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 December 31, 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.)
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 January 31, 1998:
25,842,453
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
ASSETS
Current assets:
Cash $ 142,842
Accounts receivable, net 298,461
Other current assets 69,673
--------------
Total current assets 510,976
PROPERTY AND EQUIPMENT:
Equipment 12,908
Furniture and fixtures 148,445
--------------
161,353
Accumulated depreciation and amortization (155,437)
--------------
Property and equipment, net 5,916
$ 516,892
--------------
--------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to stockholders $ 3,592,565
Accounts payable to stockholders 351,484
Accounts payable 107,989
Accrued payroll and related expenses 307,763
Accrued preferred stock dividends 428,751
Other current liabilities 57,881
--------------
Total current liabilities 4,846,433
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 $1,653,753 1,225,002
Common stock, $0.01 par value - 100,000,000 shares
authorized, 25,842,453 shares issued and outstanding 258,425
Additional paid-in capital 28,754,134
Accumulated deficit (34,567,102)
--------------
Total stockholders' deficit (4,329,541)
--------------
$ 516,892
--------------
--------------
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 SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1997 1996 1997 1996
Contract programming:
Contract programming
revenue $ 1,107,947 $ 406,330 $ 2,029,689 $ 767,258
Programmer costs (723,009) (431,320) (1,432,934) (729,566)
Start-up and other costs (238,968) (77,786) (396,457) (124,264)
----------- ----------- ----------- -----------
Contract programming
gross profit 145,970 (102,776) 200,298 (86,572)
----------- ----------- ----------- -----------
SYSTEM SERVICE:
Service revenue - 72,151 - 165,885
Cost of service - (62,225) - (125,312)
----------- ----------- ----------- -----------
System service gross
profit - 9,926 - 40,573
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE (353,703) (233,245) (687,488) (445,498)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (207,733) (326,095) (487,190) (491,497)
OTHER INCOME (EXPENSE):
Interest expense (140,362) (75,740) (224,026) (122,971)
Other, net - (8,348) - (3,685)
(140,362) (84,088) (224,026) (126,656)
----------- ----------- ----------- -----------
NET LOSS $ (348,095) $ (410,183) $ (711,216) $ (618,153)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PREFERRED STOCK DIVIDENDS
IN ARREARS (30,625) (30,625) (61,250) (61,250)
----------- ----------- ----------- -----------
Net loss applicable to
common stockholders $ (378,720) $ (440,808) $ (772,466) $ (679,403)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.03) $ (O.03)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHARES USED IN PER SHARE
CALCULATIONS 25,829,309 25,263,317 25,811,394 25,244,961
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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)
Six Months Ended
DECEMBER 31,
1997 1996
Net cash used in operating activities $ (747,789) $ (518,521)
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 47,063 16,702
Proceeds from notes payable to stockholders 805,303 500,510
Payments on notes payable and capital leases (23,539) (31,473)
---------- ----------
Net cash provided by financing activities 828,827 485,739
---------- ----------
Net increase (decrease) in cash 83,099 (26,617)
Cash at beginning of period 59,743 52,106
---------- ----------
Cash at end of period $ 142,842 $ 25,489
---------- ----------
---------- ----------
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
December 31, 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 December 31, 1997, results of operations
for the three and six month periods ended December 31, 1997 and 1996, and
cash flows for the six months ended December 31, 1997 and 1996. The
results for the period ended December 31, 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 and six month periods ended December 31, 1996
have been reclassified to conform with the December 31, 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
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 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 six month periods ended December 31, 1997
increased $702,000 or 173% and $1,262,000 or 165%, 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
first half of fiscal 1998 compared to the same period during fiscal 1997.
For the six months ended December 31, 1997 and 1996 there was an average of
58 and 28 programmers, respectively. For the three months ended December
31, 1997 and 1996 there was an average of 61 and 29, 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 68% and 138% for the
three months and six months ended December 31, 1997, respectively, compared
to 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.
<PAGE>7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
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 $161,000 or 207% and $272,000 or 219%
in the three and six month periods ended December 31, 1997, respectively,
as compared to the same periods in fiscal 1997. Increases are due to
placing or relocating more programmers during the first half of fiscal 1998
compared to the first half of fiscal 1997. For the six and three month
periods ended December 31, 1997 there were 23 and 7 programmers placed or
relocated, respectively. This compares to 11 and 3 programmers placed or
relocated during the same periods last year.
CONTRACT PROGRAMMING GROSS PROFIT. The gross profit on contract
programming revenue was 13% and 10% for the three and six month periods
ended December 31, 1997, respectively, compared to negative margins of
(25%) and (11%) 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 $120,000 or 52% and $242,000 or 54% for the three and six month
periods ended December 31, 1997, respectively, compared to the same periods
of fiscal 1997. This increase is due to increasing the average number of
employees currently assigned to administrative functions during the six
months ended December 31, 1997 to 11 compared to 4 for the same period in
fiscal 1997.
<PAGE>8
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
Other Income (Expense)
INTEREST EXPENSE. Interest expense increased $65,000 and $101,000 in the
three and six month periods ended December 31, 1997, respectively compared
to the same periods in fiscal 1997 due to a net increase in notes payable
and other debt of $1.3 million since December 31, 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 $93,000 or 15% for the six months ended December 31,
1997 compared to the same period in fiscal 1997. Net loss decreased
$62,000 or 15% for the quarter ended December 31, 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 December 31, 1997 and 1996, and $61,250 in each of the six
months ended December 31, 1997 and 1996, 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
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
<PAGE>9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
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 $0.8 million from these stockholders during the first six months
ended December 31, 1997. 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.
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>10
PART II. OTHER INFORMATION
Items 1, 2, 3
None
Item 4. Submission of Matter to a Vote of Security Holders
An annual meeting of shareholders was held November 18, 1997 at the
Company's offices in Sacramento, California. The shareholders voted on the
following matters and approved:
1) The election of W. Robert Keen, Edward L. Lammerding, and Thomas W.
O'Neil, Jr., as directors of the Company: 25,224,142 shares were received
in favor of Mr. Keen and 18,242 shares were withheld; 25,223,142 shares
were received in favor of Mr. Lammerding and 19,242 shares were withheld;
and 25,224,542 shares were received in favor of Mr. O'Neil and 17,842
shares were withheld.
2) The Alternative Technology Resources, Inc. 1997 Stock Option Plan was
approved by a vote of 20,470,280 shares in favor, 38,145 shares opposed,
11,785 shares abstaining, and 4,722,174 shares not voting.
Item 5
None
Item 6 Exhibits and Reports on Form 8-K
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.32 Third Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated January 5, 1998.
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>11
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: February 5, 1998 W. ROBERT KEEN
W. Robert Keen
Chief Executive Officer
(Principal Executive Officer)
Dated: February 5, 1998 EDWARD L. LAMMERDING
Edward L. Lammerding
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 10.32
THIRD ADDENDUM TO LEASE
This third addendum to Lease (Third Addendum) is made between James W.
Cameron, Jr., an unmarried man (Lessor) and Alternative Technology
Resources, Inc., (ATR), previously known as 3Net Systems, Inc., a Delaware
Corporation, (Lessee), to be a part of that certain Lease, and any
addendums thereto (The Lease), dated November 7, 1995 between Lessor and
Lessee. Lessor and Lessee agree that, not withstanding anything to the
contrary in the Lease, the Lease is hereby modified as follows:
1. Effective immediately, paragraph 2 (k) of the Lease is modified to
read approximately 5,401 sq. ft., located on the Basement, 2nd and 3rd
floors of the Building.
2. Effective immediately, paragraphs 2 (a) & (i) of the Lease are
modified to read: Base Rent shall now be $87,198.60 per year. Monthly
Installments of base Rent shall be $7,266.55 per month.
3. Paragraph 2 (g) is modified to extend the Lease Term to December 31,
1998.
4. All other terms and conditions of the Lease not inconsistent herewith
are incorporated herein by reference as though fully set forth and remain
in full force and effect unless modified by this Third Addendum to Lease.
Agreed and Accepted
LESSOR: LESSEE:
JAMES W. CAMERON, JR., Alternative Technology Resources, Inc.,
An unmarried man A Delaware Corporation
By: /S/ CLARK H. CAMERON By: /S/ W. ROBERT KEEN
Title: ATTORNEY IN FACT Title: CHIEF EXECUTIVE OFFICER
Date: JANUARY 5, 1998 Date: JANUARY 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
FOR THE PERIOD ENDED DECEMBER 31, 1997 FOR ALTERNATIVE TECHNOLOGY RESOURCES,
INC. (FORMERLY KNOWN AS 3NET SYSTEMS, INC.) AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 142,842
<SECURITIES> 0
<RECEIVABLES> 298,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 510,976
<PP&E> 161,353
<DEPRECIATION> 155,437
<TOTAL-ASSETS> 516,892
<CURRENT-LIABILITIES> 4,846,433
<BONDS> 0
0
1,225,002
<COMMON> 258,425
<OTHER-SE> 28,754,134
<TOTAL-LIABILITY-AND-EQUITY> 516,892
<SALES> 0
<TOTAL-REVENUES> 1,107,947
<CGS> 0
<TOTAL-COSTS> 1,315,680
<OTHER-EXPENSES> 140,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,362
<INCOME-PRETAX> (348,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (348,095)
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<EXTRAORDINARY> 0
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<NET-INCOME> (348,095)
<EPS-PRIMARY> (.01)
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</TABLE>
