United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2001
Commission file number 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0195770
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Jewel Court, Portsmouth, N.H. 03801
(Address of principal executive offices)
(603) 501-3200
(Registrant's telephone number, including area code)
(Former address if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Number of shares of common stock outstanding as of September 30, 2001:
59,418,344
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
(Unaudited)
September 30, June 30,
2001 2001
------------- -------------
Assets
------
Current assets:
Cash and cash equivalents $ 2,749,984 $ 3,159,017
Short-term investments - 1,354,137
Trade accounts receivable 225 24,252
Interest receivable 7,978 52,134
Prepaid expenses and other current assets 241,984 267,635
------------- -------------
Total current assets 3,000,171 4,857,175
------------- -------------
Property and equipment:
Equipment and software 592,659 501,626
Accumulated depreciation and amortization (142,395) (107,848)
------------- -------------
Property and equipment, net 450,264 393,778
------------- -------------
Prepaid annual license and service fees 242,138 259,155
Other non-current assets 40,996 67,550
------------- -------------
$ 3,733,569 $ 5,577,658
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payable to Healthcare Exchange participants $ 86,348 $ 40,756
Trade accounts payable 232,889 151,371
Accrued payroll and related expenses 363,858 181,028
Accrued preferred stock dividends 283,195 283,195
Accounts payable and accrued interest payable
to stockholders 530,866 728,941
Other current liabilities 240,533 295,680
------------- -------------
Total current liabilities 1,737,689 1,680,971
------------- -------------
Notes payable to stockholder 1,630,529 1,511,635
Convertible notes payable to stockholder 2,423,823 2,228,815
------------- -------------
Total notes payable to stockholders 4,054,352 3,740,450
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.01 par value - 100,000,000 shares
authorized; 59,418,344 shares issued and
outstanding at September 30, 2001
(59,394,844 at June 30, 2001) 594,184 593,949
Additional paid-in capital 49,128,300 49,109,283
Accumulated other comprehensive (loss) - (22)
Accumulated deficit (51,780,956) (49,546,973)
------------- -------------
Total stockholders' equity (deficit) (2,058,472) 156,237
------------- -------------
$ 3,733,569 $ 5,577,658
============= =============
See accompanying notes to condensed financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
September 30
2001 2000
------------ ------------
Healthcare Exchange
Healthcare exchange revenue $ 108,218 $ -
Healthcare exchange costs (224,788) -
------------ ------------
Healthcare exchange gross profit (loss) (116,570) -
Contract Programming
Contract programming revenue - 178,019
Programmer costs - (129,602)
Start-up and other costs - (6,200)
------------ ------------
Contract programming gross profit - 42,217
Selling, Marketing and Product development costs (1,505,195) (1,057,426)
General and administrative expenses (505,834) (2,141,486)
------------ ------------
Loss from operations (2,127,599) (3,156,695)
Other income (expense)
Interest income 33,133 80,736
Interest expense to stockholders and directors (139,517) (131,672)
------------ ------------
Total other income (expense) (106,384) (50,936)
------------ ------------
Net loss (2,233,983) (3,207,631)
Preferred stock dividends in arrears - (886,142)
------------ ------------
Net loss applicable to common stockholders $ (2,233,983) $ (4,093,773)
============ ============
Basic and diluted net loss per share $ (0.04) $ (0.07)
============ ============
Shares used in per share calculations 59,401,860 56,695,586
============ ============
See accompanying notes to condensed financial statements.
4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2001 2000
------------ ------------
Net cash used in operating activities $ (2,005,312) $ (1,575,969)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (91,033) (51,972)
Maturities of short-term investments 1,354,159 -
------------ ------------
Net cash provided (used) by investing activities 1,263,126 (51,972)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock - 9,564,644
Proceeds from exercise of options and warrants 19,251 26,666
Proceeds from notes payable to stockholders 313,902 233,027
Payments on notes payable to directors - (23,324)
------------ ------------
Net cash provided by financing activities 333,153 9,801,013
------------ ------------
Net increase (decrease) in cash and cash equivalents (409,033) 8,173,072
Cash and cash equivalents at beginning of period 3,159,017 1,909,421
------------ ------------
Cash and cash equivalents at end of period $ 2,749,984 $ 10,082,493
============ ============
See accompanying notes to condensed financial statements.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
September 30, 2001
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended June 30,
2001.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of normal recurring adjustments, considered
necessary to present fairly the Company's financial position at September 30,
2001 and June 30, 2001, results of operations for the three months ended
September 30, 2001 and 2000, and cash flows for the three months ended September
30, 2001 and 2000. The results for the period ended September 30, 2001 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2002.
The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $51,780,956 at September 30, 2001. Based on the
steps the Company has taken to refocus its operations and obtain additional
financing, the Company believes that it has developed a viable plan to address
the Company's ability to continue as a going concern, and that this plan will
enable the Company to continue as a going concern, at least through the end of
fiscal year 2002. However, the Company believes it will need to raise additional
funds during fiscal 2002. There can be no assurance that this plan will be
successfully implemented. If unsuccessful, the Company may be required to reduce
the development efforts of its Healthcare Exchange or be forced into seeking
protection under federal bankruptcy laws. As a result, the report of independent
auditors on the Company's June 30, 2001 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Note 2 - Financing Arrangements
See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Note 3 - Comprehensive Loss
Total comprehensive loss for the three months ended September 30, 2001 and 2000,
was $2,233,961, and $3,207,631, respectively. Other comprehensive income (loss)
represents the net change in unrealized gains (losses) on available-for-sale
securities.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note 4 - Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Boards issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," or SFAS 141 and
No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method is no
longer permitted. SFAS 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS 142 no longer permits
the amortization of goodwill and indefinite-lived intangible assets. Instead,
these assets must be reviewed annually (or more frequently under certain
conditions) for impairment in accordance with this statement. Intangible assets
that do not have indefinite lives will continue to be amortized over their
useful lives and reviewed for impairment in accordance with existing guidance.
We are required to adopt SFAS 142 effective July 1, 2002. Because the Company
has historically not been party to any business combinations and therefore has
not recorded related goodwill and intangible assets, the adoption of SFAS 141
and 142 did not and will not, respectively, have an effect on the Company's
results of operations, financial position or cash flows.
Note 5 - 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 stock shares outstanding without giving effect to outstanding options,
warrants, and convertible securities whose effects are anti-dilutive. For the
three-months ending September 30, 2001 and 2000, there were stock options, stock
warrants, and a convertible note payable outstanding, which could potentially
dilute earnings per share in the future but were not included in the computation
of diluted loss per share as their effect was anti-dilutive in the periods
presented.
7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis
The following discussion provides information to facilitate the understanding
and assessment of significant changes in trends related to the financial
condition of the Company and its results of operations. It should be read in
conjunction with the Company's financial statements and the notes thereto and
other financial information included elsewhere in the Form 10-K for the fiscal
year ended June 30, 2001.
Overview
General
Alternative Technology Resources, Inc. has developed and is operating an
exchange for healthcare services ("Healthcare Exchange"). The purpose of the
Healthcare Exchange is to utilize the Internet and other technologies to
facilitate Provider initiated discounts and administrative, billing and
remittance services for all commercial lines of business. The Healthcare
Exchange offers a direct and efficient conduit between Providers and Purchasers
of healthcare services and/or their agents, such as Preferred Provider
Organizations.
ATR's Healthcare Exchange began operations with a limited number of Providers
and Purchasers in the quarter ending June 30, 2001. The Company continues to
receive, process and analyze operating data, and the results of the Company's
analysis will determine the amount and timing of remaining development related
efforts.
The Company is currently recruiting in twenty states 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").
The Company has outsourced to multiple vendors portions of the development and
operations of the information systems for its Healthcare Exchange. The Company
signed agreements effective in January 2001, with an application services
provider to license, support and run software to process medical bills submitted
to the Company's Healthcare Exchange. ATR has also signed agreements to receive
claims from Providers through electronic clearinghouses and to convert paper
claims into electronic formats. ATR is evaluating other potential technology
vendors as well.
ATR will not provide healthcare services, but rather expects to act as a neutral
conduit for efficiency between Providers, Purchasers and their intermediaries
including Preferred Provider Organizations, that should benefit all. ATR
believes that eliminating the costs associated with traditional "bricks and
mortar" operations, creating economies of scale, facilitating access to
Providers and Purchasers, streamlining overhead costs, exploiting possibilities
for functional integration, reducing errors and speeding the payment of claims
should allow Purchasers to pay less and Providers to recover more of what they
bill.
History
Alternative Technology Resources, Inc. was founded as 3Net Systems, Inc. in
1989. In August 1999, James W. Cameron, Jr., the Company's largest stockholder,
was named Chairman and Chief Executive Officer. Under his direction the Company
identified what it believes to be a significant business opportunity and began
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
developing a business model involving the establishment of a Healthcare Exchange
under the name "DoctorandPatient."
In February 2000, Jeffrey S. McCormick assumed the position of the Company's
Chief Executive Officer. Mr. McCormick has significant experience in financing,
managing and growing early stage development companies as a managing director of
Boston-based Saturn Asset Management, Inc. Mr. McCormick has served as an
advisor or director of several Internet and electronic commerce companies over
the last six years. As the Company's CEO, Mr. McCormick is responsible for all
phases of development, implementation and operation of the Company's Healthcare
Exchange. Mr. Cameron still acts as Chairman and Chief Financial Officer and
continues to play an active and substantial role in formulating the Company's
business strategy and policy.
The Company is using its management's experience in health care and information
technology to establish the Healthcare Exchange, which has become the Company's
sole focus. At present, the Healthcare Exchange is operating with a limited
number of Providers so the Company can refine its model and determine the amount
and timing of remaining development efforts. ATR's previous business was
recruiting, hiring, and training foreign computer programmers and placing them
with U.S. companies. In line with the Company's strategy to focus on the
establishment of a Healthcare Exchange for health care services, ATR suspended
recruitment of foreign computer programmers in December 1999 and began pursuing
the conversion of foreign computer programmers to become employees of ATR's
former customers. This conversion process was complete as of June 30, 2001.
Financial Condition
Cash and cash equivalents decreased approximately $409,033 and short-term
investments decreased $1,354,137 since June 30, 2001. At September 30, 2001
substantially all of ATR's cash was invested in money market accounts.
Because the Company is emphasizing the development of the Healthcare Exchange,
the results of operation for the three months ended September 30, 2001, may not
be indicative of results of operations for the year ended June 30, 2002.
Results of Operation
Healthcare Exchange
Healthcare Exchange Revenue. The Company developed a proof of concept of its
Healthcare Exchange, which began operations with a limited number of Providers
in the three-month period ending June 30, 2001. Providers submit bills to ATR,
who reprices the bills to the Provider's Healthcare Exchange rate, including
adding a transaction-processing fee, and then routes them to Purchasers or their
intermediaries. ATR receives payments from Purchasers on behalf of Providers,
and then remits payments to Providers. The Company recognizes revenue for the
transaction-processing fee when earned and no other contractual obligations or
contingencies exist. During the three-month period ending September 30, 2001,
the second quarter of operations of the Healthcare Exchange, $108,218 of revenue
was recognized. No revenue was generated during the three-month period ending
September 30, 2000.
9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Healthcare Exchange Costs. Healthcare Exchange costs are the direct costs
related to the processing of the bills submitted by Providers and payments
received from Purchasers. These costs include the salary and other wage and
benefit costs of the Healthcare Exchange operations staff and the operating cost
of the application services provider. The costs for three-month period ending
September 30, 2001, were $224,788. No operating costs were incurred for the
three-month period ending September 30, 2000.
Contract Programming
Contract Programming Revenue. ATR's previous business was recruiting, hiring,
training and placing foreign computer programmers with U.S. companies. In line
with the Company's strategy to focus on the establishment of the Healthcare
Exchange for health care services, ATR suspended recruitment of foreign computer
programmers in December 1999 and began pursuing the conversion of computer
programmers to employees of ATR's former customers. This conversion process was
complete as of June 30, 2001. For the three-month period ending September 30,
2000, $178,019 in revenue was generated primarily from sales of programmer
services.
Programmer Costs. Programmer costs were salary, and other wage and benefit costs
of ATR's programmer employees. Due to the final phase out of contract
programming business through conversion of the computer programmers to employees
of ATR's customers as of June 30, 2001, as discussed above in "Contract
Programming Revenue," no contract programming costs were incurred for the
three-month period ending September 30, 2001. There were $129,602 in programmer
costs for the three-month period ending September 30, 2000.
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. There were no start-up and other
costs for the three-month period ending September 30, 2001 as compared to $6,200
the three-month period ending September 30, 2000.
Selling, Marketing and Product Development Costs
In October 1999 the Company began incurring costs to develop its Healthcare
Exchange. Costs incurred are primarily salary, other wage and benefit costs of
ATR's employees and other operational costs associated with recruiting the
network of healthcare Providers. The cost increase of $447,769 for the
three-month period ending September 30, 2001, compared to the same period in the
prior fiscal year is primarily the result of the increase of sales and marketing
staff to 53 at quarter end September 30, 2001, from 23 at quarter end September
30, 2000.
General and Administrative Expenses
General and Administrative Expenses ("G&A"). G&A expenses decreased $1,635,652
for the three-month period ended September 30, 2001 compared to the same period
of the prior fiscal year. This decrease is due primarily to non-cash employee
compensation related to the purchase of common stock in the Company's August
2000 private placement by the Company's Chief Executive Officer and related
10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
entities, and non-cash compensation due to conversion of Series D Preferred
Stock into common stock by the Company's Chairman of the Board recorded during
the three-month period ended September 30, 2000. No comparable costs were
recorded in the three-month period ending September 30, 2001. The period ending
September 30, 2001 reflects an increase of employees and related costs to
support development efforts of the Healthcare Exchange.
Other Income (Expense)
Interest Income. Interest income is related to the short-term investment of cash
balances. The decrease is the result of reduced cash balances in the three-month
period ending September 30, 2001, in comparison to the same period in fiscal
2001.
Interest Expense. Interest expense increased $7,845 in the three months ended
September 30, 2001 primarily due to the increase in Notes Payable to Stockholder
and Convertible Notes Payable to Stockholder.
Income Taxes
As of June 30, 2001, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $37 million and $21
million, respectively. The federal net operating loss carryforwards expire in
2004 through 2020 and the state net operating loss carryforwards expire in 2001
through 2010. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.
Under certain provisions of the Internal Revenue Code of 1986, as amended,
portions of the net operating loss carryforward and research and development tax
credit carryforward are subject to annual limitations as a result of changes in
the ownership of the company.
Liquidity and Capital Resources
Traditionally, the Company has used a combination of equity and debt financing
and internal cash flow to fund operations and finance accounts receivable but
has incurred operating losses since its inception, which has resulted in an
accumulated deficit of $51,780,956 at September 30, 2001.
The Company's Healthcare Exchange development efforts will require substantial
funds prior to generating sufficient revenues to fund operations and repay debt.
Therefore, the Company engaged a New York based financial and investment banking
firm to assist the Company in raising capital. On August 28, 2000, the Company
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 are being used to
develop the Company's Healthcare Exchange. The Company's Chief Executive Officer
and related entities purchased 2,333,335 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 $1,458,334 in the first fiscal quarter ended September
30, 2000.
On September, 11, 2000, the Company agreed with the Series D Preferred
stockholders to exchange all their outstanding Series D shares and $475,915 in
accrued preferred stock dividends into 566,972 shares of common stock based on a
11
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 $317,702 in compensation expense and $862,033 in preferred stock
dividends.
The Company has received short-term, unsecured financing to fund its operations
in the form of notes payable of $3,740,450 as of June 30, 2001, from Mr. Cameron
and another stockholder. These notes bear interest at 10.25%. On September 11,
2000, the Company agreed with Mr. Cameron to extend the due date on notes
payable to him until December 31, 2001,in exchange for an extension fee of 2%.
These extended notes total $1,511,635, including accrued interest and extension
fees, and bear interest at 10.25% per annum. Also on September 11, 2000, the
Company agreed with the other note holder to extend the due date of his notes
until December 31, 2001, in consideration of such notes becoming convertible
promissory notes. The convertible promissory notes total $2,288,815, including
accrued interest, bear interest at 10.25% per annum and are convertible into
common stock at $3.00 per share (approximate public trading price on that date)
at the note holder's option. On September 1, 2001, the due dates of these notes
were extended from December 31, 2001 to December 31, 2002. Mr. Cameron's
extended notes total $1,630,529, including accrued interest and extension fees
of 2%, and bear interest at 10.25% per annum. The convertible promissory notes
total $2,423,826, including accrued interest at 10.25% per annum.
The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical bills
submitted to the Company's Healthcare Exchange. The agreements are for 66
months. They required payment of an initial base license fee of $250,000, which
is being amortized over 66 months, and start-up costs, including data center set
up, training and implementation fees of approximately $145,000, which were
expensed. The agreements require monthly minimum payments currently of about
$35,000 and additional fees that are transaction based if volumes exceed levels
included in the monthly minimums.
Based on the steps the Company has taken to refocus its operations and obtain
additional financing, the Company believes that it has developed a viable plan
to address the Company's ability to continue as a going concern, and that this
plan will enable the Company to continue as a going concern through at least the
end of fiscal 2002. However, the Company believes it will need to raise
additional funds during fiscal 2002. There can be no assurance that this plan
will be successfully implemented. If unsuccessful the Company may be required to
reduce the development efforts or its Healthcare Exchange or be forced into
seeking protection under federal bankruptcy laws. As a result, the report of
independent auditors on the Company's June 30, 2001, 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.
Effects of Inflation
Management does not expect inflation to have a material effect on the Company's
operating expense.
12
PART I FINANCIAL INFORMATION
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has long-term debt in the aggregate amount of $4,054,352 as of
September 30, 2001, payable to two stockholders of the Company. The debt bears
interest at 10.25% per annum and is due December 31, 2002. The Company does not
believe that any change in interest rates will have a material impact on the
Company during fiscal 2002. Further, the Company has no foreign operations and
therefore is not subject to foreign currency fluctuations.
PART II OTHER INFORMATION
Items 1, 2, 3, 4, 5, 6
None
13
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Registrant)
Date: November 13, 2001 /s/ James W. Cameron, Jr.
------------------------------------------
James W. Cameron, Jr.
Chairman of the Board and Chief Financial
Officer
(Principal Executive and Financial Officer)