As filed with the Securities and Exchange Commission on January 17, 2001
File No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Alternative Technology Resources, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 7371 93-1011046
------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
629 J Street, Sacramento, California 95814
Telephone: (916) 231-0400
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(Address and telephone number of principal executive offices)
Jeffrey S. McCormick, Chief Executive Officer
Alternative Technology Resources, Inc.
629 J Street, Sacramento, California 95814
Telephone: (916) 231-0400
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(Name, address and telephone number of agent for service)
Copies to: Daniel B. Eng, Esq.
Bartel Eng & Schroder
300 Capitol Mall, Suite 1100, Sacramento, California 95814
Telephone: (916) 442-0400
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. XX
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a posteffective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
ii
CALCULATION OF REGISTRATION FEE
Title of each class of Amount of shares Proposed maximum Proposed maximum Amount of
securities to be registered to be Registered offering price per share aggregate offering price registration fee
------------------------------- ----------------- ------------------------ ------------------------ -----------------
Common Stock, par value $.01 19,367,635 $1.5625(1) $30,261,929
----------------- ------------------------ ------------------------ -----------------
Common Stock, par value $.01,
that may be issued upon the
conversion of Convertible Notes 742,938 $1.5625 1,160,841
----------------- ------------------------ ------------------------ -----------------
Common Stock, par value $.01,
that may be issued upon 494,200 $1.5625 772,188
exercise of warrants
------------------------------- ----------------- ------------------------ ------------------------ -----------------
Total 20,604,773 $32,194,958 $8,049
================= ======================== =================
(1) Fee calculated in accordance with Rule 457 of the Securities Act of 1933,
as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average quotation of
the high and low price per share of the Company's common stock on January
12, 2001, as quoted on the OTC Bulletin Board.
The registrant hereby amends this registration statement on the date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
1
Subject to Completion
PROSPECTUS Dated January 17, 2001
20,604,773 Shares
Alternative Technology Resources, Inc.
Common Stock
--------------------------
This prospectus relates to the resale by the selling stockholders of up
to 20,604,773 shares of common stock including 1,237,138 shares of common stock
that may be resold by selling stockholders upon the exercise of outstanding
warrants and upon the conversion of convertible notes. The selling stockholders
may sell the common stock from time to time in the over-the-counter market at
the prevailing market price or in negotiated transactions.
We will not receive any proceeds from the resale of shares of common
stock by the selling stockholders. We will pay for expenses of this offering.
Our common stock is quoted on the OTC Bulletin Board under the symbol
ATEK. On __________ ___, 2001, the bid quotation for one share of common stock
was $___. We do not have any other securities that are currently traded on any
other exchange or quotation system.
--------------------------
Investing in our common stock involves a high degree of risk. See "Risk Factors"
beginning on page 7 of this prospectus.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------
The Date of this Prospectus is __________, 2001
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted or would be
unlawful prior to registration or qualification under the securities laws of any
such state.
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TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..................................................................................................3
RISK FACTORS........................................................................................................4
FORWARD LOOKING STATEMENTS..........................................................................................8
THE OFFERING........................................................................................................8
USE OF PROCEEDS.....................................................................................................8
PRICE RANGE OF OUR COMMON STOCK.....................................................................................9
DIVIDEND POLICY.....................................................................................................9
SELECTED FINANCIAL DATA............................................................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................11
DESCRIPTION OF BUSINESS............................................................................................20
MANAGEMENT.........................................................................................................25
PLAN OF DISTRIBUTION...............................................................................................30
SELLING SHAREHOLDERS...............................................................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................................34
DESCRIPTION OF SECURITIES..........................................................................................36
EXPERTS............................................................................................................36
AVAILABLE INFORMATION..............................................................................................36
INDEX TO FINANCIAL STATEMENTS.....................................................................................F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front cover
page for this prospectus.
3
You should read the following summary together with the more detailed
information and the financial statements appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
Our Business
We are developing an Internet Exchange for healthcare services called
"DoctorAndPatient.com." We are currently recruiting medical doctors, medical
groups, hospitals and other healthcare practitioners to offer their services, on
a non-exclusive basis, to individuals and others who purchase or facilitate the
purchase of healthcare services. Our Internet Exchange intends to use the
Internet and other technologies connecting medical providers with purchasers
and/or their agents, and will provide administrative, billing and re-pricing
services. At this time, our Internet Exchange is in the early stages of
development. We are evaluating potential technology vendors and developing a
proof of concept, which we believe will be tested in the current year.
Our business address is 629 J Street, and our telephone number is (916)
231-0419.
Offering Summary
Up to 20,604,773 shares of common stock, including 1,237,138 shares that
may be resold by the selling stockholder upon the exercise of outstanding
warrants and convertible notes.
The selling stockholders listed in the prospectus may sell all, some,
or none of their common shares registered pursuant to this prospectus. We will
not receive any proceeds from the offering.
Summary of Consolidated Financial Data
As of and for the
Three Months Ended
As of and for the Years Ended June 30 September 30
------------ ------------- ------------- ------------- ------------- ------------- -----------
1996 1997 1998 1999 2000 1999 2000
(Unaudited)
Statement of Operations Data:
Contract programming revenue $ 1,280,303 $ 2,018,064 $ 5,250,002 $ 6,340,235 $ 2,561,101 $ 944,651 $ 178,019
Product development costs $ -- $ -- $ -- $ -- $ 1,154,244 $ -- $ 1,057,426
Loss from operations $ (1,695,096) $ (990,579) $ (805,963) $ (192,646) $ (2,008,908) $ (182,230) $ (3,156,695)
Net loss $ (1,847,812) $ (648,187) $ (1,243,944) $ (716,747) $ (4,815,641) $ (2,694,632) $ (3,207,631)
Basic and diluted net loss
per share $ (0.12) $ (0.03) $ (0.05) $ (0.03) $ (0.10) $ (0.07) $ (0.07)
Shares used in per share
calculations 16,124,056 25,369,315 25,964,142 26,127,730 50,329,614 36,818,746 56,695,586
Balance Sheet Data:
Total assets $ 366,347 $ 298,142 $ 837,353 $ 599,440 $ 2,502,703 $ 1,184,524 $ 10,674,026
Long-term obligations $ 738,752 $ 2,787,262 $ 4,006,565 $ 4,258,090 $ 3,567,424 $ 3,258,090 $ 3,800,450
Accrued preferred stock
dividends $ 245,000 $ 367,500 $ 490,001 $ 612,501 $ 735,001 $ 643,126 $ 283,195
Redeemable preferred stock,
Series D $ 1,225,002 $ 1,225,002 $ 1,225,002 $ 1,225,002 $ 1,225,002 $ 1,225,002 $ --
Stockholders' equity (deficit) $ (3,255,515) $ (3,688,513) $ (4,844,274) $ (5,587,475) $ (2,974,406) $ (3,846,822) $ 5,636,119
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In addition to the other information we provide in this prospectus, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could impair our business,
operating results or financial condition. In evaluating the risks of investing
in us, you should also evaluate the other information set forth in this
prospectus, including our financial statements.
Risks Related to Our Business
We only have a limited operating history in the health care and Internet
industries that investors may use to assess our future prospects.
Although we have been an operating company in the computer programmer
recruiting and placement industry for several years, we only recently began
operating in the Internet and health care industries. We have not generated any
revenue and may never generate sufficient revenues to achieve profitability in
this new venture. We have limited experience addressing challenges frequently
encountered by earlystage companies in the electronic commerce and health care
industries. Accordingly, our limited operating history does not provide
investors with a meaningful basis for evaluating an investment in our common
stock.
The likelihood of our success must be considered in light of the
potential problems, expenses, difficulties, complications and delays frequently
encountered in connection with any enterprise starting a new business with a
completely new business plan, particularly in new and rapidly evolving markets
such as the Internet. Such risks include an evolving, untested and unpredictable
business model, the creation of brand identity, the expansion or creation of
competing services, the uncertainty of the acceptance of the marketing medium
and the management of anticipated growth.
Our current operations are not profitable and we have a history of significant
losses.
For the year ended June 30, 1998, 1999 and 2000 and three months ended
September 30, 2000, we incurred a net loss of $1,243,944, $716,747, $4,815,641
and $3,207,631, respectively. We have experienced losses since our inception.
Our future revenue growth depends upon our establishment and maintenance of
successful relationships with Providers and strategic vendors in order to
attract customers 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, customers
and strategic vendors. To date we have established relationships with a small
number of the Providers we are targeting. In order to successfully attract
Purchasers, we will have to have a large number of relationships with Providers
with diverse practices and over broad geographic areas. We may not be able to
adequately develop relationships with the number of Providers necessary to
achieve this type of coverage and those already existing relationships with
Providers may not be ultimately successful.
To date we have established only one strategic relationship, which is
with WebMD Corp. This relationship is nonexclusive and the status of the project
is currently being evaluated by the parties. We may enter into additional
strategic relationships in the future and are currently evaluating potential
technology vendors. WebMD Corp. and any other potential strategic vendors may
offer products or services of several different companies, including products
and services that compete with our products or services. WebMD Corp. and any
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potential strategic vendor may be influenced by our competitors to scale back or
end their relationships with us. We may not establish additional strategic
relationships, and any relationships we do establish ultimately may be
unsuccessful. WebMD Corp. and any future strategic vendor may not devote
adequate resources to selling our products and services.
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.
We may be required to obtain additional financing.
Although there can be no assurance, we believe that the proceeds from
our recently completed private placement of $10 million in common stock in
August 2000 will be sufficient for us to develop our proposed Internet Exchange
and continue our normal operations through June 2001. We may require additional
financing to meet our capital needs and pursue our business strategy if actual
costs exceed our projections. Traditionally, we have relied on major
stockholders or affiliates to finance our operations. The issuance of additional
shares of common stock will dilute the ownership of existing stockholders.
Our growth depends on industry acceptance of our health care products and
services.
The time, expense and effort of securing customers and Providers may
exceed our expectations and may harm our business and operating results. The
decision to implement our products and services requires time intensive
education of both our suppliers (medical providers) and our customers of the
advantages of our products and services. The failure of industry participants to
accept our services and products 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 will join our network or that prospective customers will
purchase our products or services. In the event that customers will not purchase
our products or services, we may have incurred substantial costs that cannot be
recovered and which will not result in future revenues.
The failure of our Providers to provide high quality services to our Customers
will diminish our brand value and the number of Customers who use our proposed
services may decline.
Promotion of our brand value depends on our ability to provide our
customers a high quality experience for finding Providers. If our Providers do
not provide our customers with high quality service, the value of our services
could be damaged and the number of customers using our proposed services may
decrease. The failure by our Providers to provide the level of health care that
our customers will expect will result in low satisfaction, damage our brand name
and could materially and adversely affect our business, results of operations
and financial condition.
Failure to manage our growth effectively could harm our business and operating
results.
We recently have hired a significant number of new employees, including
a key executive. We will continue to add personnel to maintain our ability to
grow in the future. Our growth will place significant strain upon our management
and operational systems and resources. We must integrate our new employees and
key executive into a cohesive team and at the same time increase the total
number of employees and train and manage our employee work force in a timely and
effective manner to expand our business. We may not be able to do so
successfully.
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Our business could suffer if the integrity of our systems and the systems of
those third parties we depend on are inadequate.
We will depend on third parties to develop much of the information
systems for our Internet Exchange. Any failure of the systems we are developing,
or those of other third parties, could harm our business and operating results.
Once implemented, we intend that these systems will process vast amounts of
pricing and financial data and execute large numbers of payment transactions.
Any delay or failure in these systems or in our ability to communicate
electronically with health plans or in our ability to collect, store, analyze or
process accurately pricing and financial data may result in the denial of
claims, or in the delay or failure to execute payment transactions accurately.
This type of delay or failure would harm our business and operating results.
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 breakins, computer viruses, programming errors, attacks
by computer hackers and similar disruptive problems. A user, who is able to
access our computer or communication systems, when developed, 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 future revenue growth depends in part on increasing use of the Internet and
on the growth of ecommerce.
Rapid growth in the use of the Internet is a recent phenomenon. As a
result, its acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of business customers and individual customers may
not adopt or continue to use the Internet as a medium of commerce. Demand and
market acceptance for recently introduced products and services over the
Internet are subject to a high level of uncertainty, and there exist few proven
products and services.
Our future profitability depends, in part, upon increased Payor and
Provider demand for additional Internet and ecommerce solutions that we are in
the process of developing or may develop in the future.
State, federal 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
currently 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 customer access to favorable fees from
Providers requires us to meet the requirements for licensing as a health plan or
health insurer. In addition, to the extent that fees are paid by Providers,
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state regulators could assert that our business 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 ThirdParty Payors may
require us to be licensed or certified in some states.
In November 1999, the California Department of Corporations, Health
Enforcement Division, announced that it is taking enforcement action against
discount health benefit card plans conducting operations in California in
violation of the Health Care Service Plan Act of 1975 (the "HCSP Act"). If it
determines that a particular plan falls under its jurisdiction, the Department
can issue a cease and desist order to require the plan to halt its unlawful
practices, violations of which can lead to monetary penalties. In October of
1999, the Department issued us a subpoena with respect to documents relating to
our relationship with WebMD Corp. and our potential of being a health care
service plan under the Department's jurisdiction. We have responded to this
subpoena. While we do not believe our Internet Exchange is within the scope of
the HCSP Act, the Department may continue to require our compliance with the
HCSP Act, which would require substantial changes in our business model.
Legislation is being proposed in California to impose minimal licensing
requirements on discount plans. We cannot predict whether this legislation will
pass or whether it will ultimately apply to us. 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 our business and prospects.
Internet commerce has yet to attract significant regulation, but government
regulations may result in administrative monetary fines, penalties or taxes that
may reduce our future earnings.
There are currently few laws or regulations that apply directly to the
Internet. Because our business is dependent on the Internet, the adoption of new
(or applications of existing) local, state, national or international laws or
regulations may decrease the growth of Internet usage or the acceptance of
Internet commerce which could, in turn, decrease the demand for our services and
increase our costs or otherwise have a material adverse effect on our business,
results of operations and financial condition.
We face a risk of litigation.
We have been involved in several significant litigation matters in our
history. No assurances can be given that additional legal proceedings will not
be initiated against us. In addition, involvement in litigation will require us
to spend time and pay expenses to defend ourselves, which will have an adverse
effect on our operations and financial condition and results. The health care
and Internet industry that we are entering into may cause us to face an
increased risk of litigation, especially if we enter the consumer market.
Patients who file lawsuits against doctors often name as defendants all persons
and companies with any relationship to the doctors.
Risk Related to This Offering
Our Common Stock price is volatile and could be impacted by fluctuating results
in the future and by general market conditions.
Our common stock price is volatile and could be impacted by fluctuating
results in the future and by general market conditions. Our common stock is
quoted on the OTC Bulletin Board and the public market for our common stock has
been limited, sporadic and highly volatile. Between July 1, 1999 and October 31,
2000, the price of a share of our common stock ranged from a low of $0.25 to a
high of $10.44.
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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 83.0% of the
outstanding shares of our common stock as of November 30, 2000. 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.
The sale of a substantial amount of stock through this registration statement
could negatively affect our stock price.
Under an agreement with the selling stockholders, we have agreed to
register the common stock for resale by this prospectus. The number of shares of
common stock available for resale by this prospectus represents approximately
34% of our outstanding common stock. Because the trading price for our common
stock may be affected by the number of shares available for resale, the market
price of our common stock could drop as a result of sales of a large number of
shares of common stock in this market after this offering or the perception that
sales could occur.
FORWARD LOOKING STATEMENTS
This prospectus contains forwardlooking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995, in the sections
entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere. These statements relate to future events or our future financial
performance. In some cases, you can identify forwardlooking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors, including the risks outlined under "Risk Factors," that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forwardlooking statements.
Although we believe that the expectations reflected in the
forwardlooking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forwardlooking statements after the date of this
prospectus to conform these statements to actual results.
THE OFFERING
The selling stockholders listed in the prospectus may sell all, some,
or none of their common shares registered pursuant to this prospectus. We will
not receive any proceeds from the offering.
The common stock offered for resale by the selling stockholders were
issued in connection with private placements, conversion of convertible notes
and exercise of outstanding warrants.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the selling
stockholders.
9
PRICE RANGE OF OUR COMMON STOCK
The table below sets forth the high and low closing prices for the
common stock of the Company for each of the last ten quarters.
Period High Low
-------------------------------- ------ -----
Quarter ended December 31, 2000 $ 3.38 $1.13
Quarter ended September 30, 2000 $ 4.81 $2.75
Quarter ended June 30, 2000 $ 7.75 $3.00
Quarter ended March 31, 2000 $10.44 $4.13
Quarter ended December 31, 1999 $ 4.44 $1.88
Quarter ended September 30, 1999 $ 5.53 $0.25
Quarter ended June 30, 1999 $ 0.75 $0.38
Quarter ended March 31, 1999 $ 0.75 $0.28
Quarter ended December 31, 1998 $ 0.50 $0.28
Quarter ended September 30, 1998 $ 1.03 $0.44
As of November 30, 2000, we had approximately 233 holders of its shares
of common stock, not including those held in street name by several brokerage
firms. As of November 30, 2000, a total of 11,677,245 shares of our common stock
underlie outstanding options, warrants and convertible notes.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
We intend to retain earnings, if any, to support our planned growth. Any future
dividends will be at the discretion of our board of directors, subject to a
number of factors, including our results of operations, general business
conditions, capital requirements, general financial condition, and other factors
deemed relevant by our board of directors.
Our Series D preferred stock carries a cumulative dividend of $0.60 per
share per year, which has been accrued beginning July 1, 1994, and is payable
quarterly to the extent permitted by law. On September 11, 2000, and in
connection with the exchange of 204,167 shares Series D preferred stock with a
liquidation value of $6.00 per share for 408,334 shares of common stock based on
a per share price of $3.00 per share, we declared accrued dividends of $759,110
in the aggregate. 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. As of November 30, 2000, there are no shares of preferred
stock outstanding.
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SELECTED FINANCIAL DATA
In the table below, we provide you with unaudited summary historical
financial data of Alternative Technology Resources, Inc. ("ATR"). We have
prepared this information using the financial statements of ATR for the five
years ended June 30, 2000 and the three-month periods ended September 30, 1999
and 2000. Basic and diluted net loss per share data and shares used in per share
calculations have been adjusted for the year ended June 30, 1996 to reflect our
one-for-ten consolidation of our outstanding common stock effective on December
2, 1996; and certain reclassifications have been made to financial data in years
ended June 30, 1996 through 1999 to conform with the current presentation.
When you read this unaudited summary historical financial data, it is important
that you read along with it the historical financial statements and related
notes in our annual and quarterly reports, as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of and for the
Three Months Ended
As of and for the Years Ended June 30 September 30
------------- ------------- ------------ ------------ -------------- -------------- ------------
1996 1997 1998 1999 2000 1999 2000
(Unaudited)
Statement of Operations Data:
Contract programming revenue $ 1,280,303 $ 2,018,064 $ 5,250,002 $ 6,340,235 $ 2,561,101 $ 944,651 $ 178,019
Contract programming gross
profit (loss) 301,908 74,275 530,379 1,030,893 422,062 94,714 42,217
Product development costs -- -- -- -- (1,154,244) -- (1,057,426)
Selling, general and
administrative 1,313,116 1,160,015 1,336,342 1,223,539 1,276,726 276,944 2,141,486
Loss from operations (1,695,096) (990,579) (805,963) (192,646) (2,008,908) (182,230) (3,156,695)
Total other income (expense) (152,716) 342,392 (437,981) (524,101) (2,806,733) (2,512,402) (50,936)
Net loss (1,847,812) (648,187) (1,243,944) (716,747) (4,815,641) (2,694,632) (3,207,631)
Preferred stock dividends in
arrears (122,500) (122,500) (122,500) (122,500) (122,500) (30,625) (886,142)
Net loss applicable to common
stockholders (1,970,312) (770,687) (1,366,444) (839,247) (4,938,141) (2,725,257) (4,093,773)
Basic and diluted net loss per
share $ (0.12) $ (0.03) $ (0.05) $ (0.03) $ (0.10) $ (0.07) $ (0.07)
Shares used in per share
calculations 16,124,056 25,369,315 25,964,142 26,127,730 50,329,614 36,818,746 56,695,586
Balance Sheet Data:
Total assets $ 366,347 $ 298,142 $ 837,353 $ 599,440 $ 2,502,703 $ 1,184,524 $ 10,227,895
Long-term obligations 738,752 2,787,262 4,006,565 4,258,090 3,567,424 3,258,090 3,800,450
Accrued preferred stock
dividends 245,000 367,500 490,001 612,501 735,001 643,126 283,195
Redeemable preferred stock,
Series D 1,225,002 1,225,002 1,225,002 1,225,002 1,225,002 1,225,002 --
Stockholders' equity (deficit) (3,255,515) (3,688,513) (4,844,274) (5,587,475) (2,974,406) (3,846,822) 5,636,119
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of the
factors described in the section entitled "Risk Factors" and elsewhere in this
document.
Results of Operation
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Financial Condition
Cash and cash equivalents increased approximately $8.2 million since
June 30, 2000 primarily as a result of the Company selling 3,333,334 shares of
its common stock at a price of $3.00 per share in a private placement in August
2000 The private placement was also the primary cause for the Company's
stockholders' deficit of $2,974,406 at June 30, 2000 becoming positive
stockholders' equity of $5,636,116 at September 30, 2000. At September 30, 2000
substantially all of the Company's cash was invested in money market accounts.
Because the Company is emphasizing the development of the Internet
Exchange and phasing out its contract programming services, the results of
operation for the three months ended September 30, 2000 may not be indicative of
results of operations for the year ended June 30, 2001.
Results of Operation
Contract programming
Contract Programming Revenue. Contract programming revenue results
primarily from sales of programmer services. Revenue for the three-month period
ended September 30, 2000 decreased $767,000 or 81%, over the same period of the
previous year. This decrease is due to a reduction in the monthly average number
of contract programmers working at customer sites in the three-month period
ended September 30, 2000, compared to the same period in the prior year. This
decline in the number of programmers at customer sites started in the last half
of fiscal year 1999 and is due to several customers choosing to exercise a
contract termination provision which allowed them to convert, for a fee, the
Company's programmers to their employees. The Company escalated this conversion
process during fiscal years 2000 and 2001 to enable it to focus its business
strategy toward developing its Internet Exchange for healthcare services.
Contract Termination Fees. Contract termination fees are amounts
received from customers when they exercise the contract provision, which allows
them to convert the Company's programmer to their employee. In addition, these
fees can also be received from programmers when they exercise their contract
provision to terminate their relationship with the Company prior to the
termination date of their contract. These fee amounts are stipulated in customer
and programmer contracts, are based on the length of time remaining under the
contract, and are recognized as revenue when such contract provisions are
invoked. Although contract termination fees are common in the industry, the
number and frequency of exercises of the "buy-out" provisions is unpredictable.
12
Programmer Costs. Programmer costs are the salary, and other wage and
benefit costs of the Company's programmer employees. These costs decreased 80%
for the three month period ended September 30, 2000 compared to the same period
last year. This decrease is primarily due to the reduction in the number of
contract programmers working at customer sites as discussed above in "Contract
Programming Revenue".
Start-up and Other Costs. Start-up and other costs are the costs of
recruiting, 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.
Included in this category of costs is compensation paid by the Company
whenever programmer employees are hired and enter the United States or are
relocated once in the United States but before these programmers begin working
at a customer's work site. There are times when under immigration law, the
Company, as employer, must pay a programmer employee at least 95% of prevailing
wages for his or her specialty even when the programmer is not placed.
Start-up and other costs decreased $197,000 in the three-month period
ended September 30, 2000, as compared to the same period in fiscal 2000. This
decrease is due to ceasing to recruit programmer employees and a decrease in the
number of programmers who were in the United States but not working at customer
sites.
Contract Programming Gross Profit. The gross profit on contract
programming revenue was 24% for the three month period ended September 30, 2000
compared to 10% for the same period in fiscal 2000. This increase is primarily
due to the significant decrease in start-up and other costs in the quarter ended
September 30, 2000 compared to the same quarter of the previous year.
Product Development Costs
In October 1999 the Company began incurring costs to development its
Internet Exchange. Costs incurred are primarily the salary and other wage and
benefit costs of the Company's employees involved in recruiting the network of
healthcare providers.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
for the three month period ended September 30, 2000 increased $1,865,000 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 entities ($1,458,000) and due to conversion of
Series D preferred stock into common stock by the Company's Chairman of the
Board ($317,000) in September 2000. See "Liquidity and Capital Resources."
Other Income (Expense)
Interest Income. Interest income in fiscal 2001 is related to the
short-term investment of cash balances. In fiscal 2000 interest income is
related to the short-term investment of cash balances and to notes receivable
from employees and officers of the Company. The increase is the result of
greater cash balances in fiscal 2001 over fiscal 2000.
Interest Expense. Interest expense decreased $2,392,000 in the three
months ended September 30, 2000 primarily due to the benefit accruing to note
holders in fiscal 2000 when conversion terms of a $1,000,000 convertible note
13
were amended and due to the resulting decrease in notes payable to stockholders.
See "Liquidity and Capital Resources."
Income Taxes
As of June 30, 2000, the Company had a net operating loss carryforward
for federal and state income tax purposes of $30 million and $13 million,
respectively. The federal net operating loss carryforward expires in the years
2006 through 2019 and the state net operating loss carryforward expires in 2000
through 2005. In connection with the Company's initial public offering, a change
of ownership (as defined in Section 382 of the Internal Revenue Code of 1986, as
amended) occurred. As a result, the Company's net operating loss carryforwards
generated through August 10, 1992 are subject to an annual limitation of
approximately $300,000.
Net Loss
Net loss increased $513,000 for the three month period ended September
30, 2000 compared to the same period in fiscal 2000 primarily due to the
increases in product development and selling, general and administrative costs,
offset by the decrease in interest expense.
Preferred Stock Dividends in Arrears
Dividends are $855,517 higher for the three months ended September 30,
2000 compared to the same period in fiscal 2000 due to the benefit associated
with the exchange of the Series D preferred stock on September 11, 2000 for
common stock in the amount of $862,033. See "Liquidity and Capital Resources."
Basic and Diluted Net Loss Per Share
The Company's net loss per share has been computed by dividing net loss
after deducting preferred stock dividends ($886,142 in fiscal year 2001 and
$30,625 in fiscal year 2000) by the weighted average number of shares of common
stock outstanding during the periods presented. Common stock issuable upon
conversion of preferred stock (for fiscal year 2000), common stock options and
common stock warrants have been excluded from the net loss per share
calculations, as their inclusion would be antidilutive
Year ended June 30, 2000 compared to year ended June 30, 1999
Contract Programming
Contract Programming Revenue. Contract programming revenue results
primarily from sales of programmer services. Revenues decreased $3,779,000 or
60% in fiscal year 2000 compared to fiscal year 1999. This decrease is due to a
reduction in the monthly average number of contract programmers working at
customer sites in fiscal year 2000 compared to fiscal year 1999. There was an
average of 31 contract programmers at customer sites for fiscal year 2000
compared an average of 82 in fiscal year 1999. The Company's results of
operations, in the last half of fiscal year 1999, were impacted by customers'
moves toward utilizing individual programmers or small (2 to 4 people)
programming teams rather than large programming teams, and the election by
several customers to exercise their contract termination provision allowing them
to convert, for a fee, the Company's programmers to their employees. As a
result, when contracts with several customers approached their termination date,
they were either not renewed, renewed for a fewer number of programmers, or
programmers converted to customer employees. The Company has escalated this
conversion process during fiscal year 2000 to enable it to focus its business
strategy towards developing its Internet Exchange for healthcare services.
14
Contract Termination Fees. Contract termination fees are amounts
received from customers when they exercise the contract provision to convert the
Company's programmer to their employee. In addition, these fees can also be
received from programmers when they exercise their contract provision to
terminate their relationship with the Company prior to the termination date of
their contract. These fee amounts are stipulated in customer and programmer
contracts, are based on the length of time remaining under the contract, and are
recognized as revenue when such contract provisions are invoked. Although
contract termination fees are common in the industry, the number and frequency
of exercises of the "buyout" provisions is unpredictable.
Programmer Costs. Programmer costs are the salary and other wage and
benefit costs of the Company's programmer employees. These costs decreased by
$2,769,000 or 61% in fiscal year 2000 compared to fiscal year 1999. This
decrease is primarily due to the reduction in the number of contract programmers
working at customer sites as discussed above in "Contract Programming Revenue".
Startup and Other Costs. Startup and other costs are the costs of
recruiting, training, and travel for programmer employees coming to the United
States 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.
Included in this category of costs is compensation paid by the Company
whenever programmer employees are hired and enter the United States or are
relocated once in the United States but before these programmers begin working
at a customer's work site. There are times when under immigration law, the
Company, as employer, must pay a programmer employee at least 95% of prevailing
wages for his or her specialty even when the programmer is not placed.
The Company expenses startup and other costs as incurred, which results
in timing differences between the incurring of current expense and recognition
of resulting future revenue. Such differences may be particularly evident in the
Company's case because of its relatively small revenue base. The effect may be
particularly noticeable whenever the timing of placement of employees is such
that the major startup costs occur late in one reporting period and the revenues
appear in subsequent periods.
Startup and other costs decreased $649,000 or 62% in fiscal year 2000
as compared to fiscal year 1999. This decrease is due to a decrease in the
number of programmers who were in the United States but not working at customer
sites. In fiscal year 2000 there was an average of 2 programmers per month
temporarily unassigned compare to 8 in fiscal year 1999.
Contract Programming Gross Profit. The gross profit on contract
programming revenue was 16% for fiscal year 2000 and 12% (before contract
termination fees) for fiscal year 1999. The increase for fiscal year 2000 is
primarily due to the programmer employees retained during fiscal year 2000 being
at a lower salary level than programmers employed in fiscal year 1999 and to
suspension of recruitment in fiscal year 2000.
Product Development Costs
In October 1999 the Company began incurring costs to develop its
Internet Exchange. Costs incurred primarily are the salary and other wage and
benefit costs of the Company's employees involved in recruiting the network of
healthcare providers.
15
Selling, General and Administrative Expenses
SG&A expense increased $53,000 or 4% in fiscal year 2000 compared to
fiscal year 1999 primarily due to startup development fees payable to WebMD
Corp.
Other Income (Expense)
Interest Income. Interest income increased $88,000 in fiscal year 2000
primarily due to short-term investment of cash balances and to notes receivable
from employees and officers of the Company. No such investments or notes
receivable existed in fiscal year 1999.
Interest Expense. Interest expense increased $2,370,000 in fiscal year
2000 compared to fiscal year 1999 due to the benefit accruing to the note
holders from amending the conversion terms of the $1,000,000 convertible note.
See "Liquidity and Capital Resources."
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 2000, the Company had a net
operating loss carryforward for federal and state income tax purposes of $30
million and $13 million, respectively. The federal net operating loss
carryforward expires in the years 2006 through 2019 and the state net operating
loss carryforward expires in 2000 through 2005. In connection with the Company's
initial public offering, a change of ownership (as defined in Section 382 of the
Internal Revenue Code of 1986, as amended) occurred. As a result, the Company's
net operating loss carryforwards generated through August 10, 1992 are subject
to an annual limitation of approximately $300,000.
In 1993, a controlling interest of the Company's stock was purchased,
resulting in a second annual limitation of approximately $398,000 on the
Company's ability to utilize net operating loss carryforwards generated between
August 11, 1992, and September 13, 1993. The Company expects that the
aforementioned annual limitations will result in $4.5 million of net operating
loss carryovers, which will not be utilized prior to the expiration of the
carryover period.
Net Loss
Net loss increased to $4,815,641 in fiscal year 2000 from $716,747 in
fiscal year 1999 primarily due to product development costs of the Company's
Internet Exchange and increased interest expense.
Basic and Diluted Net Loss Per Share
The Company's net loss per share has been computed by dividing net loss
after deducting preferred stock dividends ($122,500 in each of the fiscal years
2000 and 1999) by the weighted average number of shares of common stock
outstanding during the periods presented. Common stock issuable upon conversion
of preferred stock, common stock options and common stock warrants have been
excluded from the diluted net loss per share calculations, as their inclusion
would be antidilutive. Net loss per share increased as a result of a greater
loss partially offset by a greater weighted average number of shares in fiscal
year 2000 compared to fiscal year 1999.
16
Year ended June 30, 1999 compared to year ended June 30, 1998
Contract Programming
The Company's results of operations were impacted, during the last half
of fiscal 1999, by customers moving toward utilizing individual programmers or
small (2 to 4 people) programming teams rather than large programming teams and
several customers choosing to exercise a contract provision which allowed them
to convert the Company's programmers to their employees. As a result, when
contracts with several customers approached their termination date, they were
either not renewed, renewed for a fewer number of programmers, or programmers
converted to customer employees. Therefore, in the last half of fiscal 1999, the
monthly average number of programmers at customer sites dropped to 70 from the
93 monthly average in the first half of fiscal 1999 and 88 in the last half of
fiscal 1998; and the number of programmers pending a customer assignment
increased to a monthly average of 13 in the second half of fiscal 1999 from the
3 monthly average in the first half of fiscal 1999 and the last half of fiscal
1998. Although the gross margin (excluding contract termination fees) for the
second half of fiscal 1999 was only 7.7%, it was 15.9% in the first half of
fiscal 1999, and 12.3% for the full fiscal year 1999 compared to 10.1% for
fiscal 1998.
Contract Programming Revenue. Contract programming revenue results from
sales of programmer services. Revenues increased $1,090,000 or 21% in fiscal
1999 compared to fiscal 1998. This increase was due to a 12% increase in the
number of programmers in fiscal 1999 compared to fiscal 1998 and due to billing
rate increases during fiscal 1999.
Contract Termination Fees. Contract termination fees are amounts
received from customers when they exercise the contract provision to convert the
Company's programmer to their employee. In addition, these fees can also be
received from programmers when they exercise their contract provision to
terminate their relationship with the Company prior to the termination date of
their contract. These fee amounts are stipulated in customer and programmer
contracts, are based on the length of time remaining under the contract, and are
recognized as revenue when such contract provisions are invoked. Although
contract termination fees are common in the industry, the number and frequency
of exercises of the "buyout" provisions is unpredictable.
Programmer Costs. Programmer costs are the salary and other wage and
benefit costs of the Company's programmer employees. These costs increased
$653,000, or 17% in fiscal 1999 compared to fiscal 1998. This increase is due to
the 12% increase in the number of programmers and to increasing salaries for
more experienced programmers.
Start-up and Other Costs. Startup and other costs are the costs of
recruiting, training, and travel for programmer employees coming to the United
States 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.
Included in this category of costs is employee compensation paid by the
Company whenever programmer employees are hired and enter the United States or
are relocated once in the United States but before these programmers begin
working at a customer's work site. There are times when under immigration law,
the Company, as employer, must pay a programmer employee at least 95% of
prevailing wages for his or her specialty even when the programmer is not
placed.
The Company expenses startup and other costs as incurred, which results
in timing differences between the incurring of expense and recognition of
resulting revenue. Such differences may be particularly evident in the Company's
case because of its relatively small revenue base and because of its growth. The
17
effect may be particularly noticeable whenever the timing of placement of
employees is such that the major startup costs occur late in one reporting
period and programmers begin to generate revenue in subsequent periods.
Start-up and other costs increased $190,000 or 22% in fiscal 1999
compared to fiscal 1998. This increase is due to an increase in the number of
programmers in the United States who were not working at customer sites. In
fiscal 1999 there was an average of 8 programmers per month temporarily
unassigned compared to approximately 3 in fiscal 1998.
Contract Programming Gross Profit. The gross profit percentage was 16%
for fiscal 1999 compared to 10% for fiscal 1998. Gross profit margin increased
due to the $253,000 in contract termination fees received in fiscal 1999. The
remaining difference is primarily due to billing rate increases exceeding
programmer salary increases.
Selling, General and Administrative Expenses
SG&A expense decreased to $113,000 or 8% in fiscal 1999 compared to
fiscal 1998 primarily due to a decrease in noncash employee compensation related
to stock grants to Mr. W. Robert Keen.
Other Income (Expense)
Interest Expense. Interest expense increased $86,000 in fiscal 1999
compared to fiscal 1998 due to a net increase in notes payable and other debt
over the last two years of $1,500,000.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 1999, the Company had a net
operating loss carryforward for federal and state income tax purposes of $25
million and $5 million, respectively. The federal net operating loss
carryforward expires in the years 2006 through 2018 and the state net operating
loss carryforward expires in 1999 through 2004. In connection with the Company's
initial public offering, a change of ownership (as defined in Section 382 of the
Internal Revenue Code of 1986, as amended) occurred. As a result, the Company's
net operating loss carryforwards generated through August 10, 1992 are subject
to an annual limitation of $300,000.
In 1993, a controlling interest of the Company's stock was purchased,
resulting in a second annual limitation of $398,000 on the Company's ability to
utilize net operating loss carryforwards generated between August 11, 1992, and
September 13, 1993. The Company expects that the aforementioned annual
limitations will result in $4.1 million of net operating loss carryovers, which
may not be utilized prior to the expiration of the carryover period.
Net Loss
Net loss decreased to $716,747 in fiscal 1999 from $1,243,944 in fiscal
1998 due to a greater gross margin and lower SG&A, offset by higher interest
expense.
Basic and Diluted Net Loss Per Share
The Company's net loss per share has been computed by dividing net loss
after deducting preferred stock dividends ($122,500 in each of the fiscal years
1999 and 1998) by the weighted average number of shares of common stock
outstanding during the periods presented. Common stock issuable upon conversion
18
of preferred stock, common stock options and common stock warrants have been
excluded from the net loss per share calculations, as their inclusion would be
antidilutive. Net loss per share decreased as a result of a smaller loss and
only a slightly greater weighted average number of shares in fiscal 1999
compared to fiscal 1998.
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 $43,839,849 at September 30, 2000.
The Company has received short-term, unsecured financing to fund its
operations in the form of notes payable of $3,567,424 as of June 30, 2000, 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 April 21, 1997, the Company issued an unsecured note payable (the
"Straight Note") to Mr. Cameron for $1,000,000 in accordance with the
Reimbursement 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 the Company'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.
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 nonrenewal 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 $2.4 million and was recorded as additional interest
expense in the quarter ended September 30, 1999.
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 the Company's common stock. All other Straight Note holders
also 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 during fiscal 2000.
19
The Company received $3,712,348 in private sales of its common stock at
an average price of $3.42 per share during fiscal year 2000.
The Company's Internet Exchange development efforts will require
substantial funds prior to generating revenues. 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 $10 million of its common
stock at $3.00 per share. Proceeds net of offering costs were approximately $9.6
million. The proceeds from the private placement will be used to develop the
Company's proposed Internet Exchange and are expected to be sufficient to meet
the Company's working capital needs through at least this fiscal year. 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 approximately
$1,458,000 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
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 $317,000 in compensation expense and $862,000 in preferred stock
dividends.
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 2001. However, there can be no assurance that this plan
will be successfully implemented.
Effects of Inflation
Management does not expect inflation to have a material effect on the
Company's operating expenses.
Quantitative and Qualitative Disclosures About Market Risk
The Company has long-term debt in the aggregate amount of $3,800,450 as
of September 30, 2000 payable to two stockholders of the Company. The debt bears
interest at 10.25% per annum and is due December 31, 2001. The Company does not
believe that any change in interest rates will have a material impact on the
Company during fiscal 2001. Further, the Company has no foreign operations and
therefore is not subject to foreign currency fluctuations.
20
DESCRIPTION OF BUSINESS
General
Alternative Technology Resources is in the early stages of constructing
an Internet Exchange for healthcare services called "DoctorAndPatient.com." The
Company has contracted with, and is currently recruiting additional, medical
doctors, medical groups, hospitals and other health care practitioners
(collectively, "Providers") to offer their services, on a nonexclusive basis, to
individuals and others who purchase or facilitate the purchase of health care
services ("Purchasers"). The Company is recruiting these Providers through its
employees located in twenty-two cities in the United States. The Company is also
evaluating potential technology vendors and developing a proof of concept, which
it believes it will test in the current year. The purpose of the Internet
Exchange is to utilize the Internet and other technologies to provide
administrative, billing and repricing services, as well as a direct and
efficient connection between Providers and Purchasers.
The Company will not provide health care services, but rather expects
to act as an intermediary between Providers and Purchasers that should benefit
both parties. The Company 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 allow
Providers to recover more of what they bill.
History
Alternative Technology Resources, Inc. was founded as 3Net Systems,
Inc. in 1989 to develop and sell medical laboratory information systems. In
1996, the Company began to focus on the business of recruiting, hiring, training
and placing foreign computer programmers with U.S. companies and soon changed
its name to Alternative Technology Resources, Inc.
In August 1999, James W. Cameron, Jr., the Company's largest
stockholder, was named Chairman and Chief Executive Officer. Under his direction
the Company identified what it believes to be a significant business opportunity
and began developing a business model involving the establishment of an Internet
Exchange for healthcare services under the name "DoctorAndPatient." In line with
its business strategy to focus on the establishment of an Internet Exchange, the
Company suspended recruitment for the contract programming division in December
1999 and is pursuing the conversion of computer programmers to become the
customers' employees.
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 Bostonbased 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 will be responsible
for all phases of development, implementation and operation of the Company's
Internet Exchange. Mr. Cameron still acts as Chairman and expects to continue to
play an active and substantial role in formulating the Company's business
strategy and policy. The Company will use its management's experience in health
care and information technology to establish the Internet Exchange, which has
become the Company's primary focus. At present, the Company is in the early
stages of developing the Internet Exchange.
The Company will not provide health care services, but rather expects
to act as an intermediary between Providers and Purchasers that should benefit
both. The Company 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,
21
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.
Overview of the Industry
According to the Healthcare Financing Administration ("HCFA"), in 1998,
health care in the United States was a $1.149 trillion dollar industry, which
accounted for approximately 13.5% of gross domestic product. The industry is
characterized by extremely complex decisionmaking, high fragmentation, high
barriers to entry, rising costs and slow adoption and incorporation of many
information technologies. The health care 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
myriad 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. The Company believes that there are gaps and
inefficiencies in the purchasing process and in billing and claims processing
systems creating a key business opportunity for an Internet Exchange.
In its simplest form, health care can be described as the demand for
services by individuals ("Patients") and the supply of services by Providers,
which include medical doctors, hospitals, physical therapists and other health
practitioners. Providers often form groups and practice associations. Purchasers
include Patients and various forms of third parties, such as HMO's, insurance
companies, Medicare, Medicaid and selfinsured employers, that act as purchaser
and Payor for services provided to Patients (collectively, "ThirdParty Payors").
In most instances, Patients are members of a health service purchasing
group or pool commonly offered by ThirdParty Payors. The members' health
coverage is described in a plan that spells out what care is fully, partially or
not covered, rules relating to payment and deductibles, selection of Providers,
use of specialists, required permissions, exclusions and so on. In these
circumstances, Patients rarely pay Providers directly except for copayments and
deductibles that represent only a fraction of the total bill.
ThirdParty Payors pay Providers generally after considerable delay.
Provider bills are reviewed by Purchasers and their managed care companies to
verify Patient's eligibility, plan group membership, compliance with treatment
and billing format and rules, and other plan provisions. The Provider's bill
often is adjusted for violations and errors. Providers, like their Patients,
often do not understand many health plans and may accept incorrect payment
lowered by reductions they do not understand.
There are a large number of variations of the above
PatientProviderThirdParty Payor relationship - such as HMOs, PPOs, Medicare,
Medicare enrolled HMOs, Medicaid - all of which involve some combination or
redistribution of some of the functions described.
In a cash model, the Patient will pay the Provider directly. For many
Americans, this simple cash model is the only one possible for all or much of
their care. In many cases, these individuals may have the financial wherewithal
to pay for many health services. However, Providers generally do not have the
time, inclination or capability to seek out these cash Patients.
Relationship to the Provider
The Company is developing the Internet Exchange for contracted
Providers (including Provider groups) to market their services to Purchasers
more efficiently. In addition, the Company believes eliminating costs and delays
in the billing process should allow Providers to recover more of what they bill.
In the United States, there are approximately 750,000 medical doctors, 6,000
hospitals, 539,000 licensed ancillary Providers (such as chiropractors,
optometrists, physical therapists and physician assistants) and various
22
suppliers (such as pharmacies, durable medical equipment suppliers, and
transportation). The Company is currently marketing to and entering into
contracts with Providers. A transaction-processing fee will be added to bills
received from Providers and routed to Purchasers or their intermediaries.
Each Provider will be responsible for keeping information about its
services on the Company's Internet Exchange up to date.
Relationship to ThirdParty Payors
The Company intends to integrate the Internet Exchange with billpricing
software so as to add efficiencies to the purchasing and processing function. We
will make these additional services available to ThirdParty Payors on a
contractual basis. Third Party Payors will contract with us in order to receive
Providers' offered rates, and in order to lower their costs by receiving bills
electronically and prepriced. The goal of this system is to introduce additional
cost certainty and to streamline the billing and payment process. We will
receive a fee for transactions on our Internet Exchange. ThirdParty Payors will
be contractually required to pay timely and according to rates on our Internet
Exchange in order to receive the benefit of reduced rates from Providers.
However, we have not yet reached the critical mass of Providers we believe will
be required to commence entering into these contractual relationships with
ThirdParty Payors.
The revenue models for ThirdParty Payors will vary depending on the
nature of the Payor and on our negotiated contractual arrangements.
Relationship to Individual Uninsured and Under Insured Purchasers
According to a 1998 U.S. Census Bureau Estimate, in the United States
today, more than 44.3 million people have no medical plan or insurance coverage.
Many more have no or inadequate coverage for anything but catastrophic care,
being mainly without coverage for anything but a medical disaster requiring
hospitalization. Most plans exclude many types of treatment. Our Internet
Exchange is being developed to facilitate the provision of health services by
Providers at favorable rates to interested individual uninsured or under insured
Patients.
In September 1999, the Company entered into an agreement with WebMD
Corp. to develop a webbased portal through which Patients can procure health
services. Through this portal, a Patient will be able to view Provider offerings
and search detailed profile information for Providers that meet his or her
particular needs and preferences. Patients will pay a fee for access to
Providers. We will notify the Providers and forward information obtained from
the individual. The Provider and Patient will thus be connected and can make
arrangements for care on a schedule that suits them. The Company and WebMD Corp.
are currently evaluating the status of this project.
Competition
The Company's Internet Exchange will compete with established preferred
provider organizations, integrated delivery systems and health plans and other
companies offering "discount plans" to potential customers, including
established and new Internet companies. 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 the
Company's business and operating results. The Company's success depends on the
ability to market the Internet Exchange to potential Providers and third party
and individual Payors and their agents. The Company believes that the principal
competitive factors in this market are health and managed care expertise, data
23
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. Competition is expected to increase in the future.
As a new participant in the health care industry, the Company's
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources and significantly greater
name recognition. In addition, many of the Company's competitors have
wellestablished relationships with the Company's current and potential customers
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 Payor needs. These competitors may seek and obtain business method
patents on portions of or all their operations, which could effectively preclude
the Company from competing with the most efficient model. Also, other companies
may implement a similar Internet strategy. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Government Regulation
The Company's operations are subject to various federal and state laws.
The Company believes that its operations currently comply with such laws, but
there can be no assurance that subsequent laws, or subsequent changes in current
laws or legal interpretations, will not adversely affect the Company's
operations.
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 the Company's 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 the Company's databases. If these laws
are extended to cover the Company's business, the Company may be required to
expend additional resources in order to comply with these laws, including
changes to the Company's security practices, and may be exposed to greater
liability in the event of failure to comply with these laws.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") mandates the use by health plans of standard transactions,
identifiers, security and other provisions. The Company plans to design its
products and services to comply with HIPAA, but any change in federal standards
would require the Company to expend additional resources. Finally, the Federal
Trade Commission has become very active in investigating privacy issues on the
Internet within its jurisdiction over unfair and deceptive trade practices.
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 customer 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 the Company's Internet 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. In addition, the Company's relationships with
ThirdParty Payors may require licensing or certifications in some states. Also,
although the Company does not currently anticipate entering the Medicare or
state Medicaid markets, similar federal regulations could adversely impact the
business. Because the ecommerce business is relatively new to the provider
network industry, the impact of current or future regulations is difficult to
anticipate.
In November 1999, the California Department of Corporations, Health
Enforcement Division, announced that it is taking enforcement action against
discount health benefit card plans conducting operations in California in
violation of the Health Care Service Plan Act of 1975 (the "HCSP Act"). If it
24
determines that a particular plan falls under its jurisdiction, the Department
can issue a cease and desist order to require the plan to halt its unlawful
practices, violations of which can lead to monetary penalties. In October 1999,
the Department issued the Company a subpoena with respect to documents relating
to the Company's relationship with WebMD Corp. and the potential of being a
health care service plan under the Department's jurisdiction. The Company has
responded to this subpoena. While the Company does not believe its Internet
Exchange is within the scope of the HCSP Act, the Department may continue to
require compliance with the HCSP Act, which would require substantial changes in
the Company's business model. Legislation is being proposed in California to
impose minimal licensing requirements on discount plans. The Company cannot
predict whether this legislation will pass or whether it will ultimately apply
to the Company. As the Company develops a business plan, compliance with or
prohibitions by state regulations could delay or eliminate certain aspects of
the Company's business or force the Company to modify its business, which could
have a material adverse impact the Company's business and prospects. As of
November 30, 2000, the Department has not requested additional information from
the Company.
In connection with its program placing foreign computer programmers
into U.S. companies, the Company must comply with the laws and regulations of
the U.S. Immigration and Naturalization Service (INS). Further, as previously
disclosed, Alternative Technology Resources is in the process of converting its
remaining programming employees to its customers' employees. While the Company
has engaged an immigration lawyer to interpret INS rules and regulations, there
can be no assurance that the immigration laws of the United States will prevent
the Company from converting the remaining programming employees to customer
employees.
Legal Proceedings
The Company is not currently a party to any pending legal proceedings.
Human Resources
At November 30, 2000, the Company had 49 employees, consisting of 24
employees located at the Company's headquarters in Sacramento, 3 foreign
computer programmer employees located at customer locations, and 22 employees in
satellite offices in 15 states, including California. This includes Provider
Development staff of 33 that is recruiting medical providers for contracting in
35 markets in 27 states for the Internet Exchange.
Description of Property
The Company's headquarters are located in Sacramento, California. The
Company occupies approximately 5,200 square feet of office space, which it
leases from Mr. James W. Cameron, Jr., the Company's Chairman of the Board and
majority stockholder, for a monthly rent of $11,434. A February 1, 2000 addendum
to the lease extended the expiration of the lease to January 1, 2004.
In addition, the Company has assumed a lease on approximately 2,340
square feet of office space in Portsmith, New Hampshire for a monthly rent of
$3,263 commencing December 1, 2000 through May 31, 2003.
25
MANAGEMENT
Directors and Executive Officers
The following table lists our current directors and executive officers
as of November 30, 2000:
Name Age Position
---------------------- ------ ----------------------------------------------
James W. Cameron, Jr. 52 Chairman of the Board, Chief Financial Officer
Jeffrey S. McCormick 39 Director, Chief Executive Officer
Edward L. Lammerding 71 Director
Thomas W. O'Neil, Jr. 71 Director
James W. Cameron, Jr., 52, has served as our Chairman of our Board of
Directors since August 1999 and Chief Financial Officer since November 2000. Mr.
Cameron also currently serves as the Chief Executive Officer of Cameron and
Associates, a company he founded in 1992. From 1982 through 1992, Mr. Cameron
was the Chief Executive Officer and Chairman of the Board of Occupational Urgent
Care Health Systems, Inc., a publiclytraded company he founded that, when sold
to First Health Group Corp. in 1992, had a market capitalization of $400
million. (Subsequent to the sale, Mr. Cameron served as a director on the Board
of First Health Group.)
Jeffrey S. McCormick, 39, has served as our Chief Executive Officer
since February 2000. In November 2000, he was elected director. For at least the
previous five years, Mr. McCormick served as the Founder and Managing Director
of Saturn Asset Management, Inc., and its affiliates, a Boston based venture
capital and private equity firm which predominantly focuses on healthcare,
electronic commerce, digital media and telecommunications. Mr. McCormick
identifies, researches, and capitalizes emerging growth companies, and works
extensively with management teams on strategic partnerships, capitalization,
strategy and recruiting senior personnel. He currently sits on the Board of
Directors of Saturn and MediaSite, Inc., a Saturn portfolio company.
Edward L. Lammerding, 71, is a Director of the Company since November
1993 and served as Chief Financial Officer from 1995 to November 2000. Mr.
Lammerding was the Chairman of the Board of Alternative Technology Resources
from 1995 to 1999, President of Sierra Resources Corporation from 1982 to 1996;
Chairman of the Board of Digital Power Corporation from 1989 to 1998. Mr.
Lammerding is a former member of the California Lottery Commission; a member of
the St. Mary's College Board of Trustees and was a Director and Secretary of
OUCH from September 1983 to February 1992.
Thomas W. O'Neil, Jr., 71, is a Director of the Company and has been
since November 1995. Mr. O'Neil is a Certified Public Accountant and a Partner
at Schultze and O'Neil, CPA's since April 1991. He has been a director of
Digital Power Corporation since 1991 and is a Retired Partner from KPMG Peat
Marwick where he worked from 1955 to 1991. Also, he served as Chairman of the
Board of Directors of the California Exposition and State Fair and serves as
Director, Regional Credit Association and is a member of the St. Mary's College
Board of Regents.
26
Family Relationships.
There are no family relationships between any of the directors or
executive officers.
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table contains information regarding compensation paid
with respect to the three preceding fiscal years to the Company's Chief
Executive Officer and each other executive officer whose salary and bonus
exceeded $100,000 (the "Named Executives" for the fiscal year ended June 30,
2000):
Long-Term Compensation
Annual Compensation Awards
------------------------------------------------------ --------------------------------
Other Securities All Other
Fiscal Annual Underlying Compensation
Name Year Salary ($) Bonus Compensation Options/SARs# and LTIP
--------------------------- ------- ----------- ------ ----------------- ---------------- -------------
James W. Cameron, Jr. (1) 2000 None None $ 90,000(2) 25,000(3) None
Jeffrey S. McCormick (4) 2000 $ 25,000 None None 7,000,000(5) None
George R. Van Derven (6) 2000 $ 112,500 None None 25,000(7) None
1999 $ 151,735 None None None None
1998 $ 150,000 None None None None
-------------------
(1) Mr. Cameron served as Chief Executive Officer from August 1999 until
February 2000.
(2) Amounts were paid to Cameron and Associates for providing consulting
services to the Company.
(3) On January 3, 2000, the Company granted to Mr. Cameron an option to
purchase 25,000 shares of common stock at $4.44 per share.
(4) Mr. McCormick was named Chief Executive Officer of the Company on February
17, 2000. See "Employment Agreement with Jeffrey S. McCormick."
(5) On April 14, 2000 the Company granted to Mr. McCormick a non-qualified
option to purchase 7,000,000 shares of common stock at $3.00, the closing
price per share of the Company's common stock as of the date of the
employment agreement.
(6) Mr. Van Derven served as President until October 1999
(7) On August 19, 1999, the Company granted to Mr. Van Derven an option to
purchase 25,000 shares of common stock at $0.25 per share. These options
were forfeited (in accordance with terms of the stock option plan) 90 days
following termination of his employment with the Company.
27
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options
granted during fiscal year ended June 30, 2000.
Potential Realized Value at
% of Total Assumed Annual Rates of
Options Stock Price Appreciation for
Granted to Exercise Option Term
Options/SARs Employees in Price per Expiration ------------------------------
Granted # Fiscal Year Share Date 5% 10%
-------------- -------------- --------- ------------ -------------- --------------
James W. Cameron, Jr. 25,000 0.32% $4.44 1/2/2010 $ 69,807 $ 176,905
Jeffrey S. McCormick 7,000,000 88.83% $3.00 4/14/2010 $ 13,206,787 $ 33,468,592
George R. Van Derven 25,000 0.32% $0.25 6/30/2000(1) N/A N/A
-------------------------
(1) On August 19, 1999, the Company granted Mr. Van Derven an option to
purchase 25,000 shares of common stock at $0.25 per share. These options
were forfeited (in accordance with terms of the stock option plan) 90 days
following termination of his employment with the Company.
The exercise price of each option was equal to the fair market value of
our common stock on the date of the grant. Percentages shown under "Percent of
Total Options Granted to Employees in the Last Fiscal Year" are based on an
aggregate of 7,880,000 options granted to our employees under the 1997 Stock
Option Plan and outside of this plan during the year ended June 30, 2000.
Potential realizable value is based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the date
of grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Potential realizable values
are computed by:
o Multiplying the number of shares of common stock subject to a given option
by the exercise price.
o Assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
ten-year term of the option, and
Subtraction from that result the aggregate option exercise price.
FISCAL YEAR END OPTION VALUES
The following table sets forth for each of the executive officers named
in the Summary Compensation Table the number and value of exercisable and
unexercisable options and SARs at fiscal year end:
28
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs In-The-Money Options/SARs
Shares At June 30, 2000 At June 30, 2000
Acquired on Value ----------------------------- --------------------------------
Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------- ------------ ----------- -------------- ------------- ----------------
James W. Cameron, Jr. None None 25,000 None $ 8,525 None
Jeffrey s. McCormick None None None 7,000,000 None $ 12,467,000
George R. Van Derven 87,500 $ 322,028 None None N/A N/A
--------------------------
Amounts shown under the column "Value of Unexercised In-The-Money
Options at June 30, 2000," represent the difference between the trading price of
a share of common stock underlying the options at June 30, 2000, of $4.78 per
share (the closing price on June 30, 2000, as reported by the OTC Bulletin
Board) less the corresponding exercise price of such options.
Compensation of Directors
Directors do not receive compensation for serving as such; however,
each Director who is not an employee of the Company can be granted annual stock
options under the Company's 1997 Stock Option/Stock Issuance Plan. Messrs.
Cameron, Lammerding and O'Neil were granted options to purchase 25,000 shares of
the Company's common stock at an exercise price equal to the fair market value
on the date of grant in January 2000 for their services during fiscal year 2000.
Employment Agreement
In April 2000, we entered into an employment agreement with Mr.
McCormick to become our Chief Executive Officer effective February 17, 2000.
Beginning July 1, 2000 and for the remaining term of Mr. McCormick's employment,
the Board shall nominate him to serve as a Director of the Company. The initial
term of the agreement is 5 years, automatically continuing for successive terms
of one year unless terminated by either party by written notice at least 30 days
prior to the end of the initial or any succeeding terms. The agreement
established Mr. McCormick's initial annual base salary at $150,000 per year
beginning May 1, 2000 and provided for a grant to Mr. McCormick of a
non-qualified stock option to purchase up to 7,000,000 shares of the Company's
common stock at an exercise price of $3.00 (the fair market value of the
Company's common stock on the date of grant.)
The option vests ratably over 5 years and expires on April 14, 2010.
The agreement provides that vesting shall accelerate and the option become 100%
vested upon: death of Mr. McCormick, a change of control of the Company, a
change of a majority of the current Board of Directors during the term of his
employment, or a termination by Mr. McCormick for a "good reason" or termination
by the Company without "cause." "Piggy-back" registrations rights are applicable
to all option stock issued to Mr. McCormick, including stock related to a
6,000,000 option from Mr. Cameron to Mr. McCormick. The agreement provides that
in the event Mr. McCormick terminates for a "good reason" or is terminated
without "cause," he shall receive an amount equal to 18 months of his base
salary, at the rate then in effect, to be paid in a lump sum no later than 30
days following termination, and he shall continue to receive fringe benefits as
in effect at the time of termination for 18 months following such termination.
29
In addition he shall also receive any bonus amount, or pro rata share of any
bonus amount that may have been awarded to him as the compensation committee of
the Board, in its sole discretion, may have authorized as a bonus.
1993 and 1997 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. Upon stockholder approval of the 1997 Stock Option Plan (the "1997
Plan"), the Board of Directors terminated the 1993 Plan, which termination shall
not alter the vesting provisions or any other term or condition of any option
granted prior to the termination of the 1993 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 may be issued over the
five-year term of the 1997 Plan. Subject to the oversight and review of the
Board of Directors, the 1997 Plan shall generally be administered by the
Company's Compensation Committee consisting of at least two non-employee
directors as appointed by the Board of Directors. 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 1997 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.
During fiscal 2000, the Company granted options to purchase shares of
common stock to Messrs. Cameron, Keen and Van Derven under the 1997 Plan (see
table of "Option/SAR Grants in Last Fiscal Year"). As of June 30, 2000,
approximately 1,840,000 shares are available under the 1997 Plan for grant.
Limitation of Liability and Indemnification
Section 145 of the General Corporation Law of the State of Delaware
empowers a corporation to indemnify its directors, officers, employees and
agents under certain circumstances. Article Seventh of the Company's Amended and
Restated Certificate of Incorporation provides that the Company shall indemnify
to the fullest extent permitted by Section 145 of the General Corporation Law of
the State of Delaware, as amended from time to time, all persons whom it may
indemnify pursuant thereto. Article Sixth of the Amended and Restated
Certificate of Incorporation further provides that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director; provided, however, that
such clause shall not apply to any liability of a director (1) for any breach of
the director's duty of loyalty to the Company or its stockholders, (2) for acts
or omissions that are not in good faith or involve intentional misconduct or a
knowing violation of the law, (3) under Section 174 of the General Corporation
Law of the State of Delaware, or (4) for any transaction from which the director
derived an improper personal benefit.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Alternative Technology Resources, we have been informed that in the opinion of
the Securities and Exchange Commission, indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
30
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as to (i) the
persons or entities known to the Company to be beneficial owners of more than 5%
of the Company's common stock as of November 30, 2000, (ii) all directors of the
Company, and (iii) all directors and executive officers of the Company as a
group.
Common Stock
---------------------------------
Name of Beneficial Owner Number of Shares Percent
--------------------------------------- ----------------- --------
James W. Cameron, Jr. 39,437,784 (1) 66.5%
629 J Street
Sacramento, CA 95814
Jeffrey S. McCormick 15,650,334 (2) 23.6%
629 J Street
Sacramento, CA 95814
Edward L. Lammerding 30,000 (3) *
Thomas W. O'Neil, Jr. 81,050 (3) *
All directors and executive officers 49,198,118 (4) 81.7%
As a group (4 persons)
----------------------
* Less than 1.0%.
(1) Includes 25,000 shares issuable upon exercise of options. Also includes
6,000,000 shares optioned to Mr. McCormick and immediately exercisable.
(2) Includes 7,000,000 shares issuable upon exercise of options, all of which
are subject to vesting, includes 6,000,000 shares under option from Mr.
Cameron and immediately exercisable, and 1,699,667 shares held by entities
in which Mr. McCormick may be deemed to be in control.
(3) Includes 30,000 shares issuable upon exercise of options.
(4) Includes 7,085,000 shares issuable upon exercise of options.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all or none of their
common shares on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling common shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
31
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any of the above methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in securities of ours or derivatives
of our securities and may sell or deliver common shares in connection with these
trades. The selling stockholders may pledge their common shares to their brokers
under the margin provisions of customer agreements. If a selling stockholder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged common shares.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of common shares, from the purchaser) in amounts
to be negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the common shares may be deemed to be "underwriters" within
the meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the common shares, including fees and disbursements of counsel
to the selling stockholders. We have agreed to indemnify certain of the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
32
SELLING SHAREHOLDERS
The following table identifies the selling stockholders, as of November
30, 2000, and indicates certain information known to us with respect to (i) the
number of common shares beneficially owned by the selling stockholder, (ii) the
number of common shares to be offered for the selling stockholders' account, and
(iii) the number of common shares and percentage of outstanding common shares to
be beneficially owned by the selling stockholders after the sale of the common
shares offered by the selling stockholders. The term "beneficially owned" means
common shares owned or that may be acquired within 60 days. The number of common
shares outstanding as of November 30, 2000, was 59,351,577. The selling
stockholders may sell some, all, or none of their common shares.
Shares Beneficially Owned Shares to be Shares Beneficially
Prior to Offering Offered Owned After Offering
----------------------------- ------------------ -------------------------
Name of Shareholder Number Percentage Number Number Percentage
---------------------------------------------- --------------- ---------- ------------------ ------------ ----------
Cameron, James W., Jr.
Director 39,437,784(1) 66.4% 6,000,000 33,437,784 56.3%
McCormick, Jeffrey S.
Director 15,652,134(2) 23.5% 6,285,800(3) 9,366,334 14.0%
Aitken, Steven R. & Aitken, Nancy A. 6,667 * 6,667 0 0
Antonio, Susan M.N. 17,333 * 17,333 0 0
Brewin, Lisa A. 1,800 * 1,800 0 0
Buckner, Jeff 496,657 * 496,657 0 0
Cafarella, John A. & Cafarella, Allison R. 6,667 * 6,667 0 0
Cameron, Clark H. 2,040,853(4) 3.4% 2,040,853(4) 0 0
Cameron, Jason D. 30,013 * 30,013 0 0
Cameron, Robert W. 30,013 * 30,013 0 0
Castillo, Alice 116,043 * 116,043 0 0
Conner, Terry L. 200,085 * 200,085 0 0
Desko, John T. & Desko, Cynthia K. 13,333 * 13,333 0 0
Edelstein, David A. 2,000,853 3.8% 2,000,853 0 0
Favero, Roger 1,000,426 1.7% 1,000,426 0 0
Finlayson, Ronald J. 1,800 * 1,800 0 0
Garcia, Robert 23,977 * 23,977 0 0
Gerhard, Lang H. 166,667 * 166,667 0 0
Godsey, Dirk 200,085 * 200,085 0 0
Gradie, Phillip E. & Gradie, Grace M. 6,667 * 6,667 0 0
Haber, William M. 20,000 * 20,000 0 0
Heller, Irwin M. 33,333 * 33,333 0 0
Hoke, Barbara A. & Hoke, Thomas A. 5,000 * 5,000 0 0
33
Shares Beneficially Owned Shares to be Shares Beneficially
Prior to Offering Offered Owned After Offering
----------------------------- ------------------ -------------------------
Name of Shareholder Number Percentage Number Number Percentage
---------------------------------------------- --------------- ---------- ------------------ ------------ ----------
Jackson, Virginia 400 * 400 0 0
Jergens, Kathryn 20,000 * 20,000 0 0
Keen, W. Robert 902,414 (5) 1.5% 527,414 375,000(5) *
Keen, Walter B. & Keen, Marsha B. Trust 221,500 * 221,500 0 0
Lynch, Kevin 1,800 * 1,800 0 0
Lyustiger, Nikolai S. 266,667 * 266,667 0 0
Maher, Daniel 8,333 * 8,333 0 0
Max Negri Trust, The 3,013,832(6) 4.9% 3,013,832(6) 0 0
McBirney, Jennifer F. 1,800 * 1,800 0 0
McCormick, Bryan Casey 33,333 * 33,333 0 0
McCormick, Colleen 33,333 * 33,333 0 0
McCormick, James G. &
McCormick, Ellen J. 33,333 * 33,333 0 0
Mintz Levin Investments LLC 33,333 * 33,333 0 0
Negri Foundation 108,101(7) * 108,101(7) 0 0
O'Hara, Kevin P. & O'Hara, Tracy S. 5,000 * 5,000 0 0
O'Hara, Patrick E. &
O'Hara, Bernadette M. 5,000 * 5,000 0 0
Oliphint, Greg 30,013 * 30,013 0 0
Oliphint, Kim 100,043 * 100,043 0 0
Ramsdell, Robert 494,200(8) * 494,200(8) 0 0
Ramsdell Family Trust 100,000 * 100,000 0 0
Ramsdell Irrevocable Trust 130,814 * 130,814 0 0
Ramsdell, W. Robert &
Ramsdell, Marjorie F., Trust 275,128 * 275,128 0 0
Ramsdell, Wallis Naomi 5,000 * 5,000 0 0
Roach, Michael & Roach, Karen M. 6,667 * 6,667 0 0
Runnels, G. Tyler 185,085 * 185,085 0 0
Saponaro, Charles F. 1,800 * 1,800 0 0
Saturn Asset Management Trust 34,800(9) * 34,800(9) 0 0
Saturn Partners Limited Partners 1,666,667(9) 2.8% 1,666,667(9) 0 0
Savard, Mary Foreman 1,800 * 1,800 0 0
34
Shares Beneficially Owned Shares to be Shares Beneficially
Prior to Offering Offered Owned After Offering
----------------------------- ------------------ -------------------------
Name of Shareholder Number Percentage Number Number Percentage
---------------------------------------------- --------------- ---------- ------------------ ------------ ----------
Shaw, John 133,333 * 133,333 0 0
Smith, Carole S. 75,032 * 75,032 0 0
Stewart, Shirley F. Revocable Trust 284 * 284 0 0
Story, Colleen 100,043 * 100,043 0 0
Thomson, Stewart W. 175,000 * 175,000 0 0
Totino, Dante Francis 5,000 * 5,000 0 0
Totino, Stella Rochelle 5,000 * 5,000 0 0
Weinstein, David 10,000 * 10,000 0 0
Wojewoda, Irena 30,013 * 30,013 0 0
Young, John Sacret 20,000 * 20,000 0 0
Footnotes to Table
* Less than one percent
(1) Includes 25,000 shares issuable upon exercise of options. Also includes
6,000,000 shares optioned to Mr. McCormick and immediately exercisable.
(2) Includes 7,000,000 shares issuable upon exercise of options, all of which
are subject to vesting, 6,000,000 shares under option from Mr. Cameron and
immediately exercisable, and 1,701,467 shares held by entities in which Mr.
McCormick may be deemed in control, as disclosed in note 9 below.
(3) Includes 6,000,000 shares that may be acquired pursuant to an option with
Mr. Cameron.
(4) Includes 40,000 shares of common held by four trusts of which Mr. Clark
Cameron is a trustee.
(5) Includes options to acquire 375,000 shares of common stock. Also includes
221,500 shares of common stock held in the name of the Walter B. Keen and
Marsha B. Keen Trust.
(6) Includes 634,837 shares that may be issued upon conversion of convertible
notes.
(7) Represents shares that may be acquired upon the conversion of convertible
notes.
(8) Represents shares that may be acquired upon the exercise of warrants and
may be resold.
(9) Mr. McCormick controls both Saturn Asset Management Trust and Saturn
Partners Limited Partners.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Financing Arrangements
The Company has received shortterm, unsecured financing to fund its
operations in the form of notes payable of $3,567,424 as of June 30, 2000, from
Mr. Cameron and another stockholder. These notes bear interest at 10.25%. On
January 1, 2000, Mr. Cameron and the other stockholder extended the maturity
date on all notes payable originally maturing December 31, 1999, to the earlier
of December 31, 2000, or such time as the Company obtains equity financing, in
return for an extension fee of 2% of the amounts extended. In addition, interest
accrued on these notes as of December 31, 1999, was included in the extended
principal amounts. 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 $1,511,634, 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 at the note holder's
option.
35
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
Reimbursement Agreement the Company signed on February 28, 1994. Terms of the
straight 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 the Company'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.
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 nonrenewal 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 $2.4 million and was recorded as additional interest
expense in the quarter ended September 30, 1999.
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 the Company's common stock. All other Straight Note holders
have since 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.
On August 28, 2000 the Company received gross proceeds of $10,000,000
in a private placement of its common stock at a price of $3.00 per share.
Proceeds net of offering costs were approximately $9,600,000. The Company's
Chief Executive Officer, Jeffrey S. McCormick, and an entity controlled by him,
purchased 2,333,335 shares of the Company's common stock in private placement.
Because the purchase price of such stock was less than the trading price on the
date of purchase, the Company recorded compensation expense of approximately
$1.5 million in the quarter ending 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 with certain
Series D preferred stockholders, $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 of
approximately $1.2 million is recorded in the quarter ending September 30, 2000.
In November 1995, the Company entered into a lease agreement for its
current facility under a one-year lease with Mr. Cameron. The lease has been
extended to January 31, 2004. At June 30, 2000, $465,149 of rent owed for fiscal
years 1996 through 2000 is included in the balance of accounts payable to
stockholders.
During the year ended June 30, 2000, Cameron and Associates provided consulting
services to the Company in the amount of $90,000.
36
DESCRIPTION OF SECURITIES
The Company is authorized to issue 300,000,000 shares of common stock,
par value $0.01 and 1,200,000 shares of preferred stock, par value $6.00. As of
December 31, 2000, the number of outstanding shares of common stock is
59,351,577. There is no preferred stock outstanding.
Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Common stockholders are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor, subject to
the payment of any preferential dividends declared with respect to any preferred
stock that from time to time may be outstanding. The common stock has no
preemptive or conversion rights or other subscription rights and there are no
redemptive or sinking fund provisions application to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and all the
shares of common stock issued by the Company upon the exercise of outstanding
warrants will, when issued, be fully paid and nonassessable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's common stock is
Computershare Trust Company, Inc., located at 12039 West Alameda Parkway Z-2,
Lakewood, Colorado, 80228, mailing address Post Office Box 1596, Denver Colorado
80201, telephone number (303) 986-5400.
Legal Matters.
The validity of the share of common stock offered by the Selling
Stockholders will be passed by Bartel Eng Linn & Schroder of Sacramento,
California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 1999 and 2000, and for each of the three years in the
period ended June 30, 2000, as set forth in their report. We've included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report given on their authority as
experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form S-1, together with all
amendments and exhibits, with the Securities and Exchange Commission. This
prospectus, which forms a part of that registration statement, does not contain
all information included in the registration statement. Certain information is
omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, the references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contracts or documents. You may review a copy of the registration
statement at the Securities and Exchange Commission's public reference room, and
at Securities and Exchange Commission's regional offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, 13th Floor, New York, New York 10048. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our filings and the registration statement can
also be reviewed by accessing the Securities and Exchange Commission's website
at http://www.sec.gov.
F-1
INDEX TO FINANCIAL STATEMENTS
Alternative Technology Resources, Inc. Page
Financial Statements as of and for the Three Months Ended September 30, 2000 (unaudited)
Condensed Balance Sheets........................................................................................F-2
Condensed Statements of Operations..............................................................................F-3
Condensed Statements of Cash Flows..............................................................................F-4
Notes to Condensed Financial Statements.........................................................................F-5
Financial Statements as of June 30, 1999 and 2000 and for the Three Years Ended
June 30, 2000
Report of Ernst & Young LLP, Independent Auditors...............................................................F-7
Balance Sheets..................................................................................................F-8
Statements of Operations........................................................................................F-9
Statement of Stockholders' Deficit.............................................................................F-10
Statements of Cash Flows.......................................................................................F-12
Notes to Financial Statements..................................................................................F-13
F-2
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
Fiscal Quarter
September 30,
2000
----------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 10,082,493
Trade accounts receivable 105,495
Other current assets 39,907
----------------------
Total current assets 10,227,895
----------------------
Property and equipment:
Equipment and software 227,387
Accumulated depreciation and amortization (31,256)
----------------------
Property and equipment, net 196,131
----------------------
Prepaid annual service fee 250,000
----------------------
$ 10,674,026
======================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued interest payable to stockholders $ 488,542
Notes payable to directors -
Trade accounts payable 109,257
Accrued payroll and related expenses 146,375
Accrued preferred stock dividends 283,195
Other current liabilities 210,091
----------------------
Total current liabilities 1,237,460
----------------------
Convertible notes payable to stockholder 2,288,815
Notes payable to stockholder(s) 1,511,635
----------------------
Total notes payable to stockholders 3,800,450
----------------------
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value ( 1,200,000 shares -
authorized, 204,167 shares designated Series D issued and
outstanding at June 30, 2000; liquidation preference value of $1,960,003
at June 30, 2000
Common stock, $0.01 par value - 100,000,000 shares authorized;
59,266,577 shares issued and outstanding at September 30, 2000
(55,329,605 at June 30, 2000)` 592,666
Additional paid-in capital 48,883,299
Accumulated deficit (43,839,849)
---------------------
Total stockholders' equity (deficit) 5,636,116
----------------------
$ 10,674,026
======================
See accompanying notes to condensed financial statements.
F-3
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
September 30,
---------------------------------------
2000 1999
------------- -------------
Contract Programming
Contract programming revenue $ 178,019 $ 944,651
Contract termination fees -- 5,250
Programmer costs (129,602) (652,063)
Start-up and other costs (6,200) (203,124)
------------- -------------
Contract programming gross profit 42,217 94,714
Product development costs (1,057,426) --
Selling, general and administrative (2,141,486) (276,944)
------------- -------------
Loss from operations (3,156,695) (182,230)
Other income (expense)
Interest income 80,736 11,109
Interest expense to stockholders and directors (131,672) (2,523,511)
------------- -------------
Total other income (expense) (50,936) (2,512,402)
------------- -------------
Net loss $ (3,207,631) $ (2,694,632)
============= =============
Preferred stock dividends in arrears (886,142) (30,625)
------------- -------------
Net loss applicable to common stockholders $ (4,093,773) $ (2,725,257)
============= =============
Net loss per share $ (0.07) $ (0.07)
============= =============
Shares used in per share calculations 56,695,586 36,818,746
============= =============
See accompanying notes to condensed financial statements.
F-4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
------------------------------------
2000 1999
--------------- --------------
Net cash used in operating activities $ (1,575,969) $ (5,848)
Cash flows used in investing activities:
Purchase of property and equipment (51,972) --
Cash flows from financing activities:
Proceeds from sale of common stock 9,564,644 826,553
Proceeds from exercise of options and warrants 26,666 --
Proceeds from notes payable to stockholders 233,027 33,500
Payments on notes payable to stockholders -- (33,500)
Proceeds from notes payable to directors -- 930
Payments on notes payable to directors (23,324) --
------------- -------------
Net cash provided by financing activities 9,801,013 827,483
------------- -------------
Net increase in cash 8,173,072 821,635
Cash at beginning of period 1,909,421 32,642
------------- -------------
Cash at end of period $ 10,082,493 $ 854,277
============= =============
See accompanying notes to condensed financial statements.
F-5
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
September 30, 2000
(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,
2000.
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 and
June 30, 2000, results of operations for the three month periods ended September
30, 2000 and 1999, and cash flows for the three months ended September 30, 2000
and 1999. The results for the period ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2001.
The Company has taken steps to refocus its operations and obtain additional
financing, and believes that is has developed a viable plan to continue as a
going concern, at least through the end of fiscal year 2001. However, there can
be no assurance that this plan will be successfully implemented. The Company
does not expect to generate positive cash flow from operations during fiscal
2001 to be able to pay off obligations and pursue the establishment of the
Internet Exchange; therefore, the Company has raised additional financing during
fiscal 2001, as well as negotiated deferral of payment under its existing
obligations.
Note 2 - Financing Arrangements
The Company's Internet Exchange development efforts will require substantial
funds prior to generating revenues. 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 $10 million of its common stock at
$3.00 per share. Proceeds, net of offering costs, were approximately $9.6
million. The proceeds from the private placement will be used to develop the
Company's proposed Internet Exchange and are expected to be sufficient to meet
ATR's working capital needs through at least this fiscal year. 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 approximately $1,458,000 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
purchase price of $3.00 per common share. The benefit accruing to the Series D
F-6
Preferred stockholders was recorded in the quarter ended September 30, 2000,
approximately $317,000 in compensation expense and $862,000 in preferred stock
dividends.
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 2001. However, there can be no assurance that this plan will be
successfully implemented.
On September 11, 2000, the Company agreed with one of the note holders of Notes
payable to stockholders to extend the due date on notes totaling $2,288,815
including interest until December 31, 2001 in consideration of such notes
becoming convertible promissory notes. The convertible promissory notes bear
interest at 10.25% per annum and are convertible into common stock at $3.00 per
share at the note holder's option. In addition, the Company agreed with the
other note holder to extend the due date on notes totaling $1,511,634 including
interest until December 31, 2001 in exchange for an extension fee of 2%. These
notes also bear interest at 10.25% per annum.
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 million shares of
the Company's common stock from Mr. Cameron at the purchase price of $3.625 per
share the fair market value of the Company's stock on that date. This option is
vested immediately and can be exercised within three years from the date of
grant.
F-7
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, 1999 and 2000, and the related statements of
operations, stockholders' deficit, and cash flows for each of the three years in
the period ended June 30, 2000. 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, 1999 and 2000, and the results of its operations,
stockholder's deficit and its cash flows for each of the three years in the
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Sacramento, California
August 17, 2000,
except for the first, second and third paragraphs of Note 8,
as to which the dates are August 28, 2000, September 11, 2000
and September 11, 2000, respectively.
F-8
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
BALANCE SHEETS
June 30,
----------------------------------
1999 2000
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 32,642 $ 1,909,421
Trade accounts receivable 472,136 98,128
Accounts and notes receivable from employees and officers 88,956 --
Other current assets 5,706 84,183
------------- -------------
Total current assets 599,440 2,091,732
------------- -------------
Property and equipment:
Equipment and software 148,445 175,415
Accumulated depreciation and amortization (148,445) (14,444)
------------- -------------
Property and equipment, net -- 160,971
------------- -------------
Prepaid annual service fee -- 250,000
------------- -------------
$ 599,440 $ 2,502,703
============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued interest payable to stockholders $ 761,541 $ 613,630
Notes payable to directors 41,609 23,324
Trade accounts payable 84,294 97,205
Accrued payroll and related expenses 304,287 167,507
Accrued preferred stock dividends 612,501 735,001
Other current liabilities 124,593 273,018
------------- -------------
Total current liabilities 1,928,825 1,909,685
------------- -------------
Notes payable to stockholders 4,258,090 3,567,424
------------- -------------
Commitments and contingencies (Notes 1, 3, 4 and 6)
Stockholders' deficit:
Convertible preferred stock, $6.00 par value ( 1,200,000 shares 1,225,002 1,225,002
authorized ,204,167 shares designated Series D issued and
outstanding; liquidation preference value of $1,960,003 at June 30, 2000
Common stock, $0.01 par value - 100,000,000 shares authorized; 553,297 261,697
55,329,605 shares issued and outstanding at June 30, 2000
(26,169,728 at June 30, 1999) 28,742,403 35,879,513
Additional paid-in capital
Accumulated deficit (35,816,577) (40,632,218)
------------- -------------
Total stockholders' deficit (5,587,475) (2,974,406)
------------- -------------
$ 599,440 $ 2,502,703
============= =============
See accompanying notes.
F-9
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
STATEMENTS OF OPERATIONS
Years Ended June 30,
-----------------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Contract Programming:
Contract programming revenue $ 5,250,002 $ 6,340,235 $ 2,561,101
Contract termination fees -- 253,179 5,453
Programmer costs (3,860,641) (4,513,673) (1,745,011)
Start-up and other costs (858,982) (1,048,848) (399,481)
------------- ------------- -------------
Contract programming gross profit 530,379 1,030,893 422,062
Product development costs -- -- (1,154,244)
Selling, general and administrative (1,336,342) (1,223,539) (1,276,726)
------------- ------------- -------------
Loss from operations (805,963) (192,646) (2,008,908)
------------- ------------- -------------
Other income (expense):
Interest income -- -- 87,672
Interest expense to stockholders
and directors (437,981) (524,101) (2,894,405)
------------- ------------- -------------
Total other income (expense) (437,981) (524,101) (2,806,733)
------------- ------------- -------------
Net loss $ (1,243,944) $ (716,747) $ (4,815,641)
============= ============= =============
Preferred stock dividends in arrears (122,500) (122,500) (122,500)
------------- ------------- -------------
Net loss applicable to common stockholders
$ (1,366,444) $ (839,247) $ (4,938,141)
============= ============= =============
Basic and diluted net loss per share $ (0.05) $ (0.03) $ (0.10)
============= ============= =============
Shares used in per share calculations 25,964,142 26,127,730 50,329,614
============= ============= =============
See accompanying notes.
F-9
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Convertible
Preferred Stock Common Stock
------------------------ ---------------------
Additional Total
Unearned Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Compensation Capital Deficit Deficit
-------- ------------- ---------- ---------- ------------ ------------ -------------- -------------
Balance, July 1, 1997 204,167 $ 1,225,002 25,783,926 $ 257,839 $ (84,375) $ 28,768,907 $ (33,855,886) $ (3,688,513)
Issuance of common stock in
settlement of accounts
payable -- -- 5,712 57 -- 5,265 -- 5,322
Issuance of common stock for
future compensation -- -- 275,000 2,750 (154,688) 151,938 -- --
Amortization of unearned
compensation -- -- -- -- 161,720 -- -- 161,720
Options exercised -- -- 55,861 559 -- 43,082 -- 43,641
Preferred stock dividends -- -- -- -- -- (122,500) -- (122,500)
Net loss -- -- -- -- -- -- (1,243,944) (1,243,944)
-------- ------------- ---------- ---------- ------------ ------------ -------------- -------------
Balance, June 30, 1998 204,167 1,225,002 26,120,499 261,205 (77,343) 28,846,692 (35,099,830) (4,844,274)
Issuance of common stock in
settlement of accounts
payable -- -- 36,719 367 -- 18,211 -- 18,578
Amortization of unearned
compensation -- -- -- -- 77,343 -- -- 77,343
Warrants exercised -- -- 12,500 125 -- -- -- 125
Preferred stock dividends -- -- -- -- -- (122,500) -- (122,500)
Net loss -- -- -- -- -- -- (716,747) (716,747)
-------- ------------- ---------- ---------- ------------ ------------ -------------- -------------
Balance, June 30, 1999 204,167 1,225,002 26,169,718 261,697 -- 28,742,403 (35,816,577) (5,587,475)
Issuance of common stock in
settlement of accounts
payable -- -- 15,126 151 -- 8,751 -- 8,902
Issuance of common stock on
conversion of notes payable -- -- 27,761,197 277,612 -- 3,359,029 -- 3,636,641
Private sale of common stock -- -- 1,086,145 10,862 -- 3,701,486 -- 3,712,348
Options and warrants exercised -- -- 309,919 3,100 -- 190,219 -- 193,319
Retirement of treasury stock -- -- (12,500) (125) -- 125 -- --
Preferred stock dividends -- -- -- -- -- (122,500) -- (122,500)
Net loss -- -- -- -- -- -- (4,815,641) (4,815,641)
-------- ------------- ---------- ---------- ------------ ------------ -------------- -------------
Balance, June 30, 2000 204,167 $ 1,225,002 55,329,605 $ 553,297 $ -- $ 35,879,513 $(40,632,218) $ (2,974,406)
======== ============= ========== ========== ============ ============ ============== =============
See accompanying notes.
F-11
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended June 30,
1998 1999 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(1,243,944) $ (716,747) $(4,815,641)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,525 -- 14,444
Interest expense resulting from amendment to -- -- 2,415,223
conversion terms of notes payable
Interest expense included in notes payable 177,303 273,647 309,334
to stockholders
Non-cash employee compensation 161,720 77,343 --
Changes in operating assets and liabilities:
Accounts receivable (420,099) 167,221 374,008
Other current assets (99,746) 13,638 (239,521)
Accounts payable to stockholders 286,016 199,296 73,509
Accounts payable (38,545) (27,302) 12,911
Accrued payroll and related expenses 70,755 (42,215) (136,781)
Other current liabilities 25,884 16,372 157,329
------------ ------------ ------------
Net cash used in operating activities (1,072,131) (38,747) (1,835,185)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment -- -- (175,415)
Disposal of equipment 2,063 -- --
------------ ------------ ------------
Net cash provided (used) in investing activities 2,063 -- (175,415)
------------ ------------ ------------
(Continued on next page)
F-12
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(CONTINUED)
Years ended June 30,
-----------------------------------------------------
1998 1999 2000
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from private sale of common stock -- -- $ 3,712,348
Proceeds from exercise of warrants and options $ 43,641 $ 125 193,319
Proceeds from notes payable to stockholders 1,317,000 992,543 33,500
Payments on notes payable to stockholders (275,000) (1,014,665) (33,500)
Proceeds from notes payable to directors 37,919 72,690 3,361
Payments on notes payable to directors -- (69,000) (21,649)
Payments on other notes payable (23,539) -- --
------------ ------------ ------------
Net cash provided (used) by financing activities 1,100,021 (18,307) 3,887,379
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 29,953 (57,054) 1,876,779
Cash and cash equivalents at beginning of year 59,743 89,696 32,642
------------ ------------ ------------
Cash and cash equivalents at end of year $ 89,696 $ 32,642 $ 1,909,421
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 73,448 $ 89,699 $ 54,926
Supplemental disclosure of non-cash financing activities:
Conversion of Notes payable to common stock -- -- $ 1,000,000
See accompanying notes.
F-13
1. Summary of Significant Accounting Policies
Description of Business
The Company was founded in 1989 and during fiscal 1997, the Company changed its
name to Alternative Technology Resources, Inc. (the "Company") and focused its
efforts on its computer programmer placement business whereby it recruited
experienced, qualified computer programmers primarily from the former Soviet
Union, obtained necessary visas, and placed them for assignment in the United
States. The Company's computer programmer placement business has not generated
and currently is not generating sufficient cash flow to support operations.
Therefore, the Company suspended recruitment for the contract programming
division in December 1999 and is pursuing the conversion of computer programmers
to become the customers' employees.
In August 1999, the Company decided to pursue the establishment of an Internet
Exchange for healthcare services under the name "DoctorAndPatient". The Company
plans to use current management's experience in healthcare and information
technology to offer the nation's medical providers the ability to more directly
link their practice via the Internet to parties that pay for medical services.
At present the Company is in the early stages of developing the Internet
Exchange. The Company is currently recruiting medical doctors, medical groups,
hospitals and other health care practitioners (collectively, "Providers") to
offer their services, on a non-exclusive basis, to individuals and others who
purchase or facilitate the purchase of health care services ("Purchasers"). The
purpose of the Internet Exchange is to utilize the Internet and other
technologies to provide administrative, billing and re-pricing services, as well
as a direct and efficient connection between Providers and Purchasers. There can
be no assurance that the Company will be successful in its efforts to establish
the Internet Exchange.
The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $40,632,218 at June 30, 2000. In addition, at June
30, 2000 the Company had a stockholders' deficit of $2,974,406. Based on the
steps the Company has taken to refocus its operations and obtain additional
financing (see Note 8), 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 2001. However, there can be no assurance that this plan
will be successfully implemented. The Company does not expect to generate
positive cash flow from operations during fiscal 2001 to be able to pay off
obligations and pursue the establishment of the Internet Exchange; therefore,
the Company has raised additional financing during fiscal 2001, as well as
negotiated further deferral of payment under its existing obligations (see Note
8).
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in marketable securities
consisting of commercial paper with maturities of three months or less. Such
investments are deemed to be cash equivalents.
Prepaid Annual Service Fee
The prepaid annual service fee will be amortized over a 12-month period
beginning at the commencement of operation of the Company's Internet Exchange
through Healtheon/Web MD Corp.'s Internet consumer portal. Operations are to
begin no later than six months following acceptance of application software or
when the Company's Internet Exchange has 100,000 primary care providers,
whichever is earlier. Terms are more fully described in Note 4.
F-14
Internet Exchange for Healthcare Services Costs
In connection with the costs to develop the "DoctorAndPatient" Internet portal,
the Company has adopted EITF Issue 00-2, "Accounting for Website Development
Costs". Costs incurred during the year ended June 30, 2000 represented primarily
costs of developing the portal's functional specifications, evaluating
alternatives, and designing the databases, and were expensed as planning stage
and preliminary project stage costs, in accordance with EITF 00-2 and AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", respectively.
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
Contract programming revenue represents work performed for customers, primarily
on a time and materials basis, and is recognized when the related services are
rendered. Contract termination fees are amounts received from customers when
they exercise the contract provision, which allows them to convert the Company's
programmer to their employee. In addition, these fees can also be received from
programmers when they exercise their contract provision to terminate their
relationship with the Company prior to the termination date of their contract.
These fee amounts are stipulated in customer and programmer contracts, are based
on the length of time remaining under the contract, and are recognized as
revenue when such contract provisions are invoked.
The Internet Exchange has not yet generated revenue.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, the liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Stock-Based Compensation
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. Disclosures required under SFAS No.
123 are included in Note 7 to the financial statements.
Concentration of Credit Risk
The Company's accounts receivable are unsecured and are primarily with companies
in the contract placement and consulting industry. The Company performs periodic
credit evaluations of its customers and believes that adequate provision for
uncollectable accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash in the form of
short-term commercial paper from several companies.
F-15
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. As of June
30, 2000, 1999 and 1998, there were stock options, stock warrants, convertible
preferred stock and a convertible note payable (Notes 3 and 7) which could
potentially dilute basic 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.
Significant Customers and Labor Suppliers
During the year ended June 30, 2000, three customers individually accounted for
40%, 21% and 10% of total revenues. During the year ended June 30, 1999, two
customers individually accounted for 52% and 31% of total revenues. During the
year ended June 30, 1998, two customers individually accounted for 51% and 34%
of total revenues.
During the years ended June 30, 2000, 1999 and 1998, two suppliers identified
100% of the computer programmer candidates employed by the Company.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, and accounts and notes payable. Fair values of cash and
cash equivalents, 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 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 March 2000, the FASB issued Interpretation No. 44 ("FIN44"), "Accounting for
Certain Transactions Involving Stock Compensation-an Interpretation of APB
Opinion No. 25." This Interpretation clarifies (a) the definition of employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 is not expected to have a material impact on the Company's
financial statements.
F-16
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.
Reclassifications
Certain reclassifications have been made to amounts reported as of June 30, 1999
and 1998, and for the years then ended, to conform with the June 30, 2000
presentation.
2. Investor Group Transactions
In fiscal 1994, the Company entered into a series of agreements with James W.
Cameron, Jr. pursuant to which Mr. Cameron and Dr. Max Negri became principal
stockholders of the Company.
As of June 30, 2000, Mr. Cameron beneficially owned 39,268,871 shares of common
stock (Notes 3 and 7), and 76,167 shares of preferred stock, Series D, which are
convertible into 73,120 shares of common stock at Mr. Cameron's option. As of
June 30, 2000 Dr. Negri held less than 5% of the Company's common stock.
During fiscal years 2000, 1999 and 1998, the Company did not generate sufficient
cash flow from operations and borrowed from these two stockholders. Notes
payable to stockholders were $3,567,424 at June 30, 2000 and $4,258,090 at June
30, 1999 (Note 3). Accrued interest of $148,481 at June 30, 2000 and $337,618 at
June 30, 1999 on these notes is included in accounts payable to stockholders.
The Company also leases its office facilities from Mr. Cameron (Note 6). Accrued
lease expense of $465,149 at June 30, 2000 and $423,923 at June 30, 1999 is also
included in accounts payable to stockholders at June 30, 2000. During the year
ended June 30, 2000, Cameron & Associates provided consulting services to the
Company in the amount of $90,000.
3. Financing Arrangements
The Company has received short-term, unsecured financing to fund its operations
in the form of notes payable of $3,567,424 at June 30, 2000 from Mr. Cameron and
another stockholder. These notes bear interest at 10.25%. On January 1, 2000,
Mr. Cameron and the other stockholder extended the maturity date on all notes
payable originally maturing December 31, 1999, to the earlier of December 31,
2000, or such time as the Company obtains equity financing, in return for an
extension fee of 2% of the amounts extended. In addition, interest accrued on
these notes as of December 31, 1999 and 1998 was included in the extended
principal amounts on those dates (see Note 8).
The aggregate principal maturities of long-term debt obligations are $3,567,424
in the year ending June 30, 2002, and $0 in each of the years ending June 30,
2001, 2003, 2004 and 2005, and thereafter.
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 Reimbursement
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 the Company'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.
F-17
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 $2.4 million and was recorded as additional interest
expense.
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 the Company's common stock. All other Straight Note holders have since
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.
The Company received $3,712,348 in private sales of its common stock at an
average price of $3.42 per share during fiscal year 2000.
The Company's Internet Exchange development efforts will require substantial
funds prior to generating revenues. Therefore, the Company engaged a New York
based financial and investment banking firm to assist the Company in raising a
minimum of $10 million and up to $40 million through the private placement of
common stock at the price of $3.00 per share. The proceeds from the private
placement will be used to develop the Company's proposed Internet Exchange and
are expected to be sufficient to meet the Company's working capital needs
through the end of fiscal 2001. If the offering is not fully subscribed, or if
alternative funding is not obtained, the development of the Internet Exchange
could be slowed. (See Note 8).
4. WebMD Corp. Agreement
In September 1999 the Company entered into an agreement with WebMD Corp. to
allow under insured and uninsured healthcare consumers to register to use the
Company's Internet Exchange, when (and if) it is developed, through the use of
WebMD Corp.'s Internet consumer portal. The agreement provides for start up
development fees to WebMD Corp. estimated to cost $160,000, of which about
$135,000 has been incurred and expensed during fiscal year 2000. The agreement
also required payment to WebMD Corp. of $250,000 upon a promotional announcement
of the Company's Internet Exchange program on WebMD Corp's Internet portal, and
a sharing of revenues when operational. This $250,000 is an annual service fee
to be amortized over a 12-month period beginning at the commencement of
operations. Operations are to begin no later than six months following
acceptance of the application software or when the Internet Exchange has 100,000
primary care providers, whichever is earlier. The agreement term is three years,
but subject to modification or withdrawal of services by WebMD Corp. with
certain financial penalties. In addition, revenue sharing is subject to
renegotiation on an annual basis based on the date the program becomes
operational.
In October 1999, the Department issued the Company a subpoena with respect to
documents relating the agreement with WebMD Corp. and the potential of being a
health care service plan under the Department's jurisdiction. The Company
responded to this subpoena and does not believe the Internet Exchange is within
the scope of the HCSP Act. However, the Department may continue to require
compliance with the HCSP Act, which would require substantial changes in the
Company's business model. Legislation is being proposed in California to impose
minimal licensing requirements on discount plans. The Company cannot predict
whether this legislation will pass or whether it will ultimately apply to the
Company. As the Company develops its business plan, compliance with or
F-18
prohibitions by state regulations could delay, eliminate or force modification
of certain aspects of the Company's business, which could have a material
adverse impact to the Company.
5. Income Taxes
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 2000 and 1999 are as follows:
June 30,
------------------------------------------
2000 1999
--------------------- --------------------
Net operating loss carry forwards $ 11,486,000 $ 8,595,000
Research credits 123,000 123,000
Common stock options 2,539,000 2,539,000
Common stock warrants 789,000 789,000
Other - net (348,000) 466,000
--------------------- --------------------
Total deferred tax assets 14,589,000 12,512,000
Valuation allowance for deferred tax assets (14,589,000) (12,512,000)
--------------------- --------------------
Net deferred tax assets $ - $ -
===================== ====================
The Company's valuation allowance as of June 30, 1999 and 1998 was $12,512,000
and $12,609,000, respectively, resulting in a net change in the valuation
allowance of $2,077,000 and ($97,000) in the years ended June 30, 2000 and 1999,
respectively.
As of June 30, 2000 the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $30 million and $13 million,
respectively. The federal net operating loss carryforward expires in 2006
through 2019 and the state net operating loss carryforward expires in 2000
through 2005. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.
In connection with the Company's initial public offering in August 1992, a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) will
be subject to an annual limitation in the amount of approximately $300,000.
In August and September of 1993, a controlling interest of the Company's stock
was purchased, resulting in a second annual limitation in the amount of
approximately $398,000 on the Company's ability to utilize net operating loss
carryforwards generated between August 11, 1992 and September 13, 1993
(approximately $7,700,000).
The Company expects that the aforementioned annual limitations will result in
approximately $4,500,000 of net operating loss carryovers, which will not be
utilized prior to the expiration of the carryover period.
6. Commitments
In November 1995, the Company entered into a lease agreement for its current
facility under a one-year lease with Mr. Cameron. The lease has been extended to
January 31, 2004. At June 30, 2000, $465,149 of rent owed for fiscal years 1996
through 2000 is included in the balance of accounts payable to stockholders.
Rental expense for all operating leases was approximately $189,121, $224,598 and
$181,589 for the years ended June 30, 2000, 1999 and 1998, respectively,
including approximately $114,285, $88,676 and $86,769 related to the lease of
the office facilities from Mr. Cameron for the years ended June 30, 2000, 1999
and 1998, respectively.
F-19
Minimum annual rental payments for all non-cancelable operating leases are as
follows:
2001 $ 22,000
2002 $ 21,100
2003 $ 20,500
2004 $ 17,700
2005 $ 16,300
7. Stockholders' Deficit
Series D Preferred Stock
In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible preferred stock for $1,225,002. The Company is required to pay
cumulative preferential dividends to holders of Series D preferred stock on a
quarterly basis beginning July 1, 1994, at a rate of $0.60 per year per share.
As of June 30, 2000, cumulative unpaid, undeclared dividends were $735,001. Each
share of Series D preferred stock is convertible at the option of the
stockholder into such number of fully paid shares of common stock as is
determined by dividing the sum of $6.00 and the accrued but unpaid dividends by
the Series D conversion price, as defined in the agreement, in effect on the
conversion date. The Series D conversion price is $10.00 per share.
Additionally, the Series D preferred stock is redeemable at any time at the
Company's option at a price of $6.00 per share plus accrued but unpaid
dividends. The liquidation preference is $6.00 per share plus accrued but unpaid
dividends.
Each share of Series D preferred stock bears the right to one vote for each
share of common stock into which such Series D preferred stock could then be
converted (196,000 votes in the aggregate at June 30, 2000), and with respect to
such vote, such holder has full voting rights and powers equal to the voting
rights and powers of the holders of common stock.
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, 1997 1,177,415 $ 0.01 - $28.80 $10.87
Expired/Cancelled (471,832) $13.75 - $28.80 $21.94
Balance at June 30, 1998 705,583 $ 0.01 - $25.00 $ 3.47
Exercised (12,500) $ 0.01 $ 0.01
Expired/Canceled (133,283) $ 5.00 - $15.00 $14.40
Balance at June 30, 1999 559,800 $ 0.01 - $25.00 $ 0.94
Exercised (20,000) $ 0.75 $ 0.75
Balance at June 30, 2000 539,800 $ 0.01 - $25.00 $ 0.95
============
At June 30, 2000, 1999 and 1998, the weighted-average remaining contractual life
of outstanding warrants was 5.2 years, 6.2 years and 4.2 years, respectively.
All warrants are immediately exercisable for common stock at June 30, 2000.
F-20
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.
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 may be issued over the
five-year term of the 1997 plan. Subject to the oversight and review of the
Board of Directors, the 1997 Plan shall generally be administered by the
Company's Compensation Committee consisting of at least two non-employee
directors as appointed by the Board of Directors. 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 1997 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.
Outstanding option activity for the 1993 and the 1997 Plans during the periods
indicated is as follows:
Number of Range of Weighted Average
Shares Exercise Prices Exercise Price
------------ --------------- ----------------
Balance at June 30, 1997 415,780 $0.75-$13.10 $1.11
Granted 240,000 $0.75 $0.75
Exercised (55,861) $0.78 $0.78
Expired/Cancelled (30,000) $0.78 $0.78
------------
Balance at June 30, 1998 569,919 $0.75-$13.10 $1.01
Granted 25,000 $0.28 $0.28
------------
Balance at June 30, 1999 594,919 $0.28-$13.10 $0.98
Granted 880,000 $0.25-$7.19 $2.72
Exercised (269,919) $0.25-$1.62 $0.65
Cancelled (25,000) $0.25 $0.25
------------
Balance at June 30, 2000 1,180,000 $0.25-$13.10 $2.36
============
F-21
The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 2000:
Weighted Weighted Average Weighted Average
Range of Exercise Average Remaining Options Exercise
Prices Options Outstanding Exercise Price Contractual Life Exercisable Price
------------------- -------------------- --------------- ---------------- ------------- -----------------
$ 0.25 - 0.28 285,000 $0.25 9.12 25,000 $ 0.28
$ 0.75 - 0.78 275,000 $0.75 7.51 265,000 $ 0.75
$ 0.91 - 1.62 85,000 $0.91 6.75 85,000 $ 0.91
$ 3.00 - 3.75 282,500 $3.69 9.90 - -
$ 4.00 - 4.82 155,000 $4.42 9.60 100,000 $ 4.44
$ 5.88 - 6.63 72,500 $6.43 9.78 - -
$ 7.19 15,000 $7.19 9.67 - -
$ 13.10 10,000 $13.10 3.83 10,000 $ 13.10
---------------- ---------
1,180,000 $ 2.36 485,000 $ 1.77
================ =========
The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 1999:
Weighted Weighted Average Weighted Average
Range of Exercise Average Remaining Options Exercise
Prices Options Outstanding Exercise Price Contractual Life Exercisable Price
------------------- -------------------- --------------- ---------------- ------------- -----------------
$ 0.28 25,000 $0.28 9.05 25,000 $ 0.28
$ 0.75 - 0.78 469,919 $0.76 7.47 447,919 $ 0.76
$ 0.91 - 1.62 90,000 $0.95 7.43 90,000 $ 0.95
$ 13.10 10,000 $13.10 4.79 10,000 $ 13.10
-------------------- -------------
549,919 $0.98 572,919 $ 0.98
==================== =============
The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 1998:
Weighted Weighted Average Weighted Average
Range of Exercise Average Remaining Options Exercise
Prices Options Outstanding Exercise Price Contractual Life Exercisable Price
------------------- -------------------- --------------- ---------------- ------------- -----------------
$ 0.75 - $0.78 469,919 $0.76 8.47 145,919 $ 0.78
$ 0.91 - $1.62 90,000 $0.95 8.43 8,333 $ 1.37
$ 13.10 10,000 $13.10 5.79 10,000 $ 13.10
------------------- --------------
$1.01 164,252 $ 1.56
=================== ==============
F-22
In addition to options granted pursuant to the 1993 and 1997 Stock Option/Stock
Issuance Plans, the Company has granted options outside these plans. In fiscal
year 1994, the Company granted to its former Chief Executive Officer and
director stock options for 400,000 shares of common stock exercisable at $0.10
per share. Out of these options 370,000 remain outstanding and are fully vested
as of June 30, 2000. These options expire on August 10, 2003.
In September 1996, the Board of Directors granted a non-statutory option to
purchase 20,000 shares of the Company's common stock at an exercise price of
$2.00 per share to the then Chairman of the Board. The option vests over 3 years
and expires in September 2001.
During fiscal year 2000, in accordance with an employment agreement, the Company
granted the current Chief Executive Officer stock options for 7,000,000 shares
of common stock exercisable at $3.00 per share, the fair market value of the
Company's common stock on the date of grant. These options are not vested as of
June 30, 2000 and will vest ratably over 5 years. They expire on April 14, 2010.
SFAS No. 123 requires presentation of pro forma information regarding net income
(loss) and earnings per share as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
the Company options was estimated at the date of grant using the binomial option
pricing model with the following weighted average assumptions for fiscal years
2000 and 1999: dividend yield of 0%, an expected life of five years from grant
date, and a risk-free interest rate of 5.0%. There was an expected volatility of
1.271 and 0.959, respectively for fiscal years 2000 and 1999. For fiscal year
1998, dividend yield was 0% expected life was three years from grant date,
risk-free interest rate was 6.6% and expected volatility was 0.955.
The model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. It requires the
input of highly subjective assumptions, the quality of which cannot be judged
except by hindsight. The Company's pro forma information follows:
2000 1999 1998
--------------------- --------------------- -------------------
Net loss applicable to common stockholders:
As reported $ (4,938,141) $ (839,247) $ (1,366,444)
Pro forma $ (6,224,858) $ (938,388) $ (1,477,071)
Basic and diluted net loss per share:
As reported $ (0.10) $ (0.03) $ (0.05)
Pro forma $ (0.12) $ (0.04) $ (0.06)
The weighted average fair value of options granted during the years ended June
30, 2000, 1999 and 1998 was $2.58, $0.21 and $0.47, respectively. Because SFAS
No. 123 is applicable only to options granted subsequent to June 30, 1995, its
pro forma effect will not be fully reflected until 2001.
Total compensation cost recognized for stock-based employee compensation awards
was $77,343 in fiscal year 1999 and $161,720 in fiscal year 1998. There were no
stock based compensation awards recognized in fiscal year 2000.
F-23
Stock Reserved for Issuance
As of June 30, 2000, the Company has reserved a total of 11,176,973 shares of
common stock pursuant to outstanding warrants, options, conversion of Series D
preferred stock, and future issuance of options to employees and non-employee
directors
8. Subsequent Events
On August 28, 2000 the Company received gross proceeds of $10,000,000 in a
private placement of its common stock at a price of $3.00 per share. Proceeds
net of offering costs are expected to be approximately $9,600,000. The Company's
Chief Executive Officer, Jeffrey S. McCormick 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 expects to record compensation expense of
approximately $1.5 million in the quarter ending September 30, 2000.
On September 11, 2000, the Company agreed with one of the note holders of Notes
payable to stockholders to extend the due date on notes totaling $2,288,815
including interest until December 31, 2001 in consideration of such notes
becoming convertible promissory notes. The convertible promissory notes bear
interest at 10.25% per annum and are convertible into common stock at $3.00 per
share at the note holder's option. In addition, the Company agreed with the
other note holder to extend the due date on notes totaling $1,511,634 including
interest until December 31, 2001 in exchange for an extension fee of 2%. These
notes also bear interest at 10.25% per annum.
Also 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
purchase price of $3.00 per common share. The benefit accruing to the Series D
Preferred stockholders of approximately $1.2 million is expected to be recorded
in the quarter ending September 30, 2000.
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 million shares of
the Company's common stock from Mr. Cameron at the purchase price of $3.625 per
share the fair market value of the Company's stock on that date. This option is
vested immediately and can be exercised within three years from the date of
grant.
F-24
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses will be borne by the selling stockholders. All of the
amounts shown are estimates, except for the SEC registration fee and the NASD
fee.
SEC registration fee $ 8,049
Accounting fees and expenses *
Legal fees and expenses *
Transfer agent and registrar fees *
Miscellaneous *
Total $*
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Our certificate of incorporation contains provisions eliminating or
limiting director liability to us and our stockholders for monetary damages
arising from acts or omissions in the capacity as a director. The provisions do
not, however, eliminate the personal liability of a director for any breach of a
director's duty of loyalty to us or our stockholders, for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law or for any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate personal liability,
under a negligence standard, for violations of Delaware statutory provisions
concerning unlawful dividends or stock repurchases or redemptions. This
provision offers persons who serve on our board of directors protection against
awards of monetary damages resulting from breaches of their duty of care, except
as discussed above. As a result, our ability or our stockholders' ability to
successfully prosecute an action against a director for breach of his or her
duty of care is limited. However, the provision does not affect the availability
of equitable remedies such as an injunction or rescission based upon a
director's breach of his duty of care.
Our certificate of incorporation and bylaws also provide that we will
indemnify our directors and officers to the fullest extent permitted by
applicable law, subject to limited exceptions against liabilities arising by
reason of their status or services as an officer or director.
Item 15. Recent Sales of Unregistered Securities.
On August 28, 2000 the Company sold $10,000,002 of its shares of common
stock at $3.00 per share to 22 accredited investors. The Company engaged
Shattuck Hammond Partners as placement agent, who received a commission of
$318,000. The sale was exempt from registration pursuant to Rule 506 of
Regulation D of the Securities Act.
During the period of September 1999 to January 2000, the Company sold a
total of 1,086,145 shares of common stock for aggregate proceeds of $3,708,611
to two stockholders who are accredited investors. No commissions were paid. The
sales were exempt from registration pursuant to Rule 506 of Regulation D of the
Securities Act.
II-2
In August and September 1999, the Company issued an aggregate of
27,761,197 shares of common stock upon the conversion of a convertible note in
the aggregate of $1,221,420. The holder of the convertible notes was the
Chairman of the Board who is an accredited investor. No commission was paid. The
issuer was exempt from registration pursuant to Rule 506 of Regulation D and
Section 3(a) (9) of the Securities Act.
In December 1997, March, May and September 1999, and May 2000, the
Company issued an aggregate of 26,643 shares of common stock in exchange for
legal services of $16,051. The purchaser is [a sophisticated] investor and the
purchases were exempt from registration pursuant to Section 4(2) of the
Securities Act. No commission was paid.
In January 1998, the Company issued 275,000 shares of common stock to
the then Chief Executive Officer as compensation. In addition, in June and July
1999, the Company issued an aggregate of 26,188 shares of common stock in
exchange for consulting services due to a Company's director who previously
served as Chief Financial Officer. The purchaser is an accredited investor and
the issuances were exempt pursuant to Section 4(2) and Rule 506 of Regulation D
of the Securities Act. No commission was paid.
Item 16. Exhibits and Financial Statement Schedules.
Unless otherwise noted, the following exhibits are filed with this
registration statement.
Exhibit
Number Description of Document
3.1.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.2 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 S3, Reg. No. 3386962).
3.2.1 Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 to Amendment No. 1
to Registration Statement on Form S18, Reg. No. 3348666).
3.2.3 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 10KSB for the fiscal year
ended June 30, 1994).
5.0 Legal Opinion of Bartel Eng Linn & Schroder. *
10.1 Form of Director and Executive Officer Indemnification
Agreement (incorporated by reference to Exhibit 10.19 to
Registration Statement on Form S18, Reg. No. 3348666).
10.2 Form of Reimbursement Agreement, dated February 28, 1994,
between the Registrant and James W. Cameron, Jr. (incorporated
by reference to Exhibit 10.29 to Form 10KSB for the fiscal
year ended June 30, 1994).
10.3 Form of Stock Purchase Warrant issued in connection with the
Confidential Private Placement Memorandum of the Registrant,
dated February 13, 1992 (Class A Warrant) (incorporated by
reference to Exhibit 10.31 to Form 10KSB for the fiscal year
ended June 30, 1994).
II-3
10.4 Form of Stock Purchase Warrant issued April 22, 1993 (Class B
Warrant) (incorporated by reference to Exhibit 10.32 to Form
10KSB for the fiscal year ended June 30, 1994).
10.5+ Stock Purchase Warrant issued to William T. Manak on April 6,
1994, for the purchase of 57,286 shares [restated to reflect
oneforten consolidation of the Company's outstanding common
stock effective December 2, 1996] of the Registrant's common
stock (incorporated by reference to Exhibit 10.34 to Form
10KSB for the fiscal year ended June 30, 1994).
10.6 Stock Purchase Warrant issued to Dennis L. Montgomery on April
6, 1994 for the purchase of 12,500 shares [restated to reflect
oneforten consolidation of the Company's outstanding common
stock effective December 2, 1996] of the Registrant's common
stock (incorporated by reference to Exhibit 10.35 to Form
10KSB for the fiscal year ended June 30, 1994).
10.7 Stock Purchase Warrant issued to Dennis L. Montgomery on April
6, 1994, for the purchase of 58,000 shares [restated to
reflect one-for-ten consolidation of the Company's outstanding
common stock effective December 2, 1996] of the Registrant's
common stock (incorporated by reference to Exhibit 10.36 to
Form 10KSB for the fiscal year ended June 30, 1994).
10.8 Form of Amended Stock Purchase Warrant issued to certain Class
A, Class B, Class C and Class D Warrant Holders (incorporated
by reference to Exhibit 10.37 to Form 10KSB for the fiscal
year ended June 30, 1994).
10.9 Form of Stock Purchase Warrant, dated June 30, 1994, issued to
stockholders of record on September 7, 1993 (incorporated by
reference to Exhibit 10.38 to Form 10KSB for the fiscal year
ended June 30, 1994).
10.10 Form of Stock Purchase Warrant to Jeff Buckner as designee for
James W. Cameron, Jr. (incorporated by reference to Exhibit
10.40 to Form 10KSB for the fiscal year ended June 30, 1994).
10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by
reference to Exhibit 10.47 to Form 10KSB 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 10KSB for the fiscal year ended June
30, 1994).
10.13 Contractor Agreement, dated June 3, 1996, between the
Registrant and Technical Directions, Inc. [formerly known as
The Systems Group, Inc.] (incorporated by reference to Exhibit
10.42 to Form 10KSB for the year ended June 30, 1996).
10.14 Lease, dated November 6, 1995, between the Registrant and
James W. Cameron, Jr. (incorporated by reference to Exhibit
10.46 to Form 10KSB for the year ended June 30, 1996).
10.15 Agreement with Technical Directions, Inc. (incorporated by
reference to Exhibit 10.47 to Form 10KSB for the year ended
June 30, 1996).
II-4
10.16 First Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated October 1, 1996 (incorporated by reference
to Exhibit 10.52 to Form SB-2 filed December 18, 1996).
10.17 Agreement between Liberty Mutual Insurance Company and the
Registrant dated October 9, 1996 (incorporated by reference
to Exhibit 10.53 to Form SB-2 filed December 18, 1996).
10.18 Note Payable between the Registrant and the Negri Foundation
dated December 24, 1996 (incorporated by reference to Exhibit
10.60 to Form 10QSB 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 10QSB 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 10QSB 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 10QSB 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 10QSB 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 10QSB 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 10QSB 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 10QSB for the quarter ended
December 31, 1996).
10.26 Agreement between the Registrant and Adept, Inc. dated
February 1997 (incorporated by reference to Exhibit 10.68 to
Form 10-QSB for the quarter ended March 31, 1997).
10.27 Sale of Cortex between the Registrant and Omnitech Migrations
International, Inc. (formerly known as Centre de Traitment
I.T.I. Omnitech, Inc.), dated May 2, 1997 (incorporated by
reference to Exhibit 10.69 to Form 10-QSB for the quarter
ended March 31, 1997).
10.28 Mutual Release and Settlement Agreement between the Registrant
and Omnitech Migrations International, Inc. (formerly known as
Centre de Traitment I.T.I. Omnitech, Inc.), dated May 6, 1997
(incorporated by reference to Exhibit 10.70 to Form 10-QSB for
the quarter ended March 31, 1997).
II-5
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 10KSB for the year ended June 30, 1997).
10.30 Second Addendum to Lease between James W. Cameron, Jr., and
the Registrant, dated June 3, 1997 (incorporated by reference
to Exhibit 10.30 to Form 10-KSB for the year ended June 30,
1997).
10.31 Joint Services Agreement between the Registrant and Prize-ITM,
Ltd., dated August 1, 1997 (incorporated by reference to
Exhibit 10.31 to Form 10-KSB for the year ended June 30,
1997).
10.32 Third Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated January 5, 1998 (incorporated by reference
to Exhibit 10.32 to Form 10-QSB for the quarter ended December
31, 1997).
10.33+ Alternative Technology Resources, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.33 to Form 10KSB 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 10KSB 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).
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 10KSB for the year ended
June 30, 2000).
10.37 Healtheon Customer Agreement effective September 16, 1999
(incorporated by reference to the Company's Form 10-K for the
year ended June 30, 2000).
10.39 Employment Agreement with Jeffrey McCormick
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Bartel Eng Linn & Schroder (contained in Exhibit
5)*
+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).
* To be filed in Amendment.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
F-6
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(5) For purposes of determining any liability under the Securities Act
of 1933, the information omitted form the form of prospectus filed as part of
this registration statement in reliance up[on Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form or prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunder duly authorized, in Sacramento, California, on January
10, 2001.
ALTERNATIVE TECHNOLOGY RESOURCES,
a Delaware Corporation
/s/ JEFFREY S. MCCORMICK
-------------------------------------
Jeffrey S. McCormick,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Known All Persons By These Present, that each person whose signature
appears below appoints Jeffrey S. McCormick or James W. Cameron, Jr. as his true
and lawful attorney-in-fact and agent, with full power of substitution, for him
and in his name, place and stead, to sign any amendment (including
post-effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he may do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or any of them, or of his substitutes, may
lawfully do or cause to be done by virtue hereof.
Date January 10, 2001 /s/ JEFFREY S. MCCORMICK
------------------------------
Jeffrey S. McCormick,
Chief Executive Officer
(Principal Executive Officer)
Date January 10, 2001 /s/ JAMES W. CAMERON, JR.
------------------------------
James W. Cameron, Jr.,
Chairman of the Board, Chief
Financial Officer (Principal
Accounting and Financial
Officer)
Date January 10, 2001 /s/ EDWARD L. LAMMERDING
------------------------------
Edward L. Lammerding,
Director
Date January 10, 2001 /s/ THOMAS W. O'NEIL, JR.
------------------------------
Thomas W. O'Neil, Jr.,
Director