U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the period ended September 30, 2006
Commission file number 333-128191
ALTERNATIVE CONSTRUCTION COMPANY, INC
(Exact Name of Registrant as specified in its charter)
FLORIDA 20-1776133
------- ----------
(State of Incorporation) (IRS Employer
Identification Number)
1900 S. Harbor City Boulevard, Suite 315, Melbourne, FL 32901
- ------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Telephone: 321-308-0834
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common equity,:
10,245,794 shares of Common Stock ($.0001 par value) as of October 26, 2006.
Transitional small business disclosure format: Yes |_| No |X|
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS (UNAUDITED) 2
CONSOLIDATED BALANCE SHEETS:
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005 2
CONSOLIDATED STATEMENTS OF OPERATIONS:
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006
AND 2005 4
CONSOLIDATED STATEMENTS OF CASH FLOWS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL INFORMATION:
SEPTEMBER 30, 2006 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 23
ITEM 3 CONTROLS AND PROCEDURES 29
PART II OTHER INFORMATION 29
ITEM 1 LEGAL PROCEEDINGS 29
ITEM 2 CHANGES IN SECURITIES 30
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 30
ITEM 5 OTHER INFORMATION 30
ITEM 6 EXHIBITS 30
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2006 2005
------------- ------------
ASSETS
Current Assets
Cash $1,456,903 $ 133,547
Notes Receivable 343,433 395,000
Accounts Receivable, Net 2,070,989 1,294,288
Due From Factor, Net 74,022 92,543
Inventory 299,761 539,153
Prepaid Expenses 44,426 233,832
---------- ----------
Total Current Assets 4,289,534 2,688,363
---------- ----------
Property, Plant and Equipment, Net 3,061,770 3,137,654
---------- ----------
Total Assets $7,351,304 $5,826,017
========== ==========
See accompanying notes to consolidated financial statements.
2
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2006 2005
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable, Current Portion $ 825,955 $2,628,594
Accounts Payable and Accrued Expenses 1,425,894 1,440,942
Accrued Payroll and Taxes 65,854 95,305
Capital Leases, Current Portion 7,094 4,806
Deferred Revenue 66,446 65,803
---------- ----------
Total Current Liabilities 2,391,243 4,235,450
---------- ----------
Non-current Liabilities
Notes Payable, Non-current Portion 968,819 481,943
Capital Leases, Non-current Portion 16,796 17,577
---------- ----------
Total Non-current Liabilities 985,615 499,520
---------- ----------
Total Liabilities 3,376,858 4,734,970
---------- ----------
Minority Interest (18,812) (22,425)
---------- ----------
Stockholders' Equity
Preferred Stock
Series A convertible preferred stock, voting, $1.00 par value,
1,500,000 shares authorized, 1,500,000 shares issued and
outstanding 1,500,000 1,500,000
Series B convertible preferred stock, voting, $.0001 par value,
3,500,000 shares authorized, 2,010,000 shares issued and
outstanding 201 201
Series C convertible preferred stock, voting, $.0001 par value,
1,000,000 shares authorized, 188,680 shares issued and
outstanding 38 --
Common Stock
Alternative Construction Company, Inc.: $.0001 par value,
100,000,000 shares authorized, 4,994,350 shares issued
and outstanding 1,033 853
Minority Interest in Subsidiaries 400 400
Subscription Receivable -- (331)
Additional Paid In Capital 3,472,167 --
Accumulated Deficit (980,581) (387,652)
---------- ----------
Total Stockholders' Equity 3,993,258 1,113,472
---------- ----------
Total Liabilities and Stockholders' Equity $7,351,304 $5,826,017
========== ==========
See accompanying notes to consolidated financial statements.
3
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Consolidated Statement of Operations
Unaudited
For the Period
Three Months Ended Nine Months January 21,
----------------------------- Ended 2005 Through
September 30, September 30, September, 30 September 30,
2006 2005 2006 2005
------------- ------------- ------------- --------------
Sales $2,449,574 $3,710,552 $6,064,173 $5,748,225
Cost of Sales 2,012,313 2,816,292 4,493,629 4,574,170
---------- ---------- ---------- ----------
Gross Profit 437,261 894,260 1,570,544 1,174,055
Operating Expenses 460,736 809,415 1,935,250 1,644,618
---------- ---------- ---------- ----------
Income (Loss) From Operations (23,475) 84,845 (364,706) (470,563)
Interest Expense (37,793) (41,264) (224,610) (100,853)
---------- ---------- ---------- ----------
Net Income (Loss) Before Minority Interest (61,268) 43,580 (589,316) (571,417)
Minority Interest in Subsidiary 46,733 (3,267) 3,613 (3,405)
---------- ---------- ---------- ----------
Net Income (Loss) $ (108,001) $ 46,847 $ (592,929) $ (568,012)
========== ========== ========== ==========
Net Income (Loss) Per Share:
Basic and diluted based upon 8,744,236
weighted average shares outstanding $ (0.01)
==========
Basic and diluted based upon 18,038,350
weighted average shares outstanding $ --
==========
Basic and diluted based upon 8,620,438
weighted average shares outstanding $ (0.07)
==========
Basic and diluted based upon 14,152,081
weighted average shares outstanding $ (0.04)
==========
See accompanying notes to consolidated financial statements.
4
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Consolidated Statement of Cash Flows
Unaudited
Nine Months Ended
---------------------------------------
September 30, 2006 September 30, 2005
------------------ ------------------
Cash Flows From Operating Activities:
Net Loss $ (592,929) $ (568,012)
Adjustments to Reconcile Net Loss to Net Cash Used By
Operating Activities:
Depreciation and Amortization 123,646 97,714
Minority Interest 3,613 (3,405)
Decrease (Increase) In:
Accounts Receivable, Net (776,701) (823,990)
Due from Factor, Net 18,521 (92,543)
Inventories 239,392 (680,401)
Prepaid Expenses and Other Current Assets 189,405 (106,078)
Other Assets -- (22,780)
Increase (Decrease) In:
Accounts payable, accrued expenses and taxes payable (44,499) 1,301,548
Deferred Revenue and Other Current Liabilities 643 6,069
----------- -----------
Net Cash Used By Operating Activities (838,909) (891,878)
----------- -----------
Cash Flows From Investing Activities:
Acquisition of Property, Plant and Equipment (47,762) (3,046,991)
Additional Costs Related to Acquisition -- (31,310)
----------- -----------
Net Cash Used By Investing Activities (47,762) (3,078,301)
----------- -----------
Cash Flows From Financing Activities:
Issuance and Repayment, Net, of Notes Payable, Line
of Credit and Capital Leases (1,314,256) 2,884,929
Issuance of Common Stock 180 773
Issuance of Series A Preferred Stock -- 1,500,000
Issuance of Series B Preferred Stock -- 201
Issuance of Series C Preferred Stock 38 --
Issuance and Receipt, Net, of Stock Subscriptions 331 75
Paid In Capital 3,472,167 --
Issuance and Repayment, Net, of Notes Receivable 51,567 (308,804)
----------- -----------
Net Cash Provided By Financing Activities 2,210,027 4,077,174
----------- -----------
Net Increase in Cash 1,323,356 106,995
Cash at Beginning of Year 133,547 --
----------- -----------
Cash at End of Period $ 1,456,903 $ 106,995
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 224,610 $ 100,853
=========== ===========
Taxes Paid $ -- $ --
=========== ===========
See accompanying notes to consolidated financial statements.
5
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim period. The results of
operations for the nine months ended September 30, 2006 are not
necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements and footnotes
have been condensed and, therefore, do not contain all required
disclosures. Reference should be made to the Company's annual audited
financial statement for the period January 21, 2005 (date of acquisition)
through December 31, 2005.
Alternative Construction Company, Inc. ("ACC") of Florida was incorporated
in 2004. The Company provides administrative and marketing expertise to
several subsidiaries. Alternative Construction Technologies Corporation
("ACT") of Delaware, a wholly-owned subsidiary, was incorporated in 1997,
designs and manufactures wall and roof panels (ACTech Panel(TM)) used in
residential, commercial and other infrastructures. Universal Safe
Structures, Inc. ("USS") of Florida, an 80% owned subsidiary, was
incorporated in 2005, and designs and markets the Universal Safe Room(TM)
to residential, commercial and other infrastructures. ProSteel Builders
Corporation ("PSB") of Florida was incorporated in 2005, and is also an
80% owned subsidiary, which contracts to build residential, commercial and
other infrastructures.
On January 21, 2005, a newly formed acquisition Company, known as
Alternative Construction Company, Inc. ("ACC") acquired all the
outstanding stock of ACT, a privately held company, and substantially all
of the assets of Quality Metal Systems, LLC ("QMS"). In addition, ACC
received an assignment of all the patents related to production by ACT,
which were owned by a shareholder of ACT. The original purchase agreements
entered into on December 14, 2004 between ACC (purchaser) and ACT and QMS
(sellers) called for the payment of $1,000,000 and issuance of 1,500,000
shares of ACC Series A Preferred Stock. During the closing transaction and
in performing its due diligence, the purchaser ("ACC") discovered that
both companies would require substantial cash infusions to continue
operations. The sellers agreed to offset the cash down payment with notes
payable of $350,000 due February 19, 2005. On March 10, 2005, the notes
were amended and restated with a due date of September 30, 2005. On July
1, 2005, the notes were amended and adjustments to the reconciliation were
mutually agreed to by all parties raising the outstanding balance to
$629,894. Therefore, the cost of the acquisition of ACT after the net
adjustments as a result of further due diligence, was $879,894 of which
$750,000 was Series A Preferred Stock. The acquisition of the assets of
QMS did not change. A new provision in the notes states that if the
Company were to file for public registration, the seller would convert the
remaining balance, less $100,000, to common stock at the value of $2.65
per share. To date, any net balances payable by the purchaser to the
sellers have not been made as the purchasers continue to collect accounts
receivable and liquidate payables and other obligations.
6
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPONENTS OF PURCHASE PRICE
Note Payable $ 629,894
Series A Preferred Stock 1,500,000
----------
Total Purchase Price $2,129,894
==========
BALANCE SHEET and ACTIVITY at JANUARY 20, 2005:
Assets:
Cash $ 43,634
Accounts Receivable, net 158,674
Inventory 70,738
Prepaid Expenses 16,378
Property, Plant and Equipment, net 658,588
----------
Total Assets $ 948,012
==========
Liabilities and Stockholders' Equity:
Accounts Payable and Accrued Expenses $ 167,452
Debt 85,528
Stockholders' Equity 695,032
----------
Total Liabilities and Stockholders' Equity $ 948,012
==========
STATEMENT of OPERATIONS for the Period JANUARY 1 - 20, 2005:
Sales $ 84,152
Cost of Sales 80,786
----------
Gross Profit 3,366
Operating Expenses 34,676
----------
(Loss) from Operations (31,310)
----------
Net (Loss) ($ 31,310)
----------
7
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table is a detail of the reduction (net) of $370,106 from
the acquisition price of $2,500,000 to $2,129,894:
ACT ACT QMS QMS
Stock Cash Stock Cash Total
------- -------- ------- ------- ---------
Purchase Price
Series A Preferred Stock 750,000 -- 750,000 -- 1,500,000
Note Payable -- 500,000 -- 500,000 1,000,000
------- -------- ------- ------- ---------
Total Purchase Price 750,000 500,000 750,000 500,000 2,500,000
------- -------- ------- ------- ---------
Adjustments to Purchase Price:
Accounts Receivable (a) -- (202,611) -- -- (202,611)
Accounts Payable (b) -- (134,441) -- -- (134,441)
Unrecorded Lease (c) -- (16,271) -- -- (16,271)
Fixed Assets (d) -- (1,982) -- -- (1,982)
Physical Inventory (e) -- (7,245) -- -- (7,245)
Unpaid Payroll at Acq. Date
(f) -- (7,556) -- -- (7,556)
------- -------- ------- ------- ---------
Total Adjustments -- (370,106) -- -- (370,106)
------- -------- ------- ------- ---------
Net Purchase Price 750,000 129,894 750,000 500,000 2,129,894
------- -------- ------- ------- ---------
(a) Uncollectable accounts receivable on books at acquisition date.
(b) Unrecorded liabilities not on books at acquisition date.
(c) Contractual lease for forklifts not recorded on books at acquisition
date.
(d) Fixed assets on books that had previously disposed of or transferred
to unrelated party.
(e) Adjustment to reflect physical inventory at date of acquisition.
(f) Predecessor liability for payroll at date of acquisition and
subsequently paid by Purchaser.
8
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The purchase price of ACT and the select assets of QMS was $2,500,000. The
actual value of the assets (net) purchased was $2,564,984 as shown below:
Purchase Adjustments
Before From
Adjustments Above Total
----------- ----------- ---------
Appraised value of fixed assets 2,528,540 2,528,540
Other assets & liabilities, net 36,444 (370,106) (333,662)
--------- -------- ---------
Acquired assets, net 2,564,984 (370,106) 2,194,878
Purchase price 2,500,000 (370,106) 2,129,894
--------- -------- ---------
Value in excess of purchase price 64,984 -- 64,984
========= ======== =========
Allocation to reduce the value of
acquired fixed assets
On April 28, 2005, the Company acquired an 80% interest in USS for a
purchase price of $800. As no tangible assets or liabilities were
acquired, the full value was booked to Common Stock.
On June 28, 2005, the Company acquired an 80% interest in PSB for a
purchase price of $800. As no tangible assets or liabilities were acquired
the full value was booked to Common Stock.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Alternative Construction Technologies
Corporation ("ACT"), and its majority owned subsidiaries, Universal Safe
Structures, Inc. ("USS") (80%), and ProSteel Builders Corporation ("PSB")
(80%). All significant inter-company transactions have been eliminated in
consolidation. Inter-company transactions include the loans from the
parent to its subsidiaries.
Revenue Recognition
The Company recognized revenue on our products in accordance with the
Securities Exchange Commission (SEC) Staff Accounting Bulletin No. 104,
(which superseded Staff Accounting Bulletin No. 101) "Revenue Recognition
in Financial Statements". Under these guidelines, revenue is recognized on
sales transactions when all of the following exist: persuasive evidence of
an arrangement did exist, delivery of product has occurred, the sales
price to the buyer is fixed or determinable and collectibility is
reasonably assured. We accrued a provision for estimated returns
concurrent with revenue recognition.
The Company has adopted Emerging Issues Task Force Issue 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor's Products)" (EITF 01-9), which became effective for fiscal
years beginning after December 15, 2001. We concluded that EITF 01-9 is
applicable to the accounting for our cooperative agreements with certain
customers, as the benefits received from consideration given to those
customers are not sufficiently separable from the revenue derived.
Accordingly, all such cooperative expenses are recorded as reductions to
revenues.
9
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Sales for ACT and USS are generated from customer's purchase orders. The
sales are recognized upon the shipment of finished goods from the
Company's plant to the customer at which time the product changes title.
Allowances for cash discounts and returns are recorded in the period in
which the related sale is recognized. Our 80% owned subsidiary, PSB,
contracts to build residential, commercial and other infrastructures to
its customers, none of which are related to ACC. As such, PSB recognizes
its revenue under the percentage of completion method as work on a
contract as progresses, recognition of revenue and profits generally is
related to costs incurred in providing the services required under the
contract. Statement of Position 81-1 discusses accounting for performance
of construction contracts. The use of the percentage of completion method
depends on our ability to make reasonable dependable estimates.
Additionally, contracts executed by PSB and their customers include
provisions that clearly specify the enforceable rights of our services
that are provided and received by our customers. Our estimates assume that
our customers will satisfy their obligations under the contract and our
performance requirements will be completed.
Freight revenue is recognized as the cost of shipping the product to the
customer plus a nominal markup.
The Company recognizes product returns as a reduction to revenue. Other
forms of customer adjustments are accounted for in the same manner.
The Company will on occasion place finished goods on consignment with a
customer. Finished goods are recorded on the Balance Sheet as part of
Inventory until the product is purchased.
Inventories
Inventories are valued at the lower of cost or market, using the first-in,
first-out method.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Accounts Receivables
Accounts receivables are uncollateralized customer obligations due for
products sold. The accounts receivable are due under normal trade terms
requiring payment within 30 days from the invoice date. Management reviews
accounts receivable to determine if any receivables will potentially be
uncollectible and any balances determined to be uncollectible are written
off. Although no assurance can be given as to the collectibles of the
accounts receivable, based on the information available, management
believes all balances are collectible.
ACT utilizes the accounts receivable factoring service provided by The
Hamilton Group ("Hamilton") for a significant percentage of its
receivables. Under the terms of the Sale of Accounts Factoring and
Security Agreement, Hamilton provides advances of 80% of the receivable
they purchase for a fee compounded daily. The factoring fee for the nine
months ended September 30, 2006 was $205,500. As of September 30, 2006,
Hamilton had purchased $243,804 of receivables, and they had advanced
$195,043 to the Company, for a net due from factor of $48,761.
10
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PSB did utilize the accounts receivable factoring service provided by
Hamilton for a portion of its receivables. Under the terms of the Sale of
Accounts Factoring and Security Agreement, Hamilton provides advances of
80% of the receivable they purchase for a fee compounded daily. The
factoring fee for the nine months ended September 30, 2006 was $6,238. As
of September 30, 2006, Hamilton had purchased $43,831 of receivables, and
they had advanced $35,065 to the Company, for a net due from factor of
$2,529. The Hamilton account was closed for new activity on July 5, 2006.
Effective July 5, 2006, PSB contracted with CyberFactor, LLC
("CyberFactor") to utilize their accounts receivable factoring service
provided by CyberFactor for a portion of its receivables. Under the terms
of the Sale of Accounts Factoring and Security Agreement, CyberFactor
provides advances of 80% of the receivable they purchase for a fee
compounded daily. The factoring fee for the nine months ended September
30, 2006 was $6,896. As of September 30, 2006, CyberFactor had purchased
$166,540 of receivables, and they had advanced $133,232 to PSB, for a net
due from factor of $26,412.
Depreciation
Depreciation of property and equipment are provided on the straight-line
method over the following estimated useful lives:
Years
-----
Transportation Equipment 5
Building 20
Machinery and Equipment 20
Computer Equipment 5
Capital Improvements 20
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in income for the period. The cost of maintenance and repairs
is charged to income as incurred, whereas significant renewals or
betterments are capitalized.
Long-Lived Assets
Long-lived assets are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the
used of these assets. When any such impairment exists, the related assets
will be written down to fair value. No such impairment existed through
September 30, 2006.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Concentration of Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of temporary cash
investments and accounts receivable.
The Company places its temporary cash investments with financial
institutions insured by the FDIC.
11
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit risk with respect to trade receivables are
limited due to the diverse group of customers to whom the Companies sell.
The Company has not established an allowance for doubtful accounts as none
is considered necessary, based upon factors such as the credit risk of
specific customers, historical trends, other information and past bad debt
history which has been immaterial and within the Company's expectations.
Although, the Company has been dependent on a limited member of suppliers
related to its manufacturing, it does not believe that there would be an
adverse effect if the current suppliers would limit deliveries. There are
other suppliers to provide adequate supplies for manufacture.
For the nine months ended September 30, 2006, sales to the Company's
primary two customers accounted for approximately 77.1% of revenues and
72.2% of accounts receivable as of September 30, 2006.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections" (SFAS No. 154), which
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. SFAS 154 replaces APB
Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless
it is impracticable to do so, in which case other alternatives are
required. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, or for the
Company's fiscal 2006. The Company is evaluating the effect that the
adoption of SFAS No. 154 will have on its results of operations and
financial position, but does not believe it will have a material impact.
In April 2005, the SEC announced that companies may implement SFAS 123R at
the beginning of their next fiscal year. In March 2005, the SEC released
SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB 107).
SAB 107 provides the SEC staff's position regarding the application of
SFAS 123R, which contains interpretive guidance related to the interaction
between SFAS 123R and certain SEC rules and regulations, and also provides
the staff's views regarding the valuation of share-based payment
arrangements for public companies. SAB 107 highlights the importance of
disclosures made related to the accounting for share-based payment
transactions. The Company is currently reviewing the effect of SAB 107,
but it does not believe SAB 107 will have a material impact on its
financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the
term "conditional asset retirement obligations" as used in FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." FASB Statement No.
143 refers to an entity's legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional
on a future event that may or may not be within the control of the entity.
If an entity can reasonably estimate a liability for the fair value of a
conditional asset retirement obligation, the entity is required to
recognize the fair value of the liability when incurred. A company
normally incurs this liability upon acquisition, construction, or
development of the asset at issue. FIN 47 is effective for fiscal years
ending after December 15, 2005. The Company is currently reviewing FIN 47,
and at the current time it does not believe that FIN 47 will have a
material impact on its financial position, results of operations or cash
flows.
12
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company computes deferred income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 (SFAS No. 109) "Accounting
for Income Taxes." The provision includes taxes currently payable plus the
deferred tax effect of temporary timing differences in financial statement
and income tax reporting. The principal differences in timing between the
income statement and taxable income involve depreciation expenses recorded
under the straight-line method in the income statements and by accelerated
methods for tax purposes, the timing of the franchise tax deduction and
the expensing of bad debt. The differences between income tax expenses and
taxes currently payable are reflected in deferred tax accounts in the
consolidated balance sheet. Because of the Company's historical earnings
history and the going concern problem, the net deferred tax asset has been
fully offset by a 100% valuation allowance.
Shipping and Handling Costs
The Company has included freight out as a component of selling and
delivery expenses, which amounted to $229,782 for the nine months ended
September 30, 2006.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, and accounts payable, approximate fair
value because of the current nature of these instruments. The carrying
amounts of debt instruments approximate fair value based upon the terms of
the instruments. The fair value of the loans due to and from affiliates
and shareholders are difficult to estimate due to their related party
nature.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. At September 30, 2006, the
Company had working capital of $1,898,291. The Company is operating at a
loss for the nine months ended September 30, 2006. For the nine months
ended March 31, 2006 (July through December 2005 and January through March
2006), the Company was operating at a profit. The second and third
quarters of 2006 were projected to be at a loss due to the season and the
timing for certain customers. Realization of the assets of the Company is
dependent upon the Company's ability to meet its financing requirements
and the continued success of future operations. The consolidated financial
statements do not include adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Income Taxes
The Company computes deferred income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 (SFAS No. 109) "Accounting
for Income Taxes." The provision includes taxes currently payable plus the
deferred tax effect of temporary timing differences in financial statement
and income tax reporting. The principal differences in timing between the
income statement and taxable income involve depreciation expenses recorded
under the straight-line method in the income statements and by accelerated
methods for tax purposes, the timing of the franchise tax deduction and
the expensing of bad debt. The differences between income tax expenses and
taxes currently payable are reflected in deferred tax accounts in the
consolidated balance sheet. Because of the Company's historical earnings
history and the going concern problem, the net deferred tax asset has been
fully offset by a 100% valuation allowance.
13
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 2 - NOTES RECEIVABLE
The Company had one note receivable as of September 30, 2006. The note is
with Peter Baker and originally was in the amount of $300,000. As of
September 30, 2006, the principal balance was $275,000 as a payment in the
amount of $25,000 was received. This amount was advanced to Mr. Baker as a
loan commitment fee that was for a line of credit of $3,000,000 that never
was finalized. The note is payable in full as of December 31, 2006 with
interest at prime plus 3%. As of September 30, 2006, the balance, with
principal and accrued interest, was $343,433.
NOTE 3 - PREPAID EXPENSES
The Company has prepaid expenses of $44,426 as of September 30, 2006. The
amount represents insurance payments and other amounts for various future
expenses.
NOTE 4 - INVENTORY
Inventory as of September 30, 2006 consists of the following:
Raw materials $180,912
Finished goods 58,477
Safe Room Kits 12,091
Finished Goods on Consignment 48,281
--------
$299,761
========
The Company has provided the Company's finished goods products to third
parties on a consignment basis. The items remain the property of the
Company.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Capitalized Lease Equipment:
Computer Equipment $ 22,383
----------
Total Capitalized Lease Equipment 22,383
Land, building and improvement 1,068,121
Machinery and equipment 2,201,422
Computer Equipment 37,385
Furniture and fixtures 6,487
----------
3,335,798
Less Accumulated Depreciation (274,028)
----------
Property, Plant, and Equipment, Net $3,061,770
==========
Depreciation expense was $123,646 for the nine months ended September 30,
2006.
14
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
Dell Financial Services, collateralized by computer, payable
in monthly installments of $388 including principal and
interest at the variable rate of 14.99% per annum. Due on
January 2010. $ 16,475
Antoinette Pace, principal, accrued, and unpaid interest at
24% per annum on revolving 30-day term. Notes are extended
every 30 days. The amount is guaranteed by Avante Holding
Group, Inc. Due on December 31, 2006. 114,807
Edward Beshara, principal, accrued, and unpaid interest at
24% per annum on revolving 30-day term. Note is extended
every 30 days. The amount is guaranteed by Avante Holding
Group, Inc. Due on December 31, 2006. 101,500
Antoinette Pace and James Beshara, principal, accrued, and
unpaid interest at 24% per annum on revolving 30-day term.
Note is extended every 30 days. The amount is guaranteed by
Avante Holding Group, Inc. Due on December 31, 2006. 200,000
M & T Mortgage Corporation, principal and interest at 9.00%
per annum. Payable in monthly installments of $6,005. Due on
April 2020. The amount is personally guaranteed by the CEO of
the Company. 407,091
Merchants & Planters Bank, line of credit, accrued interest
at 7.50% per annum. 10,033
Merchants & Planters Bank, collateralized by the building
located in Tennessee payable in monthly installments of
$1,600 including principal and interest at 7.49% per annum.
Due on September 2006. 66,674
Avante Holding Group, revolving credit, principal and
interest at Prime plus 4% per annum. Due on October 2006. 831,032
GAMI, LLC, principal and interest at 10% per annum due March
31, 2007. 29,774
Advanced Construction Options, LLC, revolving credit,
principal and interest at prime plus 4% per annum. No
expiration date. 17,388
----------
1,794,774
Current Portion 825,955
----------
Notes Payable, Long Term $ 968,819
==========
15
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 7 - CAPITAL LEASE OBILIGATIONS
Dell Financial Services, secured by computer equipment,
payable at 13.9% per annum. Due March 2009. Monthly payments
are $29 including principal and interest. $ 714
Dell Financial Services, secured by computer equipment,
payable at 18% per annum. Due March 2009. Monthly payments
are $626 including principal and interest. 14,637
Dell Financial Services, secured by computer equipment,
payable at 18% per annum. Due July 2010. Monthly payments are
$188.30 including principal and interest. 6,389
Dell Financial Services, secured by computer equipment,
payable at 18% per annum. Due July 2010. Monthly payments are
$64.84 including principal and interest. 2,150
-------
23,890
Less Current Portion (7,094)
-------
Non-Current Obligation Under Capital Lease $16,796
=======
Future minimum capital lease obligations at September 30, 2006 are as
follows:
2006 $ 2,724
2007 10,898
2008 10,898
2009 4,419
-------
Total Capital Lease Obligations $28,939
=======
NOTE 8 - COMMITMENTS
The Company leases a forklift. The lease expires in August 2007. Monthly
lease payments are $546.00.
Future minimum obligations for the above lease are as follows:
2006 $1,638
2007 4,368
------
Total Minimum Lease Obligations $6,006
======
NOTE 9 - RELATED PARTIES
Michael W. Hawkins, the CEO for the Company, is also CEO and principal
shareholder for Avante Holding Group, Inc. ("Avante"), GAMI, LLC ("GAMI"),
Hawkstone, Inc. (Hawkstone") and Ventures Unlimited, LLC ("VUL"). GAMI,
Hawkstone and VUL each hold various amounts of shares of the Company. Mr.
Hawkins, through the issuance of stock to various companies controlled by
himself, owned approximately 51.3% of the Common Stock issued for ACC and
100% of the Series B Preferred Stock. After the Reverse Split effective
July 30, 2005, the issuance of Common Stock on August 1, 2005, and the
subsequent issuance of Common Stock on August 15, 2005, Mr. Hawkins'
companies owned approximately 37.35% of the outstanding Common Stock of
the Company and 100% of the Series B Preferred Stock.
ACC has contracted with Avante for certain investment banking and
consulting services to be provided pursuant to four agreements between ACC
and Avante.
16
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 9 - RELATED PARTIES (continued)
ACC and Avante entered into a Consulting Agreement on October 24, 2004 to
provide corporate guidance and financial and accounting services. As
compensation, Avante receives $8,000 per month and bonus compensation.
Under this agreement Avante has the unilateral authority to hire
additional personnel required to perform investor relations, financial
administration, and executive oversight and request reimbursement from ACC
on a reimbursable expense basis. The term of this agreement is for three
years with one additional automatic three-year extension.
ACC and Avante entered into an Exclusive Investment Banking Services
Agreement on October 24, 2004 to provide merger and acquisition consulting
services. The term of the agreement is for three years. Compensation is
based upon a double Lehman Formula.
ACC and Avante entered into a Finder Agreement on October 24, 2004 for a
period of three years. The Agreement may be extended for consecutive terms
upon mutual consent of both parties. ACC pays Avante a standard 10% in
cash and 10% in warrants finder's fee with a 2% expense account.
ACC and Avante entered into a Sales Commission Agreement on January 20,
2005 for a period of five years with two automatic 5-year extensions.
Under this agreement Avante earns $0.10 per square foot of panels sold to
its registered customers as approved by ACC.
On August 1, 2005, ACC and Avante entered into a Compliance Consulting
Agreement for a period of five years with two automatic five year
extensions. Under this agreement, Avante is paid $270,000 per year,
payable in equal monthly installments.
PSB has a management contract with Advanced Construction Partners, LLC,
which is owned equally between GAMI and Advanced Construction Options, LLC
("ACO").
On September 30, 2006, ACO assigned to PSB a note dated July 10, 2005,
between ACO and GAMI for $50,000. At September 30, 2006, at the time of
the assignment, the balance due GAMI was $29,036 which included accrued
interest. The note included interest at the rate of 10% per annum.
On November 1, 2004, ACC and Avante entered into a Revolving Credit
Agreement for $500,000. The terms of the Agreement includes interest at
the rate of prime plus 4%. An Amendment to the Agreement was executed in
March 2006 providing an additional $500,000 credit for a total of
$1,000,000. The Agreement terminates on October 31, 2006 with an available
extension of one year at the discretion of the Lender. On September 30,
2006, the Company and Avante executed an amendment that reclassified
$500,000 of the current balance to a long-term note payable on January 1,
2008. This balance is also convertible at the option of Avante. As of
September 30, 2006, the balance due to Avante under this Agreement was
$831,032.
The CEO of the Company has personally guaranteed several obligations. In
addition to the various notes identified above, he has also personally
guaranteed the Company payable balance with Phoenix Metals, Inc.
NOTE 10 - EARNINGS PER SHARE
The Company presents both basic and diluted earnings per share (EPS)
amounts. Basic EPS is calculated by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted EPS
Is based upon the weighted average number of common and common equivalent
shares outstanding during the year which is calculated using the treasury
stock method for stock options and assumes conversion of the Company's
convertible notes. Common equivalent shares are excluded from the
computation in periods in which they have an anti-dilutive effect. Stock
options for which the exercise price exceeds the average market price over
the period have an anti-dilutive effect on EPS and, accordingly, are
excluded from the calculation.
17
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 10 - EARNINGS PER SHARE (continued)
A reconciliation of net income and the weighted average number of common
and common equivalent shares outstanding for calculating diluted earnings
per share is as follows:
For the Nine
months ended
September 30,
2006
-------------
Numerator for basic loss per share, as reported $ (592,929)
Preferred stock dividends --
-----------
Income for basic EPS calculations $ (592,929)
-----------
Effect of dilutive securities, as reported
Interest on convertible debt 105,089
-----------
DILUTED LOSS FOR EPS CALCULATIONS $ (487,840)
-----------
WEIGHTED AVERAGE NUMBER OF SHARES FOR BASIC EPS 8,620,438
Effect of dilutive securities, as reported
Stock options 780,220
Warrants 3,033,846
Convertible debt 471,943
-----------
12,906,447
-----------
BASIC AND DILUTED LOSS PER SHARE $ (0.07)
-----------
NOTE 11 - INCOME TAXES
A reconciliation of income tax computed at the statutory federal rate to
income tax expense (benefit) is as follows:
September
30, 2006
---------
Tax benefit at the statutory rate of 35% $ 343,133
State income taxes, net of federal income tax --
Change in valuation allowance $(343,133)
---------
Total $ 0
=========
18
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 11 - INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
September
30, 2006
---------
Deferred tax assets:
Net operating loss carryforward $ 343,133
=========
Total deferred tax assets $ 343,133
Less valuation allowance (343,133)
---------
Total net deferred tax assets $ 0
=========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies
in making this assessment.
Because of the historical earnings history of the Company, the net
deferred tax assets for 2005 were fully offset by a 100% valuation
allowance. The valuation allowance for the net deferred tax assets was
$343,133 as of September 30, 2006.
At December 31, 2005, the Company had net operating loss carryforward
available for U.S. tax purposes of $318,177. The carryforward expires in
2025.
NOTE 12 - COMMON STOCK AND ADDITIONAL PAID - IN CAPITAL
On July 30, 2005, the Board of Directors, pursuant to 607.0821 of the
Florida Business Corporation Act, authorized the consolidation of our
outstanding common shares, also known as a reverse split, of the Company
that caused each one hundred shares of outstanding shares of its common
stock to be converted into one share of its common stock. All share and
per share amounts have been adjusted for this reverse stock split.
The Series A Preferred Stock was issued to Paul Janssens in conjunction
with the purchase by the Company of ACC and select assets of Quality
Metals Systems, LLC. This stock has the conversion rights of one for one
share of common stock.
The Series B Preferred Stock was issued to GAMI, LLC or Avante Holding
Group, Inc in conjunction with the use of personal guarantees by Michael
W. Hawkins, CEO of the Company and principal shareholder in GAMI, LLC and
corporate guarantees by Avante Holding Group, Inc. The conversion rights
are one for two shares of common stock.
The Series C Preferred Stock was issued to New Millennium Entrepreneurs in
conjunction with an investment of $500,000. The conversion rights are one
for one shares of common stock.
NOTE 13 - STOCK OPTION PLAN
The Company complies with Accounting Principles Board (APB) No. 25
"Accounting for Stock Issued to Employees" in accounting for stock options
issued to employees. Stock options are granted with an exercise price
equal to the fair market value on the date of grant. Accordingly, no
compensation expense has been recognized for options issued to employees.
19
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 13 - STOCK OPTION PLAN (continued)
Had compensation costs for the Company's stock option plans and stock
purchase plan been determined based upon fair value at the grant date
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income (loss) and net income (loss) per share would have
been as follows:
For the Nine months
ended September 30,
2006
-------------------
Net loss applicable to common stockholders $(592,929)
Stock based employee compensation expense --
Determined under fair value based method for --
All awards
Net loss - pro forma $(592,929)
Net loss per share applicable to common stockholders as reported:
Basic and Diluted $ (.07)
Net loss per share applicable to common stockholders - pro forma:
Basic and Diluted $ (.07)
For purposes of computing pro forma net income, the Company estimates the
fair value of each option grant and employee stock purchase plan right on
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model was developed for use in estimating the
value of traded options that have no vesting restrictions and are fully
transferable, while the options issued by the Company are subject to both
vesting and restrictions on transfer. In addition, option-pricing models
require input of highly subjective assumptions including expected stock
price volatility. The Company uses projected data for expected volatility
and estimates the expected life of its stock options.
The weighted average assumptions used to value the option grants:
January 1, 2005 thru December 31, 2005 Stock Option Plans
- -------------------------------------- ------------------
Expected life (years) 3
Risk-free interest rate 7
Volatility 1
Dividend rate 0
20
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 13 - STOCK OPTION PLAN (continued)
Options granted under the 2004 incentive stock option plan are exercisable
at the exercise price of grant and, subject to termination of employment,
expire October 31, 2014, are not transferable other than on death, and
vest in three unequal annual installments commencing at various times from
the date of grant. A summary of the Company's stock option plan as of
September 30, 2006 is presented below:
2006
--------------------
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at the beginning of the year 2,000,000 0.55
Granted -- .
Forfeited (150,000)
Exercised --
---------
Outstanding at the end of the period 1,850,000 0.53
=========
Options exercisable at the end of the period 1,100,000
=========
There are currently 2,150,000 unissued options under the 2004 Stock Option
Plan.
The following table summarizes information for stock options outstanding
at September 30, 2006:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices @ 9/30/06 in years Price @ 9/30/06 Price
- ----------- ----------- --------- --------- ----------- ---------
0.25 - 0.75 1,850,000 0.53 1,100,000 0.48
A total of 3,000,000 warrants were issued on August 1, 2005 to various
individuals/entities. These warrants were issued for services as an
inducement to provide financing or refinancing of debt and for strategic
business purposes. All warrants were fully vested on the date of issue.
Warrants consists of 500,000 at a $0.50 conversion rate, 500,000 at a
$1.00 conversion rate, 500,000 at a $1.50 conversion rate, 500,000 at a
$2.00 conversion rate, 500,000 at a $2.50 conversion rate, and 500,000 at
a $3.00 conversion rate.
21
ALTERNATIVE CONSTRUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
September 30, 2006
Unaudited
NOTE 13 - STOCK OPTION PLAN (Continued)
Of the 3,000,000 warrants issued; 500,000 warrants valued at $0.01. The
remaining 2,500,000 warrants were determined to have no value. The
determined value of the warrants was based upon the conversion rates
attached to them. Based upon that value, the Company's net income (loss)
and net income (loss) per share would have been as follows:
For the Nine
months ended
September
30, 2006
------------
Net loss applicable to common stockholders $(592,929)
Stock based employee compensation expense
Determined under fair value based method for --
All awards (5,000)
Net loss - pro forma $(597,929)
Net loss per share applicable to common stockholders as reported:
Basic and Diluted $(.07)
Net loss per share applicable to common stockholders - pro forma:
Basic and Diluted $(.07)
On September 29, 2006, 750,000 warrants were exercised. The exercised
warrants consisted of 50,000 at a $0.50 conversion rate, 100,000 at a
$1.00 conversion rate, 75,000 at a $1.50 conversion rate, 225,000 at a
$2.00 conversion rate, and 300,000 at a $2.50 conversion rate.
NOTE 14 - STOCK-BASED COMPENSATION
The Company has adopted FAS 123R which requires it to record the fair
value of stock-based compensation awards as an expense. As of September
30, 2006, the Company did not incur any expense. Should there be a
determination of expense in the future, the Company will utilize the
various fair market value determination models as required.
NOTE 15 - SUBSEQUENT EVENT
On October 1, 2006, Avante Leasing Corporation, a wholly-owned subsidiary
of Avante Holding Group, Inc., leased a truss building system to
Alternative Construction Technologies Corporation. The terms of the
agreement include a five year term, 15.53% interest, with a $1 purchase
price at the end of the period. This transaction was completed as the
acquisition and financing of the truss system needed the financial
guarantee of Avante Holding Group, Inc. and Michael W. Hawkins.
On October 2, 2006, the Company was named in a lawsuit captioned New
Millennium Enterprises, LLC and Phoenixsurf.com, LLC v. Michael W.
Hawkins, et. al. U.S. District Court, Middle District of Georgia, 3:
06-CV-84 (CDC). The lawsuit alleges violations of the Georgia Securities
Act, Georgia Fair Business Practices Act, Federal Securities laws and
certain other unspecified laws in connection with the investment by
Plaintiffs of $500,000 in ACC and seeks rescission of this investment. The
Company has not yet answered the complaint, but believes it has
meritorious defenses to the claims made and intends to vigorously defend
the lawsuit.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
This report on Form 10-QSB contains forward-looking statements within the
meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of
the Securities Act of 1934, as amended, that involve substantial risks and
uncertainties. These forward-looking statements are not historical facts, but
rather are based on current expectations, estimates and projections about our
industry, our beliefs and our assumptions. Words such as "anticipate",
"expects", "intends", "plans", "believes", "seeks" and "estimates" and
variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-QSB.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with our financial
statements and summary of selected financial data for Alternative Construction
Company, Inc. Such discussion represents only the best present assessment from
our Management.
DESCRIPTION OF COMPANY:
The Company is a management company that currently operates one wholly-owned
subsidiary, Alternative Construction Technologies Corporation, an entity, which
manufactures the ACTech Panel(TM), and two other subsidiaries, ProSteel Builders
Corporation and Universal Safe Structures, Inc., a general contractor offering
building solutions utilizing the ACTech Panel(TM) and a seller of the patented
Universal Safe Room(TM), respectively.
OVERVIEW:
The Company is a manufacturing company engaged in the research, development and
marketing of proprietary products for the construction industry. We manufacture
and distribute the ACTech Panel(TM), a structural insulated panel (SIP),
throughout the United States. The marketing of our products is through our
internal sales staff and the use of distributors.
In 2004, all of the Company's Predecessors' revenues were derived from the sale
of our ACTech Panel(TM) in the United States. In 2004, the primary customers
were Nelson, LC, Enerloc, Sam Kelly and Advanced Building Company; combined
equaling 86% of total sales. In 2005, under the new ownership after the
acquisition of ACT by ACC in January 2005, the Company expanded its distribution
network to include the additional builders of classrooms in Florida.
Alternative Construction Company, Inc., a Florida Corporation ("ACC"), was
formed on October 26, 2004. Alternative Construction Technologies Corporation, a
Delaware corporation ("ACT"), was formed in 1997 by Mr. Paul Janssens, sole
shareholder and beneficial owner, and was acquired by ACC on January 21, 2005
(the "Transaction") for the purchase price of One Million Two Hundred and Fifty
Thousand ($1,250,000.00) Dollars. After the transaction was completed, continued
due diligence determined that an agreed upon reduction in the purchase price for
ACT was required to reflect various adjustments resulting in an adjusted
purchase price of Eight Hundred and Seventy-Nine Thousand Eight Hundred and
Ninety-Four Dollars ($879.894). ACC also acquired certain assets from Quality
Metal Systems, LLC, a Florida limited liability company ("QMS"), which was also
owned by Paul Janssens for One Million Two Hundred and Fifty Thousand
($1,250,000.00) Dollars. Subsequently, Avante Holding Group, Inc. incorporated
Safe Rooms, Inc. on April 27, 2005. After the incorporation, the company changed
its name to Universal Safe Structures, Inc. ("USS"). On June 28, 2005 ACC
acquired 80% of the Company stock for Eight Hundred Dollars ($800.00). Prior to
the time of acquisition by ACC, USS conducted no business. USS has two
shareholders, ACC and Avante Holding Group, Inc. Avante Holding Group, Inc.
incorporated ProSteel Builders Corporation ("PSB") on April 28, 2005 with the
initial shareholders being ACC (80%) and Avante Holding Group, Inc. (20%). PSB
was incorporated to function utilizing the ACC products in the commercial and
residential construction marketplaces. After the acquisition of ACT by ACC, the
operational and marketing personnel continued employment with the Company.
Effective January 21, 2005, ACC acquired ACT and certain assets of QMS. Prior to
January 21, 2005, ACC had only immaterial administrative activity. Prior to the
acquisition, ACT had operations but, accordingly, the following discussion and
analysis of operations is not indicative of future comparisons of ACC as the new
ownership projects a different marketing and expansion program as has already
been evident in 2005.
In 2004, the Predecessor did not invest in building the ACTech Panel(TM) brand
and infrastructure. Management believes that not spending in these two
categories negatively affected the growth of the Company as evidenced by the
2005 change post-acquisition.
23
The following Management Discussion and Analysis should be read in conjunction
with the financial statements and accompanying notes included in this Form
10-QSB.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2006 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2005
Results of Operations
Total revenues were $2,449,574 for the quarter ended September 30, 2006 as
compared to $3,710,552 in the quarter ended September 30, 2005. The decrease of
$1,260,978 is attributed to the decrease in contracts to supply school districts
in Florida.
Cost of revenues was $2,012,313 and $2,816,292, respectively for the quarters
ended September 30, 2006 and 2005. Gross profit was $437,261 and $894,260,
respectively for the quarters ended September 30, 2006 and 2005. The cost of
revenue, as a percent of revenue, increased from 75.0% to 82.1%. This is
primarily attributable to the reduced revenue for 2006 as compared to 2005.
Additionally, 2006 includes the subsidiary ProSteel Builders Corporation
("ProSteel"), which was not applicable in 2005. ProSteel, a general contractor,
as compared to the subsidiary and primary revenue producer in 2005, Alternative
Construction Technologies Corporation ("ACT"), the manufacturer of the ACTech
Panel(TM), has a lower gross profit percent.
Total operating expenses decreased to $460,736 in the quarter ended September
30, 2006 from $809,415 in the quarter ended September 30, 2005. This is mainly
attributable to the reduction in cash procurement fees in 2005 and the reduction
in other general and administrative expenses.
24
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2006 TO THE PERIOD JANUARY 21,
2005 (DATE OF ACQUISITION) THROUGH SEPTEMBER 30, 2005
Results of Operations
Total revenues increased to $6,064,173 in the nine months ended September 30,
2006 from $5,748,225 for the period January 21, 2005 (date of acquisition
through September 30, 2005. The increase is primarily related to ProSteel which
accounted for 26% of the revenue in 2006 compared to 3% in 2005, offset by the
reduction in Florida school contracts.
Cost of revenues was $4,493,629 and $4,574,170, respectively for the nine months
ended September 30, 2006 and the period January 21, 2005 (date of acquisition)
through September 30, 2005. As a percent of revenue, the cost of revenues
reduced from 79.6% to 74.1%, respectively for the period January 21, 2005 (date
of acquisition) through September 30, 2005 and the nine months ended September
30, 2006, primarily due to ordering discounts with primary vendors. The
reduction for ACT was from 79.8% and 75.7%, respectively for the period January
21, 2005 (date of acquisition) through September 30, 2005 and the nine months
ended September 30, 2006.
Gross profit was $1,570,544 and $1,174,055, respectively for the nine months
ended September 30, 2006 and the period January 21, 2005 (date of acquisition)
through September 30, 2005. As a percent of revenue, the increase in gross
profit was from 20.4% and 25.9%, respectively for the period January 21, 2005
(date of acquisition) through September 30, 2005 and the nine months ended
September 30, 2006.
Total operating expenses increased to $1,935,250 in the nine months ended
September 30, 2006 from $1,644,618 for the period January 21, 2005 (date of
acquisition) through September 30, 2005. This is mainly attributed to the cost
of accounts receivable factoring fees, certain professional fees associated with
compliance and the cost of the public registration of the Company.
Liquidity and Capital Resources
As of September 30, 2006, the Company had a working capital surplus of
$1,898,291. Net loss was $592,929 for the nine months ended September 30, 2006.
The Company generated a negative cash flow from operations of $838,909 for the
nine months ended September 30, 2006. The negative cash flow from operating
activities for the period is primarily attributable to the Company's net loss of
$592,929, decreases in inventories of $239,392 and prepaid expenses of $189,405
offset by increases in accounts receivable of $776,701, and accounts payable,
accrued expenses and taxes payable of $44,499.
Cash flows used in investing activities for the nine-month period ended
September 30, 2006 consisted of the acquisition of $47,762 of manufacturing
equipment and computers used in operations.
The Company, as an effect of its public registration on September 26, 2006, had
$2,137,927 in debt converted to equity. Additionally, 750,000 warrants were
exercised on September 29, 2006 at a total conversion price of $1,437,500.
While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Company's current and projected cash flow needs for operations and development.
The Company is presently seeking financing in the form of debt or equity in
order to provide the necessary working capital. Such financing may be upon terms
that are dilutive or potentially dilutive to our stockholders. The Company
currently has no commitments for financing. There are no assurances the Company
will be successful in raising the funds required
By adjusting its operations and development to the level of capitalization,
management believes it has sufficient capital resources to meet projected cash
flow needs through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
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The effect of inflation on the Company's revenue and operating results was not
significant. The Company's operations are located in North America and there are
no seasonal aspects that would have a material effect on the Company's financial
condition or results of operations.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect our reported assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities. We base our
estimates and judgments on historical experience and on various other
assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions.
While there are a number of significant accounting policies affecting our
consolidated financial statements; we believe the following critical accounting
policies involve the most complex, difficult and subjective estimates and
judgments:
o Revenue Recognition
o Inventories
o Allowance for doubtful accounts
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price to the customer is fixed, collectibility is reasonably assured
and title and risk of ownership is passed to the customer, which is usually upon
delivery. However, in limited circumstances, certain customers traditionally
have requested to take title and risk of ownership prior to shipment. Revenue
for these transactions is recognized only when:
(1) Title and risk of ownership have passed to the customer;
(2) The Company has obtained a written fixed purchase commitment;
(3) The customer has requested in writing the transaction be on a bill and
hold basis;
(4) The customer has provided a delivery schedule;
(5) All performance obligations related to the sale have been completed;
(6) The modular unit has been processed to the customer's specifications,
accepted by the customer and made ready for shipment; and
(7) The modular unit is segregated and is not available to fill other orders.
The remittance terms for these "bill and hold" transactions are consistent with
all other sales by the Company.
In the event that the Company's arrangements with its customers include more
than one product or service, the Company determines whether the individual
revenue elements can be recognized separately in accordance with Financial
Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables, EITF 00-21 addresses
the determination of whether an arrangement involving more than one deliverable
contains more than one unit of accounting and how the arrangement consideration
should be measured and allocated to the separate units of accounting.
Product Warranty Reserve
Currently, there are no warranties provided with the purchase of the Company's
products. The cost of replacing defective products and product returns have been
immaterial and within management's expectations. In the future, when the company
deems warranty reserves are appropriate that such costs will be accrued to
reflect anticipated warranty costs.
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Inventories
We value our inventories, which consists of raw materials, work in progress,
finished goods, at the lower of cost or market. Cost is determined on the
first-in, first-out method (FIFO) and includes the cost of merchandise and
freight. A periodic review of inventory quantities on hand is performed in order
to determine if inventory is properly positioned at the lower of cost or market.
Factors related to current inventories such as future consumer demand and trends
in the Company's core business, current aging, current and anticipated wholesale
discounts, and class or type of inventory is analyzed to determine estimated net
realizable values. A provision is recorded to reduce the cost of inventories to
the estimated net realizable values, if required. Any significant unanticipated
changes in the factors noted above could have a significant impact on the value
of our inventories and our reported operating results.
Allowance for Uncollectible Accounts
We are required to estimate the collectibility of our trade receivables. A
considerable amount of judgment is required in assessing the realization of
these receivables including the current creditworthiness of each customer and
related aging of the past due balances. In order to assess the collectibility of
these receivables, we perform ongoing credit evaluations of our customers'
financial condition. Through these evaluations we may become aware of a
situation where a customer may not be able to meet its financial obligations due
to deterioration of its financial viability, credit ratings or bankruptcy. The
reserve requirements are based on the best facts available to us and are
reevaluated and adjusted as additional information is received. Our reserves are
also based on amounts determined by using percentages applied to certain aged
receivable categories. These percentages are determined by a variety of factors
including, but are not limited to, current economic trends, historical payment
and bad debt write-off experience. We are not able to predict changes in the
financial condition of our customers and if circumstances related to our
customers deteriorate, our estimates of the recoverability of our receivables
could be materially affected and we may be required to record additional
allowances. Alternatively, if we provided more allowances than are ultimately
required, we may reverse a portion of such provisions in future periods based on
our actual collection experience. As of September 30, 2006, we determined that
there was no need for a reserve.
Employees
As of September 30, 2006 the Company had 21 employees. The Company anticipates
that the number of employees will satisfy its production during the next six
months. The Company does not expect to have any collective bargaining agreements
covering any of its employees.
Properties
The Company's principal executive offices are located at 1900 South Harbor City
Boulevard, Suite 315, Melbourne, Florida. This leased office space is used by
the Company's executive management team as well as the administrative staff. It
is in a month-to-month lease as the Company will be moving in to a new office
building in January 2007. The Company's manufacturing facility for Alternative
Construction Technologies Corporation is located 1033 Lake Street, Bolivar,
Tennessee. The property consists of 9.628+/- acres of real estate including a
154,000 square foot structure of usable space. The structure is utilized for the
manufacturing of the ACTech Panel(TM). The Company owns this property. ProSteel
Builders Corporation office is located at 1485 Highway 34 East, Suite A-1,
Newnan, Georgia. It has entered into a three-year lease expiring June 2009 for
the property at a rate of $900 per month for a 1,413 square foot office. The
Company believes that the current facilities are suitable for its current needs.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
Cautionary Factors that May Affect Future Results and Market Price of Stock
On September 26, 2006, our registration statement on Form SB-2 was declared
effective by the Securities and Exchange Commission. The Registration Statement
includes a detailed list of cautionary factors that may affect future results.
Management believes that there have been no material changes to those factors
listed, however other factors besides those listed could adversely affect us.
That report can be accessed on EDGAR at www.sec.gov.
27
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE RESULTS.
The Company has only a limited operating history upon which an evaluation of its
operations and its prospects can be based. The Company's prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the new and
evolving manufacturing methods with which the Company intends to operate and the
acceptance of the Company's business model. The Company will be incurring costs
to develop, introduce and enhance its products, to establish marketing
relationships, to acquire and develop product lines that will compliment each
other and to build an administrative organization. To the extent that such
expenses are not subsequently followed by commensurate revenues, the Company's
business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that the Company will be able to
generate sufficient revenues from the sale of their modular buildings and
related products. The Company may have negative cash flow from operations to
continue for the next four (4) quarters as it continues to develop and market
its business. If cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell additional
equity or debt securities. The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's stockholders.
POTENTIAL FLUCTUATIONS IN ANNUAL OPERATING RESULTS.
The Company's annual operating results may fluctuate significantly in the future
as a result of a variety of factors, most of which are outside the Company's
control, including: the demand for manufactured modular buildings; seasonal
trends; introduction of new government regulations and building standards;
local, state and federal government procurement delays; general economic
conditions, and economic conditions specific to the modular building industry.
The Company's annual results may also be significantly impacted by the impact of
the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at the Company's early stage of development, such
accounting treatment can have a material impact on the results for any quarter.
Due to the foregoing factors, among others, it is likely that the Company's
operating results will fall below the expectations of the Company or investors
in some future quarter.
LIMITED PUBLIC MARKET, POSSIBLE VOLATILITY OF SHARE PRICE.
The Company expects that common stock will be quoted and traded on the NASD OTC
Electronic Bulletin Board under the ticker symbol ACCY. As of October 20, 2006,
there were approximately 10,245,794 shares of common stock outstanding, of which
approximately 4,152,674 have been registered and will be tradable. There can be
no assurance that a trading market for the Company's shares will develop or,
once developed, will be sustained in the future. Factors such as, but not
limited to, technological innovations, new products, acquisitions or strategic
alliances entered into by the Company or its competitors, failure to meet
security analysts' expectations, government regulatory action, patent or
proprietary rights developments, and market conditions for manufacturing stocks
in general could have a material effect on the volatility of the Company's stock
price.
MANAGEMENT OF GROWTH
The Company expects to experience growth in the number of employees and the
scope of its operations. In particular, the Company intends to hire additional
engineering, sales, marketing, and administrative personnel. Additionally,
acquisitions could result in an increase in the number of employees and business
activity. Such activities could result in increased responsibilities for
management. The Company believes that its ability to increase its customer
support capability and to attract, train, and retain qualified engineering,
sales, marketing, and management personnel, will be a critical factor to its
future success. In particular, the availability of qualified sales engineering
and management personnel is quite limited, and competition among companies to
attract and retain such personnel is intense. During strong business cycles, the
Company may experience difficulty in filling its needs for qualified sales,
engineering and other personnel.
28
The Company's future success will be highly dependent upon its ability to
successfully manage the expansion of its operations. The Company's ability to
manage and support its growth effectively will be substantially dependent on its
ability to implement adequate improvements to financial and management controls,
reporting and order entry systems, and other procedures and hire sufficient
numbers of financial, accounting, administrative, and management personnel. The
Company's expansion and the resulting growth in the number of its employees have
resulted in increased responsibility for both existing and new management
personnel. The Company is in the process of establishing and upgrading its
financial accounting and procedures. There can be no assurance that the Company
will be able to identify, attract, and retain experienced accounting and
financial personnel. The Company's future operating results will depend on the
ability of its management and other key employees to implement and improve its
systems for operations, financial control, and information management, and to
recruit, train, and manage its employee base. There can be no assurance that the
Company will be able to achieve or manage any such growth successfully or to
implement and maintain adequate financial and management controls and
procedures, and any inability to do so would have a material adverse effect on
the Company's business, results of operations, and financial condition.
The Company's future success depends upon its ability to address potential
market opportunities while managing its expenses to match its ability to finance
its operations. This need to manage its expenses will place a significant strain
on the Company's management and operational resources. If the Company is unable
to manage its expenses effectively, the Company's business, results of
operations, and financial condition will be materially adversely affected.
RISKS ASSOCIATED WITH ACQUISITIONS.
As part of its business strategy, the Company expects to acquire assets and
businesses relating to or complementary to its operations. These acquisitions by
the Company will involve risks commonly encountered in acquisitions of
companies. These risks include, among other things, the following: the Company
may be exposed to unknown liabilities of the acquired companies; the Company may
incur acquisition costs and expenses higher than it anticipated; fluctuations in
the Company's quarterly and annual operating results may occur due to the costs
and expenses of acquiring and integrating new businesses or technologies; the
Company may experience difficulties and expenses in assimilating the operations
and personnel of the acquired businesses; the Company's ongoing business may be
disrupted and its management's time and attention diverted; the Company may be
unable to integrate successfully.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements
ITEM 3. CONTROLS AND PROCEDURES
The Company's management including the Chief Executive Officer and Chief
Financial Officer, have evaluated, as of September 30, 2006, the effectiveness
of the design, maintenance and operation of the Company's disclosure controls
and procedures. Management determined that the Company's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports that it files under the Exchange Act is
accurate and is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and regulations.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision making can be fully faulty and that
breakdowns in internal control can occur because of human failures such as
errors or mistakes or intentional circumvention of the established process.
There have been no changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation
thereof, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On October 2, 2006, the Company was named in a lawsuit captioned New Millennium
Enterprises, LLC and Phoenixsurf.com, LLC v. Michael W. Hawkins, et. al. U.S.
District Court, Middle District of Georgia, 3: 06-CV-84 (CDC). The lawsuit
alleges violations of the Georgia Securities Act, Georgia Fair Business
Practices Act, Federal Securities laws and certain other unspecified laws in
connection with the investment by Plaintiffs of $500,000 in ACC and seeks
rescission of this investment. The Company has not yet answered the complaint,
but believes it has meritorious defenses to the claims made and intends to
vigorously defend the lawsuit.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2006, we issued 806,765 shares of common
stock in exchange for the conversion of certain notes payable. We also issued
61,000 shares of common stock, valued at $.0001, to various employees of the
Company and 750,000 shares of common stock due to the exercising of certain
warrants, valued at $.50 to $2.50. Two individuals with vesting agreements on
their common stock, forfeited 125,000 shares of common stock due to their
departure. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None during this reporting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during this reporting period.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits
No. Description
- -------- ---------------------------------------------------------------------
31.1 Certification of Michael W. Hawkins Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Bruce Harmon to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael W. Hawkins Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Bruce Harmon Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
Alternative Construction Company, Inc.
Date: October __, 2006
By: /s/ Michael W. Hawkins
-------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: October __, 2006
By: /s/ Bruce Harmon
-------------------------------------
Chief Financial Officer (Principal
Accounting and Financial Officer)
30