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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2002
Commission file number 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0195770
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Jewell Court, Portsmouth, N.H. 03801
(Address of principal executive offices)
(603) 501-3200
(Registrant's telephone number, including area code)
(Former address if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of November 5, 2002: 66,754,458
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
(Unaudited)
September 30, June 30,
Assets 2002 2002
------ ---------------------- ---------------------
Current assets:
Cash and cash equivalents $ 884,725 $ 402,291
Trade accounts receivable 20,651 3,602
Prepaid maintenance and service fees 90,149 -
Prepaid expenses, and other current assets 107,444 81,223
---------------------- ---------------------
Total current assets 1,102,969 487,116
---------------------- ---------------------
Property and equipment:
Equipment and software 817,076 788,192
Accumulated depreciation and amortization (361,333) (297,987)
---------------------- ---------------------
Property and equipment, net 455,743 490,205
---------------------- ---------------------
Prepaid financing costs 52,626 -
Prepaid license and service fees 191,321 211,498
Other non-current assets 10,199 14,490
---------------------- ---------------------
$ 1,812,858 $ 1,203,309
====================== =====================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payable to Healthcare Exchange participants $ 839,566 $ 409,738
Trade accounts payable 585,523 438,460
Accrued payroll and related expenses 279,750 274,777
Accrued preferred stock dividends 283,195 283,195
Accounts payable and accrued interest payable to stockholders 909,990 797,232
Notes payable to stockholder 2,831,529 2,212,529
Convertible notes payable to stockholder 2,423,823 2,423,823
Convertible notes payable to third party 686,852 -
Accrued interest payable to third party 14,685 -
Other current liabilities 273,711 254,469
---------------------- ---------------------
Total current liabilities 9,128,624 7,094,223
---------------------- ---------------------
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value - 1,200,000 shares authorized
none issued and outstanding at September 30, 2002 and 2001, 204,167 shares
Designated Series D, none issued and outstanding at September 30, 2002 and
June 30, 2002
Common stock, $0.01 par value - 100,000,000 shares authorized; 61,069,255
shares issued and outstanding at September 30, 2002
(60,968,213 at June 30, 2002) 610,693 609,682
Additional paid-in capital 53,323,226 52,862,283
Accumulated deficit (61,249,685) (59,362,879)
---------------------- ---------------------
Total stockholders' equity (deficit) (7,315,766) (5,890,914)
---------------------- ---------------------
$ 1,812,858 $ 1,203,309
====================== =====================
See accompanying notes to condensed financial statements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
September 30,
2002 2001
Healthcare exchange
Revenue $ 776,560 $ 108,218
Costs (543,702) (224,788)
-------------- ---------------------
Gross profit (loss) 232,858 (116,570)
Selling, marketing and product development costs (1,397,306) (1,505,195)
General and administrative expenses (509,015) (505,834)
-------------- ---------------------
Loss from operations (1,673,463) (2,127,599)
Other income (expense)
Interest income 430 33,133
Interest expense to third party (77,315) -
Interest expense to stockholders and directors (136,458) (139,517)
-------------- ---------------------
Total other income (expense) (213,343) (106,384)
-------------- ---------------------
Net loss $ (1,886,806) $ (2,233,983)
============== =====================
Basic and diluted net loss per share
$ (0.03) $ (0.04)
============== =====================
Shares used in per share calculations 61,016,315 59,401,860
============== =====================
See accompanying notes to condensed financial statements.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
2002 2001
------------------------ ----------------------
Net cash used in operating activities $ (1,062,532) $ (2,005,312)
------------------------ ----------------------
Cash flows used in investing activities:
Purchases of property and equipment (28,884) (91,033)
Maturities of short-term investments - 1,354,159
------------------------ ----------------------
Net cash provided (used) by investing activities (28,884) 1,263,126
------------------------ ----------------------
Cash flows from financing activities:
Prepaid financing costs (52,626)
Proceeds from exercise of options and warrants 7,476 19,251
Proceeds from notes payable to stockholders 619,000 313,902
Proceeds from convertible notes payable 1,000,000 -
------------------------ ----------------------
Net cash provided by financing activities 1,573,850 333,153
------------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 482,434 (409,033)
Cash and cash equivalents at beginning of period 402,291 3,159,017
------------------------ ----------------------
Cash and cash equivalents at end of period $ 884,725 $ 2,749,984
======================== ======================
See accompanying notes to condensed financial statements.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
September 30, 2002
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
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 accounting principles generally
accepted in the United States 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-K for the fiscal year ended June 30,
2002.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of normal recurring adjustments, considered
necessary to present fairly the Company's financial position at September 30,
2002 and June 30, 2002, results of operations for the three months ended
September 30, 2002 and 2001, and cash flows for the three months ended September
30, 2002 and 2001. The results for the period ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2003.
The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $61,249,685 at September 30, 2002. Based on the
steps the Company has taken to refocus its operations and obtain additional
financing, 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, at least through the end of
fiscal year 2003. The Company engaged a placement agent to assist in the sale of
shares of the Company's common stock in a private placement. Subsequent to
September 30, 2002, the Company received gross proceeds of $4,125,000 through
the sale of 4,125,000 shares pursuant to this offering. Cash proceeds net of
offering costs were $3,884,567. In addition, the due dates of Notes Payable to
Stockholder and Convertible Notes Payable to Stockholder were extended from
December 31, 2002 to December 31, 2003. [See Part I Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources"]
There can be no assurance that this plan will be successfully implemented. If
the offering is not fully subscribed, the Company may be required to reduce the
development efforts of its Healthcare Exchange or be forced into seeking
protection under federal bankruptcy laws. As a result, the report of independent
auditors on the Company's June 30, 2002 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 possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Note 2 - Financing Arrangements
On July 26, 2002, the Company received cash of $1,000,000 in exchange for
issuance of a convertible note (the "Note"). The Note bears interest at 8% and
is payable at the earliest of July 25, 2003 or when the Company, in a proposed
private placement of common stock, raises $8,000,000 (the "Private Placement").
Pursuant to the original terms of the Note, all or a portion of the Note may be
converted into shares of common stock at the lower of $2.25 per share; the
subscription per share price of the proposed Private Placement; or if the
Company sells shares of its common stock, or issues options, warrants or other
securities convertible into shares of its common stock before March 29, 2003 at
a price less than the lower of $2.25 or the subscription per share price of the
proposed Private Placement, then the per share price of the common stock
subsequently sold (excluding common stock that may be (i) issued in connection
with a merger, (ii) issued as a dividend, (iii) issued upon the exercise of
options subsequently issued after the closing to employees of or consultants to
the Company, or (iv) issued upon the exercise of existing options, warrants or
other convertible securities).
In connection with the issuance of the Note, the Company may issue up to three
warrants. Each warrant provides for the purchase of 100,000 shares of the
Company's common stock at an exercise price equal to the lower of $2.14 or the
subscription per share price of the proposed Private Placement, or if further
shares are offered at a lower price per share, then at that price. The First
Warrant was issued on July 26, 2002. The Second Warrant will be issued if the
Company does not repay the Note within 180 days from the issuance of the Note.
The Third Warrant will be issued if the Company does not repay the Note within
one year from the issuance of the Note.
In connection with the issuance of the Note and First Warrant, the Company
estimated the fair value of the First Warrant to be $198,000 using the
Black-Scholes model. In accordance with EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," and EITF 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments," the Company has recognized $62,630 through interest
expense during the three months ended September 30, 2002 for a portion of the
fair value of the First Warrant and a portion of the beneficial conversion
feature of the Note, which was estimated to be $177,778. The Company will record
additional amounts totaling $313,148 through interest expense until July 26,
2003 for the remaining fair value of the First Warrant and the beneficial
conversion feature of the Note recorded at the initial transaction date.
Relating to the private placement of 4,125,000 shares of the Company's common
stock at a purchase price of $1.00 per share in October 2002, the conversion
price of the Note and per share exercise price of the First Warrant were reset
to $1.00. In accordance with EITF 00-27, the Company will record $624,222 for
the additional beneficial conversion amount relating to the value of the reset
feature. This amount will be recognized ratably through interest expense until
July 26, 2003.
Also during the period ended September 30, 2002, Mr. Cameron loaned the Company
an additional $619,000 which bears interest at 10.25% per annum and is payable
on December 31, 2002.
Note 3 - Comprehensive Loss
Total comprehensive loss for the three months ended September 30, 2002 and 2001
was $1,886,806, and $2,233,961 respectively. Other comprehensive income (loss)
represents the net change in unrealized gains (losses) on available-for-sale
securities.
Note 4 - Net Loss Per Share
Loss per share amounts for all periods have been presented in accordance with
Statement of Financial Accounting Standards Board No. 128, "Earnings per Share."
As the Company has reported net losses in all periods presented, basic and
diluted loss per share have been calculated on the basis of net loss applicable
to common stockholders divided by the weighted average number of common stock
shares outstanding without giving effect to outstanding options, warrants, and
convertible securities whose effects are anti-dilutive. For the three months
ended September 30, 2002 and 2001 there were stock options, stock warrants, and
convertible notes payable outstanding, which could potentially dilute earnings
per share in the future but were not included in the computation of diluted loss
per share as their effect was anti-dilutive in the periods presented.
Note 5 - Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
or SFAS 142. SFAS 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. Intangible assets that do not have indefinite
lives will continue to be amortized over their useful lives and reviewed for
impairment in accordance with existing guidance. The Company adopted SFAS 142
effective July 1, 2002. Because the Company has historically not been party to
any business combinations and therefore has not recorded related goodwill and
intangible assets, the adoption of SFAS 142 did not have an effect on the
Company's results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," or SFAS 144. SFAS 144 supersedes
SFAS 121, however it retains the fundamental provisions of that statement
related to the recognition and measurement of the impairment of long-lived
assets to be "held and used." Among other things, SFAS 144 provides more
guidance on estimating cash flows when performing a recoverability test. The
Company adopted SFAS 144 effective July 1, 2002. The adoption of SFAS 144 did
not have an effect on the Company's results of operations, financial condition
or cash flows.
Note 6 - Subsequent Events
The Company engaged a placement agent to assist in the sale of shares of the
Company's common stock in a private placement. Subsequent to September 30, 2002,
the Company received gross proceeds of $4,125,000 through the sale of 4,125,000
shares pursuant to this offering. Cash proceeds net of offering costs were
$3,884,567.
Subsequent to September 30, 2002, resulting from the closing of the October 2002
Private Placement of Common Stock, 1,540,729 additional shares were issued to
investors who purchased shares of common stock in the January 2002 private
placement based on the October 2002 Private Placement price of $1.00.
Compensation expense to be recorded during the second quarter ended December 31,
2002, for the additional shares issued to the Company's Chairman and Chief
Financial Officer will be $377,778.
Subsequent to September 30, 2002, the Company agreed with Mr. Cameron to extend
the due date on notes payable to him until December 31, 2003 in exchange for an
extension fee of 2%. These extended notes total $2,873,691, including accrued
interest and extension fees, and bear interest at 10.25% per annum. Also
subsequent to September 30, 2002, the Company agreed with the other note holder
to extend the due date of his convertible promissory notes until December 31,
2003. These convertible promissory notes total $2,681,415, including accrued
interest, bear interest at 10.25% per annum and are convertible into common
stock at $3.00 per share at the note holder's option.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis
The following discussion provides information to facilitate the understanding
and assessment of significant changes in trends related to the financial
condition of the Company and its results of operations. It should be read in
conjunction with the Company's financial statements and the notes thereto and
other financial information included elsewhere in the Form 10-K for the fiscal
year ended June 30, 2002.
Overview
General
Alternative Technology Resources, Inc. (hereinafter referred to as "ATR," the
"Company," "we" or "us") has developed and is operating an Exchange for
healthcare services ("Healthcare Exchange"). The purpose of the Healthcare
Exchange is to utilize the Internet and other technologies to facilitate
Provider (defined below) initiated discounts and administrative, billing and
remittance services for all commercial lines of business in the healthcare
industry. The Healthcare Exchange offers a direct and efficient conduit between
Providers and Purchasers (defined below) of healthcare services and/or their
agents, such as Preferred Provider Organizations.
ATR does not provide healthcare services, but rather expects to act as a neutral
conduit for efficiency between Providers, Purchasers and their intermediaries
including preferred provider organizations, that should benefit all. ATR
believes that reducing the costs associated with traditional "bricks and mortar"
operations, creating economies of scale, facilitating access to Providers and
Purchasers, streamlining overhead costs, exploiting possibilities for functional
integration, reducing errors and speeding the payment of claims should allow
Purchasers to pay less and Providers to recover more of what they bill.
Providers submit bills to the Company, who reprices the bills to the rate set by
the Providers, including adding a transaction-processing fee, and then routes
them to Purchasers or their intermediaries. The Company receives payments from
Purchasers on behalf of the Providers, and then remits payments to the
Providers.
ATR's Healthcare Exchange began operations with a limited number of Providers
and Purchasers in the quarter ending June 30, 2001. The Company continues to
receive, process and analyze operating data, and the results of the Company's
analysis will determine the amount and timing of remaining development related
efforts.
The Company is currently recruiting medical doctors, medical groups, hospitals
and other health care practitioners (collectively, "Providers") in thirty-two
markets in twenty-two states to offer their services through the Healthcare
Exchange to those who purchase or facilitate the purchase of healthcare services
("Purchasers").
The Company has outsourced to multiple vendors portions of the development and
operations of the information systems for its Healthcare Exchange. The Company
contracts with an application services provider to license, support and run
software to process medical bills submitted to the Company's Healthcare
Exchange. ATR also works with vendors to receive claims from Providers through
electronic clearinghouses and to convert paper claims into electronic formats.
ATR is evaluating other potential technology vendors as well.
History
Alternative Technology Resources, Inc. was founded as 3Net Systems, Inc. in
1989. In August 1999, James W. Cameron, Jr., the Company's largest stockholder,
was named Chairman and Chief Executive Officer. Under his direction the Company
identified what it believes to be a significant business opportunity and began
developing a business model involving the establishment of a Healthcare Exchange
under the name "DoctorandPatient."
In February 2000, Jeffrey S. McCormick assumed the position of the Company's
Chief Executive Officer. Mr. McCormick has significant experience in financing,
managing and growing early stage development companies as a managing director of
Boston-based Saturn Asset Management, Inc. Mr. McCormick has served as an
advisor or director of several Internet and electronic commerce companies over
the last six years. As the Company's CEO, Mr. McCormick is responsible for all
phases of development, implementation and operation of the Company's Healthcare
Exchange. Mr. Cameron still acts as Chairman and Chief Financial Officer and
continues to play an active and substantial role in formulating the Company's
business strategy and policy.
The Company is using its management's experience in health care and information
technology to establish the Healthcare Exchange, which has become the Company's
sole focus. ATR's Healthcare Exchange began operations with a limited number of
Providers and Purchasers in the quarter ending June 30, 2001. The Company
continues to receive, process and analyze operating data, and the results of the
Company's analysis will determine the amount and timing of remaining development
related efforts. ATR's previous business was recruiting, hiring, and training
foreign computer programmers and placing them with U.S. companies. In line with
the Company's strategy to focus on the establishment of the Healthcare Exchange,
ATR suspended recruitment of foreign computer programmers in December 1999 and
began pursuing the conversion of foreign computer programmers to become
employees of ATR's customers. This conversion process was complete as of June
30, 2001, and the Company is no longer in that business.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue for the
transaction-processing fee when earned and the Company has substantially
completed all of its obligations under the contract.
Product Development Costs. In October 1999, the Company began incurring costs to
develop its Healthcare Exchange. In accordance with SOP 98-5, "Reporting Costs
on Start-Up Activities," start-up costs associated with the Healthcare Exchange
have been expensed as incurred.
Stock-Based Compensation. The Company has elected to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value method, compensation cost is the excess, if any, of
the quoted market price or fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Prepaid License and Service Fees. Prepaid license and services fees are recorded
at cost and amortized on a straight-line basis over the service period.
Management considers whether indicators of impairment of these assets are
present at each balance sheet date and an impairment loss is recorded, if
necessary. In assessing the recoverability of the Company's prepaid license and
service fees, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded.
Financial Condition
Cash and cash equivalents increased $482,434 since June 30, 2002. At September
30, 2002, substantially all of ATR's cash was invested in money market accounts.
Because the Company is emphasizing the development of the Healthcare Exchange,
the results of operation for the three months ended September 30, 2002 may not
be indicative of results of operations for the year ended June 30, 2003.
Results of Operation
Healthcare Exchange
Healthcare Exchange Revenue. The Company began operations with a limited number
of Providers in the quarter ending June 30, 2001. Providers submit bills to ATR,
who reprices the bills to the rate set by the Providers, including adding a
transaction-processing fee, and then routes them to Purchasers or their
intermediaries. ATR receives payments from Purchasers on behalf of Providers,
and then remits payments to Providers. The Company recognizes revenue for the
transaction-processing fee when earned and the Company has substantially
completed all of its obligations under the contract. During the three month
period ending September 30, 2002, $776,560 of revenue was recognized as compared
to $108,218 for the three month period ending September 30, 2001. The increase
is primarily the result of an increase in the number of healthcare providers
contracted with the Healthcare Exchange.
Healthcare Exchange Costs. Healthcare Exchange costs are the direct costs
related to the processing of the bills submitted by Providers and payments
received from Purchasers. These costs include the salary and other wage and
benefit costs of the Healthcare Exchange operations staff and the operating cost
of the application services provider. The costs for the three month period
ending September 30, 2002 were $543,702, an increase of 142% over costs of
$224,788 for the three month period ending September 30, 2001. As of September
30, 2002, there were 31 operations staff members responsible for the processing
of bills submitted by Providers and payments received from Purchasers, compared
to 9 operations staff members as of September 30, 2001.
Selling, Marketing and Product Development Costs
In October 1999, the Company began incurring costs to develop its Healthcare
Exchange. Costs incurred are primarily the salary, other wage and benefit costs
of ATR's employees and other operational costs associated with recruiting the
network of healthcare Providers. The costs for the three month period ending
September 30, 2002 were $1,397,306, a decrease of 7% over costs of $1,505,195
for the three month period ending September 30, 2001. This decrease is primarily
the result of a decrease in payroll costs and travel related costs.
General and Administrative Expenses
General and administrative expenses were $509,015 for the three-month period
ended September 30, 2002, and did not fluctuate significantly from the same
period in the prior fiscal year.
Other Income (Expense)
Interest Income. Interest income is related to the short-term investment of cash
balances, primarily in money market accounts. The decrease is the result of
reduced cash balances in the three month period ending September 30, 2002 as
compared to the same period in fiscal 2001.
Interest Expense to Third Party. Interest expense to third party of $77,315, for
the three month period ending September 30, 2002, resulted primarily from the
fair value of a warrant issued in connection with a convertible note and the
beneficial conversion feature of the convertible note to third party, which were
recognized through interest expense, and the interest accrued on the note. No
interest expense to third party was recognized during the same period in the
prior fiscal year.
Interest Expense to Stockholders and Directors. The decrease of interest expense
of $3,059, for September 30, 2002 in comparison to the same period in fiscal
year 2001, despite the increase in Notes Payable, resulted primarily from the
extension of stockholder notes as of September 1, 2001. The extension included a
2% refinance fee, increasing the interest expense for the three month period
ending September 30, 2001.
Income Taxes
As of June 30, 2002 the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $46,119,000 and $26,245,000,
respectively. The federal net operating loss carryforwards expire in 2004
through 2022 and the state net operating loss carryforwards expire in 2002
through 2022. 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) are
subject to an annual limitation in the amount of approximately $300,000.
In 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).
In accordance with provisions of the Internal Revenue Code Section 382,
additional portions of the net operating loss carryforwards may be disallowed as
a result of additional changes in ownership of the Company.
The Company expects the aforementioned annual limitations will result in net
operating loss carryovers, which will not be utilized prior to the expiration of
the carryover period.
Liquidity and Capital Resources
For the three month period ending September 30, 2002, the Company earned
revenues of $776,560 but incurred a net loss of $1,886,806. Until the Company
can generate sufficient revenue to finance its operations, the Company will have
to seek other financing. Traditionally, the Company has used a combination of
equity and debt financing and revenue generated to fund operations but has
incurred operating losses since its inception, which has resulted in an
accumulated deficit of $61,249,685 at September 30, 2002. The Company had
negative working capital at September 30, 2002 of $8,025,656.
Subsequent to September 30, 2002 the Company sold 4,125,000 shares of its common
stock at a purchase price of $1.00 per share. The shares of common stock issued
in the private placement are restricted securities. Net proceeds from the
offering were $3,884,567. In connection with the private placement, the Company
engaged Stonegate Securities, Inc. as placement agent who received a placement
fee of 6% on the gross proceeds received from the sale of common stock placed by
them and a five year warrant to purchase 10% of the common stock placed by them
at $1.00 per share. The placement of the common stock was exempt from
registration pursuant to Regulation D.
On July 26, 2002 Company received short-term unsecured financing in the form of
a convertible note of $1,000,000 from a lender. This note bears interest at 8%
and is payable at the earliest of July 25, 2003 or when the Company, in a
Private Placement of Common Stock, raises $8,000,000. All or a portion of the
convertible note may be converted into shares of common stock at the lower of
$1.00 per share, the subscription per share price of the October 2002 Private
Placement of Common Stock, or if further shares are offered at a lower price per
share at that price. In consideration for the loan the Company issued three
warrants. The Company issued to the lender one warrant to purchase 100,000
shares of common stock. The lender received a second warrant to purchase 100,000
shares of common stock that may only be exercisable if the Company does not
repay the convertible note within 180 days of the agreement. The lender received
a third warrant to purchase 100,000 shares of common stock that may be
exercisable if the Company does not repay the convertible note within one year
of the agreement. Each of the warrants has an exercise price of $1.00, the
subscription per share price of the October 2002 Private Placement of Common
Stock, or if further shares are offered at a lower price per share at that
price. When, and if, exercisable the lender may exercise these warrants through
July 26, 2009.
In connection with the issuance of the convertible note and the issuance of the
first warrant, the Company estimated the fair value of the first warrant to be
$198,000 using the Black-Scholes model. In accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," and EITF 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments," the Company has recognized
$62,630 through interest expense during the three months ended September 30,
2002 for a portion of the fair value of the first warrant and a portion of the
beneficial conversion feature of the convertible note, which was estimated to be
$177,778. The Company will record additional amounts totaling $313,148 through
interest expense until July 26, 2003 for the remaining fair value of the first
warrant and the beneficial conversion feature of the Note recorded at the
initial transaction date.
Relating to the private placement of 4,125,000 shares of the Company's common
stock at a purchase price of $1.00 per share in October 2002, the conversion
price of the convertible note and per share exercise price of the first warrant
were reset to $1.00. In accordance with EITF 00-27, the Company will record
$624,222 for the additional beneficial conversion amount relating to the value
of the reset feature. This amount will be recognized ratable through interest
expense until July 26, 2003.
During the period between January 9, 2002 and March 28, 2002, the Company sold
1,232,585 shares of its common stock at a purchase price of $2.25 per share. The
shares of common stock issued in the private placement are restricted
securities. Further pursuant to the private placement, it was agreed that in the
event that within one year from the final closing the Company sells shares of
common stock, or securities exercisable or convertible into common stock, at a
price less than $2.25 per share, the Company would issue additional shares to
these investors in an amount such that the overall purchase price will be equal
to the lower, subsequent sales price. The forgoing shall exclude common stock
that may be issued in connection with a merger, as a dividend, pursuant to the
exercise of outstanding options, warrants and other convertible securities and
pursuant to options subsequently issued to employees. Net proceeds from the
offering were $2,742,519. The proceeds from the private placement were used to
fund operations and repay debt. The Company's Chairman and Chief Financial
Officer purchased 222,222 shares of the Company's common stock in the private
placement. Because the purchase price of such stock was less than the public
trading price on the date of purchase, the Company recorded compensation expense
of $138,583 during fiscal year 2002. Subsequent to September 30, 2002, resulting
from the closing of the October 2002 Private Placement of Common Stock,
1,540,729 additional shares were issued to these investors based on the October
2002 Private Placement price of $1.00. Compensation expense to be recorded
during the second quarter ended December 31, 2002, for the additional shares
issued to the Company's Chairman and Chief Financial Officer will be $377,778.
As of June 30, 2002, the Company had received short-term, unsecured financing to
fund its operations in the form of notes payable of $4,636,352, from Mr. Cameron
and another stockholder. These notes bear interest at 10.25%. On September 1,
2001, the Company agreed with Mr. Cameron to extend the due date on notes
payable to him until December 31, 2002 in exchange for an extension fee of 2%.
These extended notes total $1,630,529, including accrued interest and extension
fees, and bear interest at 10.25% per annum. During the quarter ending June 30,
2002, Mr. Cameron loaned the Company an additional $582,000 bearing interest at
10.25% payable on December 31, 2002. On September 1, 2001, the Company agreed
with the other note holder to extend the due date of his convertible promissory
notes until December 31, 2002. These convertible promissory notes total
$2,423,823, including accrued interest, bear interest at 10.25% per annum and
are convertible into common stock at $3.00 per share at the note holder's
option. During the three month period ending September 30, 2002, Mr. Cameron
loaned the Company an additional $619,000 bearing interest at 10.25% payable on
December 31, 2002. Subsequent to September 30, 2002, the Company agreed with Mr.
Cameron to extend the due date on notes payable to him until December 31, 2003
in exchange for an extension fee of 2%. These extended notes total $2,873,691,
including accrued interest and extension fees, and bear interest at 10.25% per
annum. Also subsequent to September 30, 2002, the Company agreed with the other
note holder to extend the due date of his convertible promissory notes until
December 31, 2003. These convertible promissory notes total $2,681,415,
including accrued interest, bear interest at 10.25% per annum and are
convertible into common stock at $3.00 per share at the note holder's option.
The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical bills
submitted to the Company's Healthcare Exchange. The agreements are for 66
months. The application service provider required payment of an initial base
license fee of $250,000, which is being amortized over 66 months, and start-up
costs, including data center set up, training and implementation fees of
approximately $145,000, which were expensed. The agreements require monthly
minimum payments, currently of approximately $35,000, and additional fees, that
are transaction based, if volumes exceed levels included in the monthly
minimums.
The Company's Healthcare Exchange development efforts will require substantial
funds prior to generating sufficient revenues to fund operations and repay debt.
However, based on the steps the Company has taken to refocus its operations and
obtain additional financing, 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 at
least the end of fiscal 2003. The Company believes that it has raised additional
funds to finance its operations through fiscal 2003. However, the Company must
successfully implement its business plan and there can be no assurance that the
plan will be successfully implemented. If unsuccessful, the Company may be
required to reduce the development efforts or its Healthcare Exchange or be
forced into seeking protection under federal bankruptcy laws. As a result, the
report of independent auditors on the Company's June 30, 2002 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 possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
The following table represents the debt requirements pertaining to contractual
obligations of the Company over the next five years:
- ---------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
- ---------------------------------------------------------------------------------------------------------------------------
Notes payable to stockholder $ 2,831,529 $ 2,831,529 $ - $ - $ -
Convertible notes payable to stockholder 2,423,823 2,423,823 - - -
Convertible note payable to third party 1,000,000 1,000,000 - - -
Operating leases - facilities - payable to
stockholder 222,722 147,753 74,969 - -
Operating leases - equipment 145,455 44,847 90,481 10,127 -
Application services provider 1,483,922 404,706 1,079,216 - -
- ----------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 8,107,451 $ 6,852,658 $ 1,244,666 $ 10,127 $ -
- ----------------------------------------------------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has notes payable in the aggregate amount of $6,255,352 as of
September 30, 2002 payable to two stockholders of the Company and another
lender. The notes bear interest at 8% to 10.25% per annum and are due from July
25, 2003 to December 31, 2003, or earlier if other funding is obtained. The
Company does not believe that any change in interest rates will have a material
impact on the Company during fiscal 2003. Further, the Company has no foreign
operations and therefore is not subject to foreign currency fluctuations.
Item 4. Disclosure Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
Item 5. Pre-approval on Non-audit Services
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
responsible for disclosing non-audit services to be performed by the Company's
external auditors, Ernst & Young LLP, that have been pre-approved by the audit
committee, Non-audit services are defined by law as services other than those
provided in connection with an audit of the financial statements of the company.
During the quarterly period covered by this filing, the audit committee has
approved the following non-audit services: consultation on accounting standards
or transactions; review of quarterly financial statements for fiscal 2003; and
preparation of fiscal 2002 and fiscal 2003 federal and state tax returns. The
nature of the above services is considered by the Company to be audit-related
services that are closely related to the financial statement audit process.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(c)
(1) On July 26, 2002 the Company received short-term unsecured financing in the
form of a convertible note of $1,000,000 from an Accredited Investor. The
convertible note bears interest at 8% and is payable at the earlier of July 25,
2003 or when the Company, in a private placement of Common Stock, raises
$8,000,000. All or a portion of the convertible note may be converted into
shares of common stock at the lower of $1.00 per share, or, if within 12 months
the Company sells additional shares in a financing at a price less than $1.00
per share, at that lower price. As additional consideration for the convertible
note, the Company issued three warrants. The Company issued to the lender one
warrant to purchase 100,000 shares of common stock. The lender received a second
warrant to purchase 100,000 shares of common stock that may only be exercisable
if the Company does not repay the convertible note within 180 days of the
agreement. The lender received a third warrant to purchase 100,000 shares of
common stock that may be exercisable if the Company does not repay the
convertible note within one year of the agreement. Each of the warrants has an
exercise price of $1.00 or, if within 12 months the Company sells additional
shares in a financing at a price less than $1.00 per share, at that lower price.
When, and if, exercisable the lender may exercise these warrants through July
26, 2009. The issuance of the convertible note was exempt from registration
pursuant to Regulation D.
(2) During the month of October 2002, the Company sold 4,125,000 shares of its
common stock at a purchase price of $1.00 per share to Accredited Investors. Net
cash proceeds from the offering were $3,884,567. In connection with the private
placement, the Company engaged Stonegate Securities, Inc. as placement agent who
received a placement fee of 6% on the gross proceeds received from the sale of
common stock placed by them and a five year warrant to purchase 10% of the
common stock placed by them at $1.00 per share. The placement of the common
stock was exempt from registration pursuant to Regulation D.
(3) During the period between January 9, 2002 and March 28, 2002, the Company
sold 1,232,585 shares of its common stock at a purchase price of $2.25 per share
to Accredited Investors. Pursuant to the terms of the private placement, in the
event that the Company sold shares of common stock, or securities exercisable or
convertible into common stock, at a price less than $2.25 per share within one
year from the final closing, the Company would issue additional shares to these
investors in an amount such that the overall purchase price will be equal to the
lower, subsequent sales price. As previously disclosed, during October 2002, the
Company completed a private placement of 4,125,000 shares of its common stock at
$1.00 per share. As a result of the subsequent private placement at $1.00 per
share, the Company issued 1,540,729 additional shares to the investors of the
March 2002 private placement. Included in such total was 277,778 shares issued
the Company's Chairman of the Board who initially purchased 222,222 shares of
common stock in the March 2002 private placement. The placement of the common
stock was exempt from registration pursuant to Regulation D.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act.
(b) Reports on Form 8-K None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Registrant)
Dated: November 14, 2002 /S/ JEFFREY S. MCCORMICK
-------------------------------------
Jeffrey S. McCormick
Chief Executive Officer
/S/ JAMES W. CAMERON, JR.
-------------------------------------
James W. Cameron, Jr.
Chairman of the Board and Chief
Financial Officer
Section 302 Certification
I, Jeff McCormick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alternative Technology
Resources, Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report; 4.
The Registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ JEFF MCCORMICK
-----------------------
Jeff McCormick,
Chief Executive Officer
I, James W. Cameron, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alternative Technology
Resources, Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report; 4.
The Registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ JAMES W. CAMERON, JR.
-------------------------
James W. Cameron, Jr.,
Chief Financial Officer
Exhibit 99.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18,UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of Title 18, United States Code), each of the
undersigned officers of Alternative Technology Resources, Inc., a Delaware
corporation (the "Company"), does hereby certify with respect to the Quarterly
Report of the Company on Form 10-Q for the quarter ended September 30, 2002 as
filed with the Securities and Exchange Commission (the " Form10-Q") that, to the
best of their knowledge,:
(1) the Form10-Q fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 14, 2002 /S/ JEFF MCCORMICK
-----------------------------
Jeff McCormick,
Chief Executive Officer
Dated: November 14, 2002 /S/ JAMES W. CAMERON, JR.
----------------------------
James W. Cameron, Jr.,
Chief Financial Officer