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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to ____
Commission file number 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
629 J STREET, SACRAMENTO, CA 95814
(Address of principal executive offices, including zip code)
(916) 231-0400
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant based upon the average bid and asked price reported on the
OTC-Bulletin Board on December 31, 2002, of $0.70 per share, was $16,955,128.
Number of shares of Common Stock outstanding at September 19, 2003: 72,476,014
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders are incorporated by reference in Part III. The Proxy
Statement will be filed within 120 days of the Company's fiscal year end.
Exhibit index is located on page 50.
TABLE OF CONTENTS
PART I PAGE NUMBER
ITEM 1 Business..............................................................3
ITEM 2 Description of Property..............................................13
ITEM 3 Legal Proceedings....................................................13
ITEM 4 Submission of Matters to a Vote of Security Holders..................13
PART II
ITEM 5 Market for Common Equity and Related Stockholder Matters.............14
ITEM 6 Selected Financial Data..............................................16
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation.................................................16
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk...........24
ITEM 8 Financial Statements and Supplementary Data..........................25
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Disclosure...........................................................49
ITEM 9A Controls and Procedures..............................................49
PART III
ITEM 10 Directors and Executive Officers of the Company......................49
ITEM 11 Executive Compensation...............................................49
ITEM 12 Security Ownership of Certain Beneficial Owners and Management.......49
ITEM 13 Certain Relationships and Related Transactions.......................49
ITEM 14 Principal Accountant Fees and Services...............................49
ITEM 15 Exhibits, Financial Statements Schedules, and Reports on Forms 8-K...50
2
PART I
With the exception of historical facts stated herein, the matters discussed
in this Form 10-K are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operations of Alternative Technology Resources,
Inc., projected costs and expenses related to the operations of the Company,
liquidity, capital resources, and availability of future equity capital on
commercially reasonable terms. Factors that could cause actual results to differ
materially are discussed under "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Readers of this Form 10-K are cautioned not to put undue reliance on
"forward looking" statements, which, by their nature, are not reliable
indicators of future performance. We disclaims any intent or obligation to
publicly update these "forward looking" statements, whether as a result of new
information, future events or otherwise.
As used in this report, the terms "we," "us," "our", "ATR," and the
"Company" mean Alternative Technology Resources, Inc., unless otherwise
indicated.
Item 1. Business
GENERAL
We are engaged in the business of operating a Healthcare Exchange under the
name "DoctorandPatientTM." The purpose of the Healthcare Exchange is to
facilitate provider initiated discounts for all commercial lines of business in
the healthcare industry. The Healthcare Exchange offers a direct conduit between
medical doctors, medical groups, hospitals and other healthcare practitioners
(collectively "Providers") and those who purchase or facilitate the purchase of
healthcare services and/or their agents, such as Preferred Provider
Organizations ("Purchasers"). The Healthcare Exchange is used in the absence of
an existing agreement between the Provider and the Purchaser of healthcare
services.
Under the Healthcare Exchange program Providers submit claims to us, and we
process and reprice the claims to the rate set by the Providers, including
adding a transaction-processing fee. We then route the adjusted claims to
Purchasers or their intermediaries. We receive payments from Purchasers on
behalf of Providers, and then remit payments to Providers.
During fiscal 2003, we experienced substantial loss in implementing and
operating the Healthcare Exchange. As a result, we are revising our Healthcare
Exchange program to provide for a direct pay program whereby Providers' claims
will be sent to the Purchasers via our Healthcare Exchange and payment will be
made directly to the Providers. We will then invoice the Providers a transaction
fee for each claim processed and forwarded to the Purchaser.
Our Healthcare Exchange began operations with a limited number of Providers
and Purchasers in the quarter ending June 30, 2001. We continue to receive,
process, and analyze operating data, and the results of our analysis will
determine the amount and timing of remaining development related efforts.
There are no geographic limitations to the recruitment of Providers.
However, our primary recruitment efforts have been in 15 states and the District
of Columbia.
We have outsourced to multiple vendors portions of the development and
operations of the information systems for the Healthcare Exchange. We contract
with an application services provider to license, support and run software to
process medical claims submitted to the Company's Healthcare Exchange. We also
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work with vendors to receive claims from Providers through electronic
clearinghouses and to convert paper claims into electronic formats. We are
evaluating other potential technology vendors as well.
We do not provide healthcare services, but rather act as a neutral conduit
between Providers and Purchasers including preferred provider organizations. We
believe that our Healthcare Exchange provides both economic and administrative
efficiencies to both Providers and Purchasers in the absence of a traditional
health plan agreement.
RECENT DEVELOPMENTS
During fiscal year 2003, we focused our attention on expanding our markets
in order to try to increase our revenues. In line with our objectives, we hired
a significant number of employees to promote the Healthcare Exchange. This rapid
growth in employees placed a significant strain upon our financial resources
without producing sufficient revenue to accommodate this growth. As a result, we
had to take steps to reduce our expenses in an effort to improve our financial
condition. Such steps included closing our headquarters located in Portsmouth,
New Hampshire and relocating these functions to our office in Sacramento,
California. In addition, we reduced the number of our employees from 98 as of
December 31, 2002 to 27 by August 31, 2003.
As we enter fiscal year 2004, we continue to face significant challenges
with respect to revenue and cash shortages. As of September 26, 2003, our cash
balance had declined to approximately $700,000, and in light of our prior losses
and current stock price of our common stock, no assurance can be given that we
will be able to raise additional funds for our operations, if necessary. We are
taking a number of steps to address these challenges including further
reductions in operating expenses and liabilities. In addition, our business
strategy is to transition our existing Providers to our direct pay program where
Providers will submit their claims to us, and we will process and reprice the
claims to the rate set by Providers. After re-pricing, claims will be then sent
to Purchasers or their intermediaries who will pay the Providers directly.
Providers will be invoiced our transaction fee for each claim re-priced. We will
recognize revenue when it is earned and collectibility is reasonably assured.
Revenue is earned when we have completed claim re-pricing obligations under our
service agreement with the Provider.
We intend to launch our direct pay program during fiscal year 2004. Under
this program, we will receive a fee for each claim that we process. In order to
attract new Providers and increase the number of claims that we process, we have
reduced our transaction fee which will require us to process a higher number of
claims that we have not previously been able to obtain in order to generate
sufficient revenue for our operations. This program is new and we are unsure
whether it will be accepted by the healthcare industry or whether we will be
able to attract a sufficient number of Providers in order to process the number
of claims we will need to generate sufficient revenues to sustain our
operations. If we are unable to successfully launch our direct pay program or
gain the confidence of Provders, we may be required to further reduce our
operation expenses or be forced into seeking protection under federal bankruptcy
laws.
On June 30, 2003, during a special meeting of the board of directors, the
board accepted both Mr. James W. Cameron, Jr.'s resignation as chairman and
chief financial officer, effective immediately, and that of Mr. Jeffrey
McCormick's as chief executive officer, effective July 1, 2003. The board
approved the appointments of Mr. Alan Baron and Mr. Mark W. Rieger as directors
of the Company. The board also approved the appointment of Mr. Baron as chairman
and Mr. Rieger as chief executive officer. Mr. Baron has served as general
partner of Decameron Partners, LLP since 1991. Mr. Rieger has worked more than
17 years in healthcare administration. From 1990 - 2000 he was the Regional
Service Line Administrator at Sutter Health Central, Sacramento. Sutter Health
is one of the largest integrated healthcare systems in the U.S. today. In
addition to having experience in hospital operations, he has experience in
specialty services network development and managed care contracting. Since
joining the Company in 2000, Mr. Rieger has served in both a sales and
operations management role. Most recently he was the vice president of plan
purchaser services. At the August 18, 2003 board of directors meeting the board
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appointed Mr. Rieger to be the chief financial officer in addition to his
responsibilities as chief executive officer.
On July 18, 2003, we signed the sixth addendum to our lease located in
Sacramento, California, with Mr. James W. Cameron, Jr., an affiliate of the
Company. Under the terms of the sixth addendum to our lease, Mr. Cameron forgave
$559,220 in rent and interest on rent reported as accounts payable to
stockholder in our financial statements. As consideration for forgiven unpaid
rent and interest, we assigned excess furniture and equipment to Mr. Cameron. In
addition, the sixth addendum reduced our office space from 7,523 square feet to
4,827 square feet, and our monthly rent is currently stipulated to be $3,794.
On July 25, 2003, we amended our $1,000,000 convertible note due on July
25, 2003. Under the terms of the amendment, the convertible note was extended to
the earlier of July 22, 2005 or when we receive $8,000,000 in debt or equity
financing. In consideration, we agreed to convert all accrued and unpaid
interest as of July 25, 2003 into 2,285,714 shares of our common stock at a rate
of $0.035 per share and to secure the convertible note with our assets.
On August 15, 2003, Mr. Cameron purchased 1,232 shares of our Series A
Preferred Stock, $6.00 par value per share, at $1,000 per share for an aggregate
sum of $1,232,000. In general, the Series A Preferred Stock provides for a
dividend preference of $0.50 per share if and when declared by the board of
directors and a liquidation preference of $6.00 per share. In addition, the
shares of Series A Preferred Stock have no voting rights, except as required by
law, and are not convertible into any other securities.
On August 15, 2003, Mr. Cameron assigned to Mr. Baron all of his interest
to the promissory notes payable by the Company in the aggregate principal amount
of $2,873,694 along with $283,195 in accrued Series D Preferred Stock dividends
owed by the Company. On September 18, 2003, Mr. Baron forgave all of the
obligations owed by the Company under the promissory notes including the accrued
and unpaid interest along with $283,195 in accrued Series D Preferred Stock
dividends. In connection with this transaction, Mr. Cameron sold to certain
accredited investors including Mr. Baron, an aggregate of 32,359,637 shares of
our common stock at a price of $0.035 per share. In addition, Mr. Cameron gifted
to several donees an aggregate of 490,000 shares of our common stock. As a
result of these transactions, Mr. Cameron reduced his beneficial ownership in
our common stock from approximately 57.8% to approximately 10.5% as of August
30, 2003.
On August 15, 2003, Mr. Cameron, McCormick ATEK Investments LLC, an entity
controlled by Mr. McCormick, and we agreed to cancel, without value, the option
requiring Mr. Cameron to sell 6,000,000 shares of our common stock owned by Mr.
Cameron to the McCormick ATEK Investment LLC at the purchase price of $3.625 per
share. In addition, because of Mr. McCormick's July 1, 2003 resignation as our
chief executive officer, his employment agreement with us has been terminated.
As a result of the termination, Mr. McCormick's options to purchase 7,000,000
shares and 4,000,000 shares of our common stock granted in connection with his
employment became fully vested and are exercisable pursuant to the terms of the
respective option agreements.
On September 19, 2003, we reached an agreement with The Negri Trust to
convert $2,344,704 of the outstanding principal and all accrued and unpaid
interest as of that date under convertible notes into 3,086,043 shares of our
common stock.
As of September 19, 2003, we have reduced our debt obligations outstanding
as of June 30, 2003 by $6,060,813 as a result of the conversion of The Negri
Trust convertible notes, the forgiveness of the promissory notes and other
accrued liabilities by our chairman, Mr. Alan Baron, and the forgiveness of rent
and interest on rent by Mr. Cameron.
5
HISTORY
In August 1999, we identified what we believe to be a significant business
opportunity in the healthcare industry and began developing a business model
involving the establishment of the Healthcare Exchange under the name
"DoctorandPatientTM." Prior to providing an exchange for healthcare services, we
were in the business of recruiting, hiring and training foreign computer
programmers and placing them with U.S. companies. During fiscal year 2001, we
ceased our computer programmer operations to concentrate on our Healthcare
Exchange.
OVERVIEW OF THE INDUSTRY
According to the Healthcare Financing Administration, in 1999 healthcare in
the United States was a $1.2 trillion dollar industry, up 5.6% from 1998 and
comprising approximately 13% of gross domestic product. The industry is
characterized by extremely complex decision-making, high fragmentation, high
barriers to entry, rising costs and slow adoption and incorporation of many
information technologies. The healthcare industry's poor rate of investment in
technological innovation has created a system rampant with inefficiencies.
According to the Health Data Directory, less than 39% of private sector billing
claims (including commercial, indemnity, PPO and HMO claims) were automated in
1999. Even those that are automated often have processing delays because of a
myriad of reasons, including improper coding of information, inaccurate data on
patients and improper eligibility information. Waste in the acquisition,
delivery and processing of billing and payment for health services has been
widely reported and documented. We believe that there are gaps and
inefficiencies in the purchasing process and in billing and claims processing
systems creating a key business opportunity for the Healthcare Exchange.
In its simplest form, healthcare can be described as the demand for
services by individuals ("Patients") and the supply of services by Providers,
which include licensed physicians, hospitals, surgery centers, and other allied
health professionals. Providers often form groups or practice associations.
Purchasers include Patients and various forms of third parties, such as
insurance companies, Medicare, Medicaid and self-insured and/or self
administered employers.
In most instances, Patients are members of a health service purchasing
group or pool sponsored in whole or in part by their employer. The members'
benefits are described in the conditions of coverage document. Typically this
includes the division of financial responsibility for various services,
selection of Providers, use of specialists, required authorizations, exclusions
and so on.
Following an encounter with a patient (i.e. office visit or
hospitalization), Providers document the services using a standard claim form.
These claims are submitted to and reviewed by Purchasers and their managed care
companies to first, verify a Patient's eligibility, then, if applicable, adjust
the charges to the agreed upon fee schedule, and finally determine the patient's
financial responsibility. Nearly all plans have provisions that reduce the
patient's share of cost if they select a Provider that has agreed to the
Purchaser's fee schedule.
There are a large number of variations of the above
Patient-Provider-Purchaser relationship--such as Health Maintenance
Organizations (HMOs), Preferred Provider Organizations (PPOs), Point of Service
Plans (POS), Medicare, and Medicaid--all of which involve some combination or
redistribution of the functions described.
In the absence of a health plan (uninsured) or if the plan design does not
cover the service (under-insured), the Patient will pay the Provider directly.
For as many as 41 million Americans today, this simple cash model is the only
one possible for all or much of their care. In many cases, these individuals
have the financial wherewithal to pay for many health services. However, in
general, Providers lack a simple means to market a discount of their services to
these Patients.
6
BUSINESS STRATEGY
The purpose of the Healthcare Exchange is to utilize electronic commerce
and other technologies to allow Providers, in the absence of an agreement with
the Purchaser, to submit a discount for services. The Healthcare Exchange offers
a direct and efficient conduit between Providers and Purchasers of healthcare
services, their PPOs' and/or their agents. Under the current program Providers
submit their healthcare claims to us, and we re-price these claims to the
Provider's Healthcare Exchange rate, including adding a transaction-processing
fee. We then route the adjusted claims to Purchasers or their intermediaries. We
receive payments from Purchasers on behalf of Providers, and then remit
payments, less our fee, to the Providers. Subsequent to fiscal year 2003, a
direct pay program has been implemented wherein Providers submit their
healthcare claims to us for re-pricing to the Healthcare Exchange rate. We then
route the adjusted claims to Purchasers or their intermediaries, who will pay
the Providers directly. Providers are then invoiced a transaction fee for each
claim processed and forwarded to the Purchaser.
We believe that the value proposition of the Healthcare Exchange for our
direct pay program is significant. The transition to the direct pay program has
been driven by the cost and complexity of receiving and processing payments from
Purchasers on behalf of Providers. Our current program, whereby we would receive
payments directly from the Purchasers and remit the payment, after deducting our
fee, to the Providers created a tension between the Provider and us that
interfered with efforts by our sales and marketing staff to recruit new
Providers. By developing the direct pay program, we removed the Healthcare
Exchange between the Purchaser's payments and the Provider, and allowed the
Healthcare Exchange to act as a neutral conduit. We believe that the simplicity
of the direct pay program will allow us to accelerate the growth in new
Providers. We also believe that the direct pay program will also reduce the
barriers to marketing to large healthcare provider organizations. Under the
direct pay program, our anticipated transaction fee will be less than our
transaction fee for our current program. Therefore, we must substantially
increase the number of claims that we process in order to generate sufficient
revenues for our operations. We intend to initially market our direct pay
program to our existing Providers by transitioning them from our current program
to the direct pay program. If we are unable to successfully launch our direct
pay program or gain the confidence of Providers, we may be required to further
reduce our operating expenses and/or seek additional funds for our operations.
As of September 26, 2003, our cash balance had declined to approximately
$700,000, and in light of our prior losses and current stock price of our common
stock, no assurance can be given that we will be able to raise additional funds,
if necessary. If we are unable to raise additional funds, we may be forced into
seeking protection under federal bankruptcy laws.
In addition to the direct pay program, we will begin test marketing of a
compliance program. The compliance program allows the Healthcare Exchange to
re-price medical claims within an existing agreement between the Provider and
the Purchaser. The compliance program could allow Providers to use the
Healthcare Exchange for more of their claims. Our market with the direct pay
program is limited to those claims for which there is no existing health plan
agreement. Applying the efficiencies of the Healthcare Exchange to an existing
health plan agreement can improve the Providers' ability to insure compliance
with a health plan's fee schedule. More importantly, we believe that this
compliance program could significantly increase the number of claims we process
for Providers.
RELATIONSHIP TO THE PROVIDER
We have developed the Healthcare Exchange for Providers (including Provider
groups) to market their services to Purchasers more efficiently. To date there
has been neither a simple means to offer a discount to a Purchaser in the
absence of a health plan agreement, nor a rational alternative to certain health
plan agreements. In the United States, there are approximately 750,000 medical
doctors, 6,000 hospitals and 539,000 licensed ancillary Providers (such as
chiropractors, optometrists, physical therapists and physician assistants) and
suppliers (such as pharmacies, durable medical equipment suppliers, and
transportation). We are currently marketing to and entering into contracts with
7
Providers. A transaction-processing fee will either be billed directly to the
Providers or added to the discount offer sent to the Purchaser.
RELATIONSHIP TO PURCHASERS
We have developed the Healthcare Exchange so that Purchasers can easily
access discounts for the services of Providers with whom there is no existing
discount agreement. We believe this will reduce costs and delays in the billing
process allowing Purchasers to reduce their costs. Purchasers may contract with
us in order to receive Providers' offered rates, and in order to lower their
costs by receiving claims electronically and pre-priced. The goal of this system
is to introduce additional cost certainty and to streamline the billing and
payment process. A transaction-processing fee will be billed to the Providers,
or charged to Purchasers or their intermediaries.
RELATIONSHIP TO INDIVIDUAL UNINSURED AND UNDER INSURED PURCHASERS
In September 1999, we entered into an agreement with WebMD Corp. to develop
a web-based portal through which individual uninsured and under-insured Patients
can procure healthcare services. Currently both parties are reevaluating this
agreement, given changed directions and priorities of each company. The
agreement has not formally been modified or terminated, nor has either party
proposed any specific changes. However, neither party is currently devoting any
substantial resources to this project. (See Note 4 to Financial Statements.)
APPLICATION SERVICES PROVIDER
We signed agreements effective in January 2001 with an application services
provider to license, support and run software to process medical claims
submitted to the Healthcare Exchange. The agreements are for a period of 66
months. They required payment of an initial base license fee of $250,000, which
is being amortized over the estimated useful life of this arrangement, 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 about $35,000 and additional fees that are
transaction based if volumes exceed levels included in the monthly minimums.
COMPETITION
The Healthcare Exchange generally will endeavor to cooperate with certain
established preferred provider organizations, health plans and other companies
offering "discount plans" to potential Purchasers. However, such plans and
companies may choose to compete against the Healthcare Exchange and its
purchasers, providers and affiliated organizations. These industries are
intensely competitive and rapidly evolving.
Increased competition in the industry could result in price reductions,
reduced gross margins or loss of market share, which could seriously harm our
business and operating results. Our success depends on the ability to market the
Healthcare Exchange to potential Providers and Purchasers and their agents. We
believe that the principal competitive factors in this market are health and
managed care expertise, data integration and transfer of technology, ability to
persuade Providers and Purchasers to accept new technology and new models,
customer service and support and product and service fees. Although, we
currently believe that there is no direct competition for our Healthcare
Exchange services, if we are successful, we expect that there will be new
competitors offering similar services.
As a new participant in the healthcare industry, our potential competitors
have longer operating histories, significantly greater financial, technical,
marketing and other resources and significantly greater name recognition. In
addition, many of our competitors have well-established relationships with our
current and potential Purchasers and have extensive knowledge of the industry.
Current and potential competitors have established or may establish strategic
relationships among themselves or with third parties to increase the ability of
their products and services to address Purchaser needs. These competitors may
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seek and obtain business method patents on portions of or all their operations,
which could effectively preclude us from competing in spite of the efficiency of
the Healthcare Exchange model. Also, other companies may implement a similar
strategy. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
GOVERNMENT REGULATION
Our operations are subject to various federal and state laws. We believe
that our operations currently comply with such laws, but there can be no
assurance that subsequent laws, or subsequent changes in current laws or legal
interpretations, will not adversely affect our operations.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) has
initiated and will continue to initiate obligations previously unknown on the
healthcare industry. HIPAA is designed to reduce the amount of administrative
waste in the healthcare industry and to protect the privacy of patients' medical
information. HIPAA establishes new requirements for the confidentiality of
patient health information and standard formats for the secure transmission of
healthcare data among healthcare providers and purchasers. HIPAA, among other
things, will create federal criminal penalties for health plans, providers and
claims clearinghouses that knowingly and improperly disclose information or
obtain information under false pretenses. The regulations regarding the standard
formats for the secure transmission of healthcare information became effective
in October 2002, but may be extended to October 2003 if an extension is
requested and a compliance plan is filed with Secretary of the Department of
Health and Human Services.
We were aware of and tried to incorporate HIPAA requirements or their
timely adoption as its products and services were developed. We have filed a
compliance plan and a request for extension to October 2003 to comply with the
standard formats requirements. We are currently reviewing processes, systems or
policies that may require modification, and we are working to implement
appropriate changes to avoid any adverse impact on our ability to perform
services in accordance with HIPAA standards. We are also communicating with
significant third-party service providers to assess their readiness and the
extent to which we will need to modify our agreements or relationships with them
to comply with HIPAA standards.
The regulations regarding privacy issues became effective in April 2003. We
have taken all necessary measures to fully comply with the HIPAA privacy
standards. We have provided training seminars to make certain all employees are
familiar with and adhere to the regulations regarding privacy issues. The
Company is not itself a covered entity (e.g. healthcare providers, clearing
houses and insurance plans), however, it complies with the requirements of
covered entities by being party to Business Associate Agreements with covered
entities.
The cost of this compliance effort is estimated to be less than $100,000.
However, there can be no guarantee that the costs will not materially exceed
this, or that changes in federal standards would require expending additional
resources.
The confidentiality of patient records and claims data and the
circumstances under which records and data may be released or must be secured
for inclusion in our databases may be subject to substantial regulation by state
governments. These state laws govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws
currently is principally the responsibility of Providers and health plans, these
regulations may be extended to cover the business and the claims data and other
information that are included in our databases. If these laws are extended to
cover our business, we may be required to expend additional resources in order
to comply with these laws, including changes to our security practices, and may
be exposed to greater liability in the event of failure to comply with these
laws.
The offering of health provider services is subject to extensive regulation
under state laws. Under some state laws, regulators may take the position that a
registration fee for Purchaser access to favorable fees from Providers requires
9
meeting the requirements for licensing as a health plan or health insurer. In
addition, to the extent that fees are paid by Providers, state regulators could
assert that the Healthcare Exchange is a referral agency, which requires
licensing under many state laws, or that Providers are paying prohibited
referral fees, which could subject the Provider or us to civil or criminal
penalties. In addition, our relationships with Purchasers may require licensing
or certifications in some states. Also, although we do not currently anticipate
entering the Medicare or state Medicaid markets, similar federal regulations
could adversely impact the business. Because the e-commerce business is
relatively new to the provider network industry, the impact of current or future
regulations is difficult to anticipate.
As we develop our business plan, compliance with or prohibitions by state
regulations could delay or eliminate certain aspects of our business or force us
to modify our business, which could have a material adverse impact on our
business and prospects.
HUMAN RESOURCES
On August 31, 2003, the Company had 27 employees, consisting of 18
employees located in Sacramento, and 9 employees in satellite offices in 5
states, including California.
INSURANCE
Our annual coverage limits for general premises liability, professional
liability and workers' compensation insurance policies are $3,000,000 for
liability insurance policies and $1,000,000 for workers' compensation. We also
have a $1,000,000 policy for errors and omissions insurance. Management believes
such limits are adequate for our business; however, there can be no assurance
that potential claims will not exceed the limits on these policies.
RISK FACTORS
An investment in our common stock involves considerable risk. In addition
to the other information contained in this annual report, you should carefully
consider the following factors in evaluating an investment in our common stock.
This annual report contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference includes those discussed below. Note that this is not an
all-inclusive list of the risks to which we are subject.
OUR CURRENT OPERATIONS ARE NOT PROFITABLE AND WE HAVE A HISTORY OF SIGNIFICANT
LOSSES.
We have experienced losses since our inception. Our net loss applicable to
common stockholders for fiscal years 2003 and 2002 was $7,650,181 and
$9,815,906. There is no assurance we can develop our Healthcare Exchange into a
profitable and sustainable business. Given these conditions, the report of
independent auditors on our fiscal year 2003 financial statements includes an
explanatory paragraph indicating there is substantial doubt about our 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.
OUR DIRECT PAY PROGRAM MAY NOT BE COMMERCIALLY SUCCESSFUL.
We launched our direct pay program during the first quarter of 2004. Under
this program, we will receive a fee for each claim that we process. In order to
attract new Providers and increase the number of claims that we process, we have
reduced our transaction fee which will require us to process a higher number of
claims that we have not previously been able to obtain in order to generate
sufficient revenue for our operations. This program is new and we are unsure
10
whether it will be accepted by the healthcare industry or whether we will be
able to attract a sufficient number of Providers in order to process the number
of claims we will need to generate sufficient revenues to sustain our
operations. If we are unable to successfully launch our direct pay program or
gain the confidence of Providers, we may be required to further reduce our
operating expenses and/or seek additional funds for our operations. As of
September 26, 2003, our cash balance had declined to approximately $700,000, and
in light of our prior losses and current stock price of our common stock, no
assurance can be given that we will be able to raise additional funds, if
necessary. If we are unable to raise additional funds, we may be forced into
seeking protection under federal bankruptcy laws.
WE MAY NEED ADDITIONAL FINANCING.
If our direct pay program is not successful, we may need additional
financing for our operations. Historically, we have relied on the private
placements of our common stock to finance our operations. In light of our prior
losses and current stock price of our common stock, no assurance can be giving
that we will be able to raise additional funds for our operations, if necessary.
If we do not receive additional financing, we will have to significantly reduce
our operations or be forced into seeking protection under federal bankruptcy
laws.
OUR GROWTH DEPENDS ON INDUSTRY ACCEPTANCE OF OUR HEALTHCARE PRODUCTS AND
SERVICES.
The time, expense and effort of securing Purchasers and Providers may
exceed our expectations and may negatively impact our business and operating
results. The decision by our customers to use the Healthcare Exchange requires
time intensive education as to the advantages of our services. The failure of
industry participants to accept our services as a replacement for traditional
methods of operations could limit our revenue growth. We, therefore, will devote
significant resources and incur costs without any assurance that sufficient
medical providers or Purchasers will use our services. In the event that
Purchasers do not use our services, we may have incurred substantial costs that
cannot be recovered and which will not result in future revenues.
OUR FUTURE REVENUE GROWTH DEPENDS UPON OUR ESTABLISHMENT AND MAINTENANCE OF
SUCCESSFUL RELATIONSHIPS WITH PROVIDERS AND STRATEGIC VENDORS IN ORDER TO
ATTRACT PURCHASERS TO OUR PRODUCTS AND SERVICES.
We believe that our future revenue growth depends in part upon the
successful creation and maintenance of relationships with Providers, Purchasers
and strategic vendors. To date we have established relationships with a small
number of the Providers in the relevant markets. In order to successfully
attract Purchasers, we may need to have a large number of relationships with
Providers with both specialty and geographic diversity. We may not be able to
adequately develop relationships with the number of Providers necessary to
achieve this type of coverage and our existing relationships with Providers may
not be ultimately successful. If we are unable to establish and maintain
successful relationships with Providers or strategic vendors, we may have to
devote substantially more resources to the sales and marketing of our products
and services.
OUR BUSINESS AND REPUTATION MAY BE HARMED IF WE ARE UNABLE TO PROTECT THE
PRIVACY OF OUR CONFIDENTIAL HEALTH INFORMATION.
Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks by
computer hackers and similar disruptive problems. A user who is able to access
our computer or communication systems could gain access to confidential health
information of individuals. Therefore, a material security breach could harm our
business and our reputation or could result in liability to us.
OUR ABILITY TO COMPLY WITH THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY
ACT OF 1996 (HIPAA) COULD HARM OUR BUSINESS AND OPERATING RESULTS.
11
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) has
initiated and will continue to initiate obligations previously unknown on the
healthcare industry. HIPAA is designed to reduce the amount of administrative
waste in the healthcare industry and to protect the privacy of patients' medical
information. HIPAA establishes new requirements for the confidentiality of
patient health information and standard formats for the secure transmission of
healthcare data among healthcare providers and purchasers. HIPAA, among other
things, will create federal criminal penalties for health plans, providers and
claims clearinghouses that knowingly and improperly disclose information or
obtain information under false pretenses. The regulations regarding the standard
formats for the secure transmission of healthcare information became effective
in October 2002, but may be extended to October 2003 if an extension is
requested and a compliance plan is filed with Secretary of the Department of
Health and Human Services.
We were aware of and tried to incorporate HIPAA requirements or their
timely adoption as its products and services were developed. We have filed a
compliance plan and a request for extension to October 2003 to comply with the
standard formats requirements. We are currently reviewing processes, systems or
policies that may require modification, and we are working to implement
appropriate changes to avoid any adverse impact on our ability to perform
services in accordance with HIPAA standards. We are also communicating with
significant third-party service providers to assess their readiness and the
extent to which we will need to modify our agreements or relationships with them
to comply with HIPAA standards.
The regulations regarding privacy issues became effective in April 2003. We
have taken all necessary measures to fully comply with the HIPAA privacy
standards. We have provided training seminars to make certain all employees are
familiar with and adhere to the regulations regarding privacy issues. The
Company is not itself a covered entity (e.g. healthcare providers, clearing
houses and insurance plans), however, it complies with the requirements of
covered entities by being party to Business Associate Agreements with covered
entities.
The cost of this compliance effort is estimated to be less than $100,000.
However, there can be no guarantee that the costs will not materially exceed
this, or that changes in federal standards would require expending additional
resources.
STATE AND LOCAL LAWS REGARDING CONFIDENTIALITY AND SECURITY OF HEALTH
INFORMATION COULD HARM OUR BUSINESS AND OPERATING RESULTS.
The confidentiality of patient records and claims data and the
circumstances under which records and data may be released or must be secured
for inclusion in our databases may be subject to substantial regulation by state
governments. These state laws govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws is
principally the responsibility of Providers and health plans, these regulations
may be extended to cover our business and the claims data and other information
that we include in our databases. If these laws are extended to cover our
business, we may be required to expend additional resources in order to comply
with these laws, including changes to our security practices, and may be exposed
to greater liability in the event we fail to comply with these laws.
STATE LAWS AND REGULATIONS CONCERNING THE MARKETING OF HEALTH PROVIDER SERVICES
OVER THE INTERNET COULD HARM OUR BUSINESS AND OPERATING RESULTS.
The offering of health provider services is subject to extensive regulation
under state laws. Under some state laws, regulators may take the position that a
registration fee for Purchaser access to favorable fees from Providers requires
meeting the requirements for licensing as a health plan or health insurer. In
addition, to the extent that fees are paid by Providers, state regulators could
assert that Healthcare Exchange is a referral agency, which requires licensing
under many state laws, or that Providers are paying prohibited referral fees,
which could subject the Provider or the Company to civil or criminal penalties.
12
In addition our relationships with Purchasers may require licensing or
certifications in some states. Also, although we do not currently anticipate
entering the Medicare or state Medicaid markets, similar federal regulations
could adversely impact the business. Because the e-commerce business is
relatively new to the provider network industry, the impact of current or future
regulations is difficult to anticipate.
As we develop our business plan, compliance with or prohibitions by state
regulations could delay or eliminate certain aspects of our business or force us
to modify our business, which could have a material adverse impact on our
business and prospects.
OUR COMMON STOCK IS THINLY TRADED.
Our common stock is quoted and traded on the OTC Bulletin Board. Therefore,
shareholders who wish to sell their shares may not be able to do so in light of
the limited public market.
OUR EXECUTIVE OFFICERS AND EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL.
Our executive officers, directors and holders of over five percent (5%) of
our stock and their affiliates beneficially own approximately 36.5% of the
outstanding shares of our common stock as of August 30, 2003. As a result, if
these holders act as a group, they may be able to control us and direct our
affairs, including the election of directors and approval of significant
corporate transactions without further approval by other stockholders. This
concentration of ownership also may delay, defer or prevent a change in control
of our company, and make some transactions more difficult or impossible without
the support of these stockholders.
Item 2. Description of Property
Our headquarters were previously located in Portsmouth, New Hampshire. Upon
expiration of the lease in May 2003 the offices in New Hampshire were closed.
Currently our headquarters are located at 629 J Street, Sacramento,
California. Until July 2003, we leased approximately 7,523 square feet of office
space from Mr. James W. Cameron, Jr., an affiliate of the Company, for a monthly
rent of $12,131, which was reduced to reflect an annual base rent of $120 during
the quarter ended December 31, 2002. To recognize the estimated market rate of
this transaction, a monthly expense of $11,424 is recognized through rent
expense and recorded as additional paid in capital. On July 1, 2003 we amended
our lease with Mr. Cameron to reduce our office space to approximately 4,827
square feet for a monthly rent of $3,794. This is a reduction of approximately
2,696 square feet of office space under the previous lease with Mr. Cameron.
This lease is set to expire on January 31, 2004.
Item 3. Legal Proceedings
We are not currently a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the quarter ended June 30, 2003 to a vote
of security holders.
13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Comparative Market Prices
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ATEK." Transactions in our common stock are subject to the "penny stock"
disclosure requirements of Rule 15g-9 under the Exchange Act.
The table below sets forth the high and low closing prices for the common
stock of the Company for each of the last eight quarters. Such over the counter
market quotations reflect inter dealer prices without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
Period High Low
------ ---- ---
Quarter ended September 30, 2001 $3.70 $2.08
Quarter ended December 31, 2001 $3.09 $2.62
Quarter ended March 31, 2002 $3.06 $2.06
Quarter ended June 30, 2002 $2.55 $2.00
Quarter ended September 30, 2002 $2.25 $1.25
Quarter ended December 31, 2002 $1.50 $0.65
Quarter ended March 31, 2003 $0.85 $0.40
Quarter ended June 30, 2003 $0.58 $0.08
(b) Holders
As of August 30, 2003, there were 69,389,971 shares of our common stock
outstanding, held by approximately 265 holders of record, not including holders
whose shares of common stock are held in street name.
(c) Dividend Policy
We have never paid a cash dividend on our common stock and do not
anticipate paying cash dividends on its common stock in the foreseeable future.
Our Series D preferred stock carried a cumulative dividend of $0.60 per share
per year until the Series D preferred stock was exchanged for common stock on
September 11, 2000. On September 11, 2000, in connection with the exchange of
204,167 shares Series D preferred stock, for 408,334 shares of common stock
based on a per share price of $3.00 per share, the Company declared accrued
dividends of $759,110 in the aggregate. Of the $759,110 in accrued dividends,
two of the Series D preferred stockholders agreed to accept 158,638 shares of
common stock for $475,915 in accrued dividends based on a $3.00 per share value.
The Board of Directors, on the basis of various factors, including the
results of operations, financial condition, capital requirements and other
relevant factors, will determine our future dividend policy.
(d) Recent Sale of Unregistered Securities
No sale of unregistered securities occurred during fiscal year ended 2003
not previously reported on this Form 10-K.
14
On July 25, 2003, we issued 2,285,714 shares of our common stock to a
lender for all accrued and unpaid interest in the aggregate amount of $80,000
under a convertible note as of July 25, 2003. The issuance was exempt from
registraton pursuant to Rule 506.
On August 15, 2003, we sold 1,232 shares of our Series A Preferred Stock,
$6.00 par value per share, at $1,000 per share for an aggregate sum of
$1,232,000 to an accredited investor pursuant to Rule 506. No commission or
finder's fee was paid in connection with this transaction. The Series A
Preferred Stock provides for a dividend preference of $0.50 per share if and
when declared by the board of directors and a liquidation preference of $6.00
per share. In addition, the shares of Series A Preferred Stock have no voting
rights, except as required by law, and are not convertible into any other
securities.
On September 19, 2003, we reached an agreement with The Negri Trust to
convert $2,344,704 of the outstanding principal and all accrued and unpaid
interest as of that date under the convertible notes into 3,086,043 shares of
our common stock. The issuance was excempt from registration pursuant to Rule
506. We amended the original converitible notes to provide for the issuance of
shares for accrued and unpaid interst. Further, under the terms of the
amendment, The Negri Trust is entitled to piggy back registration rights.
(e) Securities Authorized For Issuance Under Equity Compensation Plans
The following table summarized our equity compensation plans as of June 30,
2003:
Number of securities
remaining available for
future issuance under
equity compensation
Number of securities to be Weighted average exercise plans (excluding
issued upon exercise of price of outstanding securities reflected in the
Plan Category outstanding options options 1st column
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
1993 Stock Option Plan 135,000 $1.72 36,173
1997 Stock Option Plan 1,354,648 $2.07 -
2002 Stock Option Plan 80,000 $0.72 2,920,000
15
Item 6. Selected Financial Data
The following table presents a summary of unaudited selected financial data
for each of the five years ended June 30. The data should be read in conjunction
with the Financial Statements and related notes included herein.
Years Ended June 30,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ --------------- --------------- ---------------- --------------
STATEMENT OF OPERATIONS DATA
Healthcare Exchange revenue $ 2,993,124 $ 1,642,565 $ 50,944 $ - $ -
Healthcare Exchange gross profit (loss) 727,147 179,048 (33,584) - -
Contract programming revenue - - 308,469 2,561,101 6,340,235
Contract programming gross profit - - 62,797 422,062 1,030,893
Selling, marketing and product development costs (4,259,980) (7,076,558) (5,097,513) (1,154,244) -
General and administrative expenses (2,479,265) (2,482,272) (3,850,971) (1,276,726) (1,223,539)
Loss from operations (6,012,098) (9,379,782) (8,919,271) (2,008,908) (192,646)
Total other income (expense) (1,653,083) (436,124) 4,516 (2,806,733) (524,101)
Net loss (7,665,181) (9,815,906) (8,914,755) (4,815,641) (716,747)
Preferred stock dividends - - (886,142) (122,500) (122,500)
Net loss applicable to common stockholders (7,665,181) (9,815,906) (9,800,897) (4,938,141) (839,247)
Basic and diluted net loss per share $(0.12) $(0.16) $(0.17) $(0.10) $(0.03)
Shares used in per share calculation 65,176,437 59,936,435 58,686,778 50,329,614 26,127,730
BALANCE SHEET DATA
Total assets $ 793,094 $ 1,203,309 $ 5,577,658 $ 2,502,703 $ 599,440
Long term obligations 896,930 - 3,740,450 3,567,424 4,258,090
Accrued preferred stock dividends 283,195 283,195 283,195 735,001 612,501
Redeemable Preferred Stock, Series D - - - 1,225,002 1,225,002
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion provides information to facilitate the
understanding and assessment of significant changes in trends related to the
financial condition of the Company and its results of operations. It should be
read in conjunction with the audited financial statements and footnotes
appearing elsewhere in this annual report.
OVERVIEW
In the quarter ending June 30, 2001, we began operating our Healthcare
Exchange to a limited of Providers and Purchasers. In fiscal year 2003, we
focused our attention on marketing and promoting our Healthcare Exchange to
Providers in 15 states and the District of Columbia. During fiscal years 2003
and 2002, we hired a significant number of employees to support the program
design and to increase direct sales. This rapid growth placed a significant
strain upon our financial resources without producing sufficient revenue to
accommodate this growth. As a result, we had to take steps to reduce our
expenses in an effort to improve our financial condition. Such steps included
closing our headquarters located in Portsmouth, New Hampshire and relocating
these functions to our office in Sacramento, California. In addition, we reduced
the number of our employees from 98 as of December 31, 2002 to 27 by August 31,
2003.
As we enter fiscal year 2004, we continue to face significant challenges
with respect to revenue and cash shortages. As of September 26, 2003, our cash
balance had declined to approximately $700,000, and in light of our prior losses
16
and current stock price of our common stock, no assurance can be given that we
will be able to raise additional funds for our operations, if necessary. We are
taking a number of steps to address these challenges including reductions in
operating expenses and liabilities. In addition, our business strategy is to
transition our existing Providers to our direct pay program where Providers will
submit their claims to us, and we will process and re-price the claims to the
rate set by Providers. After re-pricing, claims will be then sent to Purchasers
or their intermediaries who will pay the Providers directly. Providers will be
invoiced our transaction fee for each claim re-priced. We will recognize revenue
when it is earned and collectibility is reassonably assured. Revenue is earned
when we have completed claim re-pricing obligations under the contract.
In order to attract new Providers and increase the number of claims that we
process under this new direct pay program, we have reduced our transaction fee
which will require us to process a higher number of claims that we have not
previously been able to obtain in order to generate sufficient revenue for our
operations. This program is new and we are unsure whether it will be accepted by
the healthcare industry or whether we will be able to attract a sufficient
number of Providers in order to process the number of claims we will need to
generate sufficient revenues to sustain our operations. If we are unable to
successfully launch our direct pay program or gain the confidence of Providers,
we may be required to further reduce our operation expenses or be forced into
seeking protection under federal bankruptcy laws.
Given the conditions described above, the report of independent auditors on
our June 30, 2003 financial statements includes an explanatory paragraph
indicating there is substantial doubt about our 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.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenue for the transaction-processing
fee when earned and collectibility is reasonably assured. Revenue is earned when
we have substantially completed all of our obligations under the contract.
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 our prepaid license and service
fees, we 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, we may be required to record
impairment charges for these assets not previously recorded.
RESULTS OF OPERATION
YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30, 2002
Healthcare Exchange
HEALTHCARE EXCHANGE REVENUE. Providers submit claims to us, upon which they
are re-priced to the rate set by the Providers, including the addition of a
transaction-processing fee, and route them to Purchasers or their
intermediaries. We receive payments from Purchasers on behalf of Providers, and
then remit payments to Providers less our revenue. We recognize revenue for the
transaction-processing fee when earned, we have substantially completed all of
our obligations under the contract, and collectibility is reasonably assured.
For fiscal year 2003, $2,993,124 of revenue was recognized as compared to
$1,642,565 in fiscal year 2002. This increase of $1,350,559 was primarily due to
17
an increase in the number Providers and number of transactions processed by the
Healthcare Exchange in fiscal year ended 2003 compared to fiscal year ended
2002.
HEALTHCARE EXCHANGE COSTS. Healthcare Exchange costs are the direct costs
related to the processing of the claims 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 and other technology providers. The costs
for fiscal year 2003 were $2,265,977 that caused an increase of 55% over fiscal
year 2002 costs of $1,463,517. This increase is primarily due to the increase of
staffing and the costs of temporary staffing to process claims received from
Providers and payments received from Purchasers. As of June 30, 2003 there were
15 operations staff members responsible for the processing of claims submitted
by Providers and payments received from Purchasers, compared to 25 operations
staff members as of June 30, 2002. This decrease in staffing occurred primarily
during the last quarter of fiscal year ended 2003.
Selling, Marketing and Product Development Costs
Selling, marketing, and product development costs are expenses incurred to
develop our Healthcare Exchange. Costs are primarily the salary, other wage and
benefit costs of our employees and other operational costs associated with
recruiting the network of healthcare providers. The decrease of the sales and
marketing staff from 77 in fiscal year 2002 to 14 in fiscal year 2003 resulted
in the cost decrease of $2,816,578 for fiscal year 2003 as compared to fiscal
year 2002.
General and Administrative Expenses
General and administrative expense remained relatively unchanged in fiscal
year 2003 compared to fiscal year 2002. The fiscal year 2003 non-cash
compensation expense of $347,227 related to the purchase of common stock by our
chairman was offset by decreased employee compensation costs due to a reduction
in headcount.
Other Income (Expense)
INTEREST INCOME. Interest income is related to the short-term investment of
cash balances, primarily in money market accounts. Interest income decreased
$31,124 in fiscal year 2003 compared to fiscal year 2002 primarily due to
decreased average cash balances generating interest income in fiscal year 2003.
INTEREST EXPENSE. Interest expense increased $1,185,835 in fiscal year 2003
compared to fiscal year 2002 due to the increase in the balances of Notes
Payable to Stockholders, Convertible Notes Payable to Stockholders as well as
interest expense on Convertible Notes Payable from a lender, for the stated
interest rate, expense relating to warrants issued in connection with the
Convertible Notes Payable and expense relating to this debt's beneficial
conversion option (see Note 3 to the Financial Statements). Additionally,
interest of $72,100 was paid on Provider claims when payment is received from
the Purchaser and paid to the Provider later than 21 days of receiving a claim
in accordance with the terms of the Provider contracts.
YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
Healthcare Exchange
HEALTHCARE EXCHANGE REVENUE. We began operations with a limited number of
Providers in the quarter ending June 30, 2001. For fiscal year 2002, $1,642,565
of revenue was recognized as compared to $50,944 in fiscal year 2001. This
increase of $1,591,621 was primarily due to an increase in the number of
transactions processed by the Healthcare Exchange during a full year of
operations.
18
HEALTHCARE EXCHANGE COSTS. Healthcare Exchange costs are the direct costs
related to the processing of the claims submitted by Providers and payments
received from Purchasers. The costs for fiscal year 2002 were $1,463,517, an
increase of 1,631% over fiscal year 2001 cost of $84,528. As of June 30, 2002
there were 25 operations staff members responsible for the processing of claims
submitted by Providers and payments received from Purchasers, compared to 7
operations staff members as of June 30, 2001.
Contract Programming
CONTRACT PROGRAMMING REVENUE. Contract programming revenue resulted
primarily from sales of programmer services. There was no revenue recognized in
fiscal year 2002 due to the conversion of all contract programmers to customer
employees and the phase-out of-contract programming services as of June 30,
2001. Revenue of $308,469 were recognized in fiscal year 2001.
PROGRAMMER COSTS. Programmer costs represent the salary and other wage and
benefit costs of our programmer employees. There were no programmer costs in
fiscal year 2002 due to the conversion of all contract programmers to customer
employees and the phase-out of contract programming services as of June 30,
2001. Programmer costs of $235,258 were recognized in fiscal year 2001.
START-UP AND OTHER COSTS. Start-up and other costs represent the costs of
recruiting fees, training, and travel for programmer employees coming to the
United States from the former Soviet Union for the first time, relocation costs
within the United States, and legal and other costs related to obtaining and
maintaining compliance with required visas, postings and notifications. Start-up
and other costs were expensed as incurred.
Included in this category of costs is compensation paid by us whenever
programmer employees were hired and entered the United States or were relocated
once in the United States but before these programmers began working at a
customer's work site. There were times when under immigration law, we, as
employer, paid a programmer employee at least 95% of prevailing wages for his or
her specialty even when the programmer was not placed.
There were no start up and other costs recognized in fiscal year 2002 due
to the conversion of all contract programmers to customer employees and the
phase-out of-contract programming services as of June 30, 2001.
Start-up-and-other-costs of $10,414 was recognized in fiscal year 2001.
Selling, Marketing and Product Development Costs
In October 1999 we began incurring costs to develop its Healthcare
Exchange. Costs incurred are primarily the salary, other wage and benefit costs
of our employees and other operational costs associated with recruiting the
network of healthcare Providers. The increase of the sales and marketing staff
from 55 in fiscal year 2001 to 77 in fiscal year 2002 resulted in the cost
increase of $1,979,045 for fiscal year 2002 as compared to fiscal year 2001.
General and Administrative Expenses
General and administrative expense decreased $1,368,699 in fiscal year 2002
compared to fiscal year 2001. This decrease was primarily due to non-cash stock
based compensation expense of $1,931,036 related to the purchase of common stock
in our August 2000 Private Placement by our chief executive officer and related
entities and non-cash compensation due to conversion of Series D Preferred Stock
into common stock by our chairman of the board in fiscal year 2001. This was
partially offset by an increase in the number of employees and related costs to
support the Healthcare Exchange, and non-cash compensation expense of $138,583
related to the purchase of common stock by our chairman.
19
Other Income (Expense)
INTEREST INCOME. Interest income decreased $405,179 in fiscal year 2002
compared to fiscal year 2001 primarily due to a decrease of average cash
balances generating interest income in fiscal year 2002.
INTEREST EXPENSE. Interest expense increased $35,461 in fiscal year 2002
compared to fiscal year 2001 due to the increase in notes payable to
stockholders and convertible notes payable to stockholders, and interest of
$31,076 paid on Provider claims when payment is received from the Purchaser and
paid to the Provider later than 21 days of receiving a claim in accordance with
the terms of the Provider contracts.
INCOME TAXES
As of June 30, 2003, we had net operating loss carryforwards for federal
income tax purposes of approximately $53,000,000 that expire in the years 2005
through 2023 and federal research and development tax credits of approximately
$100,000 that expire in the year 2005.
As of June 30, 2003, we had net operating loss carryforwards for state
income tax purposes of approximately $20,000,000 that expire in the years 2004
through 2013 and state research and development tax credits of approximately
$30,000 that do not expire.
In connection with our 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, our 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 our stock was purchased, resulting in a
second annual limitation in the amount of approximately $398,000 on our ability
to utilize net operating loss carryforwards generated between August 11, 1992
and September 13, 1993 (approximately $7,700,000).
Utilization of our net operating loss and credit carryforwards may be
subject to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss and
credits before utilization.
We expects that 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 fiscal year 2003, we earned revenues of $2,993,124 but incurred a
net loss of $7,665,181. In August 2003, we raised additional capital through the
sales of 1,232 shares of our Series A Preferred Stock, $6.00 par value per
share, at $1,000 per share for an aggregate sum of $1,232,000. It is our
intention to use this capital to successfully market and implement the direct
pay program to attract new Providers and to increase the number of claims that
we process. However, this direct pay program is new and we are unsure whether it
will be accepted by the healthcare industry or whether we will be able to
attract a sufficient number of Providers in order to process the number of
claims we will need to generate sufficient revenues to sustain our operations.
In order to attract new Providers and increase the number of claims that we
process under this new direct pay program, we have reduced our transaction fee
which will require us to process a higher number of claims that we have not
previously been able to obtain in order to generate sufficient revenue for our
operations. As of September 26, 2003, our cash balance had declined to
approximately $700,000. In light of our prior losses and current stock price, it
is unlikely that we will be able, at this time, to raise additional capital if
required. If our direct pay program is unsuccessful, we will be required to
20
further reduce our expenses. If we are unable to successfully launch our direct
pay program or gain the confidence of Providers, we may be required to further
reduce our operating expenses and/or be forced into seeking protection under
federal bankruptcy laws. Given the conditions described above, the report of
independent auditors on our June 30, 2003 financial statements includes an
explanatory paragraph indicating there is substantial doubt about our 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.
As of June 30, 2003, we had received short-term, unsecured financing to
fund our operations in the form of notes payable of $5,555,109 from Mr. Cameron,
our then chairman and chief financial officer and another stockholder. These
notes bear interest at 10.25%. On November 1, 2002, we 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 $2,873,694,
including accrued interest and extension fees, and bear interest at 10.25% per
annum. Also on November 1, 2002, we 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. During fiscal year 2003, Mr. Cameron loaned
us an additional $619,000 bearing interest at 10.25%, of which $193,000 was
repaid to Mr. Cameron in October 2002. Subsequent to fiscal year 2003, the notes
payable in the amount of $2,873,694 were assigned by Mr. Cameron to Mr. Baron,
and as of September 2003, Mr. Baron forgave all of the obligations under such
notes. In addition, of the convertible notes totaling $2,681,415, the note
holder agreed to convert $2,344,704 of the outstanding principal and all accrued
and unpaid interest under certain convertible notes into 3,086,043 shares of our
common stock leaving a total of $336,711 outstanding.
In October 2002, we sold 4,125,000 shares of our common stock at a purchase
price of $1.00 per share. The shares of common stock issued in the private
placement are restricted securities. Cash proceeds, net of offering costs, were
$3,816,209. In connection with the October 2002 private placement, we paid the
placement agent a placement fee of 6% of the gross proceeds raised by them and a
five year warrant to purchase 10% of the common stock placed by them at an
exercise price of $1.00 per share. In addition, we paid a finder's fee to one
individual of $12,500 and issued a warrant to purchase 30,000 shares of common
stock at $1.00 per share.
On July 26, 2002, we received short-term unsecured financing in the form of
a convertible note of $1,000,000 from a lender. This convertible note bears
interest at 8% and was originally payable on July 25, 2003. On July 25, 2003, we
extended this note to the earlier of July 22, 2005 or when we receive $8,000,000
debt or equity financing. 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 the
subsequent subscription price per share of any debt or equity offering made by
us.
In consideration for the loan, we issued three warrants on July 26, 2002.
Each warrant provides for the purchase of 100,000 shares of our common stock at
an exercise price equal to the $1.00 subscription per share price of the October
2002 private placement. The first and second warrants became exercisable on July
26, 2002 and January 26, 2003, respectively. The third warrant became
exercisable on July 25, 2003. The lender may exercise these warrants through
July 26, 2009.
In connection with the issuance of the convertible note and the first and
second warrants, we estimated the aggregate fair value of the first and second
warrants to be $254,000 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," we have recognized $309,211
and $952,930 through interest expense for the three and twelve month periods
respectively, ending June 30, 2003 for a portion of the fair value of the first
and second warrants and a portion of the beneficial conversion feature of the
convertible note, which was estimated to be in total $802,000. We have recorded
additional amounts totaling $103,070 during the first quarter of 2004 through
21
interest expense for the remaining fair value of the first and second warrants
and the beneficial conversion feature of the convertible note recorded at the
initial transaction date, and in accordance with EITF 00-27, the additional
beneficial conversion feature recorded in the quarter ending December 31, 2002
of $624,222 relating to the reset of the conversion price of the convertible
note from $2.25 to $1.00 per share.
During the period between January 9, 2002 and March 28, 2002, we sold
1,232,584 shares of our common stock at a purchase price of $2.25 per share. The
shares of common stock issued in the private placement are restricted
securities. Proceeds, net of offering costs, were $2,742,519. The proceeds from
the private placement were used to fund operations and repay debt. Our then
chairman and chief financial officer purchased 222,222 shares our 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, we recorded compensation
expense of $138,583 during fiscal year 2002. In October 2002, pursuant to the
terms of this private placement and as a result of the October 2002 private
placement at a purchase price lower than $2.25, 1,540,729 additional shares were
issued to these investors based on the October 2002 private placement price of
$1.00 per share. Compensation expense of $347,222 was recorded for the
additional shares issued to our then chairman and chief financial officer.
As a result of our July 2002 bridge financing in which we granted warrants
equal to 30% of the loan at an exercise price of $1.00 per share, we granted to
the investors of the January 2002 and October 2002 private placements warrants
to purchase 30% of their respective investment at an exercise price of $1.00 per
share. Our then chairman and chief financial officer, a participant in the
private placement, received a warrant to purchase 150,000 shares of common stock
at an exercise price of $1.00 per share, which was greater than the fair value
of the common stock at the warrant issuance date.
During fiscal year ended 2002, we issued 284,200 shares of common stock
pursuant to the exercise of warrants for the amount of $213,150.
On August 28, 2000, we sold 3,333,334 shares of its common stock at $3.00
per share. Proceeds, net of offering costs, were approximately $9,560,345.
Proceeds were used to develop the Healthcare Exchange. Our then chief executive
officer and related entities purchased 2,333,335 shares of our 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, we recorded compensation
expense of $1,458,334 in the first fiscal quarter ended September 30, 2000.
During fiscal year 2000, we received $3,712,348 in private sales of its
common stock at an average price of $3.42 per share.
On September, 11, 2000, we agreed with the Series D Preferred stockholders
to exchange all their outstanding Series D Preferred shares and $475,915 in
accrued preferred stock dividends into 566,972 shares of common stock based on a
purchase price of $3.00 per common share. The benefit accruing to the Series D
Preferred stockholders was recorded in the quarter ended September 30, 2000,
approximately $316,702 in compensation expense and $862,000 in preferred stock
dividends.
22
The following table represents the debt requirements pertaining to our
contractual obligations of over the next five years as of June 30, 2003:
- --------------------------------------------- ------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- --------------------------------------------- ------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Notes payable to stockholder $ 2,873,694(1) $ 2,873,694 $ - $ - $ -
Convertible notes payable to stockholder 2,681,415(2) 2,681,415 - - -
Convertible note to third party 1,000,000(3) 1,000,000 - - -
Operating leases - facilities - payable to
stockholder 294,494 45,528 144,944 104,022 -
Operating leases - equipment 63,279 42,920 20,359 - -
Application services provider 1,082,952 270,738 812,214 - -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Total contractual cash obligations $ 7,995,834 $ 6,914,295 $ 977,517 $ 104,022 $ -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
- --------------
(1) On August 15, 2003, Mr. Cameron assigned to Mr. Baron all of his interest
to the promissory notes payable by the Company in the aggregate amount of
$2,873,694. On September 18, 2003, Mr. Baron forgave all obligations owed
by the Company under the promissory notes.
(2) On September 19, 2003, The Negri Trust agreed to convert $2,344,704 of the
outstanding principal and all accrued and unpaid interest as of that date
under convertible notes into 3,086,043 shares of our common stock.
(3) On July 25, 2003, we extended the due date for the $1,000,000 convertible
note to the earlier of July 22, 2005 or when we receive $8,000,000 in debt
or equity financing.
SUBSEQUENT EVENTS
On July 25, 2003, we amended our $1,000,000 convertible note due on July
25, 2003. Under the terms of the amendment, the convertible note was extended to
the earlier of July 22, 2005 or when we receive $8,000,000 in debt or equity
financing. In consideration, we agreed to convert all accrued and unpaid
interest as of July 25, 2003 into 2,285,714 shares of our common stock at a rate
of $0.035 per share and to secure the convertible note with our assets.
On August 15, 2003, Mr. Cameron purchased 1,232 shares of our Series A
Preferred Stock, $6.00 par value per share, at $1,000 per share for an aggregate
sum of $1,232,000. The Series A Preferred Stock provides for a dividend
preference of $0.50 per share if and when declared by the board of directors and
a liquidation preference of $6.00 per share. In addition, the shares of Series A
Preferred Stock have no voting rights, except as required by law, and are not
convertible into any other securities.
On August 15, 2003, Mr. Cameron assigned to Mr. Baron all of his interest
to the promissory notes payable by the Company in the aggregate principal amount
of $2,873,694 along with $283,195 in accrued Series D Preferred Stock dividends
owed by the Company. On September 18, 2003, Mr. Baron forgave all of the
obligations owed by the Company under the promissory notes including the accrued
and unpaid interest along with $283,195 in accrued Series D Preferred Stock
dividends. In connection with this transaction, Mr. Cameron sold to certain
accredited investors including Mr. Baron, an aggregate of 32,359,637 shares of
our common stock at a price of $0.035 per share. In addition, Mr. Cameron gifted
to several donees an aggregate of 490,000 shares of our common stock. As a
result of these transactions, Mr. Cameron reduced his beneficial ownership in
our common stock from 57.8% to 10.5% as of August 30, 2003.
23
On August 15, 2003, Mr. Cameron, McCormick ATEK Investments LLC, an entity
control by Mr. McCormick, and we agreed to cancel, without value, the option
requiring Mr. Cameron to sell 6,000,000 shares of our common stock owned by Mr.
Cameron to the McCormick ATEK Investment LLC at the purchase price of $3.625 per
share. In addition, because of Mr. McCormick's July 1, 2003 resignation as our
chief executive officer, his employment agreement with us has been terminated.
As a result of the termination, his options to purchase 7,000,000 shares and
4,000,000 shares of our common stock granted in connection with his employment
have fully vested and are exercisable pursuant to the terms of the respective
option agreements.
On September 19, 2003, we reached an agreement with The Negri Trust to
convert $2,344,704 of the outstanding principal and all accrued and unpaid
interest as of that date under convertible notes into 3,086,043 shares of our
common stock.
As of September 19, 2003, we have reduced our debt obligations outstanding
as of June 30, 2003 by $6,060,813 as a result of the conversion of The Negri
Trust convertible notes, the forgiveness of the promissory notes and other
accrued liabilities by our chairman, Mr. Alan Baron, and the forgiveness of rent
and interest on rent by Mr. Cameron.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified as liabilities.
Many of these instruments previously were classified as equity or temporary
equity and as such, SFAS 150 represents a significant change in practice in the
accounting for a number of mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS 150 is
not expected to have a material effect on our results of operations, liquidity,
or financial condition.
EFFECTS OF INFLATION
Management does not expect inflation to have an effect on our operating
expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have notes payable in the aggregate amount of $5,555,109 as of June 30,
2003, payable to two of our stockholders. The notes bear interest at 10.25% per
annum and are due December 31, 2003. Subsequent to fiscal year 2003, notes
payable in the amount of $2,873,694 were forgiven by the holder and notes
payable in the outstanding principal amount, including all accrued and unpaid
interest, of $2,344,704 were converted into 3,086,043 shares of our common stock
leaving a total of $336,711 outstanding.
On July 26, 2002, we received cash of $1,000,000 in exchange for issuance
an 8% convertible note. On July 25, 2003, we amended our $1,000,000 convertible
note due on July 25, 2003. Under the terms of the amendment, the convertible
note was extended to the earlier of July 22, 2005 or when we receive $8,000,000
in debt or equity financing. In consideration, we agreed to convert all accrued
and unpaid interest as of July 25, 2003 into 2,285,714 shares of our common
stock at a rate of $0.035 per share and to secure the convertible note with our
assets.
We do not believe that any change in interest rates will have a material
impact on us during fiscal 2004. Further, we have no foreign operations and
therefore is not subject to foreign currency fluctuations.
24
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Alternative Technology Resources, Inc.
Page
----
Report of Ernst & Young LLP, Independent Auditors......................... 26
Balance Sheets as of June 30, 2003 and 2002............................... 27
Statements of Operations for the Years Ended June 30, 2003, 2002 and 2001. 28
Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
2003, 2002 and 2001..................................................... 29
Statements of Cash Flows for the Years Ended June 30, 2003, 2002 and 2001. 30
Notes to Financial Statements............................................. 32
25
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Alternative Technology Resources, Inc.
We have audited the accompanying balance sheets of Alternative Technology
Resources, Inc. as of June 30, 2003 and 2002, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended June 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alternative Technology
Resources, Inc. at June 30, 2003 and 2002 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2003 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Alternative Technology Resources, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has an accumulated deficit of $67,028,060 as of June 30, 2003. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the 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.
/S/ ERNST & YOUNG LLP
Sacramento, California
September 3, 2003,
except for the fifth paragraph of Note 8, as to which the date is
September 19, 2003
26
Alternative Technology Resources, Inc.
Balance Sheets
June 30,
2003 2002
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 270,102 $ 402,291
Trade accounts receivable 20,492 3,602
Prepaid expenses and other current assets 43,857 81,223
------------------- ------------------
Total current assets 334,451 487,116
Property and equipment:
Equipment and software 865,555 788,192
Accumulated depreciation and amortization (547,479) (297,987)
------------------- ------------------
Property and equipment, net 318,076 490,205
Prepaid license and service fees 140,567 211,498
Other non-current assets - 14,490
------------------- ------------------
$ 793,094 $ 1,203,309
=================== ==================
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Payable to Healthcare Exchange providers $ 294,192 $ 409,738
Trade accounts payable 551,762 438,460
Accrued payroll and related expenses 142,355 274,777
Accrued preferred stock dividends 283,195 283,195
Accounts payable and accrued interest payable to stockholders 871,063 797,232
Notes payable to stockholder 2,873,694 2,212,529
Convertible notes payable to stockholder 2,681,415 2,423,823
Accrued interest payable to third party 74,521 -
Other current liabilities 327,672 254,469
------------------- ------------------
Total current liabilities 8,099,869 7,094,223
Convertible notes payable to third party 896,930 -
Commitments and contingencies (Notes 1 and 6)
Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value - 1,200,000 shares authorized,
none issued and outstanding at June 30, 2003 and 2002, 204,167 shares
designated
Series D, none issued and outstanding at June 30, 2003 and 2002 Common
stock, $0.01 par value - 100,000,000 shares authorized
66,908,669 shares issued and outstanding at June 30, 2003 (60,968,213 at
June 30, 2002) 669,087 609,682
Additional paid-in capital 58,155,268 52,862,283
Accumulated deficit (67,028,060) (59,362,879)
------------------- ------------------
Total stockholders' equity (deficit) (8,203,705) (5,890,914)
------------------- ------------------
$ 793,094 $ 1,203,309
=================== ==================
See accompanying notes.
27
Alternative Technology Resources, Inc.
Statements of Operations
Years Ended June 30,
-------------------------------------------------------------
2003 2002 2001
------------------------- ----------------- -----------------
Healthcare Exchange
Healthcare Exchange revenue $ 2,993,124 $ 1,642,565 $ 50,944
Healthcare Exchange costs (2,265,977) (1,463,517) (84,528)
------------------------- ----------------- -----------------
Healthcare Exchange gross profit (loss) 727,147 179,048 (33,584)
Contract Programming:
Contract programming revenue - - 308,469
Programmer costs - - (235,258)
Start-up and other costs - - (10,414)
------------------------- ----------------- -----------------
Contract programming gross profit - - 62,797
Selling, marketing & product development costs (4,259,980) (7,076,558) (5,097,513)
General and administrative expenses (2,479,265) (2,482,272) (3,850,971)
------------------------- ----------------- -----------------
Loss from operations (6,012,098) (9,379,782) (8,919,271)
------------------------- ----------------- -----------------
Other income (expense):
Interest income 11,439 42,563 447,742
Interest expense to third party (1,027,451) - -
Interest expense to stockholders and directors (637,071) (478,687) (443,226)
------------------------- ----------------- -----------------
Total other income (expense) (1,653,083) (436,124) 4,516
------------------------- ----------------- -----------------
Net loss (7,665,181) (9,815,906) (8,914,755)
Preferred stock dividends - - (886,142)
------------------------- ----------------- -----------------
Net loss applicable to common stockholders $ (7,665,181) $ (9,815,906) $ (9,800,897)
========================= ================= =================
Basic and diluted net loss per share applicable to
common stockholders $ (0.12) $ (0.16) $ (0.17)
========================= ================= =================
Weighted-average common stock outstanding 65,176,437 59,936,435 58,686,778
========================= ================= =================
See accompanying notes.
28
Alternative Technology Resources, Inc.
Statements of Stockholders' Equity (Deficit)
Years ended June 30, 2003, 2002 and 2001
Accumulated Total
Convertible Preferred Other Stock-
Stock Common Stock Additional Compre holders
--------------------- -------------------- Paid-In Accumulated hensive Equity
Shares Amount Shares Amount Capital Deficit Loss (Deficit)
---------- ----------- ---------- ---------- ---------- ------------ ------- ----------
Balance, June 30, 2000 204,167 $ 1,225,002 55,329,605 $ 553,297 $35,879,513 $(40,632,218) $ - $(2,974,406)
Issuance of common stock in
settlement of accounts payable - - 80,000 800 155,200 - - 156,000
Issuance of common stock upon conversion
of Series D preferred stock (204,167) (1,225,002) 566,972 5,670 2,011,949 - - 792,617
Issuance of common stock upon conversion
of note payable - - 20,000 200 59,800 - - 60,000
Private placement of common stock, net
of issuance costs - - 3,333,334 33,333 10,985,346 - - 11,018,679
Options exercised - - 64,933 649 41,584 - - 42,233
Preferred stock dividends - - - - (24,109) - - (24,109)
Other comprehensive income (loss) - change
in unrealizedgain/loss on
available-for-salesecurities - - - - - - (22) (22)
Net loss - - - - - (8,914,755) - (8,914,755)
---------- ----------- ---------- ---------- ---------- ------------ ------- ----------
Balance, June 30, 2001 - - 59,394,844 593,949 49,109,283 (49,546,973) (22) 156,237
Private placement of common stock,
net of issuance costs - - 1,232,584 12,325 2,868,777 - - 2,881,102
Compensation expense related to
grant of stock options to employees
and issuance of stock to a consultant - - - - 649,028 - - 649,028
Options and warrants exercised - - 340,785 3,408 235,195 - - 238,603
Other comprehensive income (loss) - change
in unrealized gain/loss on available-for-sale
securities - - - - - - 22 22
Net loss - - - - - (9,815,906) - (9,815,906)
---------- ----------- ---------- ---------- ---------- ------------ ------- ----------
Balance, June 30, 2002 - - 60,968,213 609,682 52,862,283 (59,362,879) - (5,890,914)
Private placement of common stock,
net of issuance costs - - 4,125,000 41,250 3,774,959 - - 3,816,209
Issuance of additional common stock to
January 2002 private placement investors
upon adjustment of private placement
stock price - - 1,540,730 15,408 (15,408) - - -
Issuance of common stock to a consultant - - 11,000 110 11,890 - - 12,000
Compensation expense related to CEO stock
purchase in private placement of common stock - - - - 347,222 - - 347,222
Expense related to adjustment of conversion
price of convertible note payable and
warrants issued to third party - - - - 1,056,000 - - 1,056,000
Contribution from stockholder - - - - 79,971 - - 79,971
Options and warrants exercised - - 263,726 2,637 38,351 - - 40,988
Net loss - - - - - (7,665,181) - (7,665,181)
---------- ----------- ---------- ---------- ---------- ------------ ------- ----------
Balance, June 30, 2003 - $ - 66,908,669 $669,087 $58,155,268 $(67,028,060) $ - $(8,208,705)
========== =========== ========== ========== =========== ============ ======= ============
See accompanying notes.
29
Alternative Technology Resources, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years ended June 30,
2003 2002 2001
-------------------- -------------------- --------------------
Cash flows from operating activities:
Net loss $ (7,665,181) $ (9,815,906) $ (8,914,755)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 249,492 190,139 93,404
Interest expense included in notes payable to
stockholders 492,757 313,902 233,026
Interest expense on Convertible Notes
payable to third party relating to warrants and
beneficial conversion option 952,930 - -
Incremental fair value of rent expense in excess of
amounts paid to stockholder 79,971 - -
Write-off of WebMD prepaid service fee - - 250,000
Stock based compensation 359,222 787,611 1,931,036
Changes in operating assets and liabilities:
Trade accounts receivable (16,890) 20,650 73,876
Prepaid expenses and other current assets 37,366 238,546 (235,586)
Non-current assets 85,421 100,717 (326,705)
Payable to Healthcare Exchange providers (115,546) 368,982 40,756
Trade accounts payable 113,302 287,089 54,166
Accrued payroll and related expenses (132,422) 93,749 13,521
Accounts payable and accrued interest payable to
stockholders 73,831 68,291 115,311
Accrued interest payable to third party 74,521 - -
Other current liabilities 73,203 (41,211) 22,662
-------------------- -------------------- --------------------
Net cash used by operating activities (5,338,023) (7,387,441) (6,649,288)
-------------------- -------------------- --------------------
Cash flows from investing activities:
Purchases of equipment and software (77,363) (286,566) (326,211)
Purchases of short-term investments - - (6,306,989)
Maturities of short-term investments - 1,354,159 4,952,830
-------------------- -------------------- --------------------
Net cash provided (used) by investing activities (77,363) 1,067,593 (1,680,370)
-------------------- -------------------- --------------------
(Continued on next page)
30
Alternative Technology Resources, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(continued)
Years ended June 30,
2003 2002 2001
-------------------- ------------------- --------------------
Cash flows from financing activities:
Proceeds from private placement of common stock $ 3,816,209 $ 2,742,519 $ 9,560,345
Proceeds from exercise of options and warrants 40,988 238,603 42,233
Proceeds from notes payable to stockholders 619,000 582,000 -
Payments on notes payable to stockholders (193,000) - -
Payments on notes payable to directors - - (23,324)
Proceeds from notes payable to third party 1,000,000 - -
-------------------- ------------------- --------------------
Net cash provided by financing activities 5,283,197 3,563,122 9,579,254
-------------------- ------------------- --------------------
Net increase (decrease) in cash and cash equivalents (132,189) (2,756,726) 1,249,596
Cash and cash equivalents at beginning of year 402,291 3,159,017 1,909,421
-------------------- ------------------- --------------------
Cash and cash equivalents at end of year $ 270,102 $ 402,291 $ 3,159,017
==================== =================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 131,026 $ 110,697 $ 94,611
==================== =================== ====================
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to common stock - - 60,000
Incremental fair value of rent expense recorded as
additional paid in capital $ 79,971 $ - $ -
==================== =================== ====================
See accompanying notes.
31
Alternative Technology Resources, Inc.
Notes to Financial Statements
Years Ended June 30, 2003, 2002 and 2001
1. Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS
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 Company contracts with medical
doctors, medical groups, hospitals and other health care practitioners
(collectively, "Providers") to offer their services through the Healthcare
Exchange to those who purchase or facilitate the purchase of healthcare services
("Purchasers"). ATR's Healthcare Exchange began operations with a limited number
of Providers and Purchasers in the quarter ending June 30, 2001.
The purpose of the Healthcare Exchange is to utilize the Internet and other
technologies to facilitate Provider initiated discounts and administrative,
billing and remittance services for all commercial lines of business within the
healthcare industry. Our Healthcare Exchange offers a direct and efficient
conduit between Providers and Purchasers of health care services, their PPOs'
and/or their agents. Providers submit claims to the Company, who reprices the
claims 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
Providers, and then remits payments to Providers.
Subsequent to fiscal year 2003, the Company implemented a direct pay
program wherein Providers submit their healthcare claims to ATR for re-pricing
to the Healthcare Exchange rate. The Company then routes the adjusted claim to
Purchasers or their intermediaries, who pay the Providers directly. The Company
then invoices the Providers a transaction fee for each claim processed and
forwarded to the Purchaser.
The continuing development efforts of the Company's Healthcare Exchange
will require substantial funds. In August 2003, the Company raised additional
capital through the sale of 1,232 shares of its Series A Preferred Stock, $6.00
par value per share, at $1,000 per share for an aggregate sum of $1,232,000. It
is management's intention to use this capital to successfully market and
implement the direct pay program, to attract new Providers and to increase the
number of claims that it processes. However, this direct pay program is new, and
the Company is unsure whether it will be accepted by the healthcare industry or
whether it will be able to attract the number of Providers required in order to
process the number of claims needed to generate sufficient revenues to sustain
the Company's operations. To attract new Providers and, therefore, increase the
number of claims processed under this new direct pay program, the Company has
reduced its per claim transaction fee which will require that the Company
process a greater number of claims than it has previously been able to obtain in
the program in effect prior to the direct pay program.
As of September 26, 2003, the Company's cash balance had declined to
approximately $700,000. In light of the Company's prior losses and current stock
price, it is unlikely that management will be able, at this time, to raise
additional capital if required. If the direct pay program is unsuccessful,
management will be required to further reduce the Company's expenses. If the
Company is unable to successfully launch its direct pay program or gain the
confidence of Providers, management may be required to further reduce the
Company's operating expenses or be forced into seeking protection under federal
bankruptcy laws.
32
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
Given the conditions described above, the report of independent auditors on
the Company's June 30, 2003 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.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase to be cash
equivalents. At June 30, 2003 and 2002 substantially all of the Company's cash
equivalents represent investments in money market accounts.
PREPAID LICENSE AND SERVICE FEES
Prepaid license and service fees are recorded at cost and amortized on a
straight-line basis over the expected 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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives range from three to five
years.
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 and collectibility is reasonably assured.
Contract programming revenue represented work performed for customers,
primarily on a time and materials basis, and was recognized when the related
services were rendered. Contract termination fees were amounts received from
customers when they exercised the contract provision, which allowed them to
convert the Company's programmer to their employee. In addition, these fees were
also received from programmers when they exercised their contract provision to
terminate their relationship with the Company prior to the termination date of
their contract. These fee amounts were stipulated in customer and programmer
contracts, were based on the length of time remaining under the contract, and
33
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
were recognized as revenue when such contract provisions were invoked. As of
June 30, 2001, the Company is no longer in the contract programming business.
PRODUCT DEVELOPMENT COSTS
In October 1999, the Company began incurring costs to develop its
Healthcare Exchange. In accordance with SOP 98-5, "Reporting on Costs of
Start-Up Activities," start-up costs associated with the Healthcare Exchange
have been expensed as incurred. The Company's Healthcare Exchange began
operations in the quarter ending June 30, 2001.
NET LOSS PER SHARE
All 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 shares outstanding without giving effect to outstanding
options, warrants, and convertible securities whose effects are anti-dilutive.
For fiscal years 2003, 2002 and 2001, there were stock options, stock warrants
and a convertible notes payable outstanding, and for fiscal year 2000 there was
also convertible preferred stock outstanding (Notes 3 and 7), 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.
As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Additional
disclosures required under SFAS No. 123 are included in Note 7 to the financial
statements.
SFAS No. 123 requires presentation of pro forma information regarding net
loss and loss per share as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of ATR
options was estimated at the date of grant using the Black-Scholes model with
the following weighted average assumptions for fiscal years 2003, 2002 and 2001:
dividend yield of 0%, an expected life of five years, a risk-free interest rate
of 3.0%, 5.0% and 5.0%, and expected volatility of 0.835, 1.168, and 1.271,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is the Company's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the employee stock options. For
34
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period.
Years Ended June 30,
---------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- ---------------------
Net loss applicable to common stockholders as
reported: $ (7,665,181) $ (9,815,906) $ (9,800,897)
Add: stock-based employee compensation
included in reported net loss 347,222 787,611 1,931,036
Less: stock-based employee compensation
expense, determined under fair value
method for all awards (6,094,078) (4,786,814) (6,283,568)
-------------------- -------------------- ---------------------
Pro forma net loss $ (13,412,037) $ (13,815,109) $ (14,153,429)
==================== ==================== =====================
Loss per share:
Basic and diluted net loss per share as $ (0.12) $ (0.16) $ (0.17)
reported
Pro forma basic and diluted net loss per
share $ (0.21) $ (0.23) $ (0.24)
==================== ==================== =====================
Future pro forma results may be materially different from amounts reported
as future years will include the effects of additional stock option grants.
SEGMENT DISCLOSURES
As of June 30, 2003, the Company operates in one segment, the selling,
marketing, development and operation of an Exchange for health care services.
COMPREHENSIVE LOSS
Total comprehensive loss for fiscal years 2003, 2002 and 2001 was
$7,665,181, $9,815,884 and $8,914,777 respectively. Other comprehensive income
(loss) represents the net change in unrealized gains (losses) on
available-for-sale securities.
CONCENTRATIONS OF RISK
The Company invests its cash with high credit quality financial
institutions. The Company believes the financial risks associated with these
financial instruments are minimal.
During fiscal years 2003 and 2002, no single healthcare provider
represented 10% or more of the Company's Healthcare Exchange revenues. During
fiscal year 2001, three customers individually accounted for 41%, 39% and 11% of
Contract Programming revenues.
35
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, cash equivalents,
accounts receivable, and accounts and notes payable. Fair values of cash, cash
equivalents, short-term investments, accounts receivable, and accounts payable
(other than accounts payable to stockholders) are considered to approximate
their carrying values.
Fair values of accounts payable to stockholders and notes payable to
stockholders could not be determined with sufficient reliability because these
are instruments held by related parties and because of the cost involved in such
determination. Principal characteristics of these financial instruments that,
along with information on the financial position of the Company, are pertinent
to their fair values are described in Notes 2 and 3.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified as liabilities.
Many of these instruments previously were classified as equity or temporary
equity and as such, SFAS 150 represents a significant change in practice in the
accounting for a number of mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS 150 is
not expected to have a material effect on the Company's results of operations,
liquidity, or financial condition.
2. INVESTOR GROUP TRANSACTIONS
In fiscal year 1994, the Company entered into a series of agreements with
James W. Cameron, Jr. pursuant to which Mr. Cameron and Dr. Max Negri became
principal stockholders of the Company. As of June 30, 2003, Mr. Cameron owned
39,891,783 shares of the Company's common stock. As of June 30, 2003 Dr. Negri
held less than 5% of the Company's common stock.
During fiscal years 2003, 2002 and 2001, the Company did not generate
sufficient cash flow from operations and borrowed funds from these two
stockholders. Notes payable to stockholders were $5,555,109 at June 30, 2003 and
$4,636,352 at June 30, 2002 (Note 3). Accrued interest of $312,143 at June 30,
2003 and $269,435 at June 30, 2002 on these notes is included in accounts
payable and accrued interest payable to stockholders.
On August 15, 2003, Mr. Cameron assigned to Mr. Alan Baron, our new
chairman, all of his interest to the promissory notes payable by the Company in
the aggregate principal amount of $2,873,694 along with $283,195 in accrued
Series D Preferred Stock dividends owed by the Company. On September 18, 2003,
Mr. Baron forgave all of the obligations owed by the Company under the
promissory notes including the accrued and unpaid interest along with $283,195
in accrued Series D Preferred Stock dividends.
36
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
The Company leases its office facilities in Sacramento, California from Mr.
Cameron (Note 6). Accrued lease expense of $559,220 at June 30, 2003 and
$527,896 at June 30, 2002 is also included in accounts payable and accrued
interest payable to stockholders.
During fiscal years 2003, 2002 and 2001, Cameron & Associates, which is
wholly owned by Mr. Cameron, provided consulting services to the Company. Fees
for such services totaled $50,000 in fiscal years 2003, and $120,000 in each of
2002 and 2001.
3. FINANCING ARRANGEMENTS
On July 26, 2002, the Company received short-term unsecured financing in
the form of a convertible note of $1,000,000 from a lender ("Convertible Note").
This Convertible Note, bearing interest at 8% was originally payable on July 25,
2003. On July 25, 2003, the Company extended this note to the earlier of July
22, 2005 or when the Company receives $8,000,000 in debt or equity financing.
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 the subsequent subscription price per
share of any debt or equity offering made by the Company. In consideration for
the amendment, the Company agreed to convert all accrued and unpaid interest as
of July 25, 2003 into 2,285,714 shares of its common stock at a rate of $0.035
per share and to secure the Convertible Note with our assets. In connection with
the amendment, the Company has classified the Convertible Note as a long-term
obligation since the term of repayment has been extended to July 22, 2005.
In consideration for the Convertible Note, the Company issued three
warrants on July 26, 2002. Each warrant provides for the purchase of 100,000
shares of the Company's common stock at an exercise price equal to the $1.00
subscription per share price of the Company's October 2002 Private Placement.
The First and Second Warrants became exercisable on July 26, 2002 and January
26, 2003, respectively, and are exercisable before the expiration date. The
Third Warrant issued became exercisable on July 26, 2003 and is also exercisable
before the expiration date. When, and if, exercisable the lender may exercise
these warrants through July 26, 2009.
In connection with the issuance of the Note and the First and Second
Warrants, the Company estimated the aggregate fair value of the First and Second
Warrants to be $254,000 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
$952,930 through interest expense for fiscal year 2003 for a portion of the fair
value of the First and Second Warrants and a portion of the beneficial
conversion feature of the Note, which was estimated to be in total $802,000. The
Company recorded additional amounts totaling $103,070 in the first quarter of
2004 through interest expense for the remaining fair value of the First and
Second Warrants and the beneficial conversion feature of the Note recorded at
the initial transaction date, and in accordance with EITF 00-27, the additional
beneficial conversion feature recorded in the quarter ending December 31, 2002
of $624,222 relating to the reset of the conversion price of the Note from $2.25
to $1.00 per share.
In July 2002, the Company engaged a placement agent to assist in the sale
of shares of the Company's common stock in a private placement. During October
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
37
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
were $3,816,209. In connection with the October 2002 Private Placement, the
Company paid the placement agent a placement fee of 6% of the gross proceeds
raised by them and a five year warrant to purchase 10% of the common stock
placed by them at an exercise price of $1.00 per share. In addition, the Company
paid a finder's fee to one individual of $12,500 and issued a warrant to
purchase 30,000 shares of common stock at $1.00 per share. The warrant had an
estimated fair value of $22,800.
Resulting from the closing of the October 2002 Private Placement, 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 per share. Compensation expense of $347,222 was
recorded for the additional shares issued to the Company's Chairman and Chief
Financial Officer.
During fiscal year 2003, the facilities lease agreement between the Company
and the Mr. James W. Cameron was modified to reflect an annual base rent of $120
until further notice from lessor, in his sole and absolute discretion, to return
the rent to its previous level. To recognize the estimated market rate of this
transaction, a monthly expense of $11,424 was recognized through rent expense
and other capital contributions. On July 1, 2003, Company entered into a sixth
addendum to the lease, which reduces the square footage occupied by the Company
and stipulates the monthly rent to be $3,794.
The Company has received short-term, unsecured financing to fund its
operations in the form of notes payable of $5,555,109 as of June 30, 2003, from
Mr. Cameron and another stockholder. These notes bear interest at 10.25%. On
November 1, 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 $2,873,694, including accrued interest and
extension fees, and bear interest at 10.25% per annum. Also on November 1, 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. During to fiscal year 2003, Mr. Cameron loaned the Company
an additional $619,000 bearing interest at 10.25%, of which $193,000 was repaid
to Mr. Cameron in October 2002. Subsequent to June 30, 2003, these debt
obligations were forgiven (Note 8).
As a result of the issuance of the convertible note in July 2002 in which
the Company granted warrants equal to 30% of the loan at an exercise price of
$1.00 per share, the Company granted to the investors of the January 2002 and
October 2002 Private Placements warrants to purchase 30% of their respective
investment at an exercise price of $1.00 per share. Mr. Cameron, as a
participant in the private placement, received a warrant to purchase 150,000
shares of common stock at an exercise price of $1.00 per share, which was
greater than the fair value of the common stock at the warrant issuance date.
Subsequent to August 19, 1999, Mr. Cameron elected to replace his remaining
interest in the Straight Note, including accrued interest, with the Convertible
Note and then simultaneously converted the Convertible Note into 19,762,786
shares of ATR's common stock. All other Straight Note holders have since
38
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
replaced their Straight Notes, including accrued interest, with Convertible
Notes and converted such Convertible Notes into an aggregate of 7,998,411 shares
of the Company's common stock.
Subsequent to June 30, 1999, Mr. Cameron disposed of a portion of his
interest in the Straight Note, reducing the balance due him to $711,885, plus
accrued interest. On August 19, 1999, the Company's Board of Directors agreed
with the Straight Note holders to fix the conversion price of the Convertible
Note to $0.044 in exchange for the Straight and/or Convertible Notes ceasing to
accrue interest as of that date. Because of the decline in revenues caused by
the non-renewal of programmer contracts and the steady decline in the quoted
value of the Company's common stock at that time (trading price was at $0.25 on
August 19, 1999), the Board agreed it was in the best interest of the Company to
eliminate the future market risk that the conversion price become lower than a
fixed conversion price of $0.044. The benefit accruing to the note holders
resulting from the amendment to the conversion terms, as measured on August 19,
1999, was approximately $2,415,222 and was recorded as additional interest
expense.
On April 21, 1997, the Company issued an unsecured note payable (the
"Straight Note") to Mr. Cameron for $1,000,000 in accordance with the agreement
the Company signed on February 28, 1994. Terms of the note provided for an
interest rate of 9.5% and monthly interest payments. No maturity date was stated
in the note; however, under the terms of the Reimbursement Agreement, upon
written demand by Mr. Cameron, the Straight Note was to be replaced by a note
convertible into ATR's common stock (the "Convertible Note") in a principal
amount equal to the Straight Note and bearing interest at the same rate. The
conversion price of the Convertible Note was equal to 20% of the average trading
price of the Company's common stock over the period of ten trading days ending
on the trading day next preceding the date of issuance of such Convertible Note.
4. WEBMD CORP. AGREEMENT
In September 1999, the Company entered into an agreement with WebMD Corp.
to develop a web-based portal through which individual uninsured and under
insured Patients can procure healthcare services. The agreement required a
prepaid service fee to be paid to WebMD of $250,000 upon a promotional
announcement on WebMD's Internet portal, and a sharing of revenues when
operational. Currently both parties are reevaluating this agreement, given
changed directions and priorities of each company. The agreement has not
formally been modified or terminated, nor has either party proposed any specific
changes. However, neither party is currently devoting any substantial resources
to this project. Accordingly, the prepaid service fee was written off in fiscal
year 2001 and is included as a component of product development costs in the
statement of operations.
5. INCOME TAXES
There is no provision for income taxes because the Company has incurred
operating losses. Deferred income taxes reflect the net tax effects of net
operating loss and tax credit carryovers and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
39
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
June 30,
2003 2002
---- ----
---------------------- -----------------------
Net operating loss carry forwards $ 19,220,000 $ 18,043,000
Research credits 120,000 123,000
Common stock options 2,720,000 2,818,000
Common stock warrants 790,000 789,000
Other - net 410,000 362,000
---------------------- -----------------------
Total deferred tax assets 23,620,000 22,135,000
Valuation allowance for deferred tax assets (23,620,000) (22,135,000)
---------------------- -----------------------
Net deferred tax assets $ - $ -
====================== =======================
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $1,125,000 and $4,653,000 during 2003 and 2002,
respectively.
As of June 30, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $53,000,000 that expire in the
years 2005 through 2023 and federal research and development tax credits of
approximately $100,000 that expire in the year 2005.
As of June 30, 2003, the Company had net operating loss carryforwards for
state income tax purposes of approximately $20,000,000 that expire in the years
2004 through 2013 and state research and development tax credits of
approximately $30,000 that do not expire.
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).
Utilization of the Company's net operating loss and credit carryforwards
may be subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
Such an annual limitation could result in the expiration of the net operating
loss and credits before utilization.
The Company expects that the aforementioned annual limitations will result
in net operating loss carryovers, which will not be utilized prior to the
expiration of the carryover period.
40
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
6. COMMITMENTS AND CONTINGENCIES
The Company may from time to time become a party to various legal
proceedings arising in the ordinary course of its business. The Company is not
currently subject to any legal proceedings.
The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical claims
submitted to the Company's Healthcare Exchange. The agreements are for a period
of 66 months. They required payment of an initial base license fee of $250,000,
which is being amortized over the expected term of the arrangement, and data
center set up, training and implementation fees of about $145,000, which were
expensed. The agreements require monthly minimum payments currently of about
$35,000 and additional fees that are transaction based if volumes exceed levels
included in the monthly minimums.
In November 1995, the Company entered into a lease agreement for its
facility in Sacramento, California under a one-year lease with Mr. Cameron. The
lease has been extended to January 31, 2004. Payments under this facilities
lease were approximately $141,330 per year. At June 30, 2003, $559,220 of rent
owed for fiscal years 1996 through 2003 is included in the balance of accounts
payable and accrued interest payable to stockholders. During the fiscal year
2003, the facilities lease agreement between the Company and Mr. Cameron was
modified to reflect an annual base rent of $120 until further notice from
lessor, in his sole and absolute discretion, to return the rent to its previous
level. To recognize the estimated market rate of this transaction, a monthly
expense of $11,424 was recognized through rent expense and other capital
contributions. On July 1, 2003 the Company entered into a sixth addendum to the
lease, which reduces the square footage occupied by the Company and stipulates
the monthly rent to be $3,794. Rental expense for all operating leases was
approximately $221,237, $230,987 and $196,390, for fiscal years June 30, 2003,
2002 and 2001, respectively, including approximately $143,122, $148,302 and
$139,272 related to the lease of the office facilities from Mr. Cameron.
Minimum annual payments for all non-cancelable operating leases and amounts
due to an application services provider are as follows:
2004 $ 359,186
2005 336,859
2006 319,927
2007 320,732
2008 51,242
Thereafter 52,779
-------------------------
Total 1,440,725
=========================
7. STOCKHOLDERS' EQUITY TOTAL
SERIES D PREFERRED STOCK
In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible Preferred Stock for $1,225,002. ATR's Series D Preferred Stock
carried a cumulative dividend of $0.60 per share per year, until the Series D
preferred stock was exchanged for common stock on September 11, 2000. On
September 11, 2000, in connection with the exchange of 204,167 shares Series D
41
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
preferred stock, for 408,334 shares of common stock based on a per share price
of $3.00 per share, the Company declared accrued dividends of $759,110 in the
aggregate. Of the $759,110 in accrued dividends, two of the Series D preferred
stockholders agreed to accept 158,638 shares of common stock for $475,915 in
accrued dividends based on a $3.00 per share value. The benefit accruing to the
Series D Preferred stockholders recorded in the quarter ended September 30, 2000
was approximately $316,702 in compensation expense and $862,000 in preferred
stock dividends. As of June 30, 2003, cumulative unpaid, dividends were
$283,195.
COMMON STOCK
The Company's Healthcare Exchange development efforts will require
substantial funds. In July 2002, the Company engaged a placement agent to assist
in the sale of shares of the Company's common stock in a private placement.
During October 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 $3,816,209. In connection with the October 2002 Private
Placement, the Company paid the placement agent a placement fee of 6% of the
gross proceeds raised by them and a five-year warrant to purchase 10% of the
Common Stock placed by them at an exercise price of $1.00 per share. In
addition, the Company paid a finder's fee to one individual of $12,500 and
issued a warrant to purchase 30,000 shares of common stock at $1.00 per share.
The fair value of the warrant was $22,800.
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 per share. Compensation expense of $347,222 was
recorded for the additional shares issued to the Company's Chairman and Chief
Financial Officer.
On January 9, 2002, the Board of Directors of the Company unanimously
approved a private placement of up to $12,000,000 of the Company's 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, 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 will 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.
Proceeds, net of offering costs, were $2,742,519. Proceeds were used for further
development and operation of the Healthcare Exchange. 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 in fiscal year 2002.
42
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
The Company received $9,560,345 in a private placement of its common stock
at a price of $3.00 in fiscal year 2001, and in fiscal year 2000 received
$3,712,348 in a private placement of its common stock at an average price of
$3.42 per share.
WARRANTS
Warrant activity during the periods indicated is as follows:
Number of Range of Weighted Average
Shares Exercise Prices Exercise Price
---------------------- ---------------------- ----------------------
Balance at June 30, 2000 539,800 $0.01-$25.00 $0.95
Expired/Canceled (40,000) $0.01 $0.01
----------------------
Balance at June 30, 2001 499,800 $0.01-$25.00 $1.02
Exercised (284,200) $0.75 $0.75
----------------------
Balance at June 30, 2002 215,600 $0.01-$25.00 $1.38
Issued 2,774,494 $1.00 $1.00
----------------------
Balance at June 30, 2003 2,990,094 $0.01-$25.00 $1.03
======================
At June 30, 2003, the weighted-average remaining contractual life of
outstanding warrants was 6.62 years. All warrants are immediately exercisable
for common stock at June 30, 2003 except for the Third Warrant for 100,000
shares issued in consideration of the $1,000,000 bridge loan. In consideration
for the loan, the Company issued three warrants on July 26, 2002. Each warrant
provides for the purchase of 100,000 shares of the Company's common stock at an
exercise price equal to the $1.00 subscription per share price of the October
2002 Private Placement, or if further shares are offered at a lower price per
share, then at that price. The First and Second Warrants became exercisable on
July 26, 2002 and January 26, 2003, respectively, and are exercisable before the
expiration date. The Third Warrant issued became exercisable on July 26, 2003
and is also exercisable before the expiration date of July 26, 2009. When, and
if, exercisable the lender may exercise these warrants through the expiration
date of July 26, 2009.
As a result of the issuance of the convertible note in July 2002 in which
the Company granted warrants equal to 30% of the loan at an exercise price of
$1.00 per share, the Company granted to the investors of the January 2002 and
October 2002 Private Placements warrants to purchase 30% of their respective
investment at an exercise price of $1.00 per share. Mr. Cameron, as a
participant in the private placement, received a warrant to purchase 150,000
shares of common stock at an exercise price of $1.00 per share, which was
greater than the fair value of the common stock at the warrant issuance date.
43
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
STOCK OPTION/STOCK ISSUANCE PLANS
The 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"), pursuant to
which key employees (including officers) and consultants of the Company and the
non-employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on August 31, 1993 and became
effective at that time. The 1993 Plan provided that up to 400,000 shares of
common stock could be issued over the ten-year term of the 1993 Plan. As of June
30, 2003, shares available for future issuance under this plan were 36,173. This
plan will expire as of September 30, 2003 or the date on which all shares
available for issuance under the plan have been issued or cancelled pursuant to
the exercise, surrender or cash-out of the options granted under the plan or the
issuance of shares under the Stock Issuance Program.
The 1997 Stock Option Plan (the "1997 Plan"), pursuant to which key
employees (including officers) and consultants of the Company and the
non-employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on November 18, 1997 and
became effective at that time. An aggregate of 3,000,000 shares of common stock
were issued over the five-year term of the 1997 plan. This plan expired as of
November 18, 2002 and as of June 30, 2003 no shares are available for future
issuance.
The 2002 Stock Option Plan (the "2002 Plan"), pursuant to which key
employees (including officers) and consultants of the Company and the
non-employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on November 19, 2002 and
became effective at that time. An aggregate of 3,000,000 shares of common stock
may be issued over the five-year term of the 2002 plan. Subject to the oversight
and review of the Board of Directors, the 2002 Plan shall generally be
administered by a committee or subcommittee consisting of two or more members of
the Board, all of whom are Outside Directors and who satisfy the requirements
under the Exchange Act for administering this plan (the "Committee"). The grant
date, the number of shares covered by an option and the terms and conditions for
exercise of options shall be determined by the Committee, subject to the 2002
Plan requirements. The Board of Directors shall determine the grant date, the
number of shares covered by an option and the terms and conditions for exercise
of options to be granted to members of the Committee. As of June 30, 2003,
shares available for future issuance under this plan were 2,920,000. This
five-year plan will expire November 19, 2007.
44
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
Option activity for the 1993, 1997 and the 2002 Plans during the
periods indicated is as follows:
Number of Weighted Average
Shares Exercise Price
---------------------- ----------------------
Balance at June 30, 2000 1,180,000 $2.36
Granted 920,600 $2.77
Exercised (49,933) $0.25
Cancelled (317,500) $4.04
----------------------
Balance at June 30, 2001 1,733,167 $2.33
Granted 1,234,053 $1.83
Exercised (51,585) $0.45
Cancelled (326,432) $2.60
----------------------
Balance at June 30, 2002 2,589,203 $2.60
Granted 230,000 $1.36
Exercised (263,726) $0.16
Cancelled (985,829) $1.70
----------------------
Balance at June 30, 2003 1,569,648 $1.97
======================
The following table summarizes information about stock options outstanding under
the 1993, 1997 and the 2002 Plans at June 30, 2003:
Weighted Average
Weighted Remaining Weighted
Range of Options Average Contractual Options Average
Exercise Prices Outstanding Exercise Price Life (Years) Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------
$ 0.01-1.95 767,150 $0.70 6 752,428 $0.69
$ 2.00-3.85 579,166 $2.44 9 313,332 $2.63
$ 4.00-6.63 213,332 $4.72 7 193,888 $4.74
$ 13.10 10,000 $13.10 2 10,000 $13.10
------------------- -------------------
1,569,648 $1.97 1,269,648 $1.89
=================== ===================
The weighted average fair value of options granted during the fiscal years
June 30, 2003, 2002 and 2001 whose exercise price equals the market price of the
stock on the grant date was $0.97, $1.95 and $2.30 respectively. The
weighted-average fair value of options granted in fiscal years 2003 and 2002
45
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
whose exercise price was less than the market price of the stock on the date of
grant was $1.34 and $2.03, respectively. For fiscal year 2001, all options were
granted with exercise prices equal to the market price on the date of grant.
At June 30, 2002 and 2001 the number and weighted average exercise price of
options exercisable were 1,393,284 and $1.69 and 745,022 and $1.88,
respectively.
In addition to options granted pursuant to the 1993, 1997 and 2002 Plans,
the Company has granted options outside of these plans. In fiscal year 1994, the
Company granted to its former Chief Executive Officer and director stock options
to purchase 400,000 shares of common stock exercisable at $0.10 per share. Of
these options, 370,000 remain outstanding and are fully vested as of June 30,
2003. These options expire on August 10, 2003.
During fiscal year 2000, in accordance with an employment agreement, the
Company granted the Chief Executive Officer stock options to purchase 7,000,000
shares of common stock at $3.00 per share, the fair market value of the
Company's common stock on the date of grant. Subject to acceleration events, the
options vest ratably over 5 years and expire on April 14, 2010. As of June 30,
2003, 4,200,000 options have vested, and 7,000,000 remain outstanding.
Subsequent to June 30, 2003, Mr. McCormick resigned as the Company's Chief
Executive Officer. As a result of his resignation, Mr. McCormick's employment
agreement was terminated. Pursuant to the terms of the option agreement, all
7,000,000 options immediately vested and are exercisable.
Also, on August 1, 2000, Mr. Cameron entered into an agreement with the
Company's Chief Executive Officer to grant him the option to purchase 6,000,000
shares of the Company's common stock from Mr. Cameron at a purchase price of
$3.625 per share, the fair market value of the Company's stock on that date. As
of June 30, 2003, these options are fully vested and 6,000,000 remain
outstanding. Subsequent to June 30, 2003, this option grant agreement between
Mr. Cameron and Mr. McCormick was cancelled, reverting full ownership of these
shares back to Mr. Cameron.
On January 25, 2003, the Board of Directors approved the issuance of a
non-qualified option grant to Mr. Jeffrey S. McCormick, Chief Executive Officer,
to purchase up to 4,000,000 shares of common stock at the exercise price of
$1.25 per share. The effective date of the option grant was November 7, 2002.
Subject to acceleration events, the option grant was to vest over a four-year
period, commencing with the vesting of the first 1,000,000 shares of common
stock on January 31, 2003. No compensation expense was recorded in connection
with this option grant, as the exercise price was greater than the fair value of
the common stock at the option grant date. Subsequent to the June 30, 2003, Mr.
McCormick's employment agreement was terminated because of his resignation as
the Company's Chief Executive Officer. Pursuant to the terms of the option
agreement, all 4,000,000 options immediately vested and are exercisable.
Non-cash stock based compensation expense was $359,222 for fiscal year
2003, $787,611 for fiscal year 2002 and $19,831,036 for fiscal year 2001. Costs
incurred in fiscal 2003 primarily represent $347,222 recorded for the additional
shares issued to the Company's Chairman and Chief Financial Officer. Additional
compensation expense of $12,000 was recorded for stock issued to Providers for
consulting services.
46
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
Stock Reserved for Issuance
As of June 30, 2003, the Company has reserved a total of 20,908,854 shares
of common stock pursuant to outstanding warrants, options, convertible notes
payable to stockholders, and future issuance of options to employees and
non-employee directors.
Common Shares Reserved for Issuance
-------------------------------------------------------------------
Options 15,895,821
Warrants 2,990,094
Notes (including accrued interest) 2,022,939
---------------
Total 20,908,854
===============
8. SUBSEQUENT EVENTS
On July 25, 2003, we amended our $1,000,000 convertible note due on July
25, 2003. Under the terms of the amendment, the convertible note was extended to
the earlier of July 22, 2005 or when we receive $8,000,000 in debt or equity
financing. In consideration, the Company agreed to convert all accrued and
unpaid interest as of July 25, 2003 into 2,285,714 shares of its common stock at
a rate of $0.035 per share and to secure the convertible note with our assets.
On August 15, 2003, Mr. Cameron purchased 1,232 shares of our Series A
Preferred Stock, $6.00 par value per share, at $1,000 per share for an aggregate
sum of $1,232,000. The Series A Preferred Stock provides for a dividend
preference of $0.50 per share if and when declared by the board of directors and
a liquidation preference of $6.00 per share. In addition, the shares of Series A
Preferred Stock have no voting rights, except as required by law, and are not
convertible into any other securities.
On August 15, 2003, Mr. Cameron assigned to Mr. Baron, our new chairman,
all of his interest to the promissory notes payable by the Company in the
aggregate principal amount of $2,873,694 along with $283,195 in accrued Series D
Preferred Stock dividends owed by the Company. On September 18, 2003, Mr. Baron
forgave all of the obligations owed by the Company under the promissory notes
including the accrued and unpaid interest along with $283,195 in accrued Series
D Preferred Stock dividends.
On August 15, 2003, Mr. Cameron, McCormick ATEK Investments LLC, an entity
controlled by Mr. McCormick, and the Company mutually agreed, without value, to
cancel the option requiring Mr. Cameron to sell 6,000,000 shares of our common
stock owned by Mr. Cameron to McCormick ATEK Investment LLC at the purchase
price of $3.625 per share.
On September 19, 2003, we reached an agreement with The Negri Trust to
convert $2,344,704 of the outstanding principal and all accrued and unpaid
interest as of that date under convertible notes into 3,086,043 shares of our
common stock.
47
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)
Years Ended June 30, 2003, 2002 and 2001
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents the Company's unaudited quarterly statement of
operations data for the four quarters of fiscal 2003 and fiscal 2002. The
Company believes that this information has been prepared on the same basis as
its audited consolidated financial statements and that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the selected quarterly information. The Company's quarterly
results of operations for these periods are not necessarily indicative of future
results of operations.
2003
----------------------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Healthcare Exchange revenue $ 776,560 $ 877,993 $ 829,011 $ 509,560
Healthcare Exchange gross profit 232,858 235,606 231,449 27,234
Selling, marketing and product development costs (1,397,306) (1,507,974) (822,523) (532,177)
General and administrative expenses (509,015) (945,417) (546,603) (478,230)
Loss from operations (1,673,463) (2,217,785) (1,137,677) (983,173)
Total other expense (213,343) (496,095) (466,197) (477,448)
Net loss (1,886,806) (2,713,880) (1,603,874) (1,460,621)
Net loss applicable to common stockholders (1,886,806) (2,713,880) (1,603,874) (1,460,621)
Basic and diluted net loss per share $ (0.03) $ (0.04) $ (0.02) $ (0.02)
Shares used in per share calculation 61,016,315 66,053,573 66,789,339 66,895,806
- -----------------------------------------------------------------------------------------------------------------------------------
2002
----------------------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Healthcare Exchange revenue $ 108,218 $ 253,876 $ 430,308 $ 850,163
Healthcare Exchange gross profit loss (116,570) (96,337) 28,779 363,176
Selling, marketing and product development costs (1,505,195) (1,546,462) (1,852,186) (2,172,714)
General and administrative expenses (505,834) (600,045) (673,076) (703,317)
Loss from operations (2,127,599) (2,242,844) (2,496,483) (2,512,855)
Total other expense (106,384) (105,364) (110,929) (113,447)
Net loss (2,233,983) (2,348,208) (2,607,412) (2,626,302)
Net loss applicable to common stockholders (2,233,983) (2,348,208) (2,607,412) (2,626,302)
Basic and diluted net loss per share $ (0.04) $ (0.04) $ (0.04) $ (0.04)
Shares used in per share calculation 59,401,860 59,421,866 61,261,644 60,945,581
- -----------------------------------------------------------------------------------------------------------------------------------
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
a. We carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of our fourth fiscal quarter
pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in our periodic SEC filings.
b. There have been no changes in our internal control over financial
reporting identified in connection with our evaluation that occurred during our
fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Company
The information required by this item is incorporated by reference from the
information contained in the section captioned "Election of Directors", "Further
Information concerning the Board of Directors" and "Section 16 (a) Information"
in our Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information contained in the section captioned "Principal Stockholders" in our
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is incorporated by reference from the
information contained in the section Captioned "Principal Stockholders" in our
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
Pursuant to SEC Release No. 33-8183 (as corrected by Release No. 33-8183A),
the disclosure requirements of this Item are not effective until the Annual
Report on Form 10-K for the first fiscal year ending after December 15, 2003.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. Financial Statements
1. Financial Statements - See Index to Financial Statements at page 25 of
this Form 10-K.
2. Financial Statement Schedules - No Financial Statement Schedules are
required.
3. Exhibits -- See Exhibit Index at page 50 of this Form 10-K.
b. Reports on Form 8-K:
Date of Report Item(s) Description
July 3, 2003 5 Announcing the resignations and appointment
of our officers and directors
c. Exhibits:
Exhibit
Number Description of Document
3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement
on Form S-18, Reg. No. 33-48666).
3.2 Amendment to Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1994).
3.3 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.3 of Form 10-KSB for the
fiscal year ended June 30, 1997).
3.4 Certificate of Designation for Series A Preferred Stock, filed
herewith.
4.1 Amended and Restated Certificate of Incorporation of Registrant,
including Certificates of Designation with respect to Series A, Series
B, Series C, Series D, and Series E Preferred Stock, including any
amendments thereto (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3, Reg. No. 33-86962).
10.1 Form of Director and Executive Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.19 to Registration Statement
on Form S-18, Reg. No. 33-48666).
10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by reference to
Exhibit 10.47 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.12+ Stock Option Agreement, dated August 11, 1993, between the
Registrant and Russell J. Harrison (incorporated by reference to
Exhibit 10.51 to Form 10-KSB for the fiscal year ended June 30, 1994).
50
10.18 Note Payable between the Registrant and the Negri Foundation dated
December 24, 1996 (incorporated by reference to Exhibit 10.60 to Form
10-QSB for the quarter ended December 31, 1996).
10.19 Note Payable between the Registrant and the Negri Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.61 to Form
10-QSB for the quarter ended December 31, 1996).
10.20 Note Payable between the Registrant and the Max Negri Trust dated
December 31, 1996 (incorporated by reference to Exhibit 10.62 to Form
10-QSB for the quarter ended December 31, 1996).
10.21 Note Payable between the Registrant and the Cameron Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.63 to Form
10-QSB for the quarter ended December 31, 1996).
10.22 Note Payable between the Registrant and the James W. Cameron, Jr., as
an individual, dated December 31, 1996 (incorporated by reference to
Exhibit 10.64 to Form 10-QSB for the quarter ended December 31, 1996).
10.23 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 16, 1997 (incorporated by reference to
Exhibit 10.65 to Form 10-QSB for the quarter ended December 31, 1996).
10.24 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 31, 1997 (incorporated by reference to
Exhibit 10.66 to Form 10-QSB for the quarter ended December 31, 1996).
10.25 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated February 7, 1997 (incorporated by reference to
Exhibit 10.67 to Form 10-QSB for the quarter ended December 31, 1996).
10.29 Note Payable between the Registrant and James W. Cameron, Jr., dated
April 21, 1997 (incorporated by reference to Exhibit 10.29 to Form
10-KSB for the year ended June 30, 1997).
10.33+ Alternative Technology Resources, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.33 to Form 10-KSB for the
year ended June 30, 1998).
10.34 Memorandum regarding rent reduction on that Lease between James W.
Cameron, Jr., and the Registrant, dated July 15, 1998 (incorporated by
reference to Exhibit 10.34 to Form 10-KSB for the year ended June 30,
1998).
10.35 Fourth Addendum to Lease between James W. Cameron, Jr., and the
Registrant, effective January 1, 1999 (incorporated by reference to
Exhibit 10.35 to Form 10-QSB for the quarter ended March 31, 1999).
51
10.36 Fifth Addendum to Lease between James W. Cameron, Jr., and the
Registrant, effective January 1, 2000 (incorporated by reference to
Exhibit 10.36 to Form 10-KSB for the year ended June 30, 2000).
10.37 Healtheon Customer Agreement effective September 16, 1999
(incorporated by reference to Exhibit 10.37 to Form 10-K for the year
ended June 30, 2001).
10.38 Employment Agreement with Jeffrey McCormick. (Incorporated by
reference to Exhibit 10.38 to Form 10-K for year end June 30, 2001.)
10.40 Master Agreement for Computer Software Products and Related Services
between Alternative Technology Resources, Inc. and Resource
Information Management Systems, Inc. (incorporated by reference to
Exhibit 10.40 to Form 10-Q for the quarterly period ended December 31,
2000).
10.41 Sixth Addendum to Lease between James W. Cameron, Jr., and the
Registrant, effective July 1, 2003, filed herewith.
10.42 Forgiveness of Debt and Accrued Series D Preferred Stock Dividend,
filed herewith.
23.1 Consent of Ernst & Young LLP, Independent Auditors
31.1 Certification of Principal Executive Officer, filed herewith
31.2 Certification of Principal Financial Officer, filed herewith
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith.
+ Indicates a management contract or compensatory plan or arrangement.
Financial Statement Schedules
All schedules have been omitted because they are not required or are not
applicable or the required information is shown in the financial statements or
related notes
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: September 26, 2003 ALTERNATIVE TECHNOLOGY RESOURCES, INC.
By /s/ Mark W. Rieger
--------------------------------------
Mark W. Rieger.
Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alan Baron Chairman of the Board, September 26, 2003
- ------------------------------ Director
Alan Baron
/s/ Edward L. Lammerding Director September 26, 2003
- -------------------------------
Edward L. Lammerding
/s/ Jeffrey S. McCormick Director September 26, 2003
- -------------------------------
Jeffrey S. McCormick
/s/ Mark W. Rieger Director September 26, 2003
- -------------------------------
Mark W. Rieger
53