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, 1998
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 January 31, 1999: 26,135,478
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheet
December 31, 1998
(Unaudited)
Assets
------
Current assets:
Cash $ 53,346
Accounts receivable, net 572,528
Other current assets 118,020
---------------
Total current assets 743,894
---------------
$ 743,894
===============
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Notes payable to stockholders 4,267,252
Notes payable to officers 39,779
Accounts payable to stockholders 573,114
Accounts payable 82,068
Accrued payroll and related expenses 340,314
Accrued preferred stock dividends 551,251
Other current liabilities 88,883
---------------
Total current liabilities 5,942,661
---------------
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 $1,776,253 1,225,002
Common stock, $0.01 par value - 100,000,000 shares
authorized, 26,120,499 shares issued and outstanding 261,205
Additional paid-in capital 28,785,441
Accumulated deficit (35,470,415)
---------------
Total stockholders' deficit (5,198,767)
---------------
$ 743,894
===============
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 Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract programming:
Contract programming revenue $ 1,809,755 $ 1,107,947 $ 3,519,763 $ 2,029,689
Programmer costs (1,291,561) (723,009) (2,562,819) (1,432,934)
Start-up and other costs (239,068) (238,968) (397,591) (396,457)
----------- ----------- ----------- -----------
Contract programming gross profit 279,126 145,970 559,353 200,298
----------- ----------- ----------- -----------
Selling, general and administrative (302,151) (353,703) (642,345) (687,488)
----------- ----------- ----------- -----------
Loss from operations (23,025) (207,733) (82,992) (487,190)
Other income (expense):
Interest expense (175,766) (140,362) (287,594) (224,026)
----------- ----------- ----------- -----------
(175,766) (140,362) (287,594) (224,026)
----------- ----------- ----------- -----------
Net loss $ (198,791) $ (348,095) $ (370,586) $ (711,216)
=========== =========== =========== ===========
Preferred stock dividends in arrears (30,625) (30,625) (61,250) (61,250)
----------- ----------- ----------- -----------
Net loss applicable to
common stockholders $ (229,416) $ (378,720) $ (431,836) $ (772,466)
=========== =========== =========== ===========
Net loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.03)
=========== =========== =========== ===========
Shares used in per share calculations 26,120,499 25,829,309 26,120,499 25,811,394
=========== =========== =========== ===========
</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>
Six Months
Ended December 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Net cash used in operating activities $ (298,897) $ (747,789)
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 - 47,063
Proceeds from notes payable to stockholders 273,647 805,303
Proceeds from notes payable to officers 1,860 -
Payments on notes payable to stockholders (12,960) -
Payments on notes payable and capital leases - (23,539)
-------------- --------------
Net cash provided by financing activities 262,547 828,827
-------------- --------------
Net (decrease) increase in cash (36,350) 83,099
Cash at beginning of period 89,346 59,743
-------------- --------------
Cash at end of period $ 53,346 $ 142,842
============== ==============
</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
December 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, 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 December 31, 1998, results of operations for the three and
six month periods ended December 31, 1998 and 1997, and cash flows for the six
months ended December 31, 1998 and 1997. The results for the period ended
December 31, 1998 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 short history in the
contract computer programming industry, there can be no assurance that this plan
will be successfully implemented. The Company expects to generate positive cash
flow from operations during fiscal 1999, but not at levels sufficient to pay off
current obligations and fund growth of its contract computer programming and
consulting services; therefore, the Company contemplates needing to 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. During fiscal 1998, 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
were immaterial in fiscal 1998 and are expected to be immaterial in fiscal 1999.
Revenue for the three and six month periods ended December 31, 1998 increased
$702,000 or 63% and $1,490,000 or 73%, respectively, over the same periods of
the previous year. The increased revenue is due to billing rate increases,
growth in the number of contract programmers working at customer sites in fiscal
1999 compared to fiscal 1998, and the length of time contract programmers were
at customer sites during each of the periods ended December 31.
<PAGE>7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
Programmer Costs. Programmer costs are the salary, and other wage and benefit
costs of ATR's programmer employees. These costs increased 79% for each of the
three and six month periods ended December 31, 1998, compared to the same
periods last year. This increase is primarily due to almost doubling the average
number of programmers working at customer sites in the current quarter compared
to the comparable quarter in fiscal 1998 and due 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 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 yet 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 less than $1,000 and slightly over $1,000 in
the three and six month periods ended December 31, 1998, as compared to the same
periods in fiscal 1998. This small increase is due to an increase in recruiting
and training efforts overseas offset by a decrease in placing and relocating
programmers during the first six months of fiscal 1999 compared to fiscal 1998.
Contract Programming Gross Profit. The gross profit on contract programming
revenue was 15% and 16% for the three and six month periods ended December 31,
1998, respectively, compared to 13% and 10% in the same periods in fiscal 1998.
Increases are primarily due to the increase in the total number of programmers
generating revenues at higher billing rates during fiscal 1999 compared to
fiscal 1998.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses decreased
$52,000 or (15%) and $45,000 or (7%) for the three and six month periods ended
December 31, 1998, respectively, compared to the same periods of the prior
fiscal year. This decrease is principally due to reducing the use of outside
financial consultants and reducing the cost of general insurance coverage during
the first six months of fiscal 1999 compared to fiscal 1998.
<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 $35,000 and $64,000 in the three
and six month periods ended December 31, 1998, respectively, compared to the
same periods in fiscal 1998 due to a net increase in notes payable and other
debt of $0.7 million since December 31, 1997.
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 $341,000 or 48% for the six months ended December 31, 1998
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
December 31, 1998 and 1997, and $61,250 in each of the six months ended December
31, 1998 and 1997, 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 periods ended December 31, 1998 compared to the comparable
periods 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.
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 short history in
the contract computer programming industry, there can be no assurance that this
plan will be successfully implemented. The Company expects to generate positive
<PAGE>9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
cash flow from operations during fiscal 1999, but not at levels sufficient to
pay off current obligations and fund growth of its contract computer programming
and consulting services; therefore, the Company contemplates needing to raise
additional financing during fiscal 1999, the receipt of which cannot be assured.
The Company received short-term, unsecured financing in the form of notes
payable of approximately $0.3 million in the first six 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 $161,370 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
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. Both the 275,000 shares and the 225,000 shares are subject to
forfeiture in the event Mr. Keen voluntarily leaves the Company prior to January
1, 1999. 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.
<PAGE>10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis and Results of Operations
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
None
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of stockholders was held November 17, 1998 at the Company's
offices in Sacramento, California. The stockholders 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: 19,567,834 shares were received in favor of
Mr. Keen , Mr. Lammerding, and Mr. O'Neil and 12,675 shares were withheld.
Items 5 and 6
None
<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.
(Registrant)
Dated: February 9, 1999 EDWARD L. LAMMERDING
-------------------------------------------
Edward L. Lammerding
Chairman of the Board
(Principal Executive and Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
10-QSB FOR THE PERIOD ENDED DECEMBER 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-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 53,346
<SECURITIES> 0
<RECEIVABLES> 572,528
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 743,894
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 743,894
<CURRENT-LIABILITIES> 5,942,661
<BONDS> 0
0
1,225,002
<COMMON> 261,205
<OTHER-SE> 28,785,441
<TOTAL-LIABILITY-AND-EQUITY> 743,894
<SALES> 0
<TOTAL-REVENUES> 1,809,755
<CGS> 0
<TOTAL-COSTS> 1,832,780
<OTHER-EXPENSES> 175,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,766
<INCOME-PRETAX> (198,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> (198,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (198,791)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
