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, 1999
Commission file number 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, 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) 231-0400
(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, 1999: 26,135,478
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheet
March 31, 1999
(Unaudited)
Assets
Current assets:
Cash $ 19,334
Accounts receivable, net 488,880
Other current assets 112,024
-------------
Total current assets 620,238
-------------
$ 620,238
=============
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable to stockholders 4,308,090
Notes payable to directors 40,689
Accounts payable to stockholders 667,137
Accounts payable 90,450
Accrued payroll and related expenses 358,837
Accrued preferred stock dividends 581,876
Other current liabilities 113,058
-------------
Total current liabilities 6,160,137
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 $1,806,878 1,225,002
Common stock, $0.01 par value - 100,000,000 shares
authorized, 26,135,478 shares issued and outstanding 261,355
Additional paid-in capital 28,762,360
Accumulated deficit (35,788,616)
-------------
Total stockholders' deficit (5,539,899)
-------------
$ 620,238
=============
See accompanying notes to condensed financial statements.
<PAGE>3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract programming:
Contract programming revenue $ 1,543,432 $ 1,462,983 $ 5,063,195 $ 3,492,672
Contract termination fees 16,110 - 16,110 -
Programmer costs (1,077,778) (1,052,750) (3,640,597) (2,485,684)
Start-up and other costs (367,005) (272,791) (764,596) (669,248)
------------- -------------- ------------- -------------
Contract programming gross profit 114,759 137,442 674,112 337,740
Selling, general and administrative (315,094) (311,810) (957,439) (999,298)
------------- -------------- ------------- -------------
Loss from operations (200,335) (174,368) (283,327) (661,558)
Other income (expense):
Interest expense (117,865) (100,608) (405,459) (324,634)
------------- -------------- ------------- -------------
Net loss $ (318,200) $ (274,976) $ (688,786) $ (986,192)
============= ============== ============= =============
Preferred stock dividends in arrears (30,625) (30,625) (91,875) (91,875)
------------- -------------- ------------- -------------
Net loss applicable to
common stockholders $ (348,825) $ (305,601) $ (780,661) $ (1,078,067)
============= ============== ============= =============
Net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
============= ============== ============= =============
Shares used in per share calculations 26,131,484 25,843,333 26,124,107 25,821,885
============= ============== ============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net cash used in operating activities $ (374,657) $ (1,235,238)
Cash flows from investing activities:
Sale of property and equipment - 2,061
------------- -------------
Net cash provided by investing activities - 2,061
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants - 49,843
Proceeds from notes payable to stockholders 1,079,150 1,175,303
Proceeds from notes payable to directors 2,770 -
Payments on notes payable to stockholders (777,625) -
Payments on notes payable and capital leases - (23,539)
------------- -------------
Net cash provided by financing activities 304,295 1,201,607
------------- -------------
Net (decrease) increase in cash (70,362) (31,570)
Cash at beginning of period 89,696 59,743
------------- -------------
Cash at end of period $ 19,334 $ 28,173
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
March 31, 1999
(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, 1998.
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, 1999, results of operations for the three and
nine month periods ended March 31, 1999 and 1998, and cash flows for the nine
months ended March 31, 1999 and 1998. The results for the period ended March 31,
1999 are not necessarily indicative of the results to be expected for the entire
fiscal year ending June 30, 1999.
The report of independent auditors on the Company's June 30, 1998 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 1999. However, considering, among other
things, the Company's historical operating losses and its history in the
contract computer programming industry, there can be no assurance that this plan
will be successfully implemented. The Company does not expect to generate
positive cash flow from operations during fiscal 1999 or to be able to pay off
current obligations and fund growth of its computer programmer placement
business; therefore, the Company must raise additional financing during fiscal
1999, the receipt of which cannot be assured.
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, 1998.
Overview
Alternative Technology Resources, Inc. ("ATR" or the "Company"), a Delaware
corporation, 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. 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. Recently, the
Company has begun to recruit programmers from South Korea for future placement.
Year 2000 Issues
Management 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 systems and programs have no
impairment related to the Year 2000 issue. Therefore, management does not
currently anticipate that the Company will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be Year
2000 compliant.
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, 1999 increased
$80,000 or 5% and $1,571,000 or 45%, respectively, over the same periods of the
previous year. For the quarter, the increased revenue is primarily due to a
greater number of billing hours per programmer and to slightly higher billing
rates. During the nine months, revenue also increased due to a 27% increase in
the monthly average number of programmers at customer sites.
Contract Termination Fees. Contract termination fees are amounts received from
customers when they exercise the contract provision which allows them to convert
ATR's programmer to their employee. In addition, these fees can also be received
from programmers when they exercise their contract provision to terminate their
relationship with the Company prior to the termination date of the contract.
<PAGE>7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
These fee amounts are stipulated in customer and programmer contracts and are
based on the length of time remaining under the existing contract. Although
contract termination fees are common in the industry, the number and frequency
of exercises of the "buy-out" provisions is unpredictable.
Programmer Costs. Programmer costs are the salary, and other wage and benefit
costs of ATR's programmer employees. These costs increased 2% for the three
months and 46% for the nine months ended March 31, 1999 compared to the same
periods last year. The slight increase for the three month period was due to
salary increases for the more experienced programmers. The larger increase for
the nine month period is due to a 27% increase in the average number of
programmers working at customer sites in the current period compared to the
comparable period in fiscal 1998 and due to increasing salaries for more
experienced programmers. These costs have remained within a range of 70% to 72%
of contract programming revenue for all periods presented.
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 from several days to several months 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 $94,000 and $95,000 in the three and nine
month periods ended March 31, 1999, as compared to the same periods in fiscal
1998. This increase is primarily due to the cost of paying programmers who
experienced gaps in time between completing an assignment with one customer
before beginning work with another customer. As discussed above, in such cases
the programmer must be paid by ATR even though the programmer is not generating
revenue for the Company.
Contract Programming Gross Profit. The gross profit on contract programming
revenue (excluding contract purchase fees from the calculation) was 6% for the
three months and 13% for the nine months ended March 31, 1999, respectively,
compared to 9% and 10% in the same periods in fiscal 1998. The decrease in the
quarter was due to increased start-up and other costs discussed in the previous
paragraph. The nine-month increase was primarily due to the increase in the
total number of programmers generating revenues at higher billing rates during
fiscal 1999 compared to fiscal 1998.
<PAGE>8
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses increased
$3,000 or 1% for the three months and decreased $42,000 or 4% for the nine
months ended March 31, 1999, respectively, compared to the same periods of the
prior fiscal year. This decrease for the nine-month period is principally due to
reducing the use of outside financial consultants and to negotiating reductions
of insurance premiums during fiscal 1999.
Other Income (Expense)
Interest Expense. Interest expense increased $17,000 and $81,000 in the three
and nine month periods ended March 31, 1999, respectively, compared to the same
periods in fiscal 1998 due to a net increase in notes payable and other debt
since March 31, 1998.
Income Taxes
As of June 30, 1998, the Company had a net operating loss carryforward for
federal and state income tax purposes of $24 million and $13 million,
respectively. The federal net operating loss carryforward expires in the years
2006 through 2013 and the state net operating loss carryforward expires in 1998
through 2003. 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 decreased $297,000 or 30% for the nine months ended March 31, 1999
compared to the same period in fiscal 1998.
Basic and Diluted 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, 1999 and 1998, and $91,875 in each of the nine months ended March 31,
1999 and 1998, respectively) by the weighted average number of shares of Common
Stock outstanding during the periods presented. Common stock issuable upon
conversion of Preferred Stock, Common Stock options and Common Stock warrants
have been excluded from the net loss per share calculations as their inclusion
would be anti-dilutive. Net loss per share decreased as a result of a smaller
loss and only a slightly greater number of shares used in the calculation in the
nine-month period ended March 31, 1999 compared to the comparable period of
fiscal 1998.
Liquidity and Capital Resources
The Company has used a combination of equity and debt financing and internal
cash flow to fund operations and finance accounts receivable but has incurred
operating losses since its inception.
<PAGE>9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
As a result, the report of independent auditors on the Company's June 30, 1998
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 1999. However, considering, among
other things, the Company's historical operating losses and its history in the
contract computer programming industry, there can be no assurance that this plan
will be successfully implemented. The Company does not expect to generate
positive cash flow from operations during fiscal 1999 or to be able to pay off
current obligations and fund growth of its computer programmer placement
business; therefore, the Company must raise additional financing during fiscal
1999, the receipt of which cannot be assured.
The Company received short-term, unsecured financing (net) in the form of notes
payable of approximately $0.3 million in the first nine months of fiscal 1999,
and $1.3 million, $1.0 million, and $0.7 million during fiscal years 1998, 1997
and 1996, respectively ($3.3 million in the aggregate), from two stockholders,
Mr. James W. Cameron, Jr. ("Cameron") and Dr. Max Negri ("Negri"), to fund its
operations. These notes bear interest at 10.25%. In December 1998, Cameron and
Negri extended the maturity date on all notes payable originally maturing
December 31, 1998, to the earlier of December 31, 1999, or such time as the
Company obtains replacement financing.
On April 21, 1997, the Company issued an unsecured note payable (the "Straight
Note") to Cameron for $1,000,000 in accordance with the 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. Since the Company has
not made interest payments on the note, accrued interest of $185,000 is included
in accounts payable to stockholders.
The Company must obtain additional funds during fiscal 1999 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
agreements with Cameron or Negri, management believes, based on discussions with
these two individuals, that they will continue to fund operations and extend the
maturity dates of the various notes payable until at least June 30, 1999, 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
<PAGE>10
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 December 31, 1996, the Board of Directors named Mr. W. Robert Keen as Chief
Executive Officer of the Company. In exchange for his services, Mr. Keen
initially received 225,000 shares of common stock with a fair market value on
the date of issuance of $168,750, and on November 18, 1997 Mr. Keen received
275,000 shares of common stock with a fair market value on the date of issuance
of $154,688. Mr. Keen retired as Chief Executive Officer on January 15, 1999 but
will continue as a non-employee board member and will consult with the Company
on a regular basis. As a provision of his consulting agreement, Mr. Keen agreed
to extend the trading restrictions on these shares until March 2000.
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.
<PAGE>11
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, and 5
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description of Document
- ------- ------------------------
10.35 Fourth Addendum to Lease between James W. Cameron, Jr., and
the Registrant, effective January 1, 1999.
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.
(Registrant)
Dated: May 11, 1999 EDWARD L. LAMMERDING
-----------------------------------------
Edward L. Lammerding
Chairman of the Board
(Principal Executive and Financial Officer)
Exhibit 10.35
FOURTH ADDENDUM TO LEASE
This fourth addendum to lease (Fourth 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 January 1, 1999, paragraph 2(k) of the Lease is modified to read
approximately 5,207 sq. ft., located in the basement, 2nd and 3rd floors of
the Building. (See Exhibit A, pages A-1 through A-3 attached).
2. Effective January 1, 1999, paragraphs 2(a) and (i) of the Lease are
modified to read: Base Rent shall now be $91,356.84, per year. Monthly
installments of Base Rent shall be $7,613.07, per month.
3. Paragraph 2(g) is modified to extend the Lease Term to December 31, 1999.
4. All other terms and conditions of the Lease, and all addendums thereto, not
inconsistent herewith are incorporated herein by reference as though fully
set forth and remain in full force and effect unless modified by the Fourth
Addendum to Lease.
AGREED AND ACCEPTED:
LESSOR: LESSEE:
JAMES W. CAMERON, JR. Alternative Technology Resources, Inc.
a Delaware Corporation
By /S/ By /S/
-------------------------- ------------------------------
Clark A. Cameron W. Robert Keen
Attorney in Fact CEO
Date: 12/1/98 Date: 12/2/98
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 10-QSB
for the period ended March 31, 1999, for Alternative Technology Resources and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,334
<SECURITIES> 0
<RECEIVABLES> 488,880
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 620,238
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 620,238
<CURRENT-LIABILITIES> 6,160,137
<BONDS> 0
0
1,225,002
<COMMON> 261,355
<OTHER-SE> (7,026,256)
<TOTAL-LIABILITY-AND-EQUITY> 620,238
<SALES> 0
<TOTAL-REVENUES> 5,079,305
<CGS> 0
<TOTAL-COSTS> 5,362,632
<OTHER-EXPENSES> 405,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 405,459
<INCOME-PRETAX> (688,786)
<INCOME-TAX> 0
<INCOME-CONTINUING> (688,786)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (688,786)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
