1
Filed Pursuant to Rule 424(b)(1)
File No. 33-18145
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
24,901,669 SHARES OF COMMON STOCK
($0.01 PAR VALUE)
Of the 24,901,669 shares of common stock, $0.01 par value (the "Common
Stock") of Alternative Technology Resources, Inc. (the "Company"), 22,968,706
shares are being offered by certain stockholder (the "Selling Stockholders")
and up to 1,004,463 shares are being offered by the Company to holders of the
Company's Preferred Stock, Series D and to holders of outstanding warrants and
options consisting of (i) 153,125 shares of common stock issuable as of
December 31, 1996, upon the conversion of the Company's Preferred Stock, Series
D; (ii) 5,000 shares of Common Stock issuable upon the exercise of a warrant
having an exercise price of $15.00 per share; (iii) 40,000 shares of Common
Stock issuable upon the exercise of a warrant having an exercise price of $0.01
per share; (iv) 132,618 shares of Common Stock issuable upon the exercise of a
warrant having an exercise price of $30.00 per share; (v) 132,618 shares of
Common Stock issuable upon the exercise of a warrant having an exercise price
of $50.00 per share; (vi) 4,306 shares of Common Stock issuable upon the
exercise of two warrants having an exercise price of $25.00 per share; (vii)
516,796 shares of Common Stock issuable upon the exercise of a warrant having
an exercise price of $1.00 per share; and (viii) 20,000 shares of Common Stock
issuable upon the exercise of an option having an exercise price of $2.00 per
share. See "Selling Stockholders"; "Use of Proceeds"; "Plan of Distribution";
and "Description of Securities."
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders, or the shares to be issued upon the conversion of the
Preferred Stock, Series D. The Company will, however, receive the exercise
price of any of the warrants and options described above upon the exercise of
such warrants and options, which proceeds total $11,349,286 in the aggregate,
before deducting expenses payable by the Company estimated to be $58,904.
However, since approximately 95% of the total shares (and 99.9% of the
aggregate proceeds) subject to outstanding warrants and options have an
exercise price greater than the fair market value of the Company's Common Stock
as of the date of this Prospectus, it is unlikely that such warrants and
options will be exercised unless the fair market value of the Company's Common
Stock increases above the applicable exercise price. Therefore, the Company
does not expect to receive $11,348,886 of proceeds for exercise of these
warrants and options since they are "out-of-the-money." The Company's Common
Stock quoted on the OTC Bulletin Board under the symbol "ATEK". See
"Description of Securities." On February 10, 1997, the average of the high and
low price of the Common Stock was $0.50, as reported on the OTC Bulletin
Board.
In addition, the Company is registering up to 928,500 shares of Common
Stock which may be issued by the Company in exchange for debt or settlement of
existing liabilities. The per share price of such shares will depend on a
number of factors, including the fair market value of a share, and will be
subject to negotiation. See "Plan of Distribution."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THESE ARE
SPECULATIVE SECURITIES. SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February 11, 1997.
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TABLE OF CONTENTS
Prospectus Summary 3
The Company 5
Risk Factors 6
Use of Proceeds 11
Dividend Policy 11
Plan of Distribution 11
Selected Financial Data 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Business 22
Management 32
Certain Relationships and Related Transactions 37
Selling Stockholders 38
Description of Securities 41
Legal Matters 45
Experts 45
Index to Financial Statements F-1
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933 (the "Securities Act") with respect to the Common Stock offered hereby.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
periodic reports, proxy statements, and other information with the Commission.
Such reports, proxy statements, and other information concerning the Company
may be inspected and copies may be obtained (at prescribed rates) at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's Regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, New York, New York 10048. In addition, the Commission maintains a
World Wide Website at http://www.sec.gov. The Website contains reports, proxy
statements, information statements, and other information pertaining to issuers
that file electronically with the Commission. This Prospectus does not contain
all information set forth in the Registration Statement and Exhibits thereto
which the Company has filed with the Commission under the Securities Act and to
which reference is hereby made.
No person has been authorized in connection with the offering made hereby
to give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any of
the securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
THE COMPANY
Alternative Technology Resources, Inc. (the "Company"), formerly known as
3Net Systems, Inc., provides contract computer programming and consulting
services to an expanding base and variety of industrial customers. These
services include: (i) providing alternative programming resources to domestic
customers through the recruitment, training, transportation, and contractual
deployment of foreign information technology professionals, drawing prospective
contractors primarily from selected areas within the former Soviet Union; (ii)
software development and implementation services for customers who desire new
applications which are based on personal computer ("PC") network, client-
server, and/or Internet technology platforms; and (iii) software and hardware
support and maintenance services for customers who license and use the
Company's proprietary application system products. These services are provided
by virtue of the Company's depth of knowledge and experience in PC networks,
client-server technologies, object-oriented technologies, Internet
technologies, system integration, laboratory information systems, and
application systems development.
Previously, the Company focused on the design, development, and marketing
of integrated computer application systems, with particular emphasis on the
automation of medical/clinical/insurance laboratories through its laboratory
information system ("LIS") products. These products collect and validate test
request and test result data, interface with and respond to requests for
information from laboratory instruments, organize data, communicate it to
various user departments of a hospital, and provide quality control and
assurance functions. During the second half of fiscal 1996, however, the
Company began to redirect its strategic focus away from product development/
sales of LIS products in order to concentrate its resources on its contract
computer programming and consulting services businesses.
This change in strategy was effected by the Company as a direct result of
several critical factors. First, the Company had been largely unsuccessful in
selling new customer licenses to its primary products. Second, the markets in
which the Company sold products offered the Company little opportunity for
significant growth in sales and market share. Third, in fiscal 1996, the
Company recognized that contract programming and consulting services offered
the greatest potential for profitability and improved shareholder value. By
focusing its operations on providing contract programming and consulting
services, the Company has begun to generate new revenues and has reduced
expenses, thus reducing its operating losses. Although the Company is still
experiencing a negative cash flow, these actions substantially reduced the
Company's level of cash consumption in fiscal 1996 as compared to fiscal 1995.
The Company's current operating growth strategy includes the expansion of
its marketing efforts of contract computer programming and consulting services
through strategic alliances and the development of new customers with the
expenditure of a minimum of resources. During fiscal 1996, the Company reduced
its staff by 50% and lowered operating expenses by 64% when compared to fiscal
1995; however, such cost-saving moves will not be sufficient to allow the
Company to timely meet all of its obligations while attempting to grow revenues
to a level necessary to generate cash from operations. Therefore, the Company
is pursuing additional funds through private equity financings or additional
debt financings. Although there can be no assurance 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.
See "Risk Factors -- Need for Additional Capital".
On December 2, 1996, the Company effected a one-for-ten consolidation of
the Company's outstanding Common Stock, par value $0.01 per share. Reference
to shares throughout this Prospectus gives effect to the one-for-ten share
consolidation. In addition, effective on December 2, 1996, the Company changed
its name from 3Net Systems, Inc., to Alternative Technology Resources, Inc.
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RISK FACTORS
The shares of Common Stock offered by this Prospectus are speculative in
nature and involve a high degree of risk. Prospective investors should
carefully consider the following factors, among several others, before
purchasing the shares of Common Stock offered hereby: (i) since its inception,
the Company has suffered substantial losses; (ii) the Company will need
additional capital in the short-term to achieve its business objectives; (iii)
the Company is currently in default under the terms of a $1 million line of
credit; (iv) the Company has been involved in substantial litigation during the
past three years; (v) there exists only a limited operating history with
respect to the Company's contract programming and consulting services on which
to predict the likely future operating results of the Company; (vi) the Company
currently is dependent on a limited number of placement contracts providing for
temporary professional staffing services; and (vii) a single shareholder
beneficially owns approximately 78.50% of the total voting power of the
Company's capital stock. For a fuller discussion of these and other
considerations relevant to an investment in the Common Stock, see "Risk
Factors."
SUMMARY FINANCIAL DATA
The unaudited summary financial data presented below should be read in
conjunction with the more detailed financial statements of the Company and
notes thereto along with the section entitled "Management's Discussion and
Analysis Of Financial Conditions And Results Of Operations."
Three Months Ended Years Ended
SEPTEMBER 30 JUNE 30
1996 1995 1996 1995
STATEMENT OF OPERATIONS DATA:
Revenues $454,663 $369,178 $1,781,226 $2,328,166
Loss from operations (165,401) (602,400) (1,695,096) (7,309,020)
Net loss (207,970) (634,577) (1,847,812) (7,525,367)
Net loss per share{1} ($0.01) $(0.25) $(0.12) $(3.04)
Shares used in per share
calculations{1} 25,218,887 2,686,726 16,124,056 2,519,875
(1) The net loss per share and shares used in the per share calculations have
been adjusted to reflect the Company's one-for-ten consolidation of
Common Stock effective on December 2, 1996.
AT SEPTEMBER 30, 1996
BALANCE SHEET DATA:
Working capital deficit........................................$(3,573,251)
Total assets.......................................................334,968
Long-term debt...........................................................0
Stockholders' deficit....................................... $(3,493,033)
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THE COMPANY
Alternative Technology Resources, Inc. (the "Company"), formerly known as
3Net Systems, Inc., provides contract computer programming and consulting
services to an expanding base and variety of industrial customers. These
services include: (i) providing alternative programming resources to domestic
customers through the recruitment, training, transportation, and contractual
deployment of foreign information technology professionals, drawing prospective
contractors primarily from selected areas within the former Soviet Union; (ii)
software development and implementation services for customers who desire new
applications which are based on personal computer ("PC") network, client-
server, and/or Internet technology platforms; and (iii) software and hardware
support and maintenance services for customers who license and use the
Company's proprietary application system products. These services are provided
by virtue of the Company's depth of knowledge and experience in PC networks,
client-server technologies, object-oriented technologies, Internet
technologies, system integration, laboratory information systems, and
application systems development.
Previously, the Company focused on the design, development, and marketing
of integrated computer application systems, with particular emphasis on the
automation of medical/clinical/insurance laboratories through its LIS products.
These products collect and validate test request and test result data,
interface with and respond to requests for information from laboratory
instruments, organize data, communicate it to various user departments of a
hospital, and provide quality control and assurance functions. During the
second half of fiscal 1996, however, the Company began to redirect its
strategic focus away from product development/sales in order to concentrate its
resources on its contract computer programming and consulting services
businesses.
This change in strategy was effected by the Company as a direct result of
several critical factors. First, the Company had been largely unsuccessful in
selling new customer licenses to its primary products. Second, the markets in
which the Company sold products offered the Company little opportunity for
significant growth in sales and market share. Third, in fiscal 1996, the
Company recognized that contract programming and consulting services offered
the greatest potential for profitability and improved shareholder value. By
focusing its operations on providing contract programming and consulting
services, the Company has begun to generate new revenues and has reduced
expenses, thus reducing its operating losses. Although the Company is still
experiencing a negative cash flow, these actions substantially reduced the
Company's level of cash consumption in fiscal 1996 as compared to fiscal 1995.
The Company has incurred operating losses since inception which have
resulted in an accumulated deficit of $33,207,699 as of June 30, 1996. In
addition, at June 30, 1996, the Company had a working capital deficit of
$3,406,254 and a stockholders' deficit of $3,255,515. At September 30, 1996,
the Company had an accumulated deficit of $33,415,669, a net working capital
deficit of $3,573,251, and a stockholders' deficit of $3,493,033. In fiscal
1993 and fiscal 1994, the Company experienced delays in completion of its
products which resulted in an inability to timely install ordered systems and
an inability to close new orders. In fiscal 1995, the Company succeeded in
receiving acceptance of its products by some of its customers; however, sales
momentum had been lost because of the extended delays. During fiscal 1995, the
Company wrote off software development costs and purchased software costs
because the cost reduction strategies employed by the Company included
reduction of sales and marketing staff and related activities. In fiscal 1996,
the Company wrote off the remaining net book value of purchased software. In
fiscal 1996, the closing of new orders continued to be impacted by this lack of
momentum and by the Company's financial status. In order to reduce its losses,
the Company no longer markets its medical software and related products and has
taken steps to decrease expenses and generate revenues by providing contract
programming and consulting services and by acting as an intermediary in
providing such services.
The Company's current operating growth strategy includes the expansion of
its marketing efforts through strategic alliances and the development of new
customers with the expenditure of a minimum of resources. During fiscal 1996,
the Company reduced its staff by 50% and lowered operating expenses by 64% when
compared to fiscal 1995; however, such cost-saving moves will not be sufficient
to allow the Company to timely meet all of its obligations while attempting to
grow revenues to a level necessary to generate cash from operations.
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
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reduce its level of operations or 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. See "Risk Factors -- Need for Additional Capital."
Alternative Technology Resources, Inc. was incorporated in California in
August 1989 as 3Net Systems, Inc. It effected a reincorporation in Delaware on
April 9, 1992, through a merger with a wholly owned Delaware subsidiary. The
Company's principal executive offices are located at 629 J Street, Sacramento,
California 95814, and its telephone number is (916) 498-3900.
RISK FACTORS
In addition to the other information presented in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby. The shares
of Common Stock offered under this Prospectus are speculative in nature and
involve a high degree of risk. Prospective investors should carefully consider
the following factors, among others, before purchasing the shares of Common
Stock offered hereby.
LACK OF PROFITABILITY AND HISTORY OF SIGNIFICANT LOSSES
The Company has experienced losses since its inception. Net loss for
fiscal 1995 was $7,525,367; net loss for fiscal 1996 was $1,847,8121; and net
loss for the first quarter of fiscal 1997 was $207,970. As a result of the
Company's recurring losses from operations and its working capital deficit, the
report of the independent auditors of the Company for fiscal 1996 and 1995
indicates there is substantial doubt about the Company's ability to continue
as a going concern.
NEED FOR ADDITIONAL CAPITAL
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund research and development, support
operations, obtain capital equipment, and finance inventory and accounts
receivable. The Company expects to continue to be a net user of cash for
operations in the near future. In fiscal 1996 the Company used an average of
approximately $53,000 per month of cash for operating activities, as compared
with an average of approximately $337,000 per month of cash for operating and
investing activities in fiscal 1995. In the first quarter of fiscal 1997 the
Company used an average of approximately $52,000 per month of cash for
operating activities, as compared with an average of approximately $22,000 per
month in the first quarter of fiscal 1996. The Company believes that it will
continue to be a net user of cash for operations during fiscal 1997 as a direct
result of attempting to grow its contract computer programming and consulting
services. During fiscal 1996 and the first 2 quarters of fiscal 1997, the
Company has received short-term financing in the form of notes payable of
approximately $1.2 million from two stockholders, James W. Cameron, Jr.
("Cameron") and Max Negri ("Negri"), to fund its operations. The Company must
obtain additional funds during fiscal 1997 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 1997. In December 1996, Cameron and Negri extended
the maturity date on notes payable totaling approximately $1.2 million from
December 31, 1996, to the earlier of December 31, 1997, or such time as the
Company obtains equity financing. In addition, the Company has a $1,000,000
line of credit with Bank of America, NT&SA (the "Bank") (see "Risk Factors --
Security Interest in the Company's Assets; Default on Revolving Line of
Credit") which matured on January 1, 1997, but was extended by the Bank until
March 1, 1997, providing time for Mr. Cameron to conclude negotiations with the
Bank to become the borrower under the line of credit. Cameron is a guarantor
of this $1,000,000 line of credit and is currently negotiating with the Bank to
assume the debt. When Cameron becomes the named borrower under the line of
credit, the Company will enter into a note payable to Cameron for the
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$1,000,000. Terms of that note are expected to provide for the same monthly
interest payments as with the Bank and have a maturity date of the earlier of
December 31, 1997, or such time as the Company obtains equity financing. See
"Certain Relationships and Related Transactions -- Financing Arrangements."
Management believes that Cameron and Negri will continue to fund operations and
extend the maturity dates of the various notes payable until such time as the
Company can repay the notes. However, there can be no assurance that events
may arise which may affect these stockholders' ability to finance the Company
or that the Company may experience significant and unanticipated cash flow
problems which may cause these two stockholders to reconsider their investment.
Further, if the Company experiences significant cash flow problems, the Company
may be required to reduce the level of its operating activities or be forced
into seeking protection under federal bankruptcy laws.
In addition, the Company is contractually obligated to register 23,778,169
shares of Common Stock held by Selling Stockholders which may have an adverse
effect on the ability of the Company to raise additional financing. The
Company sold the Common Stock to the Selling Stockholders in connection with
raising capital. As an inducement to investors to purchase the Common Stock,
the Company contractually obligated itself to register the shares of Common
Stock held by the Selling Stockholders in this registration statement.
INVOLVEMENT IN SUBSTANTIAL LITIGATION
The Company has been involved in several significant litigation matters in
each of the past three years, and several entities have threatened litigation
against the Company. No assurances can be given that the Company will not be
found liable in one or more of these pending litigation matters, or that
additional legal proceedings will not be initiated against the Company. In
addition, involvement in litigation will require the Company to spend time and
pay expenses to defend itself, which will have an adverse effect on the
Company's financial operations. See "Business" and "Legal Proceedings."
LIMITED OPERATING HISTORY OF CONTRACT PROGRAMMING SERVICE AND INEXPERIENCE
The Company initiated its contract computer programming and consulting
service in May 1995, and the Company made such service the principal focus of
its business operations beginning in August 1996. Therefore, the Company has
only a limited operating history in connection with its contract programming
service upon which prospective investors may predict the Company's likely
future performance. Future operating results will depend upon many factors,
including fluctuations in the economy, the degree and nature of competition,
demand for the Company's services, and the Company's ability to recruit and
place temporary professionals, to expand into new markets, and to maintain
margins in the face of pricing pressures.
In addition, the management of the Company has limited experience in
operating a contract placement and consulting service.
CUSTOMER CONCENTRATION
The Company currently has placement contracts with only three companies
for providing alternative programming resources. For the fiscal year ended
June 30, 1996, these companies accounted for $638,733 (36%) of total revenues,
and for the quarter ended September 30, 1996, they accounted for $312,348 (69%)
of total revenues. No assurance can be given that the Company will be able to
contract with additional companies for the provision of temporary staffing
services, or that the companies with whom the Company already has contracts
will renew their contracts at the end of their terms.
CONCENTRATION OF STOCK OWNERSHIP
Mr. James W. Cameron, Jr. currently owns or controls 20,055,961 shares of
Common Stock and holds approximately 78.50% of the total voting power of the
Company's capital stock. Because of his ownership interest in the Company, Mr.
Cameron will have a substantial influence over the policies of the Company. In
addition, Mr. Cameron has registered 19,363,935 shares of his Common Stock as a
Selling Shareholder and may sell all, some, or none of such shares. Such
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action may adversely affect the market price of the Company's Common Stock.
Mr. Cameron, however, has indicated that he has no present intention to sell
all of his shares of Common Stock. In the event that Mr. Cameron sells all or
a large portion of his shares of Common Stock, this may have a negative effect
on the market price of the Company's Common Stock.
The present directors, executive officers, and stockholders owning more
than 5% of the outstanding Common Stock and their respective affiliates
beneficially own approximately 91.0% of the outstanding Common Stock of the
Company. As a result of their ownership, the directors, executive officers,
and more than 5% stockholders and their respective affiliates collectively have
substantial control of all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholders"
and "Description of Securities."
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
Temporary service providers are in the business of placing their employees
in the work place of other businesses. Representatives of the Company cannot
monitor or control the work environment at distant customer locations on a day-
to-day basis. Therefore, there is a potential risk relating to possible claims
by the Company's contract employees that they have been discriminated against
and/or harassed by the customer's employees, or that the Company's contract
employees have discriminated against or harassed the customer's employees. The
Company has non-discrimination and unlawful harassment policies and guidelines
in place to reduce its exposure to these risks, and Company representatives
regularly communicate with its contract employees and with the customer
supervisor of the employees to evaluate the quality of the work environment.
However, a failure to follow these policies and guidelines may result in
negative publicity and the payment by the Company of monetary damages or fines.
Although as of the date of this filing, the Company has not experienced any
such claims, there can be no assurance that the Company will not experience
such problems in the future.
The Company is also exposed to liability with respect to actions taken by
its employees while on assignment, such as damages caused by employee errors,
misuse of client proprietary information, or theft of client property. To
reduce such exposures, the Company requires all employees to sign an agreement
containing confidentiality and non-disclosure clauses and maintains insurance
policies covering general liability with a $2,000,000 limit and workers'
compensation coverage with a $1,000,000 limit. See "Business -- Insurance."
Due to the nature of the Company's assignments, access to client information
systems and confidential information, and the potential liability with respect
thereto, there can be no assurance that insurance coverage will continue to be
available or that it will be adequate to cover any such liability.
PRODUCT LIABILITY
The Company does not currently have product errors and omissions
insurance. A defect in the design or configuration of the Company's products
or in the failure of a system to perform the use which the Company specifies
for systems currently at customer locations may subject the Company to claims
of liability. Although as of the date of this filing, the Company has not
experienced any such claims, there can be no assurance that claims will not
arise in the future.
RELIANCE ON KEY PERSONNEL; DEPENDENCE ON RELATIONSHIP WITH PRIZE-ITM,
LTD.
The Company is highly dependent on its management and in particular, its
President, George Van Derven. The Company believes that its continued success
will depend upon the efforts and abilities of Mr. Van Derven and his
relationship with PRIZE-ITM, Ltd. ("PRIZE"), a Latvian company which
specializes in information technology recruiting, training, and software
development. Currently, all technology personnel being placed by the Company
have been identified by PRIZE. Although the Company does not have a contract
with PRIZE, the Company pays a monthly fee to PRIZE for its services. The loss
of either Mr. Van Derven or the relationship with PRIZE would have a material
adverse effect on the Company. See "Management" and "Business - Services."[/R]
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INCREASES IN UNEMPLOYMENT TAXES AND WORKERS' COMPENSATION RATES
The Company is required to pay unemployment tax and workers' compensation
benefits for its temporary employees. Unemployment taxes and workers
compensation rates could increase, resulting in increased operating costs for
the Company.
HIGHLY COMPETITIVE MARKET
The temporary services industry is highly competitive with limited
barriers to entry. The Company competes in national, regional, and local
markets with full service agencies and with specialized temporary services
agencies. Several competitors of the Company are substantially larger, have
greater marketing and financial resources than the Company, and expend
considerably larger sums of capital than does the Company. The Company expects
that the level of competition will remain high in the future. See "Business --
Competition."
FLUCTUATIONS IN THE GENERAL ECONOMY AFFECT DEMAND FOR TEMPORARY STAFFING
SERVICES
Demand for temporary staffing services is significantly affected by the
general level of economic activity. When economic activity increases,
temporary employees are often added before full-time employees are hired.
Similarly, as economic activity slows, many companies reduce their usage of
temporary employees before undertaking layoffs of full-time employees.
Further, in an economic downturn, the Company may face pricing pressure from
its customers and increased competition from other staffing companies which
could have a material adverse effect on the Company's business.
STOCK PRICE VOLATILITY
The Company's Common Stock is quoted and traded on the OTC Bulletin Board.
The market price of the Common Stock in the past has fluctuated substantially.
In the future, the market price of the Common Stock could fluctuate
substantially due to a variety of factors, including quarterly operating
results of the Company or other companies in the same or similar industry,
changes in general conditions in the economy, the financial markets, or the
staffing services industry, or other events or developments affecting the
Company or its competitors. These broad market and industry fluctuations may
adversely affect the trading price of the Company's Common Stock, regardless of
the Company's operating performance. Moreover, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors.
DEPENDENCE ON PROGRAMMERS FROM THE FORMER SOVIET UNION
The Company plans to recruit substantially all of its temporary computer
programming professionals from countries within the borders of the former
Soviet Union. Political instability in these regions could affect the
Company's ability to recruit additional professionals or to retain the
professionals already in the United States on work visas.
WORK VISA LAWS AND REGULATIONS
The Company's computer programming professionals are admitted into the
United States on work visas. The laws and regulations relating to work visas
specify a maximum number of professionals that may be admitted into the United
States in any one year. An increase in the number of foreign professionals
seeking admission into the United States on work visas, or changes in the laws
and regulations of the United States relating to work visas, could adversely
affect the Company's ability to recruit and to facilitate the immigration of
additional professionals or to retain the professionals already in the United
States on work visas.
SECURITY INTEREST IN THE COMPANY'S ASSETS; DEFAULT ON REVOLVING LINE OF CREDIT
Bank of America, NT&SA, holds a security interest in substantially all
assets of the Company, including the Company's accounts receivable. In
February 1994, the Company entered into a revolving line of credit with the
10
Bank in the amount of $2,000,000 with a maturity date of August 1, 1994. Since
July 1994, the maturity date of the line of credit has been extended several
times, and in March 1995 the Bank agreed to extend the maturity date of the
line of credit, but reduced the line of credit to $1,000,000. After several
extensions, the maturity date of the line of credit was extended by the Bank
from January 1, 1997, to March 1, 1997, so that Mr. Cameron can conclude
negotiations with the Bank to become the named borrower under the line of
credit. See "Risk Factors -- Need For Additional Capital." The line of credit
is fully utilized at $1,000,000. The Company's obligations under the line of
credit have been guaranteed by James W. Cameron, Jr. (the "Continuing
Guaranty") (see "Certain Relationships and Related Transactions -- Financing
Arrangements"); and the line of credit is secured by substantially all assets
of the Company. Interest under the line of credit is payable monthly at a rate
of 1% in excess of the Bank's Reference Rate. Among other covenants, the line
of credit prohibits the Company from incurring additional debt (other than that
to the Bank) without the Bank's written consent. The Company is in technical
default under the terms of the line of credit because of additional borrowing
from two stockholders, Cameron and Negri (see "Risk Factors -- Need for
Additional Capital"), borrowing of approximately $15,000 to purchase three
automobiles used by the Company's foreign contract employees to travel to
customer work sites in areas where public transportation is inadequate, and
converting approximately $71,000 accrued on the Company's financial statements
for royalty payments due St. Agnes Hospital to a note payable. See "Notes to
Financial Statements -- Note 7. Commitments -- Royalty Commitments." There can
be no assurance that the Bank will conclude negotiations making Cameron the
borrower under the line of credit. In the event negotiations are not
satisfactorily concluded between Cameron and the Bank, the Bank may enforce
its security interest in the Company's assets or seek payment from the
guarantor.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS
The share of Common Stock offered by the Company and Selling Stockholders
have been registered with the Commission. The Company will be required, from
time to time, to file post-effective amendments to its registration statement
in order to maintain a current prospectus covering the issuance of such shares
upon the exercise of the warrants or the offer by the Selling Stockholders.
The Company has undertaken to make such filings and use its best efforts to
cause such post-effective amendments to become effective. If for any reason a
required post-effective amendment is not filed, does not become effective, or
is not maintained, Warrant and option holders will be prevented from receiving
registered shares and the Selling Stockholders may be prevented from offering
their shares.
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and the broker-
dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to
the customer in writing before or with the customer's confirmation. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to
the penny stock rules. Because of the current trading price of the Company's
Common Stock, the Common Stock will be subject to penny stock regulation rules.
11
USE OF PROCEEDS
If the Warrants and Options to purchase shares of Common Stock are
exercised, the Company would receive $11,349,286 before deducting expenses of
approximately $58,861 related to this Offering. As of February 10, 1997, the
average high and low price of a share of Common Stock was $0.50 (giving effect
for the one-for-ten consolidation of shares). Approximately 95% of the total
shares (and 99.9% of the aggregate proceeds) related to outstanding warrants
and options have an exercise price greater than the fair market value of the
Company's Common Stock on the date of this Prospectus, and such warrants and
options are unlikely to be exercised unless the fair market value of the
Company's Common Stock increases above the applicable exercise price.
Therefore, the Company does not expect to receive $11,348,886 of proceeds for
exercise of these warrants and options since they are "out-of-the-money." Any
funds received by the Company will be used to retire outstanding indebtedness
and for working capital.
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders, or the shares to be issued upon the conversion of the
Preferred Stock, Series D.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain future earnings, if any,
for use in the operation and expansion of the business. The Company does not
intend to pay any cash dividends in the foreseeable future.
PLAN OF DISTRIBUTION
The Company intends to offer up to 1,004,463 shares of Common Stock to
holders of outstanding warrants and options, and holders of Preferred Stock,
Series D.
In addition, the Company is registering 928,500 shares of Common Stock
which may be issued by the Company from time to time to satisfy liabilities
accrued in its financial statements which total approximately $700,000. The
price per share and the number of shares the Company actually issues, if any,
will depend upon the Company's ability to negotiate satisfactory settlement
agreements with its creditors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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 inside bid price of its Common
Stock at or above $1.00 per share. The Company's shares have continued to
trade on the OTC 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.
Set forth below are the high ask and low bids for the Common Stock of the
Company for the past two fiscal years and the first quarter of fiscal 1997.
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.
12
PERIOD HIGH LOW
Quarter ending September 30, 1994 $22.50 $10.30
Quarter ending December 31, 1994 $15.60 $ 6.30
Quarter ended March 31, 1995 $15.60 $ 6.30
Quarter ended June 30, 1995 $ 9.10 $ 3.80
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
The Company had approximately 181 Common Stockholders of record and 3
Preferred Stockholders of record as of December 31, 1996. The last reported
sales price for the Company's Common Stock was $0.50 on February 10, 1997.
13
SELECTED FINANCIAL DATA
The selected statement of operations data presented below for the years
ended June 30, 1996 and 1995, are derived from and should be read in
conjunction with the more detailed financial statements of the Company and the
notes thereto, which have been audited by Ernst & Young LLP, independent
auditors, whose report is included elsewhere in this Prospectus, which includes
an explanatory paragraph which indicates there is substantial doubt about the
Company's ability to continue as a going concern due to recurring operating
losses and a working capital deficit. The selected statement of operations
data for the three months ended September 30, 1996 and 1995, and the balance
sheet data as of September 30, 1996, are derived from the unaudited financial
statements of the Company. In the opinion of the Company, such unaudited
financial statements include all necessary adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of results for
such periods. The selected financial data presented below should also be read
along with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which follows this section.
Three Months Ended September 30 Years Ended June 30
1996 1995 1996 1995
STATEMENT OF OPERATIONS DATA:
Contract programming revenue $ 360,929 $ 245,653 $1,280,303 $176,443
Total revenues 454,663 369,178 1,781,226 2,328,166
Cost of Contract programming 344,724 151,962 978,395 119,047
revenue
Total costs and expenses 620,064 971,578 3,476,322 9,637,186
Loss from operations (165,401) (602,400) (1,695,096) (7,309,020)
Other income (expense), net (42,569) (32,177) (152,716) (216,347)
Net loss (207,970) (634,577) (1,847,812) (7,525,367)
Preferred stock dividends (30,625) (30,625) (122,500) (122,500)
Net loss applicable to common (238,595) (665,202) (1,970,312) (7,647,867)
stockholders
Net loss per share{(1)} $(0.01) $(0.25) $(0.12) $(3.04)
Shares used in per share 25,218,887 2,686,726 16,124,056 2,519,875
calculations{(1)}
(1) The net loss per share and shares used in the per share calculations have
been adjusted to reflect the Company's one-for-ten consolidation of
Common Stock effective as of December 2, 1996.
AT SEPTEMBER 30, 1996
BALANCE SHEET DATA:
Working capital deficit $(3,573,251)
Total assets 334,968
Long-term debt 0
Stockholders' deficit $(3,493,033)
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
The following discussion and analysis should be read in connection with
the Company's Financial Statements and the notes thereto and other financial
information included elsewhere in the Prospectus.
OVERVIEW
Alternative Technology Resources, Inc. (formerly known as 3Net Systems,
Inc.) provides contract computer programming and consulting services and acts
as an intermediary in providing such services. During fiscal years 1995 and
1996, the Company developed and implemented a program whereby the Company
recruits qualified personnel primarily from the former Soviet Union, obtains
necessary visas, and places them for assignment in the United States. The
Company has chosen to emphasize this program because of the significant growth
dynamics of the high technology temporary placement industry and to de-
emphasize the laboratory software and service business upon which it was
originally founded in 1989.
The Company was founded in 1989 to focus on the design, development, and
sale of integrated computer network systems primarily for use by hospitals,
commercial and insurance laboratories and physician clinics. The Company
effected a public Common Stock offering in August 1992. Fiscal 1993 and fiscal
1994 operating results were adversely affected by significant delays by the
Company in finishing development and implementation of its LIS systems. The
delays resulted in significant losses and severe liquidity problems. Cost
cutting required by the negative cash flow resulted in additional software
development and implementation delays. As a result, the Company recognized no
material revenue in fiscal 1993 or fiscal 1994 and significant losses in both
of those years. The Company received acceptance of LIS at one customer site in
fiscal 1995; but the Company had lost sales momentum due to the earlier delays
and now no longer devotes any dedicated resources to the marketing or selling
of this product. The Company successfully installed four of its automatic
timekeeping ("TimeNet") systems in fiscal 1995; however, the Company's
continuing lack of financial strength negatively affected the Company's ability
to close new TimeNet business in fiscal 1995 and fiscal 1996. In January 1996,
the Company decided to no longer devote any dedicated resources to the
marketing or selling of TimeNet. The Company has also suspended further
development of the product and is no longer providing service support on
TimeNet systems that have been sold. During fiscal 1996, the Company wrote off
TimeNet purchased software with a net book value of $45,000.
The Company's inability to close new business in fiscal 1995 and fiscal
1996 and the resulting lack of revenues caused the Company to recognize
significant losses in fiscal 1995 and fiscal 1996. In order to reduce its
losses, the Company has taken steps to reduce expenses and generate revenues by
focusing its operations on providing contract programming and consulting
services, and acting as an intermediary in providing such services. These
actions have substantially reduced the Company's level of cash consumption in
fiscal 1996 as compared to fiscal 1995. However, the Company did not generate
sufficient cash flow in fiscal 1996 to support its operations.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
REVENUES
Revenues increased $85,485 or 23.2% in the quarter ended September 30,
1996, as compared to the quarter ended September 30, 1995. The higher level of
revenue in the first quarter of fiscal 1997 compared to fiscal 1996 was due to
management's decision that the Company's long-term prospects were best served
by concentrating existing resources on providing contract computer
programming and consulting services in the high technology temporary
placement industry. The following is an analysis of the Company's revenues
by category:
CONTRACT PROGRAMMING REVENUE. Contract programming revenue (sales of
custom programming and software development services, and acting as an
intermediary in providing such services) for the quarter ended September 30,
15
1996, increased $115,276 or 46.9% over the same period of the previous year. A
$176,100 increase resulted from agreements to provide additional contract
programming personnel to two customers. This increase was primarily offset by
a decrease in providing contract system enhancements programming for an
existing LIS customer.
SERVICE REVENUE. Service revenue (sales of annually renewable maintenance
contracts for software support and hardware services) decreased $15,700 or
14.3% in the quarter ended September 30, 1996, compared to the comparable
quarter in fiscal 1996. This decrease resulted primarily from several service
customers replacing their Cortex LIS systems with systems of competitors during
fiscal 1996 causing a general decline in service revenues. The Company expects
service revenue to decrease over time as more Cortex LIS customers choose to
move to systems of competitors since the company is not enhancing this system.
Also, the Company is no longer providing service to TimeNet customers.
SYSTEM SALES. No product sales were recorded in the first quarter of
fiscal 1997 and none are expected to be recorded during fiscal 1997 since the
Company no longer devotes any dedicated resources to marketing or selling its
LIS or TimeNet products. System sales revenues recorded in the first quarter
of fiscal 1996 were primarily enhancements to existing systems at customer
sites.
COST OF REVENUES
CONTRACT PROGRAMMING REVENUE. The gross margin on contract programming
revenue was 4.5% for the quarter ended September 30, 1996, compared to 38.1% in
the same quarter of fiscal 1996. This decrease is due to generating lower
revenues providing contract system enhancements for an existing LIS customer
and due to start-up costs related to recruitment and placement of 9 programmers
from the former Soviet Union at two U.S. sites. In addition, in fiscal 1997,
technical staff whose costs were assigned to research & development in fiscal
1996 are now assigned to contract programming revenue and customer service
revenue.
SERVICE REVENUE. The gross margin on service revenue was 32.7% for the
three months ended September 30, 1996, compared to 56.7% for the same period in
fiscal 1996. The lower margin in fiscal 1997 resulted primarily from an
increase in the number of employees assigned to customer services. In fiscal
1997, technical staff whose costs were assigned to research & development in
fiscal 1996 are now assigned to contract programming revenue and customer
service revenue.
SYSTEM SALES. There were no system sales costs in the first quarter of
fiscal 1997 and none are expected during the fiscal year 1997. System sales
gross margin was negative during fiscal 1996 primarily due to the write down of
the remaining net book value of purchased TimeNet system software.
EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. There were no research and development
("R&D") expenses during the quarter ended September 30, 1996, and none are
expected during the fiscal year 1997. In fiscal 1997, technical staff whose
costs were assigned to R & D in fiscal 1996 are now assigned to contract
programming revenue and customer service.
MARKETING AND SELLING EXPENSES. There were no marketing and selling
expenditures during the quarter ended September 30, 1996, and none are expected
during the fiscal year 1997. The fiscal 1996 expenses are related to five
sales/marketing employees who were terminated during the second quarter of
fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A expenses decreased
$93,745 or 30.6% for the quarter ended September 30, 1996, compared to the same
quarter of fiscal 1996. This decrease is due primarily to a reduction of
approximately $52,000 in legal costs and $35,000 in personnel costs.
SETTLEMENT EXPENSE. There were no settlement expenses in the first
quarter of fiscal 1997. Expenses in fiscal 1996 were primarily settlement of a
suit by a former employee.
16
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 1996, the Company had a net
operating loss carryforward for federal and state income tax purposes of
approximately $23 million and $11 million, respectively. The federal net
operating loss carryforward expires in the years 2005 through 2011 and the
state net operating loss carryforward expires in 1997 through 2001. 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
approximately $300,000.
In August and September 1993, a controlling interest of the Company's
stock was purchased, resulting in a second annual limitation of approximately
$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 approximately $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 $426,607 or 67.2% for the quarter ended September 30,
1996, compared to the same quarter in fiscal 1996. Although the Company
expects losses to continue, the Company expects these losses could be
significantly below prior year levels due to cost and expense reductions and
potential contract programming revenue increases.
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 first
quarters of fiscal 1997 and 1996) by the weighted average number of shares of
Common Stock outstanding during the quarters presented, including Common Stock
to be issued.
YEAR ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995
REVENUES
Revenues decreased $546,940 or 23.5% in fiscal 1996 as compared to fiscal
1995. The lower level of revenue in fiscal 1996 was due in part to
management's decision that the Company's long-term prospects were best served
by concentrating existing resources on providing contract computer programming
and consulting services in the high technology temporary placement industry.
The following is an analysis of the Company's revenues by category:
CONTRACT PROGRAMMING REVENUE. Contract programming revenue increased
$1,103,860 or 625.62% in fiscal 1996 from fiscal 1995. This increase is due in
part to the growth in the number of contract programmers placed at customer
sites in fiscal 1996 compared to fiscal 1995 and to the length of time contract
programmers were at customer sites during each of the fiscal years. At June
30, 1996, there were 25 programmers at 6 sites compared to 3 programmers who
were at 3 sites for slightly over 1 month during fiscal 1995. The remaining
increase is due to quadrupling the amount of custom programming and development
services performed for an existing LIS customer in fiscal 1996 compared to
fiscal 1995. The Company is focusing its efforts on expanding contract
programming revenues in fiscal 1997.
SERVICE REVENUE. Service revenue (sales of annually renewable maintenance
contracts for software support and hardware services and the sale of non-
contract programming and software development services) decreased $685,949 or
59.9% in fiscal 1996 from fiscal 1995. This decrease was primarily the result
of non-recurring revenue related to the fiscal 1995 interim working agreement
with Cameron & Associates, Inc. for system integration and detailed design
activities in connection with the development of health care information
systems in Russia. Under this agreement, the Company recognized approximately
$380,000 in fiscal 1995. Additionally, the Company recognized approximately
17
$226,000 of revenue in fiscal 1995 for system enhancements for a current LIS
customer. Such revenues were not received in fiscal 1996 because of the
discontinuation of the Russian project and because additional system
enhancement work for the LIS customer was not performed in fiscal 1996, but
contract programming was performed for this customer in fiscal 1996. The
Company believes that service revenues will decline further in fiscal 1997.
SYSTEM SALES. System sales (sales of information systems including
hardware, software, installation and training) accounted for 2.4% of total
revenue for fiscal 1996 as compared with 43.3% for the previous fiscal year.
System sales in fiscal 1996 decreased $964,851, or 95.8%, from system sales in
fiscal 1995 due to recognition of the sale of four TimeNet systems and the sale
of an additional LIS license to an existing customer in fiscal 1995. No such
sales were made in fiscal 1996. The Company has discontinued marketing its
TimeNet and RUMS products and its LIS systems and does not expect to derive
revenues from these products in fiscal 1997.
COST OF REVENUES
CONTRACT PROGRAMMING REVENUE. Gross margins on contract programming
revenues were $301,908 or 23.6% in fiscal 1996 compared to $57,396 or 32.5% in
fiscal 1995. This increase in total margin dollars is due to the significant
increase in custom programming and development services performed for an
existing LIS customer in fiscal 1996 compared to fiscal 1995. The decrease in
margin percentage in fiscal 1996 is due to a greater use in fiscal 1996 of
higher paid, more technical employees compared to the employees performing the
work in fiscal 1995.
SERVICE REVENUE. Gross margins on service revenue were 27.1% for fiscal
1996 versus 31.8% for fiscal 1995. The decreased margin on service revenue in
fiscal 1996 is due primarily to incurring fixed salary costs during a period
of lower revenues.
SYSTEM SALES. Gross margins on system sales were negative ($72,447) for
fiscal 1996 and ($2,103,657) for fiscal 1995. System sales gross margins were
negative for fiscal year 1996 due to the write down of the remaining net book
value of purchased system software and the write down of hardware inventory,
while system sales were insignificant. In fiscal 1995, the Company wrote off
software development costs and purchased software costs totaling approximately
$2,070,000 because the cost reduction strategies employed by the Company
included reduction of sales and marketing staff and related activities.
EXPENSES
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
decreased $1,360,439 or 67.4% in fiscal 1996 as compared to fiscal 1995. As a
percentage of revenue, R&D expenses were 36.9% in fiscal 1996 as compared with
86.7% in fiscal 1995. These decreases are primarily due to reductions in the
Company's system development staff related to LIS systems and due to using a
larger percentage of the remaining technical staff to generate contract and
service revenues.
MARKETING. Marketing expenses decreased $660,066 or 77.3% compared to
fiscal 1995. This decrease resulted primarily from reductions in the Company's
sales and marketing staff and related marketing activities.
GENERAL AND ADMINISTRATIVE ("G&A"). G&A expenses were $1,119,787 for
fiscal 1996 as compared with $2,622,455 for fiscal 1995, a decrease of
$1,502,668, or 57.3%. G&A expenses in fiscal 1995 included a charge of
$345,000 related to the valuation of warrants to purchase common stock to be
issued in connection with the strategic alliance entered into with EDS. Due to
a reduction of personnel and moving to a less expensive facility, the Company
reduced G&A personnel and facility costs by approximately $312,000 in fiscal
1996. The Company also incurred approximately $552,000 less in legal,
accounting and filing fees in fiscal 1996 compared to fiscal 1995.
SETTLEMENT EXPENSES. Expenses incurred to settle various claims and
disputes amounted to $78,125 for fiscal 1996 versus $133,287 for fiscal 1995.
During fiscal 1996, the Company recorded $78,125 of expense for settlement of a
lawsuit by a former employee which alleged sexual harassment and wrongful
termination. During fiscal 1995, the Company recorded approximately $96,000 of
expense for settlement of a customer dispute and approximately $200,000 of
18
expense for settlement of a dispute with a distributor offset by the reversal
of a reserve in the amount of approximately $170,000 covering these disputes.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 1996, the Company had a net
operating loss carryforward for federal and state income tax purposes of
approximately $23 million and $11 million, respectively. The federal net
operating loss carryforward expires in the years 2005 through 2011 and the
state net operating loss carryforward expires in 1997 through 2001. 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
approximately $300,000.
In August and September 1993, a controlling interest of the Company's
stock was purchased, resulting in a second annual limitation of approximately
$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 approximately $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 $1,847,812 for fiscal 1996 from $7,525,367 for
fiscal 1995.
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
1996 and 1995) 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.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund research and development, support
operations, obtain capital equipment, and finance inventory and accounts
receivable. The Company expects to continue to be a net user of cash for
operations in the near future. In fiscal 1996 the Company used an average of
approximately $53,000 per month of cash for operating activities, as compared
with an average of approximately $337,000 per month of cash for operating and
investing activities in fiscal 1995. In the first quarter of fiscal 1997 the
Company used an average of approximately $52,000 per month of cash for
operating activities, as compared with an average of approximately $22,000 per
month in the first quarter of fiscal 1996. The Company expects that the
average rate at which cash is used during fiscal 1997 will decrease as a direct
result of the change in its emphasis to providing contract computer programming
and consulting services.
The Company encountered serious financial difficulties in fiscal 1993 and
incurred significant losses in fiscal years 1993 through 1996. As a result,
beginning in July 1993 and extending through February 1995, the Company entered
into a series of agreements with one or more groups of investors including
James W. Cameron, Jr. During that period, Mr. Cameron and those investors
invested a total of approximately $9,640,000 in the Company's Common Stock,
Preferred Stock and Warrants, and Mr. Cameron has guaranteed bank loans
totaling $1,000,000 as of the date of this Prospectus. Mr. Cameron currently
owns or controls 20,055,961 shares of Common Stock and holds approximately
78.50% of the total voting power of the Company's capital stock.
In February 1994, the Company entered into a revolving line of credit with
the Bank in the amount of $2,000,000 with a maturity date of August 1, 1994.
Since July 1994, the maturity date of the line of credit has been extended
several times, and in March 1995 the Bank agreed to extend the maturity date of
19
the line of credit but reduced the line of credit to $1,000,000. After several
extensions, the maturity date of the line of credit was extended by the Bank
from January 1, 1997, until March 1, 1997, providing Mr. Cameron with
additional time so that he can conclude negotiations with the Bank to become
the borrower under the line of credit. See "Risk Factors -- Need For
Additional Capital." The line of credit is fully utilized at $1,000,000. The
Company's obligations under the line of credit have been guaranteed by James W.
Cameron, Jr. (the "Continuing Guaranty") (see Certain Relationships and Related
Transactions -- Financing Arrangements"); and the line of credit is secured by
substantially all assets of the Company. Interest under the line of credit is
payable monthly at a rate of 1% in excess of the Bank's Reference Rate. Among
other covenants, the line of credit prohibits the Company from incurring
additional debt (other than that to the Bank) without the Bank's written
consent. However, the Company is in technical default under the terms of the
line of credit because of additional borrowing from two stockholders, Cameron
and Negri (see "Risk Factors -- Need for Additional Capital"), borrowings of
approximately $15,000 to purchase three automobiles used by the Company's
foreign contract employees to travel to customer work sites in areas where
public transportation is inadequate, and converting approximately $71,000
accrued on the Company's financial statements for royalty payments due St.
Agnes Hospital to a note payable. See "Notes to Financial Statements -- Note
7. Commitments -- Royalty Commitments." There can be no assurance that the
Bank will conclude negotiations making Cameron the borrower under the line of
credit. In the event negotiations are not satisfactorily concluded between
Cameron and the Bank, the Bank may enforce its security interest in the
Company's assets or seek payment from the guarantor. See "Risk Factors --
Security Interest in the Company's Assets; Default on Revolving Line of
Credit."
As consideration for the execution of the Continuing Guaranty, the Company
entered into a Reimbursement Agreement with Mr. Cameron pursuant to which 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. Additionally,
pursuant to the Reimbursement Agreement, in the event that Mr. Cameron is
required to repay the Bank any moneys under the Continuing Guaranty, the
Company is required to repay Mr. Cameron the amount of each payment by either
i) paying an equal cash amount or ii) issuing to Mr. Cameron a non-convertible
note (the "Straight Note") in the principal amount of such payment by Mr.
Cameron, bearing interest at an interest rate equal to the interest rate of the
line of credit on the date of such payment and subject to adjustment when and
to the extent that the interest rate prevailing under the line of credit may
change. Furthermore, under the terms of the Reimbursement Agreement, upon
written demand by Mr. 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. As a
result of the maturity date of the line of credit being extended by the Bank
each six months since signing of the Reimbursement Agreement, the Applicable
Percentage is 20% and cannot be reduced below this percentage by terms of the
agreement.
In January and February 1994, the Company received $720,000 from
Mr. Cameron and signed a note payable to him. The note payable, including
unpaid interest, was converted into Series E Preferred Stock in connection with
the Series E equity financing in November 1994, described below. In June 1994,
the Company sold 204,167 shares of Series D Preferred Stock for approximately
$1,225,000 to certain investors, including James W. Cameron, Jr.
From September through November 1994, and prior to the consummation of the
Series E equity financing, the Company received $1,450,000 in advances from Mr.
Cameron which were subsequently converted into Series E Preferred Stock in
November 1994, described below.
In November 1994, the Company received $301,250 in a private sale of a
combination of Common Stock and warrants to purchase Common Stock. This
transaction consisted of the purchase of 33,500 shares of the Company's Common
Stock at $7.50 per share and the purchase of 5,000 units at $10.00 per unit,
each unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $15.00 per share.
Also in 1994, the Company entered into a series of agreements for the
purchase of Series E Convertible Preferred Stock with two existing
stockholders. The transaction included a debt to equity conversion of
20
$2,232,856 and an additional aggregate cash investment of $1,215,004 in
exchange for the issuance of 287,322 shares of Series E Preferred Stock.
In February 1995, the Company received commitments from several investors,
including a foundation controlled by James W. Cameron, Jr., to invest
$1,475,000 in a private sale of 147,500 units at $10.00 per unit, each unit
consisting of one share of Common Stock and a warrant to purchase one share of
Common Stock at an exercise price of $15.00 per share or $7.50 per share below
the last trading price on the date of the notice of exercise, whichever is
lower. The Company received $1,475,000 prior to June 30, 1995, and issued
147,500 shares pursuant to these agreements
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
22,335,933 shares of the Company's Common Stock pursuant to the terms of the
Series E Preferred Stock Purchase Agreement.
In fiscal 1996, the Company again suffered significant losses from
operations. As of June 30, 1996, the Company had a net working capital deficit
of $3,406,254 and an accumulated deficit of $33,207,699. The Company was
unable to generate adequate cash flow from operations to meet its cash flow
requirements and, as a result, the Company met its cash flow requirements
primarily through short term financing from two stockholders. During fiscal
1995, the Company met its cash flow requirements primarily through the sale of
equity securities and debt financing. During fiscal 1996, the Company
generated approximately $646,000 from financing activities, generated
approximately $5,000 on investing activities and consumed approximately
$638,000 on operating activities. During fiscal 1995, the Company generated
approximately $3.7 million from financing activities, consumed approximately
$15,000 on investing activities and consumed approximately $4.0 million on
operating activities.
The report of the independent auditors on the Company's June 30, 1996,
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 1997.
However, considering, among other things, the Company's historical operating
losses, its lack of experience in the contract computer programming industry,
and anticipated negative cash flow from operations, there can be no assurance
that this plan will be successfully implemented. The Company does not expect
to generate sufficient cash flow from operations to sustain its operations
during fiscal 1997; therefore, the Company contemplates needing to raise
additional financing during fiscal 1997.
Historically, the Company has relied upon cash infusions from two if its
major stockholders, Cameron and Negri, to fund its operations. Although the
Company has not entered into any written agreement with Cameron or Negri,
management believes, based on discussions with these individuals, that these
two stockholders will continue to finance the Company's operations during
fiscal 1997. In December 1996, Cameron and Negri extended the maturity date on
notes payable totaling approximately $1.2 million from December 31, 1996, to
the earlier of December 31, 1997, or such time as the Company obtains equity
financing. In addition, the maturity date of the $1,000,000 line of credit
with Bank of America (see "Risk Factors -- Security Interest in the Company's
Assets; Default on Revolving Line of Credit") was extended by the bank until
March 1, 1997, providing Mr. Cameron with additional time so that he can
conclude negotiations with the Bank to become the borrower under the line of
credit. When Cameron becomes the borrower under the line of credit, the
Company will enter into a note payable to Cameron for the $1,000,000. Terms of
that note are expected to provide for the same monthly interest payments as
with the Bank and have a maturity date of the earlier of December 31, 1997, or
such time as the Company obtains equity financing. See "Certain Relationships
and Related Transactions -- Financing Arrangements." In addition, based on
discussions with Cameron and Negri, management believes that these two
stockholders will continue to fund operations and extend the maturity dates of
the various notes payable until such time as the Company can repay the notes.
However, there can be no assurance that events may arise which may affect these
stockholders' ability to finance the Company or that the Company may experience
21
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 the first quarter of fiscal 1997, Cameron and Negri advanced $173,000
to the Company to fund its operations. In the second quarter of fiscal 1997,
these two stockholders advanced another $293,900 to the Company to fund its
operations. The Company executed unsecured notes payables for these amounts
that include, among other requirements, an interest rate of 10.25% per annum
and a maturity date extended to December 31, 1997.
The Company is registering 928,500 shares of Common Stock which may be
issued by the Company from time to time to satisfy liabilities accrued in its
financial statements which total approximately $700,000. The price per share
and the number of shares the Company actually issues, if any, will depend upon
the Company's ability to negotiate satisfactory settlement agreements with its
creditors. See "Plan of Distribution." No assurance can be given that any
creditor will accept shares of Common Stock in exchange for the settlement of
liabilities.
COMMITMENTS
In December 1996, the Company had $1,205,652 in notes payable to
stockholders outstanding with a maturity date of December 31, 1996. See "Risk
Factors -- Need for Additional Capital." In addition, the $1,000,000 line of
credit with Bank of America was to mature on January 1, 1997. See "Risk
Factors -- Security Interest in the Company's Assets; Default on Revolving Line
of Credit." In December 1996, Cameron and Negri extended the maturity date on
notes payable totaling approximately $1.2 million from December 31, 1996, to
the earlier of December 31, 1997, or such time as the Company obtains equity
financing. In addition, the maturity date of the $1,000,000 line of credit
with Bank of America was extended by the Bank until March 1, 1997, providing
Mr. Cameron with additional time so that he can conclude negotiations with the
Bank to become the borrower under the line of credit. When Cameron becomes the
borrower under the line of credit, the Company will enter into a note payable
to Cameron for the $1,000,000. Terms of that note are expected to provide for
the same monthly interest payments as with the Bank and have a maturity date of
the earlier of December 31, 1997, or such time as the Company obtains equity
financing. See "Certain Relationships and Related Transactions -- Financing
Arrangements."
EQUITY FOR DEBT AGREEMENTS
In June 1995, the Company negotiated an equity for debt swap agreement
with Pillsbury Madison & Sutro whereby they agreed to accept a warrant to
purchase, at $1.00 per share, the number of shares of the Company's Common
Stock equal to 1.85% of the number of issued and outstanding shares of Common
Stock, plus the number of shares of Common Stock issuable pursuant to
outstanding options, warrants, conversion provisions and other rights to
purchase Common Stock, at the time of exercise, as full payment of
approximately $522,000 in outstanding legal fees for services provided to the
Company.
EFFECTS OF INFLATION
Management does not expect inflation to have a material effect on the
Company's operating expenses.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The requirements of the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of,"
issued in March 1995 ("FAS 121") and the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," issued in October
1995 ("FAS 123"), are effective for financial statements for years that begin
after December 15, 1995. Although the Company has not performed a detailed
analysis of the impact of FAS 121 on the Company's financial statements, the
Company does not believe that the adoption of FAS 121 will have a material
effect on the Company's financial statements.
22
FAS 123 encourages, but does not require, companies to recognize
compensation expense based on fair value for grants of stock, stock options,
and other equity instruments granted to employees. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. The Company currently does
not intend to adopt the fair value accounting prescribed by FAS 123 and will be
subject only to the disclosure requirements prescribed by FAS 123.
BUSINESS
OVERVIEW
Alternative Technology Resources, Inc. (the "Company"), formerly known as
3Net Systems, Inc., provides contract computer programming and consulting
services to an expanding base and variety of industrial customers. These
services include: (i) providing alternative programming resources to domestic
customers through the recruitment, training, transportation, and contractual
deployment of foreign information technology professionals, drawing prospective
contractors primarily from selected areas within the former Soviet Union; (ii)
software development and implementation services for customers who desire new
applications which are based on personal computer ("PC") network, client-
server, and/or Internet technology platforms; and (iii) software and hardware
support and maintenance services for customers who license and use the
Company's proprietary application system products. These services are provided
by virtue of the Company's network of international business contacts and its
depth of knowledge and experience in PC networks, client-server technologies,
object-oriented technologies, Internet technologies, system integration,
laboratory information systems, application systems development, and business
development.
Previously, the Company had focused on the design, development, and
marketing of integrated computer application systems, with particular emphasis
on the automation of medical/clinical/insurance laboratories through its
laboratory information system products ("Cortex LIS" and "PrismCare LIS", or
"FAILSAFE LIS"). These products collect and validate test request and test
result data, interface with and respond to requests for information from
laboratory instruments, organize data and communicate it to various user
departments of a hospital, and provide quality control and assurance functions.
The Cortex LIS includes clinical, microbiology, and laboratory communications
applications designed for small/medium-sized customer installations, and is
licensed by a substantial majority of the Company's current laboratory
information system customers. By comparison, the PrismCare LIS includes
clinical, microbiology, and laboratory communications applications designed for
medium/large-sized customer installations. As discussed below, due to the
continuing losses attributed to the development and sale of medical software,
the Company has decided that it will no longer devote any dedicated resources
to the marketing or selling of these products.
In fiscal 1995 and early fiscal 1996, a significant portion of the
Company's resources were also devoted to its automated timekeeping ("TimeNet")
and universal resource scheduler ("RUMS") products. TimeNet automates the time
and attendance record-keeping functions typically maintained either manually or
by a card-punch clock system. The Company sold and installed four TimeNet
Systems to hospitals during 1994-96; additionally, two systems had already been
installed in hospitals when the marketing rights to TimeNet were acquired by
the Company. RUMS is an objected-oriented system that simulates highly
complex, real-time resource scheduling circumstances, such as scheduling all
facets of patient care at a hospital. In December 1993, the Company purchased
an exclusive license to the proprietary software development methodology and
for the use and resale, into the health care market, of RUMS, from
TransMillenial Resources Corporation in exchange for 100,000 shares of Common
Stock. Further, in February 1995, the Company entered into an agreement to
purchase rights to use and resell, into any market, the proprietary software
acquired in fiscal 1994 for the health care market. Since its acquisition of
said rights to RUMS, the Company has marketed RUMS through its strategic
alliances and business partnerships. However, the Company has sold no customer
licenses to RUMS to date.
During the second half of fiscal 1996, the Company began to redirect its
strategic focus away from product development/sales in order to concentrate its
resources on its contract services businesses. This change in strategy was
effected by the Company as a direct result of several critical factors.
23
First, the Company had been largely unsuccessful in selling new customer
licenses to its primary products, PrismCare LIS and TimeNet. Concerning
PrismCare LIS, this lack of new sales resulted from the significant delay
experienced by the Company in completing the development and implementation of
the system at the initial customer site. This delay resulted in significant
losses and severe liquidity problems. Cost cutting required by negative cash
flows resulted in further delays in software development and implementation.
When PrismCare LIS was finally implemented at its first customer site in fiscal
1995, its overall marketability was limited by its commercial insurance
laboratory design. Therefore, significant additional time and investment would
be required to bring the product up to competitive clinical laboratory market
standards. Concerning TimeNet, the lack of new sales was related to a dramatic
increase in the number of competitive offerings in the time and attendance
system market, TimeNet's lack of a graphical user interface, and customer
reluctance to contract with the Company based upon its financial condition.
Second, the markets in which the Company sold products offered the Company
little opportunity for significant growth in sales and market share. The
domestic laboratory information system market had become highly saturated so
that the majority of system sales opportunities were to replace customers' old
existing systems. This proved to be difficult considering the long-standing
loyalty and investments of these customers with their existing laboratory
system vendors. The negative cash flow associated with the lack of new sales
and the significant remaining investment required to bring PrismCare LIS and
TimeNet up to competitive market standards combined to bring about the
suspension of all existing product sales efforts in the Company by the end of
fiscal 1996.
Third, in fiscal 1996, the Company recognized that contract programming
and consulting services offered the greatest potential for profitability and
improved shareholder value. Although the Company had earlier ceased its
product development efforts in Cortex LIS and PrismCare LIS, twelve customers
continued to renew their system license and/or hardware/software maintenance
support agreements each year. The total number of such customer
license/maintenance contracts has slowly decreased during the past two years.
More importantly for the future, however, the Company has begun to
determine the market potential for its alternative programming resources
business since its inception in fiscal 1995. Based upon its experience in the
market and critical industry forecasts, the Company believes that this line of
business is the best vehicle for financial recovery and the development of a
viable ongoing enterprise for the future. By focusing its operations on
providing contract programming and consulting services, the Company has begun
to generate new revenues and has reduced expenses, thus reducing its operating
losses. These actions substantially reduced the Company's level of cash
consumption in fiscal 1996 as compared to fiscal 1995. However, the Company
did not generate sufficient cash flow in fiscal 1996 to support its operations.
The Company has incurred operating losses since inception which have
resulted in an accumulated deficit of $33,207,699 at June 30, 1996. In
addition, at June 30, 1996 the Company had a working capital deficit of
$3,406,254 and a stockholders' deficit of $3,255,515. In fiscal 1993 and
fiscal 1994, the Company experienced delays in completion of its products which
resulted in an inability to timely install ordered systems and an inability to
close new orders. In fiscal 1995, the Company succeeded in receiving
acceptance of its products by some of its customers; however, sales momentum
had been lost because of the extended delays. During fiscal 1995, the Company
wrote off software development costs and purchased software costs because the
cost reduction strategies employed by the Company included reduction of sales
and marketing staff and related activities. In fiscal 1996, the closing of new
orders continued to be impacted by this lack of momentum and by the Company's
financial status. In order to reduce its losses, the Company no longer
marketed its medical software and related products, but has taken steps to
decrease expenses and generate revenues by providing contract programming and
consulting services and by acting as an intermediary in providing such
services.
The Company's operating growth strategy includes the expansion of its
marketing efforts through strategic alliances and the development of new
customers with the expenditure of a minimum of resources. During fiscal 1996,
the Company reduced its staff by 50 percent and lowered operating expenses by
64%; however, such cost-saving moves will not be sufficient to allow the
Company to timely meet all of its obligations while attempting to grow revenues
to a level necessary to generate cash from operations; therefore, the Company
is pursuing additional funds through private equity financings or additional
debt financings. Although there can be no assurances that additional financing
24
can be obtained or that if obtained, such financing will be sufficient to
prevent the Company from having further to reduce materially 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.
See "Risk Factors -- Need for Additional Capital."
SERVICES
ALTERNATIVE PROGRAMMING RESOURCE SERVICES
According to STAFFING INDUSTRY REPORT, a staffing services industry
publication, the information technology temporary staffing sector of the
industry is one of the fastest growing sectors of the temporary staffing
industry and was estimated to have 1995 revenues of approximately $9 billion,
which represents a 25% increase per year for the past two years.
The prodigious growth rate of the information technology staffing services
sector is being driven by several important corporate strategic trends.
Corporate restructuring, downsizing, government regulations, rapid advances in
technology, and the desire by many companies to shift employee costs from a
fixed to a variable expense basis, have resulted in the use of a wide range of
staffing alternatives by businesses. Over the last decade, the increased use
of technology has led to a dramatic rise in demand for technical project
support, software development, and other computer-related services.
Corporations have outsourced many of these departments and/or have utilized the
employees of staffing firms in an attempt to meet the increased demand for
computer-skilled personnel.
Since fiscal 1995, the Company has developed a growing niche business
within the information technology sector by providing alternative programming
resources (APR) to domestic customers. The Company achieves this 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 cooperative business relationship
with a technology firm based in the FSU. The Company has a working
relationship with PRIZE-ITM, LTD. ("PRIZE"), a Latvian company which
specializes in information technology recruiting, training and software
development. The principals of PRIZE are generally 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. Although the Company has no contract
with PRIZE, 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
which describes the specific applications software, computer hardware,
operating systems and years experience required to qualify for the
specific U.S. customer-identified position. PRIZE has developed three
methods for identification and selection of appropriate candidates.
First, 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 interrogated 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. The second method is to advertise in local newspapers
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. Third, 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 or technical
companies in their local area.
25
<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 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 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 who have
specific technical needs which are not being filled with domestic workers.
Usually these jobs are in technical areas of legacy system maintenance
where older technologies are still being used, and where there is a
defined 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 which they cannot fill from the available U.S. personnel
resource pool.
<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's first target of opportunity for the contractual placement of
these FSU computer specialists in U.S.-based computing assignments is in the
legacy system support and maintenance. A "legacy system" is defined as 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 will
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 cost to the U.S.
federal government alone is estimated to be over $30 billion.
With the further expansion of its APR business and associated contacts
throughout the FSU, the Company believes it can offer American businesses a
viable legacy system maintenance staffing alternative. Contractual engagements
are arranged either directly by the Company with individual customers or
through the sales and marketing efforts of third-party business partners. When
the Company receives orders for such foreign contractors from the customer, it
26
arranges for their work visas, their transportation to the U.S., and their
housing and local transportation needs in the customer's city/state of
business. While working under customer contracts, the foreign contractors
generate revenues at market rates for their time, from which the Company pays
them a basic salary that includes cash and payments-in-kind for basic
necessities (i.e., housing, utilities, transportation, etc.) according to the
prevailing wage determined by the local state government.
The Company currently has 30 foreign contractors actively employed in
U.S.-based contracts at six different customer business locations in
California, Minnesota, Georgia, and New Hampshire.
The Company has recently entered into a joint marketing agreement with
Technical Directions, Inc. ("TDI"). TDI is a professional contract services
company, and under the five year joint marketing agreement, TDI will market the
Company's personnel resources. The Company will be the preferred provider of
foreign workers to TDI. The joint marketing agreement is in its initial stages
and no assurances can be given that TDI will be successful in placing the
Company's personnel resources or that the Company will find qualified technical
personnel to fulfill the needs of TDI's clients.
SOFTWARE/HARDWARE MAINTENANCE SUPPORT SERVICES
The Company provides software and hardware maintenance support services to
customers who have licensed one or more of its proprietary system products on
the basis of annually renewable contracts. Products for which maintenance
support service contracts are available include PrismCare LIS. Maintenance
support services are no longer provided by the Company to TimeNet customers.
These maintenance support services are available to such customers 24 hours per
day seven days per week. In addition, overnight delivery of hardware is
available when needed.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
The Company provides software development and implementation services for
customers who desire new customized applications which are based on PC network,
client-server, and/or Internet technology platforms. These engagements are
contracted on an individual customer basis and generate revenues at market
rates for required time and materials.
PRODUCTS
TIMENET TIMEKEEPING SYSTEM
In fiscal 1993, the Company acquired all of the marketing rights to an
automated timekeeping system known as "TimeNet", formerly "IntelliTime". This
system automates the time and attendance record-keeping functions maintained
either manually or by card-punch clock system. Time and attendance information
(as well as information regarding the worker's location in the hospital,
office, or plant) is taken directly from a magnetically encoded or bar-coded
badge. As consideration for the marketing rights to the system, the Company
agreed to pay $40,000 and a royalty of 10% of gross software and hardware sales
through February 12, 1995 up to a cumulative total of $100,000, with respect to
TimeNet. The Company has an additional commitment to pay royalties to St.
Agnes Hospital on software sales related to the TimeNet product at 15% of
related sales, but in any event not less than $75,000 for a three-year period
ending December 22, 1995. The Company has sold and installed four TimeNet
systems in hospitals to date; additionally, two systems had already been
installed in hospitals when the marketing rights were acquired. However,
TimeNet development, sales, and marketing efforts were suspending indefinitely
in April 1996, and all existing TimeNet customer maintenance support service
contracts terminated.
RESOURCE UTILIZATION MANAGEMENT SYSTEM (RUMS)
In December 1993, the Company purchased an exclusive license to a
proprietary software development methodology and for the use and resale, into
the health care market, of a proprietary universal scheduler software
27
package ("Resource Utilization Management System" or "RUMS") from
TransMillenial Resources Corporation in exchange for 100,000 shares of Common
Stock.
In connection with this agreement, the Company recorded in December 1993
$550,000 in consulting expenses and $1,000,000 as an asset for the purchased
software. This agreement also encompassed compensation for past services. In
February 1995, the Company entered into an agreement to purchase rights to use
and resell, into any market, the proprietary universal scheduling software
acquired in fiscal 1994 for the health care market. The agreement required the
Company to issue 10,000 shares of its Common Stock and a warrant to purchase
40,000 shares of its Common Stock at $0.01 per share with a fair market value
of $500,000 as consideration for these rights. At September 30, 1995, the
Company expensed the remaining asset value of $1,156,522 related to RUMS
because the cost reduction strategies employed by the Company included
reduction of sales and marketing staff and activities. The Company is not
currently directly marketing RUMS. No significant sales of this product have
been recorded to date.
ACCELERATOR
The Company developed a proprietary memory resident data base management
software for intercepting and processing file requests from a workstation in a
computer data communications network which reduces network traffic and file
server activity. Since pre-allocation of memory is not required and memory can
be released to the workstation when no longer in use, programs running against
data base servers or file managers achieve a reduction in network traffic and
provide for high speed network communications. The Accelerator overcomes the
deficiencies found in conventional network management devices and methods by
eliminating network latency and measurably increasing file access speed by
storing files in local memory.
The Accelerator software is embedded in the Company's PrismCare LIS
application software to enhance its run-time performance. During fiscal 1994-
1995, the Company submitted a patent application for the Accelerator and began
market research efforts to determine whether it could successfully be marketed
either as a stand-alone product or as a component of other vendors' product
offerings. Accelerator is not being pursued by the Company at this time since,
to date, the Accelerator has not been sold, licensed, or installed in any
customer sites other than as a component of PrismCare LIS.
PRISMCARE LIS
PrismCare LIS applications automate the various functions of the
laboratory and track the flow of events within the laboratory departments. The
Company has previously marketed, and may continue to market, PrismCare LIS as
FAILSAFE LIS. PrismCare LIS applications collect and validate data; interface
with and respond to requests for information from laboratory instruments;
organize data to ease their interpretation and to facilitate presentation;
generate reports; provide quality control and assurance functions; and
communicate data and results to various other departments of the hospital.
Specifically, PrismCare LIS includes the following three applications, each of
which can operate independently or as a part of an integrated information
system: clinical, microbiology (not yet completed), and communications
modules.
The Company capitalized approximately $2,483,000 in software development
costs through June 30, 1992, and began amortizing those costs over five years
in fiscal 1993. At June 30, 1995, the Company expensed the remaining asset
value of approximately $914,000 because the cost reduction strategies employed
by the Company included reduction of sales and marketing staff and related
activities.
In 1994, the Company completed one installation of PrismCare LIS which
comprised the clinical and communications applications. The Company has also
sold an additional license to the user based on throughput volume, and entered
into an agreement with the licensee pursuant to which the Company provided
modifications and new features customized to the customer's specifications
during fiscal 1995 and fiscal 1996.
28
CORTEX LIS
Cortex LIS is also a client-server based system which is written in a
combination of programming languages and utilizes Novell NetWare and MS DOS
operating systems. It contains clinical, microbiology, and communications
software applications which have fewer functions and run on smaller local area
networks with less powerful file servers and without the larger storage
capacity of PrismCare LIS. Cortex LIS has disk duplexing operation protection
features similar to those of PrismCare LIS. Cortex LIS is more suitable and
affordable for smaller health care facilities which do not handle the volume of
transactions of larger facilities. The Company currently has twelve customers
with Cortex LIS installed. The Company has sold no new Cortex LIS system
licenses since fiscal 1992 but has continued to provide annually renewable
software and hardware maintenance support service contracts to its
existing Cortex LIS customer base.
CUSTOMERS
The Company's present customer base includes those companies to which it
is providing services in one of the previously-described three service
categories: alternative programming resource services, software development
and implementation services, and software/hardware maintenance support
services. A small number of customers has made up a relatively large
percentage of the Company's total revenues for each of its fiscal years. The
Company's principal customers (i.e., accounting for more than 10% of its
revenues) in fiscal 1996 were Osborn Laboratories, Inc. and EDS which
constituted approximately 41% and 36% of the Company's total revenues,
respectively. In fiscal 1995, Osborn Laboratories, Inc., Cameron & Associates,
Inc. (owned by affiliates), and Southside Hospital constituted approximately
27%, 17%, and 14% of the Company's total revenues, respectively. In the
quarter ended September 30, 1996, EDS, TDI, and Osborn Laboratories, Inc.
constituted approximately 53%, 16%, and 11% of the Company's total revenues,
respectively. The loss of any significant customer through cancellation may
have a material adverse effect on the Company's operating results.
Revenues from sales to customers located outside the U.S., all of which
were sales to Canadian customers, accounted for approximately 5% of total
revenues in fiscal 1995. There were no revenues from sales to customers
located outside the U.S. in fiscal 1996.
SALES
During fiscal 1996, in connection with the Company's shift in focus to
contract programming and consulting, one 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 customers. More importantly, the
Company 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.
During fiscal 1995, all of the Company's business came from direct sales
made by the Company's sales representatives or by supplementary sales to
existing customers.
COMPETITION
ALTERNATIVE PROGRAMMING RESOURCE SERVICES
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.
29
However, due to the niche definition of its APR market segment and the
growing general shortage of legacy system maintenance programmers, the Company
does not believe the external competition represents the primary impediment to
its placement of FSU programmers in customer contracts. Rather, the Company's
APR business is limited primarily by its ability to recruit, train, and present
qualified FSU contractor 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.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
The market for providing such generalized applications software
development and implementation services is highly competitive and fragmented
along industrial and technical specialty lines. Competitive advantage is
earned by developing core competencies in particular industry applications and
in specific technology skill areas.
The Company's industrial/application core competencies are in the areas of
laboratory information systems and complex, rules-based applications.
Complementing its application expertise is a depth of technical knowledge and
experience in PC networks, client-server technologies, object oriented
technologies, Internet technologies, and system integration.
SOFTWARE/HARDWARE MAINTENANCE SUPPORT SERVICES
The Company has a virtually exclusive market offering in this component of
its services business because it owns the licensing rights to the Cortex LIS
software being maintained and supported. Therefore, customers must renew the
Company's software license and maintenance support service agreements each year
in order to continue legally to operate the system. Although the Company has
experienced a slow erosion of this customer base during the past two years as
some former customers have chosen to replace Cortex LIS with new laboratory
information systems, a critical mass of customers have continued to renew their
license and maintenance support service agreements each year.
The Company faces competition from a large number of hardware service
providers of many different sizes and specialties. However, since most of the
remaining Cortex LIS customers desire single vendor support for software and
hardware, the Company has also retained the hardware maintenance business of
most of these customers.
PROPRIETARY RIGHTS
All of the Company's software systems have only limited proprietary
protection, so it is possible that a competitor may develop systems similar to
the Company's based on its independent research and development. The Company
also believes that the size and complexity of the software encompassing its
applications would make unauthorized use of its systems difficult.
Additionally, the Company includes confidentiality provisions and proprietary
ownership disclosures in its customer and distributor agreements, and its
software includes anti-pirating features to protect further the Company's
proprietary rights.
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. Certain applicable laws and regulations are described below.
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,
30
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.
The FDA has indicated that it may further regulate health care systems
beyond the blood bank area through its regional FDA offices. This may have
some effect upon the Company's computer application systems at customer sites.
Additionally, the Company is subject to certain laws regulating clinical
laboratories under the Clinical Laboratory Improvement Amendments of 1968 (42
C.F.R. Part 405, et al.), which are enforced by the various states' Departments
of Health Services. These laws set forth standards which must be complied with
by laboratories and include the laboratory systems provided by the Company.
The Company believes that its laboratory systems are currently in compliance
with such laws.
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. In
fiscal 1995, the Company incurred product development costs totaling
$2,017,876. The Company discontinued research and development during fiscal
1996 and reassigned employees to contract programming or service and support
activities.
HUMAN RESOURCES
At December 31, 1996, the Company had 39 employees, consisting of 2
executive officers, 5 contract programming and service/support personnel, 30
contract programming and service/support personnel in the United States on visa
from the former Soviet Union, and 2 administrative persons. There are 9
employees employed at the Company's headquarters in Sacramento, 6 at customer
locations in the Sacramento area, 11 at customer locations in Georgia, 6 at
customer locations in Minnesota, 5 at customer locations in El Segundo,
California, and 2 at customer locations in Portsmouth, New Hampshire. 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. 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.
The Company does not currently have product errors and omissions
insurance. A defect in the design or configuration of the company's products
or in the failure of a system to perform the use which the Company specifies
for the system may subject the Company to claims of liability. Although as of
the date of this filing the Company has not experienced any such claims, there
can be no assurance that claims will not arise in the future.
FACILITIES
The Company's headquarters are located in Sacramento, California. The
Company occupies approximately 6,200 square feet of office which it leases form
James W. Cameron, Jr., a substantial shareholder, with a monthly rent of
$5,335. The lease expires in December 1997.
LEGAL PROCEEDINGS AND CONTINGENCIES
The Company was notified on March 16, 1995, by the staff of the regional
office of the Commission that the regional office intended to recommend that
the Commission file a civil action against the Company seeking injunctive and
other relief. The staff of the regional office indicated that the complaint
would allege violations of various disclosure provisions of the Federal
securities laws in connection with the Company's registration statement on Form
S-18 that had become effective in August 1992.
31
The Company and its attorney met with the Commission staff and the Company
proposed a settlement of the complaint. On September 30, 1996, the Commission
accepted the Company's offer of settlement whereby it has consented, without
admitting or denying liability, to a cease and desist order that it will not
commit or cause any future violation of certain Federal securities laws.
In November 1993, a dispute arose between the Company and its Canadian
distributor, Centre de Traitement I.T.I. Omnitech Inc. ("Omnitech"), which was
settled in April 1994 and resulted in, among other things, a renewal of the
Company's distribution agreement with Omnitech. The Company entered into
discussions to renegotiate its contractual relationship with Omnitech. These
discussions led to the execution of a letter agreement on January 27, 1995,
that modified certain provisions of the April 1994 agreement. In addition,
certain minor changes were agreed to in a letter dated March 22, 1995. The
Company has continued to discuss certain issues regarding the interpretation of
provisions of their agreement. On May 15, 1995, the Company received a letter
from Omnitech declaring an event of default based on the Company's alleged
failure to deliver a specified number of shares of the Company's Common Stock
pursuant to the agreement. Within approximately sixty days, the subject stock
certificates issuable to Omnitech were delivered by the transfer agent to
Omnitech. On January 5, 1996, Omnitech sent a letter to the Company indicating
that Omnitech intended to file a lawsuit against the Company and others,
stating a number of claims. Omnitech indicated their belief that the value of
these claims exceeds $5.0 million. The Company believes that Omnitech has
breached the contract and intends to vigorously defend itself if a lawsuit is
filed. The Company has offered to settle the dispute, but the Distributor has
not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement
will place additional strains on the Company's resources and cash position and
the Company may be required to seek protection under federal bankruptcy laws
should Omnitech pursue its claims through litigation. Moreover, due to the
Company's current and projected cash position, the Company may not be able to
satisfy an adverse verdict in this matter that obligates the Company to pay any
significant damages to Omnitech. In the event an adverse verdict is the result
of this dispute, the Company may be required to seek protection under federal
bankruptcy laws.
The Company was served with a lawsuit filed on September 17, 1993, in
Sacramento County Superior Court against it and others by a former employee.
The lawsuit alleged sexual harassment and wrongful termination and sought
general and special damages of $2.0 million plus undisclosed punitive damages.
On May 27, 1995, the Company reached a settlement with the former employee
pursuant to which the Company caused its insurer to deliver a cash payment to
the former employee. The Company issued 25,000 shares of unregistered common
stock to the former employee subsequent to the settlement being approved by the
Superior Court in July 1995.
In July 1994, the Company received a formal request for indemnification
from one of the individual defendants as it pertains to the lawsuit filed on
September 17, 1993, in Sacramento County Superior Court discussed above. The
Company denied that it had any obligation and the matter was submitted for
determination by an arbitrator in accordance with certain indemnification
agreements between the Company and the individual. The arbitrator determined
that the Company had an obligation to pay for the cost of defense of the
individual. Based on this ruling, the Company reimbursed the individual
approximately $93,000 for expenses he had incurred in defending the action and
will pay his continuing defense costs. However, the Company has reserved its
right to seek reimbursement of these amounts from the individual under
appropriate circumstances. On June 19, 1995, the Company received a demand by
the individual seeking reimbursement of fees and settlement costs incurred by
the individual and his insurer. On August 18, 1995, the Company formally
rejected that demand. The Company does not believe that the outcome of this
matter will have a material adverse impact on its financial position or results
of operations.
The Company also received a demand for indemnification of legal expenses
for separate counsel from the other individual defendant in the lawsuit filed
on September 17, 1993, in Sacramento County Superior Court discussed above.
The Company had been providing a defense to this individual through its counsel
and disputed that it had an obligation to provide for separate counsel. This
matter was resolved by the Company's agreement to provide for separate counsel.
The Company has reimbursed the former officer approximately $41,000 for
expenses he had incurred in defending the action. In August 1995, the Company
received notification from the individual's law firm that the Company was in
arrears of approximately $12,000 in its obligation to reimburse the firm for
32
fees and expenses in defending the individual and has arranged for terms under
which such amount will be paid. The Company does not believe that the outcome
of this matter will have a material adverse impact on its financial position or
results of operations.
In April 1994, the Company entered into a settlement agreement with a
former officer and director (the "Former Officer") and a former consultant,
officer, and director (the "Former Consultant") in connection with disputes
concerning outstanding compensation, expense reimbursement, equity entitlement
issues, and ownership of the Company's proprietary software. In November 1994,
the Former Officer and Former Consultant asserted that the Company had breached
certain of its obligations under the settlement agreement. In February 1995,
the Company cured any alleged default under the settlement agreement by
fulfilling certain nonmaterial obligations to the Former Officer and Former
Consultant. In addition, the Former Consultant asserted claims against the
Company and numerous other parties under a variety of legal theories. On
February 17, 1995, the Former Consultant demanded payment of $1.9 million in
settlement of all outstanding claims. On June 12, 1995, the Former Consultant
filed a lawsuit in Sacramento County Superior Court against the Company, its
then-current directors, James Cameron, Jr., the Former Consultant's stockbroker
and brokerage firm, and one of the Company's large customers. The lawsuit set
forth twenty causes of action based on a variety of legal theories and sought
in excess of $15.0 million in damages, plus punitive damages. On August 21,
1995, the Superior Court granted petitions to compel arbitration filed by the
Company's defendants and Mr. Cameron which petitions were based on the
arbitration provision of the April 1994 Settlement Agreement. The Court also
granted a similar motion filed by the Former Consultant's stockbroker and
brokerage firm. The litigation of the case in Superior Court was stayed
pending the outcome of the arbitration of all claims set forth in the action.
In February 1996, the Arbitration Panel entered its order dismissing with
prejudice all of the claims made against the Company's defendants and Mr.
Cameron, and awarded the Company recovery of a portion of its fees and costs.
On July 26, 1996, the Superior Court confirmed the Arbitration Panel's order of
dismissal and fee award. On September 10, 1996, the Company was notified that
the Former Consultant had filed a Notice of Appeal with the 3rd District
Appellate Court. The Company does not believe that the outcome of this matter
will have a material adverse impact on its financial position or results of
operations.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the Executive Officers and Directors of the Company
as of December 31, 1996, and certain information about such persons, are set
forth below. The Company's Bylaws provide for a Board of Directors of not less
than three nor more than seven members, with the actual number to be set by
resolution of the Board. Each of the Company's Directors is elected at the
annual meeting of shareholders of the Company and serves until the next annual
meeting, until such person's successor is elected and qualified, or until such
person's earlier death, resignation, or removal.
Executive Officers are appointed by, and serve at the discretion of the
Board of Directors. The Company has not paid any fees or other remuneration to
the Directors for their services as Directors. The Directors who are not an
employee of the Company do, however, receive upon their initial election or
appointment an automatic grant of a stock Option, subject to a three-year
vesting period, to purchase 5,000 shares of Common Stock at an exercise price
equal to the fair market value on the date of the appointment or election under
the Company's 1993 Stock Option/Stock Issuance Plan. Furthermore, beginning in
the third year as a Director, each Director who is re-elected to the Board of
Directors will receive an automatic grant of a stock option to purchase 1,000
shares of Common Stock, at an exercise price equal to the fair market value on
the date of re-election. Such subsequent grant of 1,000 shares shall continue
each year of re-election until the plan expires in 2003. No family
relationship exists between any of the Officers or Directors.
On September 17, 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.
33
On December 31, 1996, Mr. W. Robert Keen became Chief Executive Officer.
In exchange for his services, Mr. Keen received 225,000 shares of Common Stock
and 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 one of
the Company's stock option plans. The 225,000 shares of Common Stock are
subject to forfeiture in the event Mr. Keen voluntarily leaves the Company
prior to January 1, 1998, and the quarterly options to purchase in the
aggregate of 320,000 shares of Common Stock are subject to shareholder approval
of an amendment to the Company's stock option plan allowing for such issuance.
The following table indicates certain information concerning the Directors
and Executive Officers.
NAME Age Principal Occupation at Present and for Past Five Years
Gerald W. Faust, Ph.D. 53 Director since June 1994; President of Faust Management
Corporation since October 1983; Adjunct Professor at the
University of California at Los Angeles Graduate School of
Management. Dr. Faust is a member of the Board of
Directors of IMREG.
W. Robert Keen 54 Director since November 1996 and Chief Executive Officer
since December 31, 1996; Owner of Jonathan Companies, a
management and consulting company, since 1993; President
of Occupational-Urgent Care Health Systems, Inc. from 1988
to 1992. Mr. Keen is a member of the Advisory Board of
the U.C. Davis Graduate School of Management and a
Commissioner on the Sacramento County Civil Service
Commission.
Edward L. Lammerding 67 Director since November 1993, Chairman of the Board since
1995; President of Sierra Resources Corporation from 1982
to 1996; Chairman of the Board of Digital Power
Corporation since 1989; member California Lottery
Commission and member of the Board of Trustees, St. Mary's
College; Director and Secretary of Occupational-Urgent
Care Health Systems, Inc. from September 1983 to February
1992.
Thomas W. O'Neil, Jr. 67 Director since November 1995; Certified Public Accountant;
Partner, Schultze, Wallace and O'Neil, CPA's since April
1991; Retired Partner, KPMG Peat Marwick, 1955 to 1991;
Director California Exposition and State Fair and
Sacramento Regional Foundation; Chairman, Regional Credit
Association; Director of Digital Power Corporation.
George Van Derven 53 President since September 1, 1995, and Chief Executive
Officer from September 1, 1995 to December 31, 1996;
joined the Company in October 1993 as Vice President of
Operations; President, Transportation Automation Services
Division of AMR Information Services from 1989 to October
1993.
James D. Alexander 42 Vice President of Operations since 1994; formerly Vice
President of Information Systems for S&A Restaurant Corp.
in Dallas, TX (1989-94); B.S. in Computer Science from
Stephen F. Austin State University (1976); M.B.A. from
Southern Methodist University (1992).
34
COMMITTEES OF THE BOARD; MEETINGS AND ATTENDANCE
The Company has a Compensation Committee, Audit Committee and Management
Committee. The Company does not have a nominating committee.
The Compensation Committee consisted of Messrs. Lammerding and O'Neil
during the fiscal year ended June 30, 1996. The Compensation Committee held
one meeting in fiscal 1996. Its function is to establish compensation for all
executive officers of the Company and administer the Company's Special Stock
Option Plan, 1993 Stock Option/Stock Issuance Plan and Employee Savings Plan.
The Audit Committee consisted of Messrs. Faust and O'Neil in fiscal 1996 and
held one meeting during fiscal 1996. The Audit Committee provides advice and
assistance regarding accounting, auditing and financial reporting practices of
the Company. It reviews, with the Company's independent accountants, the scope
and result of their audit, fees for services and independence in servicing the
Company. The Management Committee consisted of Messrs. Faust and Lammerding in
fiscal 1996 and held no meetings during fiscal 1996. The Management Committee
may exercise all the authority of the Board of Directors in management of the
Company, except for matters expressly reserved by law for action by the Board
of Directors.
During fiscal 1996, the Board of Directors met twelve times. During this
period, there were no members of the Board of Directors who attended fewer than
seventy-five percent of the meetings of the Board of Directors and all
committees of the Board on which they served.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
the Company's Chief Executive Officer and one other executive officer who
earned in excess of $100,000. No other person made over $100,000 during the
fiscal year 1996.
Columns regarding "Bonus," "Restricted Stock Awards" and "Long-Term
Incentive Plan Payouts" ("LTIP") are excluded because no reportable payments
were made to such executive officers for the relevant years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Fiscal Other Annual Options/ All Other
PRINCIPAL POSITION Year SALARY ($) COMPENSATION ($) SARs(#) Compensation($)
George R. Van 1996 131,667 - 37,500{(3)} None
Derven, President 1995 130,000 2,580{(2)} None None
{(1)} 1994 92,667 5,235{(2)} 70,000{(3)} None
James D. Alexander, 1996 108,000 - 27,000{(4)} None
Vice President of 1995 108,000 1,065{(2)} 5,000{(4)} None
Operations 1994 22,500 2,197{(2)} 20,000{(4)} None
(1) Mr. Van Derven served as Chief Executive Officer from September 1, 1995
to December 31, 1996. Prior to September 1, 1995, he was Chief
Operating Officer.
(2) The Company paid expenses related to corporate housing for Messrs. Van
Derven and Alexander.
(3) The Company granted to Mr. Van Derven an option to purchase 37,500
shares of Common Stock at $0.78125 per share and adjusted the exercise
price of previously issued options to purchase 70,000 shares at $0.78125
in April 1996.
(4) Mr. Alexander received an option to purchase 27,000 shares of Common
Stock at $0.78125 per share in April 1996. An option to purchase 5,000
shares at $10.00 per share was granted in October 1994, and in April
1996 the exercise price of this option along with 20,000 other options
previously granted was adjusted to $0.78125 per share.
35
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Percent of total Exercise Price
Options/SARs options/SARs granted to ($/SH) Expiration DATE
NAME GRANTED (#) EMPLOYEES IN FISCAL YEAR
George R. Van Derven 37,500 22.5% $0.78125 4/10/2006
James D. Alexander 27,000 16.2% $0.78125 4/10/2006
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
No options were exercised in fiscal 1996 by any of the officers named in
the Summary Compensation Table. The following table sets forth the
value of unexercised options and SARs held by the named executives at fiscal
year end:
Options/SARs Value of
at Fiscal Unexercised in-the-
Year-End(#) Money Options/SARs
Shares Exercisable(E)/ at Fiscal Year-End
Acquired Value Subject to (1) Exercisable(E)/
NAME ON EXERCISE # REALIZED($) REPURCHASE(U) Subject to
REPURCHASE(U)
George R. Van Derven 0 $0 70,000(E) $43,750(E)
37,500(U) $23,438(U)
James D. Alexander 0 0 25,000(E) $15,625(E)
27,000(U) $16,875(U)
(1) Based on the $1.40 per share final trading price of the Common
Stock at June 28, 1996, after giving effect to the Company's
one-for-ten consolidation of Common Stock approved by the
stockholders on November 21, 1996.
SPECIAL STOCK OPTION PLAN
In June 1993, the Board of Directors adopted the Special Stock Option
Plan which authorizes 18,800 shares of Common Stock for the grant of
options. In June 1993, the Board of Directors granted options with
respect to 18,715 shares of Common Stock to approximately 43 employees.
Options to purchase 13,801 shares of Common Stock under the Special Stock
Option Plan were canceled through April 10, 1996, at which time the
remaining 4,913 options were canceled and reissued under the 1993
Stock Option/Stock Issuance Plan. The reissued options have a
$0.78125 option price, the closing market price on that day, after
giving effect to the Company's one-for-ten consolidation of Common Stock.
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 and
Shareholders during 1993.
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 1993 Plan contains three separate
components: (i) a Discretionary Option Grant Program under which
key employees and consultants may be granted options to purchase
Common Stock; (ii) an Automatic Option Grant Program under which
option grants will be made at periodic intervals to non-employee
Board members; and (iii) a Stock Issuance Program under which
eligible individuals may be issued shares of Common Stock, either
through immediate purchase or as a bonus based on performance criteria.
The 1993 Plan is administered by the Compensation Committee. 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. As of June 30, 1996,
approximately 85,711 shares are available under the 1993 Plan for grant.
During fiscal 1996, the Company granted options to purchase 37,500
and 27,000 shares of Common Stock for Messrs. Van Derven and Alexander,
respectively. In addition, during fiscal 1996, Mr. O'Neil received options
to acquire 5,000 shares of Common Stock pursuant to the Automatic Option
Grant Program of the 1993 Plan. Further, during fiscal 1996, the
Compensation Committee agreed to reprice previously granted options
to Messrs. Van Derven, Alexander and Faust of 70,000, 20,000, and
5,000 shares, respectively, at $.78125 per share which represented the
closing price of the Company's Common Stock as of that date. During the
second quarter ending December 31, 1996, Mr. Lammerding received
options to acquire 1,000 shares of Common Stock and Mr. Keen received
options to acquire 5,000 shares of Common Stock pursuant to the Automatic
Option Grant Program of the 1993 Plan.
LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS
The Company does not have and has not had any long-term incentive
plans.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON THE REPRICING OF OPTIONS
The Company currently has the Special Stock Option Plan and
the 1993 Stock Option/Stock Issuance Plan which are administered
by the Compensation Committee. The purposes of these plans are to
1) align the interest of management, employees, and shareholders to
build shareholder value by encouragement of consistent, long-term
growth; (2) attract and retain key executive officers essential to the
long-term success of the Company; (3) reward executive officers for long-term
corporate success by facilitating their ability to acquire an ownership
interest in the Company; (4) provide direct linkage between
the compensation payable to executive officers and the Company's
attainment of annual and long-term financial goals and targets; and
(5) emphasize regard for performance at the individual and corporate level.
During fiscal 1995, the Company granted options to purchase 57,890
shares of the Company's Common Stock at exercise prices ranging from
$6.25 to $10.00 per share to employees and officers. Due to the poor
financial condition of the Company, the price of the Company's Common Stock
substantially decreased. As a result, many employees no longer felt that
they had a financial interest in the Company because their options were
"out of the money" and left the Company. In an effort to retain quality
employees, the Compensation Committee, on April 10, 1996, repriced options
to acquire 115,922 shares of Common Stock to $.78125 per share, the
closing market price that day. Of the 115,922 shares repriced,
70,000 were attributed to Mr. Van Derven, 25,000 were attributed to Mr.
Alexander, and 5,000 were attributed to Dr. Faust.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 145 of the Delaware General Corporation Law provides
for the indemnification of officers, directors, employees, and
other corporate agents in terms sufficiently broad to indemnify such
persons under certain circumstances for liabilities (including
reimbursement of expenses incurred) arising under the
Securities Act. Article Seventh of the Registrant's Amended and
Restated Certificate of Incorporation and Section 7.7 of the
Registrant's Bylaws provide for indemnification to the extent and under the
circumstances permitted by Section 145 of the Delaware General Corporation Law.
Article Sixth of the Registration's Amended and Restated Certificate of
Incorporation eliminates the personal liability of its directors to
the fullest extent permitted by paragraph (7) of subsection (b) of Section
102 of the General Corporation Law of Delaware, as the same may be amended
and supplemented. Section 102(b)(7) of the General Corporation Law of
Delaware provides for the elimination of personal liability of directors to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for: (i) any breach of the duty of
loyalty to the Corporation or its stockholders; (ii) acts or omissions
not in good faith or which involve intentional
37
misconduct or a knowing violation of law; (iii) liability under Section
174 of the Delaware General Corporation Law (involving certain unlawful
dividends or stock repurchases); or (iv) any transaction from which the
director derived an improper personal benefit.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES E PREFERRED STOCK
On November 18, 1994, the Company entered into a series of
agreements for the purchase of Series E Convertible Preferred Stock with
James W. Cameron, Jr. and Dr. Max Negri, two existing stockholders.
The transaction included a debt to equity conversion of $2,232,856
and an additional aggregate cash investment of $1,215,004 in exchange
for the issuance of 287,322 shares of 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 22,335,933 shares of the Company's Common Stock pursuant to
the terms of the Series E Preferred Stock Purchase Agreement.
PRIVATE PLACEMENT UNITS
In February 1995, the Cameron Foundation, an existing stockholder,
purchased 105,000 units at $10.00 per unit, each unit consisting of one
share of the Company's Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $15.00 per share or $7.50
below the last trading price on the date of the notice of exercise,
whichever is lower. In March 1995, when the trading price was under
$7.50, the Cameron Foundation exercised its warrant for no additional
consideration.
FINANCING ARRANGEMENTS
Mr. Cameron is the guarantor of the Company's line of credit with
a bank (the "Continuing Guaranty"). As consideration for the execution of
the Continuing Guaranty, the Company entered into a Reimbursement Agreement
with Mr. Cameron pursuant to which 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. Pursuant to the Reimbursement
Agreement, in the event that Mr. Cameron is required to pay the bank any
monies under the Continuing Guaranty, the Company is required to repay Mr.
Cameron the amount of each payment by either 1) paying an equal cash
amount or 2) issuing to Mr. Cameron a non-convertible note (the "Straight
Note") in the principal amount of such payment by Mr. Cameron, bearing
interest at an interest rate equal to the interest rate of the line of
credit on the date of such payment and subject to adjustment when and
to the extent that the interest rate prevailing under the line of credit
may change.
Furthermore, under the terms of the Reimbursement Agreement, upon
written demand by Mr. 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%.
During fiscal 1996, the Company borrowed $738,752 primarily from the
Cameron Foundation and the Negri Foundation, two existing stockholders,
pursuant to three unsecured promissory notes. During the quarter ended
September 30, 1996, the Company borrowed $173,000 from the Cameron Foundation
and from James W. Cameron, Jr. During the second quarter, the Company
borrowed $255,000 from James W. Cameron, Jr. and $38,900 from the Negri
38
Trust. All of these notes mature on the earlier of December 31, 1997,
or such time as the Company obtains equity financing, and bear interest at
10.25%. Beginning in October 1996, the Company is required to make monthly
interest payments totaling $12,724 on three of the notes.
OTHER
In July 1994, the Company entered into an interim working agreement
with Cameron & Associates, Inc., which is owned by Mr. Cameron and
Dr. Negri, to provide computer systems design, integration and operations in
connection with a Cameron & Associates, Inc. contract for provision of health
care information systems in Russia. In February 1995, the systems
integration and detailed design activities project was discontinued
and the entire project was phased out over a period of sixty days. The
Company was reimbursed at cost for expenditures incurred under this agreement.
Beginning in November 1995, the Company leased office space from Mr.
Cameron. The current lease is for approximately 6,200 square feet,
provides for $5,335 in monthly rent, and expires in December 1997.
SELLING STOCKHOLDERS
The shares of Common Stock offered by the Selling Stockholders may
be offered for sale from time to time at market prices prevailing at
the time of sale or at negotiated prices, and without payment of any
underwriting discounts or commissions except for usual and customary
selling commissions paid to brokers or dealers. The Company will not
receive any proceeds from the sale of the Common Stock by the Selling
Stockholders.
Under the Exchange Act, any person engaged in a distribution of
the shares of Common Stock of the Company offered by this Prospectus may
not simultaneously engage in market making activities with respect to the
Common Stock of the Company during the applicable "cooling off" periods
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, each Selling Stockholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation, Rules 10b-6 and 10b-7, and their
successor rules set forth in Regulation M, which provisions may limit the
timing of purchases and sales of Common Stock by the Selling Stockholders.
With regard to the shares offered by the Selling Stockholders such
shares may be sold on the over-the-counter market or in private transactions
at prices to be determined at the time of sale. Such shares may be offered
through broker-dealers, acting on the Selling Stockholders' behalf, who
may offer the shares at then current market prices. Any sales may be
by block trade. The Selling Stockholders and any brokers, dealers or
others who participate with the Selling Stockholders in the
distribution of such shares of Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any
commissions or fees received by such persons and any profit on the
resale of such shares purchased by such persons may be deemed to be
underwriting commissions or discounts under the Securities Act. Sales may
be made by all Selling Stockholders pursuant to the Registration
Statement of which this Prospectus is a part.
The following table identifies the Selling Stockholders, as of
December 31, 1996, after giving effect to the Company's one-for-ten
consolidation of Common Stock as approved by the stockholders on that date,
and indicates (i) the nature of any material relationship that such Selling
Stockholders have had with the Company for the past three years; (ii) the
number of shares of Common Stock held by the Selling Stockholders; (iii)
the amount to be offered for the Selling Stockholders' account; and (iv)
the number of shares and percentage of outstanding shares of Common Stock
to be owned by the Selling Stockholders after the sale of the Common Stock
offered by the Selling Stockholders pursuant to this Offering. The
Selling Stockholders are not obligated to sell their Common Stock offered
in this Prospectus and may choose to sell all, part, or none of their
shares.
39
Shares Beneficially Owned Shares to be Shares Beneficially Owned
PRIOR TO OFFERING{(1)} OFFERED AFTER OFFERING{(1)}
NAME OF SELLING STOCKHOLDER Number Percent Number Percent
James W. Cameron, Jr.{(2)} 20,055,961 78.50% 19,306,810 749,151 2.93%
629 J Street
Sacramento, CA 95814
Max Negri, M.D.{(3)} 2,768,653 10.84% 2,639,123 129,530 *
31244 Palos Verdes Drive West
Suite 234
Rancho Palos Verdes, CA
W. Robert Ramsdell{(4)} 233,342 * 10,000 223,342 *
Jeffrey Buckner{(5)} 613,500 2.41% 600,000 13,500 *
Porter Partners, L.P. 33,500 * 33,500 0 0
Glenn Wiggins{(6)} 17,999 * 5,000 12,999 *
Kent & Catherine Williams{(7)} 20,100 * 20,000 100 *
Porpoise Investors I, LP 10,000 * 10,000 0 0
Robert H. Gurevitch 20,000 * 20,000 0 0
John & Barbara Hawley 20,000 * 20,000 0 0
G. Tyler Runnels{(8)} 8,587 * 5,000 3,587 *
John Forge{(9)} 53,000 * 10,000 43,000 *
Osborn Laboratories, Inc. 39,273 * 39,273 0 0
Penne Page 25,000 * 25,000 0 0
W. Robert Keen 230,000 * 225,000 5,000 *
* Less than 1.0%.
(1) Based on a total of 25,490,056 shares of Common Stock outstanding
December 31, 1996.
(2) Includes 57,125 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
includes 175,000 shares held by Mr. Cameron in an IRA and 213,250 shares held
by the Cameron Foundation. Mr. Cameron disclaims beneficial ownership in
the shares held by the Cameron Foundation.
(3) Includes 62,250 shares issuable upon conversion of 83,000
shares of Preferred Stock, Series D, currently convertible.
(4) Includes 33,750 shares issuable upon conversion of 45,000
shares of Preferred Stock, Series D, currently convertible, 6,092 shares
issuable upon exercise of a warrant which is currently exercisable. Also
includes 60,000 shares held by Mr. Ramsdell in an IRA, 40,000 shares held in
the Ramsdell Irrevocable Trust, and 500 shares of purchased by Mr.
Ramsdell as custodian for a minor.
(5) Includes 10,000 shares issuable upon exercise of a warrant which is
currently exercisable.
(6) Includes 5,000 shares issuable upon exercise of a warrant which is
currently exercisable.
(7) Includes 10,000 shares held in an employee pension plan, 5,000
shares held by Mr. Williams in an IRA, and 5,000 shares held by Mrs.
Williams in an IRA.
(8) Includes 3,587 shares issuable upon exercise of a warrant which is
currently exercisable.
(9) Includes 40,000 shares issuable upon exercise of a warrant which is
currently exercisable.
(10) Includes 5,000 shares issuable upon exercise of an options all of
which are subject to repurchase.
40
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as to (i) the persons
or entities known to the Company to be beneficial owners of more than 5% of the
Company's Common Stock and Preferred Stock, Series D, as of December 31, 1996;
(ii) all directors of the Company; (iii) all executive officers of the Company;
and (iv) all directors and officers of the Company as a group.
Common Stock
NAME AND ADDRESS OF
BENEFICIAL OWNER Number of Shares Percent{(1)}
James W. Cameron, Jr. 20,055,961{(2)} 78.50%
629 J Street
Sacramento, CA 95814
Max Negri, M.D. 2,768,653{(3)} 10.84%
31244 Palos Verdes Drive West
Suite 234
Rancho Palos Verdes, CA 90274
George R. Van Derven 98,500{(4)} *
James D. Alexander 52,000{(5)} *
Edward L. Lammerding 27,620{(6)} *
Gerald W. Faust, Ph.D 5,000{(7)} *
W. Robert Keen 230,000{(8)} *
Thomas W. O'Neil 6,050{(9)} *
All directors and executive officers 419,170{(10)} *
as a group (6 persons)
* Less than 1.0%.
(1) Based on a total of 25,490,056 shares of Common Stock outstanding and to
be issued as of December 31, 1996.
(2) Includes 57,125 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 includes 175,000 shares held by Mr. Cameron in an IRA and
213,250 shares held by the Cameron Foundation. Mr. Cameron disclaims
beneficial ownership in the shares held by the Cameron Foundation.
(3) Includes 62,250 shares issuable upon conversion of 83,000 shares of
Preferred Stock, Series D, currently convertible.
(4) Includes 87,500 shares issuable upon exercise of options, 50,000 of
which are not subject to repurchase.
(5) Includes 52,000 shares issuable upon exercise of options, 25,000 of
which are not subject repurchase.
(6) Includes 20,000 shares issuable upon exercise of an option which
currently not exercisable, 6,000 shares issuable upon exercise of options
of which 5,000 are not subject to repurchase, 1,500 shares issuable upon
exercise of warrants held by Sierra Resources Corporation, all of which
are currently exercisable, and 120 shares held by Mr. Lammerding in an IRA.
(7) Includes 5,000 shares issuable upon exercise of options of which
3,333 are not subject to repurchase.
(8) Includes 5,000 shares issuable upon exercise of options all of
which are subject to repurchase.
(9) Includes 5,000 shares issuable upon exercise of options of which
1,667 are not subject to repurchase.
(10) Includes 180,500 shares issuable upon exercise of options and 1,500
issuable upon exercise of warrants, 86,500 of which are not subject to
repurchase.
41
Preferred Stock, Series D
NAME AND ADDRESS OF
ENEFICIAL OWNER Number of Shares Percent
James W. Cameron, Jr. 76,167 37.3
629 J Street
Sacramento, CA 95814
W. Robert Ramsdell 45,000 22.0
474 Paseo Miramar
Pacific Palisades, CA 90272
Max Negri, M.D. 83,000 40.7
31244 Palos Verdes Drive West
Suite 234
Rancho Palos Verdes, CA 90274
All directors and executive officers -0- -0-
as a group (6 persons)
DESCRIPTION OF SECURITIES
As of December 31, 1996, the authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, par value $.01 per share,
and 1,200,000 shares of Preferred Stock, par value $6.00 per share. The
stockholders approved an amendment to the Company's Certificate of
Incorporation to provide for a one-for-ten share consolidation and reduce the
number of authorized shares of common stock to 100 million effective
December 2, 1996.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Common stockholders are
entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of any preferential dividends
declared with respect to any Preferred Stock that from time to time may be
outstanding. See "Dividend Policy." The Common Stock has no preemptive
or conversion rights or other subscription rights and there are no redemptive
or sinking fund provisions application to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and all
the shares of Common Stock issued by the Company upon the exercise of
outstanding warrants will, when issued, be fully paid and nonassessable.
As of December 31, 1996, the number of shares of Common Stock
Outstanding was 25,490,056.
PREFERRED STOCK
The Board of Directors is authorized to issue up to 1,200,000
shares of Preferred Stock, without any further vote or action by the
stockholders, in one or more series, and to fix the rights, preferences, and
privileges and qualifications thereof (including, without limitation,
voting rights and the limitation or exclusion thereof). The issuance
of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or adversely
affect the rights and powers, including voting rights, of the holders of
Common Stock, and may have the effect of delaying, deferring or preventing a
change in the control of the Company.
Of the 1,200,000 authorized shares of the Preferred Stock, 225,000
are designated Series D Preferred Stock of which 204,167 were outstanding
as of December 31, 1996.
42
Each share of Series D Preferred Stock is convertible, at the option
of the holder thereof, at any time into six-tenth shares of Common Stock,
subject to certain adjustments. Holders of Series D Preferred Stock are
entitled to receive cumulative dividends of $0.60 per year per share
which accrue beginning July 1, 1994, and are payable quarterly to the
extent permitted by law. Holders of Series D Preferred Stock are
entitled to vote together with holders of the Common Stock on an as
converted basis (i.e., each share of Preferred Stock represents the voting
equivalent of six-tenth shares of Common Stock, subject to certain
adjustments), have liquidation preferences and have special voting rights
with respect to certain matters.
WARRANTS
In connection with the private sale of Preferred Stock in March 1992,
the Company sold Class A Warrants to purchase 40,000 shares of Common
Stock which resulted in net proceeds to the Company of approximately
$81,000. In January of 1994, Class A Warrants to purchase 34,400 shares of
Common Stock were amended into new warrants (the "Conversion
Warrants") exercisable at $15.00 per share (see below). The remaining Class A
Warrants are exercisable at $25.00 per share. In the event the Company
attains net income after provision for income taxes in excess of $500,000 in
a quarterly period (the "Quarterly Goal"), the Company will have 15
days to notify the warrant holders of any intent it may have to redeem
all Class A Warrants which are not exercised by the end of a specified
period (not less than 30 days from delivery of such notice). The
redemption price of the Class A Warrants will be $.20 per share. If the
Company fails to deliver such notice within the required 15-day period, it
will lose its right to redeem the outstanding Class A Warrants until the
next quarter in which the Company reaches the Quarterly Goal.
In May 1992, the Company issued additional Class A Warrants to
purchase 4,000 shares of Common Stock to an individual in consideration
for certain financial consulting services. All of these warrants
were amended into Conversion Warrants in January of 1994 (see below).
In June 1992, the Company issued additional Class A Warrants to
purchase 6,250 shares of Common Stock to stockholders in exchange for loan
guarantees in the aggregate amount of $250,000. All of these warrants
were amended into Conversion Warrants in January of 1994 (see below).
Prior to the Company's offer to amend the Class A Warrants
into Conversion Warrants, the Company offered each of the Class A Warrant
holders a non-redeemable Class B Warrant to purchase 50% of the number of
shares that they were entitled to purchase through the exercise of their
Class A Warrants, equal to an aggregate of 25,125 shares of Common Stock,
in exchange for the execution and delivery by each Class A Warrant
holder of a release of any claims that he or she may have against the
Company for the late registration of the Common Stock underlying the Class A
Warrants. Holders of 31 Class A Warrants covering 47,840 shares signed
releases and 23,925 Class B Warrants were issued. In January of 1994,
Class B Warrants to purchase 22,325 shares of Common Stock were amended
into Conversion Warrants exercisable at $15.00 per share (see below). The
remaining Class B Warrants are exercisable through April 22, 1998,
at a price of $28.80 per share. As of June 30, 1996, the Company has not
received claims from any of the warrant holders who did not sign releases,
nor does the Company believe that the ultimate outcome of this matter will
have a material effect on its results of operations or financial position.
On February 16, 1993, the Company issued an aggregate of five Class C
Warrants to purchase an aggregate of 7,500 shares of Common Stock in
settlement of a dispute with a group of individuals and an organization
who have claimed that they were entitled to receive a finder's fee in
connection with the Company's March 1992 private placement. In January of
1994, all of the Class C Warrants were amended into Conversion Warrants
exercisable at $15.00 per share (see below).
In connection with the Company's initial public offering, the Company
issued Class D Warrants to purchase 10,000 shares of Common Stock to the
underwriter. In January of 1994, all of the Class D Warrants were
amended into 8,400 Conversion Warrants exercisable at $15.00 per share
(see below).
In December of 1993, the Company offered the holders of the Class A,
B, C and D Warrants the right to have their warrants amended to reduce
the exercise price to $15.00, to provide an early termination (call)
43
feature at the Company's option and to change the number of shares subject
to warrant. The amended warrants, (the "Conversion Warrants"), were
issued in January of 1994.
The following table summarizes the number of shares subject to
outstanding warrants at June 30, 1996:
Amended Terms-
ORIGINAL TERMS CONVERSION WARRANTS
Class A 5,600 85,200
Class B 1,600 37,062
Class C -- 7,500
Class D -- 8,400
The Conversion Warrants have a $15.00 exercise price and are
immediately callable by the Company at its sole discretion; however,
in no event may the Conversion Warrants be exercised later than December
31, 1997. During fiscal year 1995, Conversion Warrants to purchase 2,449
shares of common stock were exercised.
On June 16, 1993, the Company issued two Class E Warrants to purchase an
aggregate of 1,455 shares of Common Stock in connection with note payable
agreements with an officer and an employee of the Company. The notes
payable were repaid by the Company during fiscal 1994. The warrants
are immediately exercisable at a price of $13.75 per share through June
15, 1998. During fiscal year 1996, a warrant to purchase 1 share of common
stock was exercised.
On July 7, 1993, the Company issued two warrants to purchase an
aggregate of 8,000 shares of Common Stock in connection with note
payable agreements with an officer and an employee of the Company.
The notes payable were repaid by the Company during fiscal 1994.
The warrants are immediately exercisable at a price of $5.00 per share
through July 7, 1998. During fiscal year 1996, a warrant to purchase 2
shares of common stock was exercised.
On February 28, 1994, the Company issued a warrant to purchase an
aggregate of 10,000 shares of Common Stock to the designee of James W.
Cameron, Jr. in exchange for a line of credit guarantee in the amount of
$2,000,000. The warrant is immediately exercisable at a price of
$15.00 per share through February 28, 1999.
On April 6, 1994, the Company issued two warrants to purchase an aggregate
of 115,286 shares of Common Stock to a former officer and a former
consultant in connection with the settlement of a claim by the former
officer and the former consultant. The warrants are exercisable at a
price of $15.00 per share and had an estimated fair market value of
$645,599 which was charged to operations in fiscal 1994. In addition, the
Company issued two warrants to purchase an aggregate of 32,500 shares of
Common Stock at an exercise price of $0.01 per share to these individuals in
connection with the same settlement agreement. These warrants had an
estimated fair market value of $438,750 which was charged to operations in
fiscal 1994. All of the warrants are immediately exercisable
through April 15, 1999. In August 1995, the former officer exercised one
of these warrants for 20,000 shares of Common Stock, and in December 1995 he
exercised another warrant for 2 shares of Common Stock.
In August 1993, the Board of Directors approved the issuance to
stockholders of record on September 7, 1993 a Common Stock warrant with an
exercise price of $25.00 per share for the same number of shares of Common
Stock which each stockholder of record held on September 7, 1993, which
totaled 321,308 shares (the "Special Warrants"). The Special Warrants are
immediately exercisable and are subject to an early termination (call)
feature by the Company. The Special Warrants are callable by the Company
if the Market Price of the Company's Common Stock, as defined in the
warrant, is $32.50 per share for any ten consecutive trading days.
In no event may the Special Warrants be exercised later than December 31,
1997.
44
In July 1994, the Company agreed to issue two warrants to a
strategic partner each exercisable for 132,618 shares at $30.00 per share and
$50.00 per share, respectively. The warrant agreements have not been
finalized; however, the Company recorded $345,000 in expense during the
first quarter of fiscal 1995 for these warrants.
In November 1994, the Company issued a warrant to purchase 5,000
shares of Common Stock at an exercise price of $15.00 per share as part
of the sale of units sold to an investor in a private placement. The warrant
is immediately exercisable through December 31, 1997.
The Company sold a warrant to purchase 4,200 shares of Common Stock
at an exercise price of $25.00 per share in February 1995 to a brokerage firm.
The warrant is immediately exercisable through December 31, 1997. The
Company received $2,100 and a release of all claims by the brokerage firm.
The Company sold a warrant to purchase 107 shares of Common Stock at
an exercise price of $25.00 per share in June 1995 to a brokerage firm.
The warrant is immediately exercisable through December 31, 1997. The
Company received $54 and a release of all claims by the brokerage firm.
In February 1995, the Company issued warrants to purchase 147,500
shares of Common Stock as part of the sale of units sold to several
investors in a private placement at the exercise price of $15.00 per
share or $7.50 below the last trading price on the date of the notice of
exercise, whichever is lower. These warrants have all been exercised, and
the Company received no proceeds upon the exercise of these warrants
since the trading price at the time of exercise was less than $7.50
per share.
In June 1995, the Company negotiated an equity for debt swap agreement
with a service provider whereby the service provider agreed to accept a
warrant to purchase, at $1.00 per share, the number of shares of the Common
Stock of the Company equal to 1.85% of the number of issued and
outstanding shares of Common Stock plus the number of shares of Common
Stock issuable pursuant to outstanding options, warrants, conversion
provisions and other rights to purchase Common Stock as of the date of
exercise. This warrant expires on December 31, 2004. The amount of debt
converted into equity as a result of this transaction was $521,510.
ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board of Directors to issue the
authorized shares of Common Stock to pro-management third parties without
obtaining consent of the stockholders may have the effect of discouraging
persons from pursuing a non-negotiated takeover of the Company and preventing
certain changes in control.
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits
certain publicly held Delaware corporations from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date of the transaction in which the person or entity
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, "business
combination" is defined broadly to include mergers, asset sales, and
other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is any person or entity who,
together with affiliates and associates, owns (or within the three
immediately preceding years did own) 15% or more of the Company's voting
stock. The provisions of Section 203 requiring a super majority vote
to approve certain corporate transactions could enable a minority of
the Company's stockholders to exercise veto powers over such transactions.
The Company's Bylaws provide that vacancies on the Board of
Directors may only be filled by the vote of a majority of the members of
the Board.
The Company's Bylaws require a vote of the holders of two-thirds or
more of the outstanding shares before certain actions may be effected, if
two-thirds of the Board of Directors have not previously approved such
action. These actions include: (i) mergers or consolidations of the
Company; (ii) sales, leases, exchanges, or other dispositions of
substantial assets; (iii) issuances of securities to another
corporation in exchange for cash, other stock or securities; or (iv) the
45
dissolution or liquidation of the Company. The Bylaws provide that they
may be amended by the affirmative vote of a majority of the members of the Board
or by the vote of the holders of two-thirds or more of the outstanding
shares.
The above provisions may have the effect of delaying or making it more
difficult for a stockholders or group of stockholders to take corporate
actions to gain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
American Securities Transfer & Trust, Inc., located at 1825 Lawrence Street,
Suite 444, Denver, Colorado, 80202-1817, telephone number (303) 234-5300.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Selling
Stockholders and the Company will be passed upon by Bartel Eng Linn &
Schroder, Sacramento, California.
EXPERTS
The financial statements of the Company at June 30, 1996, and for
the years ended June 30, 1996 and 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph with respect to substantial doubt about the Company's ability to
continue as a going concern as described in Note 1 to the financial
statements) appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
F-1
INDEX TO FINANCIAL STATEMENTS
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
PAGE
UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheet at September 30, 1996 (Unaudited) F-2
Condensed Statements of Operations for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) F-3
Condensed Statements of Cash Flows for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) F-4
Notes to Condensed Financial Statements (Unaudited) F-5
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors F-8
Balance Sheet at June 30, 1996 F-9
Statements of Operations for the Years Ended
June 30, 1996 and 1995 F-10
Statements of Stockholders' Deficit for the
Years Ended June 30, 1996 and 1995 F-11
Statements of Cash Flows for the Years Ended
June 30, 1996 and 1995 F-12
Notes to Financial Statements F-14
F-2
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 61,904
Accounts receivable, net 102,132
Other current assets 90,714
-----------
Total current assets 254,750
PROPERTY AND EQUIPMENT:
Equipment 957,127
Purchased software 233,872
Furniture and fixtures 148,445
----------
1,339,444
Accumulated depreciation and amortization (1,261,864)
----------
Property and equipment, net 77,580
Other assets 2,638
----------
$ 334,968
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 1,000,000
Notes payable to stockholders 911,752
Accounts payable to stockholders 335,425
Accounts payable 653,978
Accrued payroll and related expenses 133,373
Deferred revenue 135,913
Accrued customer obligations 242,848
Accrued preferred stock dividends 275,625
Other current liabilities 75,921
Other notes payable 57,654
Obligations under capital leases 5,512
---------
Total current liabilities 3,828,001
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 $1,500,627 1,225,002
Common stock, $0.01 par value - 100,000,000 shares authorized, 20,000,000 shares issued and
outstanding 200,000
Common stock to be issued 680,240
Additional paid-in capital 27,817,394
Accumulated deficit (33,415,669)
------------
Total stockholders' deficit (3,493,033)
------------
$ 334,968
============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-3
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
REVENUES:
Contract programming revenue $ 360,929 $ 245,653
Service revenue 93,734 109,434
System sales - 14,091
---------- -----------
Total revenues 454,663 369,178
COSTS AND EXPENSES:
Costs of revenues:
Contract programming revenue 344,724 151,962
Service revenue 63,087 47,388
System sales - 19,937
Research and development - 274,958
Marketing and sales - 91,210
General and administrative 212,253 307,998
Settlement expenses - 78,125
----------- -----------
Total costs and expenses 620,064 971,578
Loss from operations (165,401) (602,400)
Other income (expense):
Interest expense (47,232) (30,462)
Other, net 4,663 (1,715)
----------- -----------
(42,569) (32,177)
Net loss $ (207,970) $ (634,577)
============ ===========
Preferred stock dividends (30,625) (30,625)
------------- -----------
Net loss applicable to common stockholders $ (238,595) $ (665,202)
============= ===========
Net loss per share $ (0.01) $ (0.25)
============= ===========
Shares used in per share calculations 25,218,887 2,686,726
------------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
Net cash used in operating activities $ (155,000) $ (65,762)
Cash flows from investing activities:
Sale (purchases) of property and equipment 6,165 (3,960)
(Increase) decrease in other assets - -
----------- ----------
Net cash used in investing activities 6,165 (3,960)
Cash flows from financing activities:
Proceeds from exercise of warrants 1,077 -
Proceeds from notes payable to stockholders 173,000 51,000
Payments on notes payable and capital leases (15,444) (12,290)
------------ ----------
Net cash provided by financing activities 158,633 38,710
------------ ----------
Net increase (decrease) in cash 9,798 (31,012)
Cash at beginning of period 52,106 38,913
------------ ----------
Cash at end of period $ 61,904 $ 7,901
============ ==========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-5
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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, 1996.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments considered necessary to present fairly the Company's
financial position at September 30, 1996, results of operations for the three
month periods ended September 30, 1996 and 1995 and cash flows for the three
months ended September 30, 1996 and 1995. The results for the period ended
September 30, 1996, are not necessarily indicative of the results to be
expected for the entire fiscal year ending June 30, 1997.
The financial statements and notes thereto also include the effect of a one-
for-ten consolidation of the Company's outstanding Common Stock, par value
$0.01 per share, which became effective on December 2, 1996. In addition,
effective on December 2, 1996, the Company changed its name from 3Net Systems,
Inc., to Alternative Technology Resources, Inc., and the number of authorized
shares of Common Stock was reduced from 200,000,000 to 100,000,000.
NOTE 2 - FINANCING ARRANGEMENTS
The Company has a $1,000,000 revolving line of credit with a bank due in
monthly installments of interest only at the bank's reference rate plus 1.0%
(9.25% at September 30, 1996). In June 1996, the maturity date of the line of
credit was extended from July 1, 1996, to January 1, 1997. In December 1996,
the bank verbally extended the maturity date from January 1, 1997, until such
time as James W. Cameron, Jr. can conclude negotiations with the bank to become
the named borrower under the line of credit. The Company's obligations under
the line of credit are guaranteed by shareholder James W. Cameron, Jr. The line
of credit was fully utilized as of September 30, 1996. Among other covenants,
the line of credit prohibits the Company from incurring additional debt (other
than to the Bank) with the Bank's written consent. At September 30, 1996, the
Company was in technical default under the terms of the line of credit because
of additional borrowing from two stockholders, Cameron and Negri, borrowing of
approximately $15,000 to purchase automobiles and financing approximately
$19,000 related to royalty payments due St. Agnes Hospital.
Through September 30, 1996, the Company borrowed $911,752 from two
shareholders, Cameron and Negri, pursuant to seven unsecured promissory notes.
All the notes mature on December 31, 1996 and bear interest at 10.25% per
annum. Beginning in October 1996, the Company is required to make monthly
interest payments totaling $12,724 on three of the notes. In December 1996,
Cameron and Negri extended the maturity date on these notes payable from
December 31, 1996 to the earlier of December 31, 1997, or such time as the
Company obtains equity financing.
F-6
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 3 - EQUITY TRANSACTIONS
On November 18, 1994, the Company entered into a series of agreements for the
purchase of Series E Convertible Preferred Stock with two existing
stockholders, one of whom is a former director. The transaction included a
debt to equity conversion of $2,232,856 and an additional aggregate investment
of $1,215,004 in exchange for the issuance of 287,322 shares of 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 22,335,933 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, 5,220,057
shares are recorded as Common Stock to be issued at September 30, 1996, until
such time as the number of authorized shares were increased on December 2, 1996
(Note 1).
NOTE 4 - CONTINGENCIES
SUIT FROM FORMER CONSULTANT
In April 1994, the Company entered into a settlement agreement with a former
officer and director (the "Former Officer") and a former consultant, officer
and director (the "Former Consultant") in connection with disputes concerning
outstanding compensation, expense reimbursement, equity entitlement issues and
ownership of the Company's proprietary software. In November 1994, the Former
Officer and Former Consultant asserted that the Company had breached certain of
its obligations under the settlement agreement. In February 1995, the Company
believes it cured any alleged default under the settlement agreement by
fulfilling certain nonmaterial obligations to the Former Officer and the Former
Consultant. In addition, the Former Consultant asserted claims against the
Company and numerous other parties under a variety of legal theories. On June
12, 1995, the Former Consultant filed a lawsuit in Sacramento County Superior
Court against the Company, its then-current directors, James W. Cameron, Jr.,
the Former Consultant's stockbroker and brokerage firm and one of the Company's
largest customers. The lawsuit set forth twenty causes of action based on a
variety of legal theories and sought in excess of $15.0 million in damages plus
punitive damages. In August 1995, the Superior Court granted petitions to
compel arbitration filed by the Company's defendants and Mr. Cameron which
petitions were based on the arbitration provision of the April 1994 settlement
agreement. The Court also granted a similar motion filed by the Former
Consultant's stockbroker and brokerage firm. The litigation of the case in
Superior Court was stayed pending the outcome of the arbitration of all claims
set forth in the action. In February 1996 the Arbitration Panel entered its
order dismissing with prejudice all of the Former Consultant's claims made
against the Company's defendants and Mr. Cameron and awarded the Company
recovery of a portion of its fees and costs. On July 26, 1996, the Superior
Court confirmed the Arbitration Panel's order of dismissal and award. On
September 10, 1996, the Company was notified that the Former Consultant had
filed a Notice of Appeal with the 3rd District Appellate Court. At September
F-7
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 - CONTINGENCIES (CONTINUED)
SUIT FROM FORMER CONSULTANT (CONTINUED)
30, 1996, legal expenses and costs of $201,550 incurred by the Company
related to this litigation are included in the balance of accounts payable to
stockholder. The Company does not that the outcome of this matter
will havewill have a material adverse impact on its financial position or
results of operations.
DISTRIBUTOR AND CO-DEVELOPMENT AGREEMENT
In November 1993, a dispute arose between the Company and its Canadian
distributor (the "Distributor") which was settled in April 1994. This
settlement agreement encompassed a cash payment of $50,000 for consulting
and administrative expense and $325,000 in marketing and sales expense during
fiscal 1994.
The Company entered into discussions to renegotiate its contractual
relationship with the Distributor. These discussions led to the execution of a
letter agreement on January 27, 1995 that modified certain provisions of the
April 1994 agreement. In addition, certain minor changes were agreed to in a
letter dated March 22, 1995. These agreements called for, among other things,
issuance of an additional 20,000 shares of the Company's Common Stock to the
Distributor, if the Distributor successfully developed a pilot site for the
Canadian version of the Company's software the Distributor was developing.
Accordingly, the Company recorded $200,000 of settlement expense in fiscal 1995
which was offset by a reduction in reserves of approximately $170,000. On May
15, 1995, the Company received a letter from the Distributor declaring an event
of default based on the Company's alleged failure to deliver a specified number
of shares of the Company's Common Stock pursuant to the agreement. Within
approximately sixty days, the subject stock certificates issuable to the
Distributor were delivered by the transfer agent to the Distributor. On
January 5, 1996, the Distributor sent a letter to the Company indicating that
the Distributor intended to file a lawsuit against the Company and others,
stating a number of claims. The Distributor indicated their belief that the
value of these claims exceeds $5.0 million. The Company believes that the
Distributor has breached the contract and intends to vigorously defend itself
if a lawsuit is filed. The Company has offered to settle the dispute, but the
Distributor has not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement will
place additional strains on the Company's resources and cash position and the
Company may be required to seek protection under federal bankruptcy law should
the Distributor pursue its claims through litigation. Moreover, due to the
Company's current and projected cash position, the Company may not be able to
satisfy an adverse verdict in this matter that obligates the Company to pay any
significant damages to the Distributor. In the event an adverse verdict is the
result of this dispute, the Company may be required to seek protection under
federal bankruptcy law.
F-8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alternative Technology Resources, Inc. (formerly known as 3Net Systems, Inc.)
We have audited the accompanying balance sheet of Alternative Technology
Resources, Inc. (formerly known as 3Net Systems, Inc.) as of June 30, 1996, and
the related statements of operations, stockholders' deficit, and cash flows for
the years ended June 30, 1996 and 1995. 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. (formerly known as 3Net Systems, Inc.) at June 30, 1996, and
the results of its operations and its cash flows for the years ended June 30,
1996 and 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Alternative Technology Resources, Inc. (formerly known as 3Net Systems, 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 Notes 1 and 13. 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
September 13, 1996,
except for Note 12 as
to which the date is
December 2, 1996,
and except for Note 13
as to which the date is
December 31, 1996
F-9
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
BALANCE SHEET
JUNE 30, 1996
ASSETS
Current assets:
Cash $ 52,106
Accounts receivable, net of allowance for doubtful accounts of $7,449 110,506
Prepaid expenses 16,565
Deposits 36,431
----------
Total current assets 215,608
Property and equipment:
Purchased software 233,873
Equipment 966,734
Furniture and fixtures 148,446
----------
1,349,053
Accumulated depreciation and amortization (1,202,451)
-----------
Property and equipment, net 146,602
Other assests 4,137
-----------
$ 366,347
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 1,000,000
Notes payable to stockholders 738,752
Accounts payable to stockholder 308,650
Accounts payable 621,602
Accrued payroll and related expenses 143,647
Deferred revenue 180,254
Accrued customer obligations 242,848
Accrued preferred stock dividends 245,000
Other current liabilities 62,499
Other notes payable 68,451
Obligations under capital leases 10,159
---------
Total current liabilities 3,621,862
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 $1,470,002 1,225,002
Common stock, $0.01 par value -- 100,000,000 shares authorized, 20,000,000 shares issued
and outstanding 200,000
Common stock to be issued 680,101
Additional paid-in capital 27,847,081
Accumulated deficit (33,207,699)
------------
Total stockholders' deficit (3,255,515)
------------
$ 366,347
============
SEE ACCOMPANYING NOTES.
F-10
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
1996 1995
Revenue:
Contract programming revenue $ 1,280,303 $ 176,443
Service revenue 458,633 1,144,582
System sales 42,290 1,007,141
----------- ----------
Total revenues 1,781,226 2,328,166
Costs and expenses:
Costs of revenues:
Contract programming revenue 978,395 119,047
Service revenue 334,512 780,328
System sales 114,737 3,110,798
Research and development 657,437 2,017,876
Marketing 193,329 853,395
General and administrative 1,119,787 2,622,455
Settlement expenses 78,125 133,287
--------- ---------
Total costs and expenses 3,476,322 9,637,186
--------- ---------
Loss from operations (1,695,096) (7,309,020)
Other income (expense):
Interest income 7,054 2,652
Interest expense (162,626) (218,970)
Other, net 2,856 (29)
---------- -----------
(152,716) (216,347)
---------- -----------
Net loss $(1,847,812) $(7,525,367)
============ ============
Preferred stock dividends (122,500) (122,500)
Net loss applicable to common stockholders $(1,970,312) $(7,647,867)
============ ============
Net loss per share $ (0.12) $ (3.04)
============ ============
Shares used in per share calculations 16,124,056 2,519,875
============ ============
SEE ACCOMPANYING NOTES.
F-11
Alternative Technology Resources, Inc.
(formerly known as 3Net Systems, Inc.)
Statements of Stockholders' Deficit
Years ended June 30, 1996 and 1995
Preferred Stock Common Stock Common Additional Total
Stock to be Paid-In Accumulated Stockholders'
Issued Capital Deficit Deficit
Shares Amount Shares Amount
Balance, June 30, 1994 204,167 $ 1,225,002 2,318,064 $ 23,181 $1,875,000 $19,878,356 $(23,834,520) $ (832,981)
Sale of preferred stock and
conversion of debt to equity 287,322 1,723,930 - - - 1,723,930 - 3,447,860
Sale of common stock and
common stock warrants 186,000 1,860 - 1,774,390 - 1,776,250
Options and warrants exercised - - 7,615 76 - 99,001 - 99,077
Issuance of common stock for
services rendered and
software purchased - - 120,000 1,200 (1,875,000) 1,873,800 - -
Issuance of common stock and
common stock warrants
for software purchased - - 10,000 100 - 499,900 - 500,000
Issuance of warrants and
cancellation of common
stock previously issued to
service provider in settlement
of disputes - - (5,714) (57) - 520,996 - 520,939
Common stock warrants issued at
below fair market value - - - - - 345,000 - 345,000
Sale of common stock warrants - - - - - 2,154 - 2,154
Common stock issued/issuable to
a service provider and a
customer in settlement of
disputes - - 20,000 200 225,000 199,800 - 425,000
Preferred stock dividends - - - - - (122,500) - (122,500)
Net loss - - - - - - (7,525,367) (7,525,367)
---------------------------------------------------------------------------------------------------
Balance, June 30, 1995 491,489 2,948,932 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 in
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)
SEE ACCOMPANYING NOTES.
F-12
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
YEAR ENDED JUNE 30,
1996 1995
Cash flows from operating activities:
Net loss $(1,847,812) $(7,525,367)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 300,986 1,031,297
Write-off of assets 79,680 2,070,837
Common stock issued/issuable in settlement of
disputes 78,125 425,000
Common stock options and warrants issued at below
fair market value - 345,000
Changes in operating assets and liabilities:
Accounts receivable 231,448 112,552
Inventory 28,518 167,761
Other current assets 114,545 (55,294)
Accounts payable to stockholder 308,650 -
Accounts payable 201,349 113,433
Accrued payroll and related expenses (26,807) (188,529)
Accrued customer obligations - (184,999)
Deferred revenue 5,379 (90,110)
Other current liabilities (112,024) (251,955)
---------- -----------
Net cash used in operating activities (637,963) (4,030,374)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (22,367) (33,233)
Decrease in other assets 27,216 18,001
--------- -----------
Net cash provided (used) in investing activities 4,849 (15,232)
--------- -----------
F-13
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(CONTINUED)
YEAR ENDED JUNE 30,
1996 1995
Cash flows from financing activities:
Proceeds from sale of stock $ - $ 2,993,406
Proceeds from exercise of common stock
warrants and options 1,240 99,077
Proceeds from lines of credit - 950,000
Payments on lines of credit (1,650,000)
Proceeds from notes payable to stockholders 738,752 1,450,000
Proceeds from other notes payable 33,806
Payments on other notes payable (81,022) (81,643)
Payments on capital lease obligations (46,469) (45,762)
--------- -----------
Net cash provided by financing activities 646,307 3,715,078
--------- -----------
Net increase (decrease) in cash 13,193 (330,528)
Cash at beginning of period 38,913 369,441
---------- ------------
Cash at end of period $ 52,106 $ 38,913
========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 106,462 $ 184,924
SEE ACCOMPANYING NOTES.
F-14
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Alternative Technology Resources, Inc. [formerly known as 3Net Systems, Inc.]
(the "Company") provides contract computer programming and consulting services
and acts as an intermediary in providing such services. During fiscal years
1995 and 1996, the Company developed and implemented a program whereby the
Company recruits qualified personnel from the former Soviet Union, obtains
necessary visas, and places them for assignment in the United States. The
Company has now chosen to emphasize this program because of the perceived
opportunity in the high technology temporary placement industry and to de-
emphasize the laboratory software and service business upon which it was
originally founded in 1989.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company has incurred operating
losses since inception which have resulted in an accumulated deficit of
$33,207,699 at June 30, 1996. In addition, at June 30, 1996, the Company has a
working capital deficit of $3,406,254 and a stockholders' deficit of
$3,255,515. In fiscal 1993 and fiscal 1994, the Company experienced delays in
completion of its products which resulted in an inability to timely install
ordered systems and an inability to close new orders. In fiscal 1995, the
Company succeeded in receiving acceptance of its products by some of its
customers; however, sales momentum had been lost because of the extended
delays. During fiscal 1995, the Company wrote off software development costs
and purchased software costs totaling $2,070,837 because the cost reduction
strategies employed by the Company included reduction of sales and marketing
staff and related activities. In fiscal 1996, the Company wrote off $45,000,
which was the remaining net book value of purchased software. In fiscal 1996,
the closing of new orders continued to be impacted by this lack of momentum and
by the Company's financial status. In order to reduce its losses, the Company
has taken steps to decrease expenses and generate revenues by providing
contract programming and consulting services and by acting as an intermediary
in providing such services.
The Company's operating growth strategy includes the expansion of its marketing
efforts through strategic alliances and the development of new customers with
the expenditure of a minimum of resources. During fiscal 1996, the Company
reduced its staff by 50 percent and lowered operating expenses by 64%; however,
such cost saving moves will not be sufficient to allow the Company to timely
meet all of its obligations while attempting to grow revenue to a level
necessary to generate cash from operations; 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, it will be sufficient to prevent the Company
from having to further materially reduce its level of operations, management of
the Company believes that sufficient financing will be available until
operations can be funded through providing contract programming and consulting
services. Ultimately, the Company will need to achieve a profitable level of
operations to fund growth and to meet its
F-15
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
obligations when they become due. 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
(Note 13).
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.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred subsequent to the determination of the
software product's technological feasibility, and prior to the product's
general release to customers, were capitalized in accordance with Statement of
Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" until fiscal 1995. In
fiscal 1995 because of the Company's inability to market products, it expensed
to cost of system sales all remaining capitalized software development costs of
$914,315 in addition to the amortization expense charged to operations during
fiscal 1995 of $496,542.
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. Service revenues are derived from support and maintenance contracts
which are deferred when billed and recognized ratably over the contract term
which is generally one year. Revenues from system sales without significant
Company obligations beyond delivery are recognized upon delivery of the
products net of revenues attributable to insignificant customer obligations and
net of any deferrals for estimated future returns under contractual product
return privileges. System sales revenues pursuant to agreements which include
significant Company obligations beyond delivery and normal installation
services are deferred, net of related hardware costs, until the Company's
remaining obligations are insignificant.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under
Statement 109, the liability 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.
F-16
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are primarily with companies in the health
care industry. The Company performs periodic credit evaluations of its
customers and generally does not require collateral. The Company 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
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 1996
and 1995) 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 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 8, certain of the Company's Preferred Stock was
converted into Common Stock during the year ended June 30, 1996. Net loss per
share would not have differed for the year ended June 30, 1996 had these
conversions occurred on the date of issuance of the Preferred Stock.
SIGNIFICANT CUSTOMERS AND EXPORT SALES
During the year ended June 30, 1996, two customers individually accounted for
more than 10% of total revenues with 41% and 36%, respectively. During the year
ended June 30, 1995, three customers individually accounted for more than 10%
of total revenues with 27%, 17% and 14%, respectively. In addition, the 17%
customer in the year ended June 30, 1995, is a related party and the related
project was discontinued during fiscal 1995. Total export sales during the year
ended June 30, 1995, all of which were sales to Canadian customers, comprised
approximately 5%. There were no export sales during fiscal 1996.
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, 1995 to conform with the June 30, 1996 presentation.
F-17
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
2. INVESTOR GROUP TRANSACTIONS
In fiscal 1994, the Company entered into a series of agreements with James W.
Cameron, Jr. pursuant to which Mr. Cameron and a group of investors
(collectively referred to herein as the "Investor Group") purchased 418,332
shares of Series B Preferred Stock for $2,509,992, 50,000 shares of Series C
Preferred Stock for $625,000, and 600,000 shares of Common Stock for $60,000.
The Series B and Series C Preferred Stock purchased by the investor group was
converted into 1,253,997 shares of Common Stock in March and June, 1994.
As a condition of the agreements between the Company and the Investor Group,
the Company granted to its former Chief Executive Officer and director, stock
options for 400,000 shares of Common Stock exercisable at $0.10 per share. The
options are fully vested as of June 30, 1996 and expire on August 10, 2003.
Compensation expense of $4,080,000 related to this stock option was recorded in
fiscal 1994. Also in conjunction with the agreements, the Company granted
options to purchase a total of 140,000 shares of Common Stock at $5.00 per
share to two new officers. Compensation expense of $1,400,000 related to these
stock options was recorded in fiscal 1994. 70,000 of these options are fully
vested as of June 30, 1996 and expire on October 6, 2003; the other 70,000
options were canceled in May 1995 after the departure of one of the officers.
In January and February 1994, Mr. Cameron advanced $720,000 in bridge financing
to the Company in exchange for a note. This note, along with accrued interest,
was converted into Series E Preferred Stock in November 1994. From September
through November 1994, and prior to the consummation of the Series E Preferred
Stock financing, the Company received $1,450,000 in advances from Mr. Cameron
which were subsequently converted into Series E Preferred Stock in November
1994 (Note 8).
Additionally, Mr. Cameron is the guarantor of the line of credit with a bank
(the "Continuing Guaranty") (Note 4). As consideration for the execution of
the Continuing Guaranty, the Company entered into a Reimbursement Agreement
with Mr. Cameron pursuant to which 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 (Note 8).
Additionally, pursuant to the Reimbursement Agreement, in the event that Mr.
Cameron is required to pay the bank any monies under the Continuing Guaranty,
the Company is required to repay Mr. Cameron the amount of each payment by
either 1) paying an equal cash amount or 2) issuing to Mr. Cameron a non-
convertible note (the "Straight Note") in the principal amount of such payment
by Mr. Cameron, bearing interest at an interest rate equal to the interest rate
of the line of credit on the date of such payment and subject to adjustment
when and to the extent that the interest rate prevailing under the line of
credit may change.
Furthermore, under the terms of the Reimbursement Agreement, upon written
demand by Mr. 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 price of the Convertible
F-18
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
2. INVESTOR GROUP TRANSACTIONS (CONTINUED)
Note is equal to the Applicable Percentage, as defined in the Reimbursement
Agreement, of 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. As a result of the maturity date of the
line of credit being extended by the Bank each six months since signing of the
Reimbursement Agreement, the Applicable Percentage at June 30, 1996, is 20% and
cannot be reduced below this percentage by terms of the agreement.
3. PURCHASED INTANGIBLES
In December 1993, the Company entered into an agreement to purchase an
exclusive license to proprietary software development methodology and for the
use, development and resale, into the healthcare market, of a proprietary
universal scheduling software package from TransMillenial Resources Corporation
in exchange for 100,000 shares of the Company's Common Stock with an estimated
fair market value of $1,550,000. The shares were issued by the Company in July
1994.
In February 1995, the Company entered into an agreement to purchase rights to
use and resell, into any market, the proprietary universal scheduling software
acquired in fiscal 1994 for the healthcare market. The Company issued 10,000
shares of its Common Stock and a warrant to purchase 40,000 shares of its
Common Stock at $0.01 per share with a total fair market value of $500,000 as
the consideration for these rights.
At June 30, 1995, the Company expensed the remaining asset value of $1,156,522
to costs of system sales because the cost reduction strategies employed by the
Company include reduction of sales and marketing staff and activities. The
Company is no longer actively marketing the software.
4. FINANCING ARRANGEMENTS
The Company has a $1,000,000 revolving line of credit with a bank, due in
monthly installments of interest only at the bank's reference rate plus 1.0%
(9.25% at June 30, 1996), with a maturity date of January 1, 1997. The
outstanding balance on the line of credit as of June 30, 1996 was $1,000,000.
The line of credit is secured by substantially all of the assets of the Company
and is guaranteed by James W. Cameron, Jr. (Note 2). At June 30, 1996, the
Company was in default under the terms of the line of credit because additional
debt was incurred during fiscal year 1996 (Note 13).
During fiscal 1996, the Company borrowed $738,752 from two existing
stockholders pursuant to three unsecured promissory notes. All three notes
mature on December 31, 1996 and bear interest at 10.25%. Beginning in October
1996, the Company is required to make monthly interest payments on the notes
totaling $12,724 (Note 13).
F-19
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
5. EQUITY FOR DEBT AGREEMENT
In June 1995, the Company negotiated an equity for debt swap agreement with a
service provider whereby the service provider agreed to accept a warrant to
purchase, at $1.00 per share, the number of shares of the Common Stock of the
Company equal to 1.85% of the number of issued and outstanding shares of Common
Stock plus the number of shares of Common Stock issuable pursuant to
outstanding options, warrants, conversion provisions and other rights to
purchase Common Stock, as of the date of exercise (Note 8). The amount of debt
converted into equity as a result of this transaction was $521,510.
6. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 8,515,000
Research credits 115,000
Common Stock options 2,369,000
Common Stock warrants 733,000
Deferred revenues 104,000
Depreciation 15,000
Other - net 137,000
Total deferred tax assets 11,988,000
Valuation allowance for deferred tax (11,988,000)
assets
$
Net deferred tax assets $ -
The Company's valuation allowance as of June 30, 1995 was $11,426,000,
resulting in a net change in the valuation allowance of $562,000.
As of June 30, 1996 the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $23 million and $11
million, respectively. The federal net operating loss carryforward expires in
2005 through 2011 and the state net operating loss carryforward expires in 1997
through 2001. 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.
F-20
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
6. INCOME TAXES (CONTINUED)
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).
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.
7. COMMITMENTS
OPERATING LEASES
In November 1995, the Company entered into a lease agreement for its current
facility under a one year lease with a stockholder. At June 30, 1996, $107,100
of rent owed for fiscal 1996 is included in the balance of accounts payable to
stockholder. Rental expense for all operating leases was approximately $70,000
and $343,000 for the years ended June 30, 1996 and 1995, respectively. Annual
minimum rental payments for all non-cancelable operating leases for fiscal 1997
are approximately $46,000, net of sublease payments to be received by the
Company of approximately $54,000.
CAPITAL LEASES
The Company leases certain equipment under capital lease agreements. The future
minimum lease payments in fiscal 1997 under capital leases are $10,817, less
$658 representing interest, which results in the present value of the net
minimum lease payments of $10,159 at June 30, 1996. There are no commitments
beyond fiscal 1997.
The cost of leased assets and related accumulated depreciation included in
property and equipment at June 30, 1996 is $173,526 and $169,598, respectively.
Depreciation expense charged to operations in fiscal 1996 and 1995 relating to
leased assets was $34,705 and $34,705, respectively.
ROYALTY COMMITMENTS
The Company had a commitment to pay royalties to Time Technologies of 10% of
hardware and software sales generated through February 12, 1995 related to the
TimeNet product, up to a cumulative total of $100,000. The Company had an
additional commitment to pay royalties to St. Agnes Hospital on software sales
related to the TimeNet product, at 15% of related sales, but in any event not
less than $75,000 for a three year period ended December 22, 1995. During
fiscal 1996, the Company entered into an agreement with St. Agnes Hospital
which provides for the Company's payment of 24 monthly principal and interest
payments of $3,277 in satisfaction of all obligations under the agreement.
F-21
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
7. COMMITMENTS (CONTINUED)
ROYALTY COMMITMENTS (CONTINUED)
Interest accrues at 10% per annum, and the outstanding balance of the
obligation at June 30, 1996, is $54,567.
8. STOCKHOLDERS' DEFICIT
In November 1994, the Company received $301,250 in a private sale of a
combination of Common Stock and warrants to purchase Common Stock. This
transaction consisted of the purchase of 33,500 shares of the Company's Common
Stock at $7.50 per share and the purchase of 5,000 units at $10.00 per unit,
each unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $15.00 per share.
In February 1995, the Company received commitments from several investors to
invest $1,475,000 in a private sale of 147,500 units at $10.00 per unit, each
unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $15.00 per share or $7.50 below
the last trading price on the date of the notice of exercise, whichever is
lower. The warrants expire on February 13, 2000. The Company received
$1,475,000 prior to June 30, 1995 and issued 147,500 shares pursuant to these
agreements.
The Company was served with a lawsuit filed on September 17, 1993 in Sacramento
County Superior Court against it and others by a former employee. The lawsuit
alleged sexual harassment and wrongful termination and sought general and
special damages of $2.0 million plus undisclosed punitive damages. On May 27,
1995, the Company reached a settlement with the former employee under which the
Company caused its insurer to deliver a cash payment to the former employee.
The Company issued 25,000 shares of unregistered common stock with a fair value
of $78,125 to the former employee subsequent to the settlement being approved
by the Superior Court in July 1995.
In June 1996, the Company issued 39,274 shares of its Common Stock to a
customer in connection with a settlement agreement entered into in fiscal 1995
(Note 9).
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, 1996, cumulative unpaid, undeclared dividends were $245,000.
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
F-22
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
8. STOCKHOLDERS' DEFICIT (CONTINUED)
SERIES D PREFERRED STOCK (CONTINUED)
conversion date. The Series D Conversion Price is $10.00 per share after
giving effect to the one-for-ten consolidation of Common Stock (Note 12).
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 November 18, 1994, the Company entered into a series of agreements for the
purchase of Series E Convertible Preferred Stock with two existing
stockholders. The transaction included a debt to equity conversion of
$2,232,856 and an additional aggregate cash investment of $1,215,004 in
exchange for the issuance of 287,322 shares of 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 22,335,933
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 until such time as the number of authorized shares
can be increased (Note 12).
In connection with the private sale of Preferred Stock in March 1992, the
Company sold Class A Warrants to purchase 40,000 shares of Common Stock which
resulted in net proceeds to the Company of approximately $81,000. In January of
1994, Class A Warrants to purchase 34,400 shares of Common Stock were amended
into new warrants (the "Conversion Warrants") exercisable at $15.00 per share
(see below). The remaining Class A Warrants are exercisable at $25.00 per
share. In the event the Company attains net income after provision for income
taxes in excess of $500,000 in a quarterly period (the "Quarterly Goal"), the
Company will have 15 days to notify the warrant holders of any intent it may
have to redeem all Class A Warrants which are not exercised by the end of a
specified period (not less than 30 days from delivery of such notice). The
redemption price of the Class A Warrants will be $0.20 per share. If the
Company fails to deliver such notice within the required 15-day period, it
will lose its right to redeem the outstanding Class A Warrants until the next
quarter in which the Company reaches the Quarterly Goal.
In May 1992, the Company issued additional Class A Warrants to purchase 4,000
shares of Common Stock to an individual in consideration for certain financial
consulting services. All of these warrants were amended into Conversion
Warrants in January of 1994 (see below).
In June 1992, the Company issued additional Class A Warrants to purchase 6,250
shares of Common Stock to stockholders in exchange for loan guarantees in the
aggregate amount of $250,000. All of these warrants were amended into
Conversion Warrants in January of 1994 (see below).
F-23
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
8. STOCKHOLDERS' DEFICIT (CONTINUED)
SERIES E PREFERRED STOCK (CONTINUED)
Prior to the Company's offer to amend the Class A Warrants into Conversion
Warrants, the Company offered each of the Class A Warrant holders a non-
redeemable Class B Warrant to purchase 50% of the number of shares that they
were entitled to purchase through the exercise of their Class A Warrants, equal
to an aggregate of 25,125 shares of Common Stock, in exchange for the execution
and delivery by each Class A Warrant holder of a release of any claims that he
or she may have against the Company for the late registration of the Common
Stock underlying the Class A Warrants. Holders of 31 Class A Warrants covering
47,840 shares signed releases and 23,925 Class B Warrants were issued. In
January of 1994, Class B Warrants to purchase 22,325 shares of Common Stock
were amended into Conversion Warrants exercisable at $15.00 per share (see
below). The remaining Class B Warrants are exercisable through April 22, 1998
at a price of $28.80 per share. As of June 30, 1996, the Company has not
received claims from any of the warrant holders who did not sign releases, nor
does the Company believe that the ultimate outcome of this matter will have a
material effect on its results of operations or financial position.
On February 16, 1993, the Company issued an aggregate of five Class C Warrants
to purchase an aggregate of 7,500 shares of Common Stock in settlement of a
dispute with a group of individuals and an organization who have claimed that
they were entitled to receive a finder's fee in connection with the Company's
March 1992 private placement. In January of 1994, all of the Class C Warrants
were amended into Conversion Warrants exercisable at $15.00 per share (see
below).
In connection with the Company's initial public offering, the Company issued
Class D Warrants to purchase 10,000 shares of Common Stock to the underwriter.
In January of 1994, all of the Class D Warrants were amended into 8,400
Conversion Warrants exercisable at $15.00 per share (see below).
In December of 1993, the Company offered the holders of the Class A, B, C and D
Warrants the right to have their warrants amended to reduce the exercise price
to $15.00, to provide an early termination (call) feature at the Company's
option and to change the number of shares subject to warrant. The amended
warrants, (the "Conversion Warrants"), were issued in January of 1994.
The following table summarizes the number of shares subject to outstanding
warrants at June 30, 1996:
Original Amended-Terms
TERMS CONVERSION WARRANTS
Class A 5,600 85,200
Class B 1,600 37,062
Class C - 7,500
Class D - 8,400
F-24
8. STOCKHOLDERS' DEFICIT (CONTINUED)
SERIES E PREFERRED STOCK (CONTINUED)
The Conversion Warrants are immediately callable by the Company at its sole
discretion; however, in no event may the Conversion Warrants be exercised later
than December 31, 1997. During fiscal year 1995, Conversion Warrants to
purchase 2,449 shares of common stock were exercised.
On June 16, 1993, the Company issued two Class E Warrants to purchase an
aggregate of 1,455 shares of Common Stock in connection with note payable
agreements with an officer and an employee of the Company. The notes payable
were repaid by the Company during fiscal 1994. The warrants are immediately
exercisable at a price of $13.75 per share through June 15, 1998. During
fiscal year 1996, a warrant to purchase 1 share of common stock was exercised
and the Company received $14.
On July 7, 1993, the Company issued two warrants to purchase an aggregate of
8,000 shares of Common Stock in connection with note payable agreements with an
officer and an employee of the Company. The notes payable were repaid by the
Company during fiscal 1994. The warrants are immediately exercisable at a
price of $5.00 per share through July 7, 1998. During fiscal year 1996,
warrants to purchase 2 shares of common stock were exercised and the Company
received $10.
On February 28, 1994, the Company issued a warrant to purchase an aggregate of
10,000 shares of Common Stock to the designee of James W. Cameron, Jr. in
exchange for a line of credit guarantee in the amount of $2,000,000 (Note 2).
The warrant is immediately exercisable at a price of $15.00 per share through
February 28, 1999.
On April 6, 1994, the Company issued two warrants to purchase an aggregate of
115,286 shares of Common Stock to a former officer and a former consultant in
connection with the settlement of a claim by the former officer and the former
consultant. The warrants are exercisable at a price of $15.00 per share and
had an estimated fair market value of $645,599 which was charged to operations
in fiscal 1994. In addition, the Company issued two warrants to purchase an
aggregate of 32,500 shares of Common Stock at an exercise price of $0.01 per
share to these individuals in connection with the same settlement agreement.
These warrants had an estimated fair market value of $438,750 which was charged
to operations in fiscal 1994. All of the warrants are immediately exercisable
through April 15, 1999. In August 1995, the former officer exercised one of
these warrants for 20,000 shares of Common Stock for an aggregate price of
$200, and in December 1995 he exercised another warrant for 2 shares of Common
Stock.
In August 1993, the Board of Directors approved the issuance to stockholders of
record on September 7, 1993 a Common Stock warrant with an exercise price of
$25.00 per share for the same number of shares of Common Stock which
each stockholder of record held on September 7, 1993, which totaled 321,308
shares (the "Special Warrants"). The Special Warrants are immediately
exercisable and
F-25
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
8. STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS (CONTINUED)
are subject to an early termination (call) feature by the Company. The Special
Warrants are callable by the Company if the Market Price of the Company's
Common Stock, as defined in the warrant, is $32.50 per share for any ten
consecutive trading days. In no event may the Special Warrants be exercised
later than December 31, 1997.
In July 1994, the Company agreed to issue two warrants to a strategic partner
each exercisable for 132,618 shares at $30.00 per share and $50.00 per share,
respectively. The warrant agreements have not been finalized; however, the
Company recorded $345,000 in expense during the first quarter of fiscal 1995
for these warrants.
In November 1994, the Company issued a warrant to purchase 5,000 shares of
Common Stock at an exercise price of $15.00 per share as part of the sale of
units sold to an investor in a private placement. The warrant is immediately
exercisable through December 31, 1997.
The Company sold a warrant to purchase 4,200 shares of Common Stock at an
exercise price of $25.00 per share in February 1995 to a brokerage firm. The
warrant is immediately exercisable through December 31, 1997. The Company
received $2,100 and a release of all claims by the brokerage firm.
The Company sold a warrant to purchase 107 shares of Common Stock at an
exercise price of $25.00 per share in June 1995 to a brokerage firm. The
warrant is immediately exercisable through December 31, 1997. The Company
received $54 and a release of all claims by the brokerage firm.
In February 1995, the Company issued warrants to purchase 147,500 shares of
Common Stock as part of the sale of units sold to several investors in a
private placement at the exercise price of $15.00 per share or $7.50 below the
last trading price on the date of the notice of exercise, whichever is lower.
These warrants expire on February 13, 2000. During fiscal 1996, several
investors exercised warrants for 132,500 shares of unregistered Common Stock.
The Company received no proceeds upon the exercise of these warrants since the
trading price at the time of exercise was less than $7.50 per share.
In June 1995, the Company negotiated an equity for debt swap agreement with a
service provider whereby the service provider agreed to accept a warrant to
purchase, at $1.00 per share, the number of shares of the Common Stock of the
Company equal to 1.85% of the number of issued and outstanding shares of Common
Stock plus the number of shares of Common Stock issuable pursuant to
outstanding options, warrants, conversion provisions and other rights to
purchase Common Stock as of the date of exercise (Note 5). This warrant
expires on December 31, 2004. The amount of debt converted into equity as a
result of this transaction was $521,510.
F-26
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
8. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTIONS
In fiscal 1994 as a condition of the agreements between the Company and the
Investor Group (Note 2), the Company granted to its then-new Chief Executive
Officer and director, stock options for 400,000 shares of Common Stock
exercisable at $0.10 per share. The options are fully vested as of June 30,
1996 and expire on August 10, 2003. In April 1996, 10,000 options were
exercised.
SPECIAL STOCK OPTION PLAN
In June 1993 the Board of Directors adopted the Alternative Technology
Resources, Inc. (formerly known as 3Net Systems, Inc.) Special Stock Option
Plan which authorizes 18,800 shares of Common Stock for the grant of options.
In June 1993 the Board of Directors granted options with respect to 18,715
shares of Common Stock to approximately 43 employees. Options to purchase
13,801 shares of Common Stock under the Special Stock Option Plan were canceled
through April 10, 1996, at which time the remaining 4,913 options were canceled
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.
During fiscal 1994, the Company granted options to purchase 182,000 shares of
the Company's Common Stock, at exercise prices ranging from $5.00 to $13.75 per
share, to six employees under the 1993 Plan, including two new officers in
conjunction with the agreements with the Investor Group (Note 2). During
fiscal 1995, the Company granted additional options to purchase 57,890 shares
of the Company's Common Stock, at exercise prices ranging from $6.25 to $10.00,
to employees and officers. Options to purchase 26,068 and 87,900 shares were
canceled in fiscal 1996 and 1995, respectively. On April 10, 1996, the Board
of Directors agreed to adjust the exercise price for 115,922 options to
$0.78125 per share, the closing market price on that day.
F-27
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
8. STOCKHOLDERS' DEFICIT (CONTINUED)
1993 STOCK OPTION/STOCK ISSUANCE PLAN
In November 1993, the Company granted two options to purchase an aggregate of
10,000 shares of the Company's Common Stock, at an exercise price of $1.62 per
share to two non-employees elected as directors at the 1993 Annual Stockholders
Meeting. In June 1994, the Company granted an option to purchase 5,000 shares
of Common Stock, at an exercise price of $13.10 per share to an individual
elected as a director who is not an employee. In April 1995, 1,667 options
were exercised at $1.62 per share and 3,333 options were canceled. On November
20, 1995 the Company granted options to purchase 5,000 shares of Common Stock,
at an exercise price of $1.00 per share to an individual elected as a director
who is not an employee.
On April 10, 1996, the Board of Directors agreed to adjust the exercise price
of $13.10 per share for an option to purchase 5,000 shares of Common Stock,
originally issued to a director in June 1994, to $0.78125 per share, the
closing market price on April 10, 1996.
On April 10, 1996, the Company granted options to purchase 166,787 shares of
the Company's Common Stock at an exercise price of $0.78125 per share to eleven
employees, including two officers.
Of the 312,622 options outstanding at June 30, 1996, options to purchase
145,835 shares were immediately exercisable at prices ranging from $0.78125 to
$13.10 per share. Approximately 85,711 shares are still available for grant
under the 1993 Plan at June 30, 1996.
STOCK RESERVED FOR ISSUANCE
As of June 30, 1996, the Company has reserved a total of 2,378,582 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. In addition, at June 30, 1996, the Company has an additional
5,218,677 shares recorded as Common Stock to be issued until such time as the
number of authorized shares can be increased (Note 12).
9. SETTLEMENT OF CUSTOMER CLAIMS
In April 1995, the Company reached a letter agreement with a customer that
mutually acknowledges that contributions beyond the scope of the original
customer agreement, as amended, had been made by both parties and that any
obligations for such contributions were mutually satisfied by the fulfillment
of the terms of the letter agreement. The letter agreement required the
Company to issue shares of its Common Stock, within 90 days of the agreement,
to the customer with a market value at the time of issuance of $225,000. The
Company recorded $225,000 of settlement expense during the year ended June 30,
1995,
F-28
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
9. SETTLEMENT OF CUSTOMER CLAIMS
pursuant to this agreement, but, had previously reserved approximately $130,000
specifically for this customer. During fiscal 1996, the Company issued 39,274
shares of its Common Stock to this customer in satisfaction of its obligations
under the letter agreement.
10. CONTINGENCIES
SUIT FROM FORMER CONSULTANT
In April 1994, the Company entered into a settlement agreement with a former
officer and director (the "Former Officer") and a former consultant, officer
and director (the "Former Consultant") in connection with disputes concerning
outstanding compensation, expense reimbursement, equity entitlement issues and
ownership of the Company's proprietary software. In November 1994, the Former
Officer and Former Consultant asserted that the Company had breached certain of
its obligations under the settlement agreement. In February 1995, the Company
believes it cured any alleged default under the settlement agreement by
fulfilling certain nonmaterial obligations to the Former Officer and the Former
Consultant. In addition, the Former Consultant asserted claims against the
Company and numerous other parties under a variety of legal theories. On June
12, 1995, the Former Consultant filed a lawsuit in Sacramento County Superior
Court against the Company, its then-current directors, James W. Cameron, Jr.,
the Former Consultant's stockbroker and brokerage firm and one of the Company's
largest customers. The lawsuit set forth twenty causes of action based on a
variety of legal theories and sought in excess of $15.0 million in damages plus
punitive damages. In August 1995, the Superior Court granted petitions to
compel arbitration filed by the Company's defendants and Mr. Cameron which
petitions were based on the arbitration provision of the April 1994 settlement
agreement. The Court also granted a similar motion filed by the Former
Consultant's stockbroker and brokerage firm. The litigation of the case in
Superior Court was stayed pending the outcome of the arbitration of all claims
set forth in the action. In February 1996 the Arbitration Panel entered its
order dismissing with prejudice all of the Former Consultant's claims made
against the Company's defendants and Mr. Cameron and awarded the Company
recovery of a portion of its fees and costs. On July 26, 1996, the Superior
Court confirmed the Arbitration Panel's order of dismissal and award. At June
30, 1996, legal expenses and costs of $201,550 incurred by the Company related
to this litigation are included in the balance of accounts payable to
shareholder. On September 10, 1996, the Company was notified that the Former
Consultant had filed a Notice of Appeal with the 3rd District Appellate Court.
The Company does not believe that the outcome of this matter will have a
material adverse impact on its financial position or results of operations.
DEMAND LETTER
The Company purchased and licensed various assets from Barrett Laboratories,
Inc. ("Barrett"). In fiscal 1993, a major creditor of Barrett asserted that
the Company was liable for $2,460,000 owed by Barrett. No basis for this
assertion has been provided to the Company nor has the Company had any
communications with Barrett's creditor in fiscal 1995 or fiscal 1996. The
documentation on which the
F-29
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
10. CONTINGENCIES (CONTINUED)
DEMAND LETTER (continued)
Barrett liability is based was signed in 1986, three years before the Company
was formed. The Company does not believe that it has any obligation with
respect to the debts of Barrett and the Company and its counsel believe that
the statute of limitations has run on any claim that the creditor may have had
against the Company.
DEMANDS FOR INDEMNIFICATION
In July 1994, the Company received a formal request for indemnification from
one of the individual defendants as it pertains to a the wrongful termination
lawsuit filed on September 17, 1993, in Sacramento County Superior Court (Note
8). The Company denied that it had any obligation and the matter was submitted
for determination by an arbitrator in accordance with certain indemnification
agreements between the Company and the individual. The arbitrator determined
that the Company had an obligation to pay for the cost of defense of the
individual. Based on this ruling, the Company reimbursed the individual
approximately $93,000 for the expenses he had incurred in defending the action
and will pay his continuing defense costs. However, the Company has reserved
its right to seek reimbursement of these amounts from the individual under
appropriate circumstances. On June 19, 1995, the Company received a demand by
the individual seeking reimbursement of fees and settlement costs incurred by
the individual and his insurer. On August 18, 1995, the Company formally
rejected that demand. The Company does not believe that the outcome of this
matter will have a material adverse impact on its financial position or results
of operations.
The Company also received a demand for indemnification of legal expenses for
separate counsel from the other individual defendant in the lawsuit filed on
September 17, 1993, in Sacramento County Superior Court, discussed above. The
Company had been providing a defense to this individual through its counsel and
disputes that it had an obligation to provide for separate counsel. This
matter was resolved by the Company's agreement to provide for separate counsel.
The Company has reimbursed the former officer approximately $41,000 for
expenses he incurred in defending the action. In August 1995, the Company
received notification from the individual's law firm that the Company was in
arrears of approximately $12,000 in its obligation to reimburse the firm for
fees and expenses in defending the individual, and has arranged for terms under
which such amount will be paid. The Company does not believe that the outcome
of this matter will have a material adverse impact on its financial position or
results of operations.
11. DISTRIBUTOR AND CO-DEVELOPMENT AGREEMENT
In November 1993, a dispute arose between the Company and its Canadian
distributor (the "Distributor") which was settled in April 1994. This
settlement agreement encompassed a cash payment of $50,000 for
F-30
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
11. DISTRIBUTOR AND CO-DEVELOPMENT AGREEMENT (CONTINUED)
consulting services and the issuance of 20,000 shares of the Company's Common
Stock (estimated fair market value of $325,000) as an incentive for entry into
a renewal of the Distributor and Co-Development Agreement. Accordingly, the
Company recorded $50,000 in general and administrative expense and $325,000 in
marketing and sales expense during fiscal 1994.
The Company entered into discussions to renegotiate its contractual
relationship with the Distributor. These discussions led to the execution of a
letter agreement on January 27, 1995, that modified certain provisions of the
April 1994 agreement. In addition, certain minor changes were agreed to in a
letter dated March 22, 1995. These agreements called for, among other things,
issuance of an additional 20,000 shares of the Company's Common Stock to the
Distributor, if the Distributor successfully developed a pilot site for the
Canadian version of the Company's software the Distributor was developing.
Accordingly, the Company recorded $200,000 of settlement expense in fiscal 1995
which was offset by a reduction in reserves of approximately $170,000. On May
15, 1995, the Company received a letter from the Distributor declaring an event
of default based on the Company's alleged failure to deliver a specified number
of shares of the Company's Common Stock pursuant to the agreement. Within
approximately sixty days, the subject stock certificates issuable to the
Distributor were delivered by the transfer agent to the Distributor. On
January 5, 1996, the Distributor sent a letter to the Company indicating that
the Distributor intended to file a lawsuit against the Company and others,
stating a number of claims. The Distributor indicated their belief that the
value of these claims exceeds $5.0 million. The Company believes that the
Distributor has breached the contract and intends to vigorously defend itself
if a lawsuit is filed. The Company has offered to settle the dispute, but the
Distributor has not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement will
place additional strains on the Company's resources and cash position and the
Company may be required to seek protection under federal bankruptcy law should
the Distributor pursue its claims through litigation. Moreover, due to the
Company's current and projected cash position, the Company may not be able to
satisfy an adverse verdict in this matter that obligates the Company to pay any
significant damages to the Distributor. In the event an adverse verdict is the
result of this dispute, the Company may be required to seek protection under
federal bankruptcy law.
12. SUBSEQUENT EVENTS
On December 2, 1996, the Company effected a one-for-ten consolidation of the
Company's outstanding Common Stock, par value $0.01 per share, and reduced the
number of authorized shares of Common Stock from 200,000,000 to 100,000,000.
Reference to shares throughout the financial statements and footnotes gives
effect to the one-for-ten share consolidation. In addition, effective on
December 2, 1996, the Company changed its name from 3Net Systems, Inc., to
Alternative Technology Resources, Inc.
F-31
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(FORMERLY KNOWN AS 3NET SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
13. RESTRUCTURING OF FINANCING ARRANGEMENTS (NOTE 4)
On December 31, 1996, the Company had $1,205,652 in notes payable to
stockholders outstanding with a maturity date of December 31, 1996. In
addition, the $1,000,000 line of credit with a bank was to mature on January 1,
1997. In December 1996, the stockholder lenders extended the maturity date on
the notes payable totaling approximately $1.2 million from December 31, 1996 to
the earlier of December 31, 1997, or such time as the Company obtains equity
financing. In addition, the maturity date of the $1,000,000 line of credit
with a bank was verbally extended by the bank until such time as stockholder
James W. Cameron, Jr., can conclude negotiations with the bank to become the
borrower under the line of credit. When Mr. Cameron becomes the borrower under
the line of credit, the Company will enter into a note payable to Mr. Cameron
for the $1,000,000. Terms of that note are expected to provide for the same
monthly interest payments as with the bank and have a maturity date of the
earlier of December 31, 1997, or such time as the Company obtains equity
financing.