Document/Exhibit Description Pages Size
1: 10KSB Form 10KSB for Alternative Technology 39 180K
2: EX-3 Articles of Incorporation/Organization or By-Laws 2 10K
3: EX-10 Material Contract 2 11K
4: EX-10 Material Contract 1 7K
5: EX-10 Material Contract 8 36K
6: EX-23 Consent of Experts or Counsel 1 6K
7: EX-27 Financial Data Schedule (Pre-XBRL) 1 9K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____
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 (IRS Employer
of incorporation or organization) Identification No.)
629 J STREET, SACRAMENTO, CA 95814
(Address of principal executive offices, including zip code)
(916) 325-9370
(Issuer's telephone number, including area code)
Securities registered under Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year. $2,378,934
Aggregate market value of the Registrant's common voting stock held by non-
affiliates of the Registrant on September 15, 1997 was $3,017,858 (based on the
final trading price on that date).
Number of shares of Common Stock outstanding at September 15, 1997: 25,812,787
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders to be held on November 18, 1997, are incorporated by
reference into Part III.
Exhibit index is located on page 12.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Alternative Technology Resources, Inc. ("ATR" or the "Company") [formerly known
as 3Net Systems, Inc.], 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
exited the LIS software market entirely.
During fiscal 1997, the Company changed its name to Alternative Technology
Resources, Inc. (ATR) and focused its efforts to develop its computer
programmer placement business. During fiscal years 1995 and 1996, the Company
developed and implemented a program whereby it recruits experienced, qualified
computer programmers primarily from the former Soviet Union, obtains necessary
visas, and places them for assignment in the United States. The Company
started this process to support its former LIS business and the needs of a
customer that was developing medical administrative systems. ATR soon
discovered an encouraging demand for these programmers from others and began
its present business on a limited basis. Initial success placing programmers
and increasing expressions of demand have encouraged ATR to focus entirely upon
growing its niche in the contract programming marketplace.
Based upon its experience in the market thus far, and critical industry
forecasts, the Company believes that its current focus offers the best
opportunity for financial recovery and the development of a viable ongoing
enterprise. In line with this business strategy, in May 1997, the Company
transferred and assigned its right, title, and interest in and to its LIS
software and hardware customer service contracts to Omnitech Migrations
International, Inc. ("OMI") and delegated to OMI all the Company's duties and
obligations of performance thereunder. This step will allow ATR to focus its
operations on providing contract programming and consulting services. The
Company has begun to generate new revenues and has reduced its operating losses
but did not generate sufficient cash flow in fiscal 1997 and fiscal 1996 to
support operations.
The Company has incurred operating losses since inception which have resulted
in an accumulated deficit of $33,855,886 at June 30, 1997. In addition, at
June 30, 1997 the Company had a working capital deficit of $3,699,100 and a
stockholders' deficit of $3,688,513. Therefore, the Company is pursuing
additional funds through private equity financings or additional debt
financings. Although there can be no assurances that additional financing can
be obtained or that if obtained, such financing will be sufficient to prevent
the Company from having to further materially reduce its level of operations or
be forced to seek protection under federal bankruptcy laws, management of the
Company believes that sufficient financing will be available until operations
can be funded through contract programming and consulting services.
Ultimately, the Company will need to achieve a profitable level of operations
to fund growth and to meet its obligations when they become due.
SERVICES
CONTRACT PROGRAMMING
ATR provides contract computer programming and consulting services to an
expanding base and variety of industrial customers by recruiting, training,
importing, and contractually deploying foreign information technology
professionals from the former Soviet Union (FSU) for direct assignment to
customer programming projects. The mechanism by which such prospective foreign
contractors are identified and prepared for assignment to U.S. company projects
is the Company's business relationship with a technology firm based in the FSU.
The Company has an exclusive contract with PRIZE-ITM, LTD. ("PRIZE"), a Latvian
2
company that specializes in information technology recruiting, training and
software development. The key principals of PRIZE are former senior executives
and managers of the Research Division of the Riga Institute for Civil Aviation
Automation and Controls, Riga, Latvia. In the former Soviet Union, the Riga
Institute provided information technology education and software development
services to the Ministry of Civil Aviation (AEROFLOT). The original nucleus of
PRIZE employees came from the Riga Institute after the major functions
supporting AEROFLOT were discontinued. The Company pays a monthly fee to PRIZE
for the services they perform in recruiting and training personnel for U.S.
assignments. The process works as follows:
<circle> The Company identifies information technology personnel requirements
with its U.S. customers, and provides PRIZE with a technical job profile
that describes the specific applications software, computer hardware,
operating systems and years experience required to qualify for the
specific U.S. customer-identified position. PRIZE uses these profiles to
identify and select appropriate candidates. PRIZE has developed a data
base of resumes of individuals from Riga and other parts of the former
Soviet Union who have technical and language proficiency skills necessary
to work in the United States, and who have indicated a desire to work
overseas. This data base is integrated with the specific job criteria,
and any personnel matches are further interviewed to ascertain if the
individual is technically qualified for the specific job and has a desire
to participate in the Company's U.S. placement program. PRIZE may also
advertise in local newspapers or industry periodicals for information
technology professionals with specific technical skills and work
experience. These advertisements are placed with a specific U.S. customer
in mind that has identified a need within its organization which cannot be
filled through its normal domestic U.S. personnel selection channels. In
addition, PRIZE has recruiting representatives in other cities in the
former Soviet Union who participate in job fairs, and who recruit
potential candidates through educational institutions, technical companies
or on-line services in their local area.
<circle> PRIZE provides several types of training depending upon the U.S. based
customer needs and the needs of the people who are being recruited to fill
positions at the customer site. Computer based or classroom training is
provided in subjects such as specific programming languages, specific
computer operating systems, and business subjects for which computer
automation support is provided by the customer to its users. Additional
training is provided in English, and U.S. business and personal
lifestyles. Not all candidates recruited by PRIZE are trained in
technical subjects if they have the requisite skills based on their
previous work experience. Depending on the U.S. customer, some specific
training may be provided by the customer either in conjunction with
PRIZE's training program or once the contractors are at the customer's
site. This training is usually more detailed education regarding the
customer's business, applications software, and technical environment.
<circle> The typical contract relationship with foreign contractors starts with
a representation agreement which allows the Company to represent the
candidate for a fixed period of time in the U.S. information technology
market. Further this contract authorizes the Company to process an H1-B
work visa with the U.S. Immigration Service when an appropriate job has
been found for the candidate. This contract also identifies specific
training required to be performed by the candidate prior to reporting to
the U.S. customer's work site. After the H1-B visa is approved, the
Company and the candidate sign a three year, extendable contract which
supports the employment requirements of the H1-B visa, and identifies all
the services to be performed by the Company and the contractor. All
employment and compensation terms are between the Company as employer, and
the contractor as an employee of the Company.
<circle> The Company places its foreign workers with companies that have
specific technical needs not being met with domestic workers. Usually
these jobs are in technical areas of computer system maintenance where
older technologies are still being used, and where there is a defined
3
shortage of qualified manpower in this country. The Company places its
candidates as contract services employees directly with customer
companies, and also has strategic business relationships with other
contract services companies who have job openings with their customers
that they cannot fill from their own available U.S. personnel resource
pools.
<circle> The Company provides all visa application support, including
application fees, and also provides international and domestic
transportation to the customer's work-site. When necessary, the Company
also provides housing and other support services, e.g. utilities and
telephone, until the contractor is capable of establishing credit in order
to provide these services for himself.
The Company believes it has an opportunity to place many FSU computer
specialists in U.S.-based computing assignments providing "legacy system"
support and maintenance. A legacy system is a business application system
developed ten or more years ago in an older computer language (such as COBOL,
PL/1, or Assembler Language) that continues to operate on a mainframe or mid-
frame hardware platform. The cost of maintenance for such systems has steadily
risen over the years. Even more problematic for the U.S. companies operating
legacy systems today is the ever-decreasing domestic labor pool of programmers
who are technically qualified and who desire to perform software maintenance
tasks.
The increasing disparity between the amount of legacy system maintenance demand
and the supply of qualified, motivated programmers to perform it is further
escalated by the Year 2000 conversion issue. Also known as the "millennium
bug," this problem arises from the widespread use of only two digits to
represent the year in computer programs performing date computations and
decision-making functions. Unless these programs are modified, many may fail
due to their inability to interpret properly these date fields (e.g., such
programs may interpret "00" as the year "1900" rather than as "2000"). The
Gartner Group, an information technology market research firm, has estimated
that it will cost the public and private sectors between $300 and $600 billion
worldwide to perform the necessary Year 2000 conversions.
The Company has joint marketing agreements with two professional contract
services companies who market the Company's personnel resources. The Company
is the preferred provider of foreign workers to these companies. The joint
marketing agreements are in initial stages and no assurances can be given that
they will be successful in placing the Company's personnel resources or that
the Company will find qualified technical personnel to fulfill the needs of its
clients.
At September 15, 1997, the Company had 63 foreign contractors actively employed
in U.S.-based contracts at 11 different customer business locations in
Massachusetts, Connecticut, Texas, Georgia, California, Missouri, New Hampshire
and Minnesota.
SYSTEM SERVICE
Until May 1997, the Company provided software and hardware maintenance support
services to customers who licensed one or more of its proprietary system
products. In line with its business strategy to focus on contract programming
services, the Company transferred and assigned its right, title, and interest
in and to its LIS software and hardware customer service contracts to Omnitech
Migrations International, Inc. ("OMI") and delegated to OMI all the Company's
duties and obligations of performance thereunder. See "Item 6. Results of
Operation -- Other Operating Expenses."
CUSTOMERS
The Company's customer base includes those companies to which it is providing
services in alternative programming resource services. In fiscal 1997 two
customers constituted approximately 73% of total revenues. In fiscal 1996 two
customers provided approximately 77% of the Company's total revenues.
4
The loss of any significant customer may have a material adverse effect on the
Company's operating results.
SALES
During fiscal 1996, in connection with the Company's shift in focus to contract
programming and consulting, one LIS product sales staff position and three
sales support staff positions were eliminated. The Company's executive
officers and certain technical staff members currently participate in selling
efforts by directly contacting potential contract programming and consulting
customers. The Company also relies upon and benefits from the efforts of
third-party business partners in the sale and placement of foreign contractors
in new customer contracts and the management of such accounts after the sale.
COMPETITION
CONTRACT PROGRAMMING
The information technology temporary services industry is highly competitive
with limited barriers to entry. Within local markets, smaller firms actively
compete with the Company for business, and in most of these markets no single
company has a dominant share of the market. The Company also competes with
larger full-service and specialized competitors in national, regional, and
local markets which have significantly greater marketing, financial, and other
resources than the Company.
Due to the niche definition of its alternative programming resources ("APR")
market segment and the growing general shortage of legacy system maintenance
programmers, the Company does not believe that external competition represents
the primary impediment to its placement of its programmers in customer
contracts. Rather, the Company's APR business is limited primarily by its
ability to recruit, train, and present qualified candidates to the customer and
to obtain acceptance by potential customers of using foreign contractors.
Qualification attributes for placement in U.S. customer contracts include the
particular technical skills and experience corresponding to the customer's
requirements and sufficient English language skills to communicate effectively
in an American business environment.
GOVERNMENT REGULATION
The Company's operations are subject to various federal and state laws. The
Company believes that its operations currently comply with such laws, but there
can be no assurance that subsequent laws, or subsequent changes in current laws
or legal interpretations, will not adversely affect the Company's operations.
In connection with its APR program using FSU employees, the Company must comply
with the laws and regulations of the United States Immigration and
Naturalization Service (the "INS"). The Company has engaged the services of a
business immigration lawyer to assist in the filing of all appropriate
documents necessary for the Company to invite foreign workers to the United
States for contract programming assignments. While the Company and its
immigration lawyer are very familiar with the current rules and regulations,
there can be no assurance that the immigration laws of the United States will
not be changed, resulting in a potentially negative effect on the Company's
ability to engage qualified FSU employees. At present there is a 65,000 person
limitation on the number of H1-B visas which can be granted in a fiscal year.
Although this limitation has been reached in the last two years, the Company's
business has not been impacted by this limitation; however, there is no
assurance that such limitation will not impact the Company's future operations.
5
RESEARCH AND DEVELOPMENT
In fiscal 1996, the Company incurred product development costs totaling
$657,437, all of which was expensed as research and development costs. The
Company discontinued research and development during fiscal 1996 and either
terminated or reassigned employees to contract programming or administrative
activities.
HUMAN RESOURCES
At September 15, 1997, the Company had 73 employees, consisting of 3 executive
officers, 63 contract programming personnel in the United States on visa from
the former Soviet Union, and 7 administrative support personnel. There are 10
employees located at the Company's headquarters in Sacramento and 63 at
customer locations as follows: 15 in Massachusetts, 12 in Connecticut, 11 in
Texas, 9 in Georgia, 9 in California, 3 in Missouri, 3 in New Hampshire, and 1
in Minnesota. None of the Company's employees is represented by a labor union.
Management considers its employee relations to be good.
INSURANCE
The annual coverage limits for the Company's general premises liability and
workers' compensation insurance policies are $2,000,000 for liability insurance
policies and $1,000,000 for workers' compensation. The Company also has a
$1,000,000 policy for errors and omissions insurance. Management believes such
limits are adequate for the Company's business; however, there can be no
assurance that potential claims will not exceed the limits on these policies.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located in Sacramento, California. The Company
occupies approximately 5,515 square feet of office space which it leases from
James W. Cameron, Jr., a substantial shareholder, for a monthly rent of $7,195.
The lease expires and will be renewed in December 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any pending legal proceedings. A
previously reported action between the Company and a former consultant was
resolved during fiscal 1997 in favor of the Company. In addition, during
fiscal 1997, legal expenses and costs of $201,550 accrued in prior periods by
the Company related to this litigation were reimbursed by insurers of Mr.
Cameron and the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the quarter ended June 30, 1997 to a vote of
security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company Common Stock is traded on the OTC Bulletin Board under the symbol
"ATEK". Effective December 2, 1996, the Company changed its name from 3Net
Systems, Inc., to Alternative Technology Resources, Inc. Prior to December 2,
1996, the Company's Common Stock was traded under the symbol "TNET." The
Company's shares were de-listed by NASDAQ on August 16, 1995, due to the
Company's failure to maintain a closing bid price of its Common Stock at or
above $1.00 per share. The Company's shares have continued to trade on the OTC
6
Bulletin Board since August 16, 1995. The loss of listing on the NASDAQ
SmallCap Market has resulted in transactions in the Common Stock becoming
subject to the "penny stock" disclosure requirements of Rule 15g-9 under the
Exchange Act and reduced liquidity in the trading market for the Common Stock.
The financial information contained herein includes 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.
Set forth below are the high ask and low bids for the Common Stock of the
Company for each of the last eight quarters. The prices have been adjusted to
give effect to a one-for-ten share consolidation effective on December 2, 1996.
The quotations are derived either from the IDD Information Services, Tradeline
Database or the National Association of Securities Dealers, Inc. and reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions in the Common Stock. There is no
public market for the Company's Preferred Stock.
PERIOD HIGH LOW
Quarter ended September 30, 1995 $ 6.30 $ 1.30
Quarter ended December 31, 1995 $ 1.90 $ 0.50
Quarter ended March 31, 1996 $ 1.30 $ 0.30
Quarter ended June 30, 1996 $ 2.80 $ 0.50
Quarter ended September 30, 1996 $ 2.50 $ 1.10
Quarter ended December 31, 1996 $ 2.20 $ 0.56
Quarter ended March 31, 1997 $ 1.25 $ 0.44
Quarter ended June 30, 1997 $ 1.25 $ 0.81
The Company had approximately 169 Common Stockholders of record and 3 Preferred
Stockholders of record as of September 15, 1997. The last reported sales price
for the Company's Common Stock was $0.9375 on September 15, 1997.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The Company's Series D Preferred Stock carries a cumulative dividend of $0.60
per year per share which accrues beginning July 1, 1994 and is payable
quarterly to the extent permitted by law.
The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including the Company's results of
operations, financial condition, capital requirements and other relevant
factors.
ITEM 6. 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 audited financial statements and footnotes appearing
elsewhere in this report. Dollar amounts reported have been rounded to the
nearest thousand.
7
RESULTS OF OPERATION
CONTRACT PROGRAMMING
CONTRACT PROGRAMMING REVENUE. Contract programming revenue results primarily
from sales of programmer services. To a lesser extent during fiscal 1997,
sales of custom programming and software development and acting as an
intermediary in providing such service are also included in Contract
Programming Revenue. These latter categories of sales are expected to be
immaterial in the future.
Revenues increased $738,000 or 58% in fiscal 1997 compared to fiscal 1996.
This increase is due to growth in the number of contract programmers placed at
customer sites in fiscal 1997 compared to fiscal 1996 and to the length of time
contract programmers were at customer sites during each of the fiscal years.
In fiscal 1997, there was an average of 33 programming personnel placed
compared to 16 in fiscal 1996. This increase was partially offset by a
decrease of $576,000 in revenues from providing contract system enhancements
programming for LIS customers, a service ATR no longer provides.
PROGRAMMER COSTS. Programmer costs are the salary, other wage and benefit
costs of ATR's programmer employees. These costs increased $825,000, or 99% in
fiscal 1997 compared to fiscal 1996. This increase was due to normal salary
management and the approximate doubling of the average number of programmers
placed during the preceding fiscal year.
START-UP AND OTHER COSTS. Start-up and other costs primarily represent the
costs of recruiting, training, and travel for programmer employees coming to
the United States from the Former Soviet Union for the first time, relocation
costs within the United States, and legal and other costs related to obtaining
and maintaining compliance with required visas, postings and notifications.
Also included in this category of costs are wage, other salary and benefit
costs incurred by ATR whenever programmer employees are hired and enter the
United States or are relocated once in the United States but before these
programmers begin working at a customer's work site. There are sometimes
periods of up to several days when under immigration law, ATR, as employer,
must pay a programmer employee prevailing wages for his or her specialty even
when the programmer is not placed.
ATR expenses start-up and other costs as incurred, which results in timing
differences between the incurring of expense and recognition of resulting
revenue. Such differences were particularly evident in ATR's case during
fiscal 1997 because of its relatively small revenue base and rapid increase in
the number of programmer placements. The affect may continue to be 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. This was the case in the quarter ended June 30, 1997.
Start-up and other costs increased $289,000 or 199% in fiscal 1997 compared to
fiscal 1996. This increase is due to placing or relocating approximately 39
programmers during fiscal 1997 compared to placing 11 new programmers during
fiscal 1996. In addition, the Company experienced increased costs in the
current period associated with expanding recruiting and training efforts
overseas.
CONTRACT PROGRAMMING GROSS PROFIT (LOSS). The gross profit (loss) percentage
on contract programming revenue was (4)% for fiscal 1997 compared to 24% for
fiscal 1996. There were revenues from contract system enhancements for LIS
customers during fiscal 1996 that were not repeated in fiscal 1997. The timing
of start-up and other costs compared to matching revenue as discussed above
also contributed to the negative margins for fiscal 1997.
8
SYSTEM SERVICE
In January 1997 the Company decided to phase out within the year all LIS
software support and hardware services. The Company notified its remaining LIS
customers that it would not renew its contracts with them on their next renewal
date. In May 1997, the Company assigned all remaining LIS contracts to a third
party, thereby completing the phase out more quickly than anticipated. As a
result of this agreement, the Company recognized $131,181 in service revenue
previously recorded as deferred revenue, although total revenue for fiscal 1997
declined as expected.
SYSTEM SERVICE REVENUE. System service revenue decreased $140,000 or 28% in
fiscal 1997 compared to comparable fiscal 1996. Decreases are due to the phase
out explained above.
SYSTEM SERVICE GROSS MARGIN. Gross margin from this line of business increased
from 10% in fiscal 1996 to 68% in fiscal 1997. This increase is due to a write
down of the remaining net book value of purchased system software licenses and
obsolete inventory which occurred during fiscal 1996 and not fiscal 1997, and
to the recognition of service contract revenue in fiscal 1997 when the Company
assigned those contracts to OMI in May 1997 (see "Description of Business --
System Service").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A expense decreased
$153,000 or 12% in fiscal 1997 compared to fiscal 1996. A decrease of $459,000
in marketing/sales, legal/accounting and travel or related expenses was
partially offset by an increase of $141,000 in SG&A personnel costs and
$165,000 in facilities costs charged to SG&A. In prior years a portion of
facilities costs was allocated to cost of sales and research and development.
However, in fiscal 1997 all facilities costs are charged to SG&A because no
other activities occurred at the Company's headquarters during fiscal 1997.
Total facilities costs in fiscal 1997 decreased by $211,000 compared to fiscal
1996.
OTHER OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. There were no research and development
expenses during fiscal 1997. During fiscal 1996, $253,000, $251,000, and
$153,000 was expensed for personnel costs, co-development fees, and allocated
facilities costs, respectively, related to LIS products.
SETTLEMENT EXPENSE. There were no settlement expenses during fiscal 1997.
Expenses in fiscal 1996 were primarily related to the settlement of a lawsuit
by a former employee.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE. Interest expense increased $125,000 in fiscal 1997 compared
to fiscal 1996 due to a net increase in notes payable and other debt of
$993,000.
SETTLEMENT OF DISPUTE WITH DISTRIBUTOR. Since 1993, the Company and its
Canadian distributor (the "Distributor") disputed several provisions of their
Distributor and Co-Development Agreement, modified certain provisions of the
agreement in 1994 and 1995, and continued to dispute several provisions of the
modified agreement during 1996 and 1997. In May 1997, the Company and the
Distributor signed a Mutual Release and Settlement Agreement wherein both
parties agreed to the settlement of any and all issues arising from or relating
to the Distributor and Co-Development Agreement, and any of its modifications,
and any and all other matters arising from or relating to any relationship or
agreements(s) between the Company and the Distributor by mutually agreeing to
cancel and terminate the agreement(s) and by releasing each other from any and
all claims, demands, or liabilities which have arisen or which may arise from
the agreement(s). As a result of this agreement, the Company reversed net
accounts payable to the Distributor previously recorded of $189,299.
9
EXPIRATION OF ACCRUED CUSTOMER OBLIGATIONS. During fiscal 1992, the Company
recorded an estimated liability in the amount of $242,848 related to certain
software sales agreements. After discussion with legal counsel, management of
the Company believes the Company has no further obligation to perform under
these customer contracts. Therefore, in fiscal 1997, the Company reversed its
previously recorded liability of $242,848.
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
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109. 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. In connection with the Company's initial public
offering, a change of ownership (as defined in Section 382 of the Internal
Revenue Code of 1986, as amended), occurred. As a result, the Company's net
operating loss carryforwards generated through August 10, 1992 are subject to
an annual limitation of $300,000.
In August and September 1993, a controlling interest of the Company's stock was
purchased, resulting in a second annual limitation of $398,000 on the Company's
ability to utilize net operating loss carryforwards generated between August
11, 1992, and September 13, 1993. The Company expects that the aforementioned
annual limitations 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 to $648,187 in fiscal 1997 from $1,847,812 for fiscal 1996.
NET LOSS PER SHARE
The Company's net loss per share has been computed by dividing net loss after
deducting Preferred Stock dividends ($122,500 in each of the fiscal years 1997
and 1996) by the weighted average number of shares of Common Stock outstanding
during the periods presented 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. Net loss per share decreased as a result
of a smaller loss and a greater number of shares used in the calculation in
fiscal 1997 compared to fiscal 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, obtain capital equipment,
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 recent steps the
10
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 of $1.0
million during fiscal 1997 and $0.7 million during fiscal 1996 from two
stockholders, Cameron and Dr. Max Negri ("Negri"), to fund its operations.
These notes mature December 31, 1997 and bear interest at 10.25%. The Company
must obtain additional funds during fiscal 1998 in order to meet its
obligations while attempting to grow revenues to a level necessary to generate
cash from operations. Although the Company has not entered into any written
agreement with Cameron or Negri, management believes, based on discussions with
these two individuals, that these two stockholders will continue to finance the
Company's operations during fiscal 1998. In December 1996, Cameron and Negri
extended the maturity date on all notes payable currently maturing from
December 31, 1996, to the earlier of December 31, 1997, or such time as the
Company obtains equity financing. Although the Company has not entered into
any written agreement with Cameron or Negri, management believes, based on
discussions with these two individuals, that Cameron and Negri will continue to
fund operations and extend the maturity dates of the various notes payable
until at least June 30, 1998, or until such time as the Company can repay the
notes. However, there can be no assurance that events may arise which may
affect these stockholders' ability to finance the Company or that the Company
may experience significant and unanticipated cash flow problems which may cause
these two stockholders to reconsider their investment. Further, if the Company
experiences significant cash flow problems, the Company may be required to
reduce the level of its operating activities or be forced into seeking
protection under federal bankruptcy laws.
In February 1994, the Company entered into a revolving line of credit with Bank
of America, NT&SA, (the "Bank") in the amount of $2,000,000, which was later
reduced to $1,000,000. On April 21, 1997, Cameron became the named borrower
under the line of credit, and the Company issued a note payable (the "Straight
Note") to Cameron for the $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 the "Applicable Percentage," as defined in the
Reimbursement Agreement, 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. The
Applicable Percentage, which was originally 50%, has been reduced to 20% per
the terms of the Reimbursement Agreement due to the Bank extending the maturity
date of the line of credit. The Applicable Percentage may not be reduced below
20%.
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
received 225,000 shares of Common Stock with a fair market value on the date of
issuance of $168,750. The shares are subject to forfeiture in the event Mr.
Keen voluntarily leaves the Company prior to January 1, 1998.
During fiscal 1997, the Company issued 303,871 shares of the Company's Common
Stock in settlement of $237,000 in accrued legal costs and $158,000 in other
claims accrued in prior years.
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.
11
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the notes thereto and report
of the independent auditors thereon, are attached hereby as exhibits following
page number 15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 18, 1997 under the Captions "Election of Directors",
"Further Information concerning the Board of Directors" and "Section 16(a)
Information." The Proxy Statement will be filed within 120 days of the
Company's fiscal year end.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 18, 1997 under the Caption "Executive Compensation." The
Proxy Statement will be filed within 120 days of the Company's fiscal year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 18, 1997 under the Caption "Principal Stockholders." The
Proxy Statement will be filed within 120 days of the Company's fiscal year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 18, 1997 under the Caption "Certain Relationships and
Related Transactions." The Proxy Statement will be filed within 120 days of
the Company's fiscal year end.
12
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement on
Form S-18, Reg. No. 33-48666).
3.2 Amendment to Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1994).
3.3 Amended and Restated Certificate of Incorporation of the Registrant.
4.1 Amended and Restated Certificate of Incorporation of Registrant, including
Certificates of Designation with respect to Series A, Series B, Series C,
Series D, and Series E Preferred Stock, including any amendments thereto
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-3, Reg. No. 33-86962).
10.1 Form of Director and Executive Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.19 to Registration Statement on
Form S-18, Reg. No. 33-48666).
10.2 Form of Reimbursement Agreement, dated February 28, 1994, between the
Registrant and James W. Cameron, Jr. (incorporated by reference to Exhibit
10.29 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.3 Form of Stock Purchase Warrant issued in connection with the Confidential
Private Placement Memorandum of the Registrant, dated February 13, 1992
(Class A Warrant) (incorporated by reference to Exhibit 10.31 to Form 10-
KSB for the fiscal year ended June 30, 1994).
10.4 Form of Stock Purchase Warrant issued April 22, 1993 (Class B Warrant)
(incorporated by reference to Exhibit 10.32 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.5+ Stock Purchase Warrant issued to William T. Manak on April 6, 1994 for
the purchase of 572,856 shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 10.34 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.6 Stock Purchase Warrant issued to Dennis L. Montgomery on April 6, 1994 for
the purchase of 125,000 shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 10.35 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.7 Stock Purchase Warrant issued to Dennis L. Montgomery on April 6, 1994 for
the purchase of 580,000 shares of the Registrant's Common Stock
(incorporated by reference to Exhibit 10.36 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.8 Form of Amended Stock Purchase Warrant issued to certain Class A, Class B,
Class C and Class D Warrant Holders (incorporated by reference to Exhibit
10.37 to Form 10-KSB for the fiscal year ended June 30, 1994).
13
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.9 Form of Stock Purchase Warrant, dated June 30, 1994, issued to
stockholders of record on September 7, 1993 (incorporated by reference to
Exhibit 10.38 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.10 Form of Stock Purchase Warrant to Jeff Buckner as designee for James W.
Cameron, Jr. (incorporated by reference to Exhibit 10.40 to Form 10-KSB
for the fiscal year ended June 30, 1994).
10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by reference to
Exhibit 10.47 to Form 10-KSB for the fiscal year ended June 30,
1994).
10.12+ Stock Option Agreement, dated August 11, 1993, between the
Registrant and Russell J. Harrison (incorporated by reference to
Exhibit 10.51 to Form 10-KSB for the fiscal year ended June 30,
1994).
10.13 Contractor Agreement, dated June 3, 1996, between the Registrant and
Technical Directions, Inc. [formerly known as The Systems Group, Inc.]
(incorporated by reference to Exhibit 10.42 to Form 10-KSB for the year
ended June 30, 1996).
10.14 Lease, dated November 6, 1995, between the Registrant and James W.
Cameron, Jr (incorporated by reference to Exhibit 10.46 to Form 10-KSB for
the year ended June 30, 1996).
10.15 Agreement with Technical Directions, Inc. (incorporated by reference to
Exhibit 10.47 to Form 10-KSB for the year ended June 30, 1996).
10.16 First Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated October 1, 1996 (incorporated by reference to Exhibit
10.52 to Form SB-2 filed December 18, 1996).
10.17 Agreement between Liberty Mutual Insurance Company and the Registrant,
dated October 9, 1996 (incorporated by reference to Exhibit 10.53 to Form
SB-2 filed December 18, 1996).
10.18 Note Payable between the Registrant and the Negri Foundation dated
December 24, 1996 (incorporated by reference to Exhibit 10.60 to Form 10-
QSB for the quarter ended December 31, 1996).
10.19 Note Payable between the Registrant and the Negri Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.61 to Form 10-
QSB for the quarter ended December 31, 1996).
10.20 Note Payable between the Registrant and the Max Negri Trust dated
December 31, 1996 (incorporated by reference to Exhibit 10.62 to Form 10-
QSB for the quarter ended December 31, 1996).
10.21 Note Payable between the Registrant and the Cameron Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.63 to Form 10-
QSB for the quarter ended December 31, 1996).
10.22 Note Payable between the Registrant and the James W. Cameron, Jr., as an
individual, dated December 31, 1996 (incorporated by reference to Exhibit
10.64 to Form 10-QSB for the quarter ended December 31, 1996).
14
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.23 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 16, 1997 (incorporated by reference to Exhibit
10.65 to Form 10-QSB for the quarter ended December 31, 1996).
10.24 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 31, 1997 (incorporated by reference to Exhibit
10.66 to Form 10-QSB for the quarter ended December 31, 1996).
10.25 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated February 7, 1997 (incorporated by reference to Exhibit
10.67 to Form 10-QSB for the quarter ended December 31, 1996).
10.26 Agreement between the Registrant and Adept, Inc. dated February 1997
(incorporated by reference to Exhibit 10.68 to Form 10-QSB for the quarter
ended March 31, 1997).
10.27 Sale of Cortex between the Registrant and Omnitech Migrations
International, Inc. (formerly known as Centre de Traitment I.T.I.
Omnitech, Inc.), dated May 2, 1997 (incorporated by reference to Exhibit
10.69 to Form 10-QSB for the quarter ended March 31, 1997).
10.28 Mutual Release and Settlement Agreement between the Registrant and
Omnitech Migrations International, Inc. (formerly known as Centre de
Traitment I.T.I. Omnitech, Inc.), dated May 6, 1997 (incorporated by
reference to Exhibit 10.70 to Form 10-QSB for the quarter ended March 31,
1997).
10.29 Note Payable between the Registrant and James W. Cameron, Jr., dated
April 21, 1997.
10.30 Second Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated June 3, 1997.
10.31 Joint Services Agreement between the Registrant and Prize-ITM, Ltd.,
dated August 1, 1997.
23.1 Consent of Independent Auditors
+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).
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.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: September 26, 1997 ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Formerly known as 3Net Systems, Inc.)
By W. ROBERT KEEN
W. Robert Keen
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
W. ROBERT KEEN Chief Executive Officer September 26, 1997
W. Robert Keen and Director
(Principal Executive Officer)
EDWARD L. LAMMERDING Chairman of the Board, September 26, 1997
Edward L. Lammerding Chief Financial Officer
and Director
(Principal Financial Officer)
Gerald W. Faust Director
THOMAS W. O'NEIL, JR. Director September 26, 1997
Thomas W. O'Neil, Jr.
INDEX TO FINANCIAL STATEMENTS
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
PAGE
REPORT OF INDEPENDENT AUDITORS ...........................................F-1
BALANCE SHEET AT JUNE 30, 1997 ..........................................F-2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996...... F-3
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED JUNE 30,
1997 AND 1996...........................................................F-4
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 AND
1996....................................................................F-5
NOTES TO FINANCIAL STATEMENTS ............................................F-7
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Alternative Technology Resources, Inc.
We have audited the accompanying balance sheet of Alternative Technology
Resources, Inc. as of June 30, 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the years ended
June 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alternative Technology
Resources, Inc. at June 30, 1997, and the results of its operations and its
cash flows for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Alternative Technology Resources, Inc. will continue as a going concern.
As more fully described in Note 1, the Company has incurred recurring
operating losses and has a working capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 1. 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 outcome of this uncertainty.
ERNST & YOUNG LLP
Sacramento, California
August 21, 1997
F-2
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
BALANCE SHEET
JUNE 30, 1997
ASSETS
Current assets:
Cash $ 59,743
Accounts receivable, net of allowance for doubtful
accounts of $5,516 219,258
Deposits 8,554
------------
Total current assets 287,555
Property and equipment:
Equipment 18,407
Furniture and fixtures 148,445
------------
166,852
Accumulated depreciation and amortization (156,265)
------------
Property and equipment, net 10,587
------------
$ 298,142
============
Current liabilities:
Notes payable to stockholders $ 2,787,262
Accounts payable to stockholders 276,229
Accounts payable 174,041
Accrued payroll and related expenses 275,747
Accrued preferred stock dividends 367,500
Other current liabilities 82,337
Other notes payable 23,539
-----------
Total current liabilities 3,986,655
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $6.00 par value -- 1,200,000 shares
authorized, 204,167 shares designated Series D
issued and outstanding; liquidation preference
value of $1,592,502 1,225,002
Common stock, $0.01 par value -- 100,000,000 shares
authorized, 25,783,926 shares issued and outstanding 257,839
Unearned compensation (84,375)
Additional paid-in capital 28,768,907
Accumulated deficit (33,855,886)
------------
Total stockholders' deficit (3,688,513)
------------
$ 298,142
============
SEE ACCOMPANYING NOTES.
F-3
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
1997 1996
CONTRACT PROGRAMMING:
Contract programming revenue $ 2,018,064 $ 1,280,303
Programmer costs (1,657,701) (832,949)
Start-up and other costs (434,638) (145,446)
-----------------------------------
Contract programming gross profit (loss) (74,275) 301,908
-----------------------------------
SYSTEM SERVICE:
Service revenue 360,870 500,923
Cost of service (117,159) (449,249)
-----------------------------------
System service gross profit 243,711 51,674
-----------------------------------
Selling, general and administrative 1,160,015 1,313,116
Research and development - 657,437
Settlement expenses - 78,125
-----------------------------------
Loss from operations (990,579) (1,695,096)
Other income (expense):
Interest expense (287,830) (162,626)
Settlement of dispute with distributor 189,299 -
Expiration of accrued customer obligations 242,848 -
Reimbursement from insurance company 201,550 -
Other, net (3,475) 9,910
----------------------------------
342,392 (152,716)
----------------------------------
Net loss $ (648,187) $(1,847,812)
==================================
Preferred stock dividends in arrears (122,500) (122,500)
----------------------------------
Net loss applicable to common stockholders $ (770,687) $(1,970,312)
==================================
Net loss per share $ (0.03) $ (0.12)
==================================
Shares used in per share calculations 25,369,315 16,124,056
==================================
SEE ACCOMPANYING NOTES.
F-4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1997 AND 1996
[Enlarge/Download Table]
COMMON UNEARNED ADDITIONAL TOTAL
PREFERRED STOCK COMMON STOCK STOCK TO COMPENSA- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT BE ISSUED TION CAPITAL DEFICIT DEFICIT
Balance, June 30, 1995 491,489 $ 2,655,965 2,655,965 $ 26,560 $ 225,000 $ - $26,794,827 $(31,359,887) $(1,364,568)
Conversion of preferred
stock into common
stock (287,322) (1,723,930) 17,117,256 171,172 521,867 - 1,030,891 - -
Warrants and options
exercised - - 162,505 1,625 - - (385) - 1,240
Issuance of common stock
settlement of disputes
and claims - - 64,274 643 (66,766) - 144,248 - 78,125
Preferred stock dividends - - - - - - (122,500) - (122,500)
Net loss - - - - - - - (1,847,812) (1,847,812)
--------------------------------------------------------------------------------------------------
Balance, June 30, 1996 204,167 1,225,002 20,000,000 200,000 680,101 - 27,847,081 (33,207,699) (3,255,515)
Issuance of common stock
from common stock to
be issued - - 5,218,676 52,186 (521,867) - 469,681 - -
Issuance of common stock
settlement of accounts
payable and other claims - - 303,871 3,039 (158,234) - 391,807 - 236,612
Issuance of common stock
for future compensation - - 225,000 2,250 - (84,375) 166,500 - 84,375
Warrants and options
exercised - - 36,379 364 - - 16,338 - 16,702
Preferred stock dividends - - - - - - (122,500) - (122,500)
Net loss - - - - - - - (648,187) (648,187)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1997 204,167 $ 1,225,002 25,783,926 $257,839 $ - $(84,375) $28,768,907 $(33,855,886) $(3,688,513)
======================================================================================================
SEE ACCOMPANYING NOTES.
F-5
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
YEAR ENDED JUNE 30,
1997 1996
Cash flows from operating activities:
Net loss $ (648,187) $(1,847,812)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 133,392 300,986
Write-off of assets - 79,680
Common stock issued/issuable in settlement
of disputes - 78,125
Non-cash employee compensation 84,375 -
Settlement of dispute with distributor (189,299) -
Expiration of accrued customer obligations (242,848) -
Reimbursement from insurance company (201,550) -
Changes in operating assets and liabilities:
Accounts receivable (108,752) 231,448
Inventory - 28,518
Other current assets 45,037 114,545
Accounts payable to stockholders 169,129 308,650
Accounts payable (21,650) 201,349
Accrued payroll and related expenses 132,100 (26,807)
Deferred revenue (180,254) 5,379
Other current liabilities 19,838 (112,024)
---------------------------
Net cash used in operating activities (1,008,669) (637,963)
---------------------------
Cash flows from investing activities:
Disposal (purchase) of property and equipment 6,165 (22,367)
Decrease in other assets - 27,216
---------------------------
Net cash provided by investing activities 6,165 4,849
---------------------------
F-5
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Statements of Cash Flows
Increase (decrease) in Cash
(continued)
YEAR ENDED JUNE 30,
1997 1996
Cash flows from financing activities:
Proceeds from exercise of common stock
warrants and options $ 16,702 $ 1,240
Proceeds from notes payable to stockholders 1,048,510 738,752
Proceeds from other notes payable - 33,806
Payments on other notes payable (44,912) (81,022)
Payments on capital lease obligations (10,159) (46,469)
------------------------------
Net cash provided by financing activities 1,010,141 646,307
------------------------------
Net increase in cash 7,637 13,193
Cash at beginning of period 52,106 38,913
------------------------------
Cash at end of period $ 59,743 $ 52,106
==============================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 153,198 $ 106,462
SEE ACCOMPANYING NOTES.
F-7
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
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 exited the LIS
software market entirely.
During fiscal 1997, the Company changed its name to Alternative Technology
Resources, Inc. (ATR) and focused its efforts to develop its computer
programmer placement business. During fiscal years 1995 and 1996, the
Company developed and implemented a program whereby it recruits
experienced, qualified computer programmers primarily from the former
Soviet Union, obtains necessary visas, and places them for assignment in
the United States. The Company started this process to support its former
LIS business and the needs of a customer that was developing medical
administrative systems. ATR discovered a demand for these programmers
from others and began its present business on a limited basis and is now
focused entirely upon growing its niche in the contract programming
marketplace.
BASIS OF PRESENTATION
The Company has incurred operating losses since inception which have
resulted in an accumulated deficit of $33,855,886 at June 30, 1997. In
addition, at June 30, 1997 the Company had a working capital deficit of
$3,699,100 and a stockholders' deficit of $3,688,513.
The report of independent auditors on the Company's June 30, 1997 financial
statements includes an explanatory paragraph indicating there is
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern. Based on
the recent steps the Company has taken to reduce its expenses and refocus
its operations, the Company believes that it has developed a viable plan to
address the Company's ability to continue as a going concern and that this
plan will enable the Company to continue as a going concern through the end
of fiscal year 1998. However, considering, among other things, the
Company's historical operating losses and its short history in the contract
computer programming industry, there can be no assurance that this plan
F-8
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
will be successfully implemented. 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 growth of its contract computer
programming and consulting services; therefore, the Company contemplates
needing to raise additional financing during fiscal 1998, the receipt of
which cannot be assured.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated or
amortized on a straight-line basis over the estimated useful lives of the
assets or the lease term, whichever is shorter. The estimated useful lives
range from three to five years. During the year ended June 30, 1997, the
Company eliminated from its balance sheet fully depreciated furniture and
equipment with a cost of approximately $781,000.
REVENUE RECOGNITION
Contract programming revenue represents work performed for customers,
primarily on a time and materials basis, and is recorded when the related
services are rendered. System service revenues are derived from support
and maintenance contracts which are deferred when billed and recognized
ratably over the contract term. In connection with its business strategy
to exit the LIS products market, the Company entered into an agreement with
Omnitech Migrations International, Inc. ("OMI") on May 2, 1997 to transfer
its LIS product and its software and hardware customer service contracts to
OMI. Under this agreement, the Company transferred and assigned to OMI all
of the Company's right, title, and interest in and to these customer
agreements and delegated to OMI all the Company's duties and obligations of
performance thereunder. As consideration, the Company retained all fees
previously paid to it under these service agreements. As a result of this
agreement, the Company recognized $131,181 in service revenue previously
recorded as deferred revenue.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, the liability
F-9
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
method is used to account for income taxes. Deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
STOCK-BASED COMPENSATION
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"), the Company has elected to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Under the intrinsic value method, compensation cost is the excess, if any,
of the quoted market price or fair value of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Disclosures required under SFAS No. 123 are included in Note 6 to
the financial statements.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are primarily with companies in the
contract placement and consulting industry. The Company performs periodic
credit evaluations of its customers and believes that adequate provision
for uncollectable accounts receivable has been made in the accompanying
financial statements. The Company maintains substantially all of its cash
at one financial institution.
NET LOSS PER SHARE
All share and per share amounts have been adjusted to reflect a one-for-ten
consolidation of the Company's outstanding Common Stock (Note 6). The
Company's net loss per share has been computed by dividing net loss after
deducting Preferred Stock dividends ($122,500 in each of the fiscal years
1997 and 1996) by the weighted average number of shares of Common Stock
outstanding during the periods presented, including Common Stock to be
issued. Common Stock issuable upon conversion of Preferred Stock
(including Preferred Stock options), Common Stock
F-10
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
options and Common Stock warrants have been excluded from the net loss per
share calculations since their inclusion would be anti-dilutive. As
described in Note 6, certain of the Company's Preferred Stock was converted
into Common Stock during the year ended June 30, 1996. Net loss per share
for the year ended June 30, 1996 would have been $(0.08) had these
conversions occurred on the date of issuance of the Preferred Stock.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for the
Company's fiscal year ending June 30, 1998. At that time, the Company will
be required to change the method currently used to compute net income
(loss) per share and to restate all prior periods. Under SFAS 128, the
dilutive effect of stock options and warrants will be excluded in the
calculation of primary or basic earnings per share. The impact of SFAS 128
on the calculation of net income (loss) per share is not expected to be
material.
SIGNIFICANT CUSTOMERS
During the year ended June 30, 1997, two customers individually accounted
for more than 10% of total revenues with 37% and 36%, respectively. During
the year ended June 30, 1996, two customers individually accounted for more
than 10% of total revenues with 41% and 36%, respectively.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported as of and for
the year ended June 30, 1996 to conform with the June 30, 1997
presentation.
F-11
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
2. INVESTOR GROUP TRANSACTIONS
In fiscal 1994, the Company entered into a series of agreements with James
W. Cameron, Jr. ("Cameron") pursuant to which Cameron and Dr. Max Negri
("Negri") became principal stockholders of the Company, holding more than
5% of the Company's Common Stock and Preferred Stock, Series D.
As of June 30, 1997, Cameron beneficially owned 19,958,245 shares of common
stock, which includes 59,410 shares issuable upon conversion of 76,167
shares of Preferred Stock, Series D, and 1,500 shares issuable upon
exercise of warrants, all of which are currently convertible or
exercisable. Also included are 213,250 shares held by the Cameron
Foundation, which Cameron disclaims beneficial ownership.
As of June 30, 1997, Negri owned 2,771,143 shares of common stock, which
includes 64,740 shares issuable upon conversion of 83,000 shares of
Preferred Stock, Series D, which are currently convertible.
During fiscal 1997 and 1996, the Company did not generate sufficient cash
flow from operations and borrowed from these two stockholders. Notes
payable to stockholders were $2,787,262 at June 30, 1997 (Note 3), and
$53,122 in accrued interest on these notes is included in accounts payable
to stockholders at June 30, 1997. The Company also leases its office
facilities from Cameron (Note 5).
3. FINANCING ARRANGEMENTS
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund operations, obtain capital
equipment, 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 growth of its
contract computer programming and consulting services; therefore, the
Company contemplates needing to raise additional financing during fiscal
1998, the receipt of which cannot be assured.
The Company received short-term financing in the form of notes payable of
approximately $1.0 million during fiscal 1997 and approximately $0.7
million during fiscal 1996 from two stockholders, Cameron and Negri, to
fund its operations. These notes mature on December 31, 1997 and bear
interest at 10.25%. The Company must obtain additional funds during fiscal
F-12
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
3. FINANCING ARRANGEMENTS (CONTINUED)
1998 in order to meet its obligations while attempting to grow revenues to a
level necessary to generate cash from operations. Although the Company has
not entered into any written agreement with Cameron or Negri, management
believes, based on discussions with these two individuals, that these two
stockholders will continue to finance the Company's operations during
fiscal 1998. In December 1996, Cameron and Negri extended the maturity
date on all notes payable currently maturing from December 31, 1996, to the
earlier of December 31, 1997, or such time as the Company obtains equity
financing. Management believes, based on discussions with these two
individuals, that Cameron and Negri will continue to fund operations and
extend the maturity dates of the various notes payable until at least June
30, 1998, or until such time as the Company can repay the notes. However,
there can be no assurance that events may arise which may affect these
stockholders' ability to finance the Company or that the Company may
experience significant and unanticipated cash flow problems which may cause
these two stockholders to reconsider their investment. Further, if the
Company experiences significant cash flow problems, the Company may be
required to reduce the level of its operating activities or be forced into
seeking protection under federal bankruptcy laws.
In February 1994, the Company entered into a revolving line of credit with
Bank of America, NT&SA, (the "Bank") in the amount of $2,000,000, which was
later reduced to $1,000,000. On April 21, 1997, Cameron became the named
borrower under the line of credit, and the Company issued a note payable
(the "Straight Note") to Cameron for the $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 the "Applicable Percentage," as defined in the Reimbursement
Agreement, 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. The Applicable
Percentage, which was originally 50%, has been reduced to 20% per the terms
of the Reimbursement Agreement due to the Bank extending the maturity date
of the line of credit. The Applicable Percentage may not be reduced below
20%.
F-13
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
4. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of June 30, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 8,612,000
Research credits 123,000
Common Stock options 2,551,000
Common Stock warrants 789,000
Other - net 145,000
------------
Total deferred tax assets 12,220,000
Valuation allowance for deferred tax assets (12,220,000)
------------
Net deferred tax assets $ -
============
The Company's valuation allowance as of June 30, 1996 was $11,988,000,
resulting in a net change in the valuation allowance of $232,000.
As of June 30, 1997 the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $24 million and $12
million, respectively. The federal net operating loss carryforward expires
in 2006 through 2012 and the state net operating loss carryforward expires
in 1998 through 2002. The Company also has approximately $98,000 and
$25,000 of research and development tax credit carryforwards for federal
and state income tax purposes, respectively. The federal research and
development tax credit carryforwards expire in 2005. In connection with
the Company's initial public offering in August 1992, a change of ownership
(as defined in Section 382 of the Internal Revenue Code of 1986, as
amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000)
will be subject to an annual limitation in the amount of approximately
$300,000.
In August and September of 1993, a controlling interest of the Company's
stock was purchased, resulting in a second annual limitation in the amount
of approximately $398,000 on the Company's ability to utilize net operating
loss carryforwards generated between August 11, 1992 and September 13, 1993
(approximately $7,700,000).
F-14
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
4. INCOME TAXES (CONTINUED)
The Company expects that the aforementioned annual limitations will result
in approximately $3,600,000 of net operating loss carryovers which may not
be utilized prior to the expiration of the carryover period.
5. COMMITMENTS: OPERATING LEASES
In November 1995, the Company entered into a lease agreement for its
current facility under a one year lease with Cameron. The lease has been
extended to December 31, 1997. At June 30, 1997, $223,107 of rent owed for
fiscal years 1997 and 1996 is included in the balance of accounts payable
to stockholders. Rental expense for all operating leases was approximately
$96,710 and $70,000 for the years ended June 30, 1997 and 1996,
respectively. Annual minimum rental payments for all non-cancelable
operating leases for fiscal years 1998, 1999, and 2000 are approximately
$97,355, $53,112, and $41,753, respectively.
6. STOCKHOLDERS' DEFICIT
The financial statements and notes thereto 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 the number of authorized
shares of Common Stock from 200,000,000 to 100,000,000.
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 received 225,000 shares of Common Stock with a fair market value on
the date of issuance of $168,750. The shares are subject to forfeiture in
the event Mr. Keen voluntarily leaves the Company prior to January 1, 1998.
During fiscal 1997, the Company issued 303,871 shares of the Company's
Common Stock in settlement of approximately $237,000 in accrued legal costs
and approximately $158,000 in other claims accrued in prior years.
F-15
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
SERIES D PREFERRED STOCK
In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible Preferred Stock for $1,225,002. The Company is required to pay
cumulative preferential dividends to holders of Series D Preferred Stock on
a quarterly basis beginning July 1, 1994, at a rate of $0.60 per year per
share. As of June 30, 1997, cumulative unpaid, undeclared dividends were
$367,500. Each share of Series D Preferred Stock is convertible, at the
option of the stockholder, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the sum of $6.00 and
the accrued but unpaid dividends by the Series D Conversion Price, as
defined in the agreement, in effect on the conversion date. The Series D
Conversion Price is $10.00 per share after giving effect to the one-for-ten
consolidation of Common Stock. Additionally, the Series D Preferred Stock
is redeemable at any time, at the Company's option, at a price of $6.00 per
share plus accrued but unpaid dividends. The liquidation preference is
$6.00 per share plus accrued but unpaid dividends.
SERIES E PREFERRED STOCK
On December 1,1995, the holders of all the outstanding shares of the
Company's Series E Preferred Stock tendered those shares for conversion
into 22,335,932 shares of the Company's Common Stock pursuant to the terms
of the Series E Preferred Stock Purchase Agreement. As of the conversion
date, 20,000,000 common shares were authorized; therefore 5,218,677 shares
were recorded as Common Stock to be issued. During fiscal 1997 the number
of authorized shares was increased and the previously unissued shares were
then issued.
F-16
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS
Warrant activity during the periods indicated is as follows:
Weighted
Range of Average
Number of Exercise Exercise
Shares Prices Price
Balance at June 30, 1995 1,185,955 $0.00-$50.00 $19.49
Granted 409,800 $1.00 $1.00
Exercised (152,504) $0.00-$15.00 $0.00
Balance at June 30, 1996 1,443,251 $0.00-$50.00 $16.30
Granted 14,400 $0.75 $0.75
Exercised (15,000) $0.00 $0.00
Expired/Canceled (265,236) $30.00-$50.00 $40.00
Balance at June 30, 1997 1,177,415 $0.01-$28.80 $10.87
At June 30, 1997, the weighted-average remaining contractual life of
outstanding warrants was 4.3 years. All warrants were immediately
exercisable at June 30, 1997.
In fiscal 1994 as a condition of the agreements between the Company and the
Investor Group (Note 2), a designee of Mr. Cameron received a warrant to
purchase 10,000 shares of the Company's Common Stock at an exercise price
of $15.00 per share. The warrant is immediately exercisable and expires on
February 28, 1999.
F-17
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTIONS
Also in conjunction with the fiscal 1994 agreements with the Investor
Group, the Company granted to its then-new Chief Executive Officer and
director, a stock option for 400,000 shares of Common Stock exercisable at
$0.10 per share, and recorded compensation expense of $1,400,000. The
option is fully vested as of June 30, 1997 and expires on August 10, 2003.
In April 1996, the option was exercised for 10,000 shares.
In September 1996, the Board of Directors granted a non-statutory option to
purchase 20,000 shares of the Company's Common Stock at an exercise price
of $2.00 per share to Edward L. Lammerding, Chairman of the Board. The
option vests over 3 years and expires on September 17, 2001.
SPECIAL STOCK OPTION PLAN
In June 1993 the Board of Directors adopted the Special Stock Option Plan
which authorized 188,000 shares of Common Stock for the grant of options.
All options granted under this plan were forfeited except 4,913 options
which were canceled on April 10, 1996 and reissued under the 1993 Stock
Option/Stock Issuance Plan. The reissued options have an exercise price of
$0.78125, the closing market price on that day.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"), pursuant to
which key employees (including officers) and consultants of the Company and
the non-employee members of the Board of Directors may acquire an equity
interest in the Company, was adopted by the Board of Directors on August
31, 1993 and became effective at that time.
An aggregate of 400,000 shares of Common Stock are reserved for issuance
over the ten year term of the 1993 Plan. However, no officer of the
Company may be issued more than 200,000 shares of Common Stock under the
1993 Plan. The shares issuable under the 1993 Plan will either be shares
of the Company's authorized but previously unissued Common Stock or shares
of Common Stock reacquired by the Company, including shares purchased on
the open market and held as treasury shares.
F-18
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN
In conjunction with fiscal 1994 agreements between the Company and the
Investor Group (Note 2), the Company granted options to purchase a total of
140,000 shares of Common Stock at $5.00 to two new officers. In fiscal
1995 after the departure of one of the officers, 70,000 options were
canceled. In fiscal 1997, the remaining officer exercised 20,000 options.
On April 10, 1996, the Board of Directors agreed to adjust the exercise
price for 125,835 options to $0.78 per share from the original exercise
prices ranging from $5.00 to $17.50. The 70,000 options in the preceding
paragraph not canceled in fiscal 1995 were included in the options
repriced.
On December 31, 1996, the Board of Directors named Mr. W. Robert Keen as
Chief Executive Officer of the Company. In connection with his
appointment, Mr. Keen will be entitled to receive on a quarterly basis
options to purchase 80,000 shares of Common Stock at an exercise price
equal to the fair market value as of the date of grant up to an aggregate
of 320,000 shares pursuant to the Company's stock option plans. During
fiscal 1997, Mr. Keen was granted options to purchase 120,000 shares under
the Company's 1993 Plan. Mr. Keen was also granted options to purchase an
additional 40,000 shares under the Company's 1997 Plan subject to
stockholder approval of the 1997 Plan.
F-19
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN
Outstanding option activity for the 1993 and the 1997 Plans during the
periods indicated is as follows:
Weighted
Range of Average
Number of Exercise Exercise
Shares Prices Price
Balance at June 30, 1995 169,865 $5.00-$17.50 $8.57
Granted 171,787 $0.78 $0.78
Forfeited (29,030) $6.25-$17.50 $9.69
Balance at June 30, 1996 312,622 $0.78-$13.10 $1.19
Granted 166,000 $0.75-$0.91 $0.83
Exercised (21,380) $0.78 $0.78
Forfeited (41,462) $0.78 $0.78
Balance at June 30, 1997 415,780 $0.75-$13.10 $1.11
F-20
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
6. STOCKHOLDERS' DEFICIT (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1997:
[Download Table]
Weighted
Range of Weighted Average Weighted
Exercise Average Remaining Average
Prices Options Exercise Contractual Options Exercise
Outstanding Price Life Exercisable Price
$0.75-$1.00 171,000 $0.83 9.35 1,667 $1.00
$0.78 229,780 $0.78 8.00 229,780 $0.78
$1.62 5,000 $1.62 7.33 5,000 $1.62
$13.10 10,000 $13.10 6.90 10,000 $13.10
-------- -------
415,780 $1.11 8.90 246,447 $1.30
======== =======
SFAS No. 123 requires presentation of pro forma information regarding net
income (loss) and earnings per share as if the Company had accounted for
its employee stock options under the fair value method of that Statement.
The fair value for ATR options was estimated at the date of grant using the
binomial option pricing model with the following weighted average
assumptions for both fiscal 1997 and 1996: dividend yield of 0%; an
expected life of three years from grant date; expected volatility of 1.104;
and risk-free interest rate of 6.6%.
The model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. It
requires the input of highly subjective assumptions, the quality of which
cannot be judged except by hindsight. The Company's pro forma information
follows:
1997 1996
Net loss:
As reported $ (648,187) $(1,847,812)
Pro forma $ (801,827) $(1,868,785)
Net loss per share:
As reported $ (0.03) $ (0.12)
Pro forma $ (0.03) $ (0.12)
F-21
6. STOCKHOLDERS' DEFICIT (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
The weighted average fair value of options granted during the years ended
June 30, 1997 and 1996 was $0.66 and $0.54, respectively. Because SFAS No.
123 is applicable only to options granted subsequent to June 30, 1995, its
pro forma effect will not be fully reflected until 1999.
STOCK RESERVED FOR ISSUANCE
As of June 30, 1997, the Company has reserved a total of 2,322,445 shares
of Common Stock pursuant to outstanding warrants, options, conversion of
Series D Preferred Stock, and future issuance of options to employees and
non-employee directors.
7. SETTLEMENT OF DISPUTE WITH DISTRIBUTOR
Since 1993, the Company and its Canadian distributor (the "Distributor")
have disputed several provisions of their Distributor and Co-Development
Agreement, modified certain provisions of the agreement in 1994 and 1995,
and continued to dispute several provisions of the modified agreement
during 1996 and 1997. In May 1997, the Company and the Distributor signed
a Mutual Release and Settlement Agreement wherein both parties agreed to
the settlement of any and all issues arising from or relating to the
Distributor and Co-Development Agreement, and any of its modifications, and
any and all other matters arising from or relating to any relationship or
agreements(s) between the Company and the Distributor by mutually agreeing
to cancel and terminate the agreement(s) and by releasing each other from
any and all claims, demands, or liabilities which have arisen or which may
arise from the agreement(s). As a result of this agreement, during fiscal
1997 the Company reversed net accounts payable to the Distributor
previously recorded of $189,299.
8. EXPIRATION OF ACCRUED CUSTOMER OBLIGATIONS
During fiscal 1992, the Company recorded an estimated liability in the
amount of $242,848 related to certain software sales agreements. After
discussions with legal counsel, management of the Company believes that the
Company has no further obligation to perform under these customer
contracts. Therefore, in fiscal 1997, the Company reversed its previously
recorded liability of $242,848.
F-22
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Notes to Financial Statements (continued)
June 30, 1997
9. REIMBURSEMENT FROM INSURANCE COMPANY FOR SUIT FROM FORMER CONSULTANT
The Company is not currently a party to any pending legal proceedings. A
previously reported action between the Company and a former consultant was
resolved during fiscal 1997 in favor of the Company. In addition, during
fiscal 1997, legal expenses and costs of $201,550 accrued in prior periods
by the Company related to this litigation were reimbursed by insurers of
Mr. Cameron and the Company.
Dates Referenced Herein and Documents Incorporated by Reference
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