing
the average number of programmers and to increasing salaries for more
experienced programmers.
START-UP AND OTHER COSTS. Start-up and other costs are 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.
Included in this category of costs is compensation paid 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 at least 95% of 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 $152,000 or 127% and $402,000 or 150%
in the three and nine month periods ended March 31, 1998, respectively, as
compared to the same periods in fiscal 1997. Increases are due to placing
or relocating more programmers during the first nine months of fiscal 1998
compared to fiscal 1997. For the nine and three month periods ended March
31, 1998 there were 59 and 35 programmers placed or relocated,
respectively. This compares to 27 and 16 programmers placed or relocated
during the same periods last year.
CONTRACT PROGRAMMING GROSS PROFIT. The gross profit on contract
programming revenue was 9% and 10% for the three and nine month periods
ended March 31, 1998, respectively, compared to negative margins of (7%)
and (6%) in the same periods of fiscal 1997. These increased margins are
primarily due to the increase in the total number of programmers generating
revenues at higher average 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 $7,000 or 2% and $144,000 or 17% for the three and nine month
<PAGE>8
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
periods ended March 31, 1998, respectively, compared to the same periods of
fiscal 1997. This increase is primarily due to increasing the average number
of employees currently assigned to administrative functions during the nine
months ended March 31, 1998 compared to the same period in fiscal 1997, offset
by a decrease in depreciation and professional fees.
Other Income (Expense)
INTEREST EXPENSE. Interest expense increased $41,000 and $142,000 in the
three and nine month periods ended March 31, 1998, respectively compared to
the same periods in fiscal 1997 due to a net increase in notes payable and
other debt of $1.4 million since March 31, 1997.
REIMBURSEMENT FROM INSURANCE COMPANY. During fiscal 1997, legal expenses
and costs of $201,550 accrued in prior periods by the Company related to a
suit from a former consultant were reimbursed by insurers of Mr. Cameron
and the Company.
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 $184,000 or 23% for the nine months ended March 31, 1998
compared to the same period in fiscal 1997. Net loss increased $91,000 or
50% for the quarter ended March 31, 1998 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 March 31, 1998 and 1997, and $91,875 in each of the nine
months ended March 31, 1998 and 1997, respectively) by the weighted average
number of shares of Common Stock outstanding during the periods 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
<PAGE>9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
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
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 totaling $1.0 million during fiscal
1997 and totaling $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 $1.2 million from these
stockholders during the first nine months ended March 31, 1998. These
notes mature on December 31, 1998 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 1997, Cameron and Negri extended the maturity date on $2.6 million
in notes payable from December 31, 1997, to the earlier of December 31,
1998, 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 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.
<PAGE>10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
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 cost increases.
<PAGE>11
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5, 6
None
Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
<PAGE>12
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: May 12, 1998 W. ROBERT KEEN
W. Robert Keen
Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 1998 EDWARD L. LAMMERDING
Edward L. Lammerding
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB FOR THE PERIOD ENDED MARCH 31, 1998, FOR ALTERNATIVE TECHNOLOGY RESOURCES
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> MAR-31-1998
<CASH> 28,173
<SECURITIES> 0
<RECEIVABLES> 715,430
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 846,094
<PP&E> 161,353
<DEPRECIATION> 156,512
<TOTAL-ASSETS> 850,935
<CURRENT-LIABILITIES> 5,445,162
<BONDS> 0
0
1,225,002
<COMMON> 261,205
<OTHER-SE> 28,877,316
<TOTAL-LIABILITY-AND-EQUITY> 850,935
<SALES> 0
<TOTAL-REVENUES> 1,462,983
<CGS> 0
<TOTAL-COSTS> 1,637,351
<OTHER-EXPENSES> 100,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,608
<INCOME-PRETAX> (274,976)
<INCOME-TAX> 0
<INCOME-CONTINUING> (274,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (274,976)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
