ALTERNATIVE TECHNOLOGY RESOURCES INC, 10-K, 2000-09-26

ALTERNATIVE TECHNOLOGY RESOURCES INC
10-K, 2000-09-26
COMPUTER PROGRAMMING SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____ to ____

Commission file number 0-20468
----------------------------------------
ALTERNATIVE TECHNOLOGY RESOURCES, INC.

(Exact name of issuer as specified in its charter)

Delaware 68-0195770
---------------------------------- --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

629 J Street, Sacramento, CA 95814
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(Address of principal executive offices, including zip code)

(916) 231-0400
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(Issuer's telephone number, including area code)

Securities registered under Section 12 (b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
None

-----------------------------------------------------------------

Securities registered under Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State issuer's revenue for its most recent fiscal year: $2,566,554

Aggregate market value of the Registrant's common voting stock held by
non-affiliates of the Registrant on September 11, 2000 was $51,103,891 (based on
the final trading price on that date).

Number of shares of Common Stock outstanding at September 11, 2000: 59,248,411

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders are incorporated by reference in Part III. The Proxy
Statement will be filed within 120 days of the Company's fiscal year end.

Exhibit index is located on page 25.

<PAGE>2

PART I

Item 1. Business

General

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., hereinafter referred to as
"ATR", the "Company" or "we" or "us".

In August 1999, James W. Cameron, Jr., ATR'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 ATR's Chief
Executive Officer. Mr. McCormick has significant experience in financing,
managing and growing early stage development companies as a managing director of
Boston-based Saturn Asset Management, Inc. Mr. McCormick has served as an
advisor or director of several Internet and electronic commerce companies over
the last six years. As ATR's CEO, Mr. McCormick will be responsible for all
phases of development, implementation and operation of ATR's Internet Exchange.
Mr. Cameron still acts as Chairman and expects to continue to play an active and
substantial role in formulating ATR's business strategy and policy. Mr. Cameron
and Mr. McCormick have focused ATR on using the experience of the management
team in health care and information technology to establish the Internet
Exchange. The development of this business has become the Company's primary
focus.

In September 1999, ATR entered into an agreement with Healtheon/WebMD Corp.
to develop a web-based portal through which under insured and uninsured
healthcare consumers can register to use ATR's Internet Exchange, when it is
developed, through the use of the WebMD consumer portal. Through this portal, a
Patient, as defined below, will be able to view Provider, as defined below,
offerings and search detailed profile information for Providers that meet his or
her particular needs and preferences.

Services

At present, ATR is in the early stages of developing the Internet Exchange,
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.

ATR will not provide health care services, but rather expects to act as an
intermediary between Providers and Purchasers that should benefit both. ATR
believes that eliminating the costs associated with traditional "bricks and
mortar" operations, creating economies of scale, facilitating access to
Providers and Purchasers, streamlining overhead costs, exploiting possibilities

<PAGE>3

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 decision-making, 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. Our Internet Exchange has initially targeted
gaps and inefficiencies in the purchasing process and in billing and claims
processing systems as creating a key business opportunity.

In its simplest form, health care requires 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 self-insured employers, that act as purchaser and payor
for services provided to Patients (collectively, "Third-Party Payors").

In most (but far from all) instances, Patients are a member of a health
services purchasing group or pool commonly offered by Third-Party 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
co-payments and deductibles that represent only a fraction of the total bill.

Third-Party 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
Patient-Provider-Third-Party Payor relationship - such as HMOs, PPOs, EPOs,
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.

<PAGE>4

Business Description

Through our Internet Exchange, ATR intends to take advantage of the
many capabilities of the Internet and other modern information technology tools
to connect Providers directly with Patients and other Purchasers. One major
objective will be to eliminate confusion and all but the essential and efficient
use of third parties.

Relationship to the Provider

ATR 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
suppliers (such as pharmacies, durable medical equipment suppliers, and
transportation). ATR 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 ATR's Internet Exchange up to date.

Relationship to Third-Party Payors

ATR intends to integrate the Internet Exchange with bill-pricing
software so as to add efficiencies to the purchasing and processing function. We
will make these additional services available to Third-Party 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 pre-priced. 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. Third-Party Payors
will be contractually required to pay timely and according to the review 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 Third-Party Payors.

The revenue models for Third-Party 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. Almost no plan exists that does not 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, ATR entered into an agreement with Healtheon/WebMD
Corp. to develop a web-based 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.

<PAGE>5

Patients will pay us 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.

Competition

ATR'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 ATR's
business and operating results. ATR's success depends on the ability to market
the Internet Exchange to potential Providers and third party and individual
Payors and their agents. ATR believes that the principal competitive factors in
this market are health and managed care expertise, data integration and transfer
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, ATR's potential
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources and significantly greater name
recognition. In addition, many of ATR's competitors have well-established
relationships with ATR'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 ATR 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.
ATR 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 ATR'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 ATR's databases. If these laws are extended to
cover ATR'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. ATR plans to design its products and
services to comply with HIPAA, but any change in federal standards would require
ATR to expend additional resources. Finally, the Federal Trade Commission has

<PAGE>6

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 ATR'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 ATR to civil or
criminal penalties. In addition, ATR's relationships with Third-Party Payors may
require licensing or certifications in some states. Also, although ATR does not
currently anticipate entering the Medicare or state Medicaid markets, similar
federal regulations could adversely impact the business. Because the e-commerce
business is relatively new to the provider network industry, the impact of
current or future regulations is difficult to anticipate.

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
last year, the Department issued ATR a subpoena with respect to documents
relating to ATR's relationship with Healtheon/WebMD Corp. and the potential of
being a health care service plan under the Department's jurisdiction. ATR has
responded to this subpoena. While ATR 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 ATR's
business model. Legislation is being proposed in California to impose minimal
licensing requirements on discount plans. ATR cannot predict whether this
legislation will pass or whether it will ultimately apply to ATR. As ATR
develops a business plan, compliance with or prohibitions by state regulations
could delay or eliminate certain aspects of ATR's business or force ATR to
modify its business, which could have a material adverse impact ATR's business
and prospects.

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). ATR has engaged the
services of a business immigration lawyer to assist in the filing of all
appropriate documents necessary to comply with INS requirements. While ATR and
its immigration lawyer are very familiar with the current rules and regulations,
there can be no assurance that the immigration laws of the United States will
not be changed resulting in a potentially negative effect on the Company's
ability to convert the remaining programming employees to end customer
employees.

Year 2000 Issues

The Company has not incurred and does not anticipate incurring any
significant operating expenses related to year 2000 issues.

Human Resources

At August 31, 2000, the Company had 51 employees, consisting of 22
employees located at the Company's headquarters in Sacramento, 10 foreign
computer programmer employees located at customer locations, and 19 employees in
satellite offices in 15 states, including California. This includes Provider

<PAGE>7

Development staff of 29 that is recruiting medical providers for contracting in
35 markets in 27 states for the Internet Exchange.

Insurance

The annual coverage limits for the Company's general premises liability
and workers' compensation insurance policies are $2,000,000 for liability
insurance policies and $1,000,000 for workers' compensation. ATR also has a
$1,000,000 policy for errors and omissions insurance. Management believes such
limits are adequate for the Company's business; however, there can be no
assurance that potential claims will not exceed the limits on these policies.

RISK FACTORS

An investment in our common stock involves considerable risk. In
addition to the other information contained in this annual report, you should
carefully consider the following factors in evaluating an investment in the
Company. This annual report contains forward-looking statements that involve
risks and uncertainties. Our actual results will differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference includes those discussed below. Note that this is not an
all-inclusive list of the risks to which we are subject.

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 and may never
generate sufficient revenues to achieve profitability in this new venture. We
have limited experience addressing challenges frequently encountered by
early-stage 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 us.

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.

We have experienced losses since our inception. Our net loss applicable
to common stockholders for the years ended June 30, 2000 and 1999 was $4,938,141
and $839,247. We are currently winding down the operations that resulted in
previous operating losses. However, there is no assurance we can develop our
Internet Exchange into a profitable and sustainable business.

We may not be able to obtain additional financing.

Although there can be no assurance, we believe that the proceeds from
our recently completed offering of common stock in August 2000 and extension of
due dates on Notes payable to stockholders to December 31, 2001, will be

<PAGE>8

sufficient for us to develop our proposed Internet Exchange and continue our
normal operations until at least June 2001. We may require additional financing
to meet our capital needs and pursue our business strategy if our costs exceed
projections. Additional financing, if available, may come through incurring
indebtedness, mortgage financing or additional issuances of securities,
including securities that may have rights senior to our common stock. Any
failure to obtain additional financing on acceptable terms will have a material,
adverse affect on our business, financial condition and results of operations.

We may borrow from lenders in the future or we may issue debt
securities in public or private offerings. Any adverse economic conditions could
result in higher interest rates on variable rate debt, which could decrease our
cash available for operations.

Our revenue 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.

Our future revenue growth depends upon our establishment and maintenance of
successful relationships with Providers and strategic partners 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 partners.

As of June 30, 2000, 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.

As of June 30, 2000, we have established only one strategic
relationship, which is with Healtheon/WebMD Corp. This relationship is in an
early stage of development and is nonexclusive. We may enter into additional
strategic relationships in the future. Healtheon/WebMD Corp. and any potential
strategic partner may offer products or services of several different companies,
including products and services that compete with our products or services.
Healtheon/WebMD Corp. and any potential strategic partner 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. Healtheon/WebMD Corp. and any future
strategic partner 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 partners, we may have to devote substantially more
resources to the sales and marketing of our products and services.

<PAGE>9

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 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 brand
could be damaged and the number of customers using our 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.

We face competition from a variety of sources.

We 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 our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business and operating results. Our success depends on our ability to market our
exchange to potential Providers and third party and individual Payors and their
agents. We believe that the principal competitive factors in this market are
health and managed care expertise, data integration and transfer technology,
ability to persuade Providers and Purchasers to accept new technology and new
models, customer service and support and product and service fees. We expect
competition to increase in the future.

We are a new participant in the health care industry. Our potential
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources and significantly greater name
recognition. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our 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 us 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.

Failure to manage our growth effectively could harm our business and operating
results.

We recently have hired a significant number of new employees, including
key executives. We will continue to add personnel to maintain our ability to
grow in the future. We must integrate our new employees and key executives 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.

Our growth will place significant strain upon our management and
operational systems and resources. We will need to hire personnel to manage our
Internet Exchange and our Purchaser and Provider relationships and we may not
have the financial resources to adequately complete this expansion.

We will need to expand our existing information systems or acquire new
systems to meet the requirements of our future operations. This expansion will
be capital intensive and we may not have the financial resources to adequately
complete this expansion. Any expansion or replacement of our information systems

<PAGE>10

may not be sufficient to meet our needs. In addition, we may experience
interruptions of service as we expand these systems.

We may make acquisitions and integrating them into our business could be
expensive, time consuming and may strain our resources.

We may make acquisitions of companies which we believe have attractive
technologies or distribution channels. Integrating newly acquired organizations
and technologies into our company could be expensive, time consuming and may
strain our resources. The health care industry is consolidating and we expect
that we will face intensified competition for acquisitions. We cannot assure you
that we will succeed in consummating any such strategic relationships or
acquisitions, or that such transactions will ultimately provide us with the
ability to offer the services described. In addition, we cannot assure you that
we will be able to successfully manage or integrate any resulting business.
Consequently, we may not achieve anticipated revenue and cost benefits.

Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.

Our future success significantly depends on the services and
performance of our senior management, particularly by James W. Cameron, Jr., our
Chairman of the Board and Jeffrey S. McCormick, our Chief Executive Officer. Our
future performance will depend on our ability to motivate and retain these and
other executive officers and key employees. The loss of the services of these
managers or other senior management or key employees, or our inability to
attract additional personnel as needed could materially adversely affect our
business, financial condition, operating results and cash flows. While we
generally will enter into employment agreements with our key executive officers,
we may not be able to retain them.

Qualified personnel are in great demand throughout the Internet and
health care industries. Our future growth and our ability to achieve our
financial and operational objectives will depend in large part upon our ability
to attract and retain highly skilled technical, engineering, sales and marketing
and customer support personnel. Our failure to attract and retain personnel may
limit the rate at which we can expand our business, including the development of
new products and services and the retention of additional customers, which could
harm our business and operating results.

Our business could suffer if the integrity of our systems and the systems of
those third parties we depend on are inadequate.

We 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 Healtheon/WebMD Corp. or 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 denial or failure would harm our business and operating
results.

The occurrence of a catastrophic event or other system failure at our
facilities, when fully built, could interrupt our operations or result in the
loss or corruption of stored data. In addition, we depend on the efficient
operation of Internet and network connections among our systems, Providers and
health plans. These connections depend on the efficient operation of data
exchange tools, Web browsers, Internet service providers and Internet and

<PAGE>11

network backbone service providers. In the past, Internet users have
occasionally experienced difficulties with Internet and online services due to
system failures. Any disruption in Internet or network access provided by third
parties could harm our business and operating results. Further, we are dependent
on hardware suppliers for prompt delivery, installation and service of equipment
used to deliver our services.

Our business and reputation may be harmed if we are unable to protect the
privacy of our confidential health information.

Our information systems and Internet communications may be vulnerable
to damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers and similar disruptive problems. A user who is able to
access our computer or communication systems, when developed, could gain access
to confidential health information of individuals or our own confidential
information. A material security breach could harm our business and our
reputation or could result in liability to us. Therefore, it is critical that
our facilities and infrastructure are secure. The occurrence of any of these
events could result in the interruption, delay or cessation of our services,
which could harm our business or operating results. Further, our reputation may
suffer if third parties were to obtain this information and we may be liable for
this disclosure. Any effect on our reputation or any liability for any
disclosure could harm our business and operating results.

Our future revenue growth depends in part on increasing use of the Internet and
on the growth of e-commerce.

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 e-commerce solutions that we are in
the process of developing or may develop in the future.

Rapidly changing technology may impair our financial performance.

We may encounter difficulties responding to technological changes that
could delay our introduction of products and services and we may not be able to
respond to these changes in a timely and cost-effective manner. Our business
depends upon the use of software, hardware, networking and Internet technology
and systems. These technologies and systems are rapidly evolving and are subject
to rapid change and obsolescence. As these technologies mature, we must be able
to quickly and successfully modify our products and services to adapt to this
change. We may encounter difficulties that could delay or harm the performance
of our products or services. We may not be able to respond to technological
changes in a timely and cost-effective manner. In addition, our competitors may
develop technologically superior products and services. Further, data formatting
and claims rules within a particular health plan, or within the health plan
industry as a whole, may change and may require substantial and expensive
re-engineering of claims data and adjustment of the tools we use to process this
claims data.

We may be unable to adequately protect our intellectual property rights.

We will rely on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
intellectual property. These protections may not be sufficient, and they do not

<PAGE>12

prevent independent third-party development of competitive products or services.
Further, the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. We
currently only have registered the name "DoctorAndPatient.com" as an Internet
domain name and have not yet sought trademark protection for this name.

We enter into agreements with our employees giving us proprietary
rights to certain technology developed by such employees while employed by us;
however, we cannot be sure a court will enforce these agreements. In addition,
we may be inadequately protected against the use of technology developed by
employees who have not entered into such agreements.

A failure or inability to protect our intellectual property could have
a material adverse effect on our business, financial condition and results of
operations.

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.

The Health Insurance Portability and Accountability Act of 1996
("HIPAA") mandates the use by health plans of standard transactions,
identifiers, security and other provisions. We plan to design our products and
services to comply with HIPAA, but any change in federal standards would require
us 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.

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,
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 Third-Party Payors may
require us to be licensed or certified in some states. Also, although we do not
currently anticipate entering the Medicare or state Medicaid markets, similar
federal regulations could adversely impact our business. Because the e-commerce
business is relative 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 ("Department"), 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

<PAGE>13

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 us a subpoena with respect to documents
relating to our relationship with Healtheon/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. For example, the FTC began an
antitrust inquiry into an online marketplace for auto parts, possibly relating
to whether there might be illegal coordination among suppliers. Because our
Internet Exchange is an online marketplace, our business might be affected by
the results of this inquiry or other antitrust concerns about online
marketplaces involving competitors. We expect to structure our Internet Exchange
in compliance with applicable antitrust law.

Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject us to additional state sales, use and income taxes.

Other state, federal and local laws could harm our business and operating
results.

State, federal or local laws could harm our business and operating
results by requiring us to change the way we provide services and increase our
cost of performing services. Further, these laws could restrict our ability to
develop our business as we may plan. The health care industry is highly
regulated by federal, state and local laws. The application of existing laws, or
the implementation of new laws, applicable to our business could harm our
business and operating results.

We face a risk of litigation.

We have been involved in several significant litigation matters in our
history. Although as of June 30, 2000, we are not involved in any legal
proceedings, 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.

<PAGE>14

Our insurance may not provide adequate levels of coverage against claims.

We may be the subject of claims which are uninsurable, such as punitive
damages, or for which we cannot purchase insurance. We may not be able to
maintain adequate insurance to cover all insurable claims that we may face in
the future. If we are the subject of a claim or sustain a loss that is not
covered by insurance, our business, financial condition, results of operations
and cash flow would be adversely affected.

Your investment in us may not be liquid.

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 and traded 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
June 30, 2000, the closing price of a share of our Common Stock ranged from a
low of $0.25 to a high of $10.44. There can be no assurance that a more active
trading market for our common stock will develop or be sustained.

Any fluctuations in our operating results could subject the market
price of our common stock to rapid and unpredictable change. Our expenses will
be high and fixed in the short term and are based in part on our expectations of
future revenues, which may vary significantly and depend significantly on market
acceptance of our product and the Internet in general for locating Providers and
for purchasing health care services. If we do not achieve expected revenue
targets, we may be unable to reduce our spending quickly enough to offset any
revenue shortfall which could harm our business and operating results. Further,
any decision by a customer to cancel our services may cause significant
variations in operating results in a particular quarter and could result in
losses for that quarter. As we secure larger customers, any cancellation of
services by a larger customer likely would result in larger fluctuations in
operating results than historically experienced.

Other factors that may cause these fluctuations include:

o the number and nature of new customers of health care services;
o costs associated with strategic acquisitions and alliances or investments
in technology;
o expenses incurred for geographic and service expansion; and
o acquisitions of our customers by other companies.

Other market factors may adversely impact the market price of our common stock.

The stock markets have recently experienced extreme price and volume
fluctuations that have affected the market prices of equity securities of many
companies, including many companies in our industry, and that have been
unrelated or disproportionate to the operating performance of such companies.
Such fluctuation may adversely affect the market price of our common stock, our
ability to raise additional capital and your ability to liquidate your
investments at a favorable price. In addition, general economic, political and
market conditions such as recessions, interest rate fluctuations or
international currency exchange rate fluctuations, may adversely affect the
market price of the common stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such company. Any such litigation,
if instituted, could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on our
business, results of operations and financial condition.

Other factors may contribute to this volatility, including:

o announcements of new products and services our competitors and customer
acceptance of such new products and services,
o changes in the information technology environment,

<PAGE>15

o announcements of mergers or acquisitions by our competitors,
o fluctuations in the market price of our competitors' publicly-traded stock,
and
o adoption of new accounting standards affecting our industry, and general
market conditions and other factors.

Our executive officers and existing stockholders will retain significant
control.

Our executive officers, directors and holders of over five percent (5%)
of our common stock and their affiliates beneficially own approximately 83.0% of
the outstanding shares of common stock as of September 11, 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 approval by the other shareholders. 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. These transactions might include proxy
contests, mergers, tender offers, open market purchase programs or other
purchases of common stock that could give our stockholders the opportunity to
realize a premium over the then-prevailing market price of our common stock.

Our stock price may be affected by the availability of shares for sale in the
near future, and the future sale of large amounts of our stock, or the
perception that such sales could occur, could negatively affect our stock price.

On August 28, 2000, we completed the sale of $10 million of our common
stock at $3.00 per share resulting in the issuance of 3,333,334 shares of our
common stock. Proceeds net of offering costs are expected to be approximately
$9,600,000.

On September 11, 2000, we 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, in consideration of such notes becoming convertible
promissory notes. The convertible promissory notes are convertible into common
stock at $3.00 per share at the note holder's option.

Also on September, 11, 2000, we 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.

In addition, the exercise of any outstanding options or warrants could
dilute the net tangible book value of our common stock. Further, the holders of
such options and warrants may exercise them at a time when we would otherwise be
able to obtain additional equity capital on terms more favorable to us. The
Company has reserved 10,972,473 as of September 11, 2000 for issuance of
outstanding stock options and warrants.

The market price of our common stock could drop as a result of sales of
a large number of shares of common stock in the market that were acquired in the
private placement and common stock that may be issued upon the exercise of our
outstanding warrants, options, and convertible promissory notes.

Future issuances of preferred stock could reduce the value of our common stock.

We are authorized to issue up to 1,200,000 shares of our preferred
stock. The preferred stock may be issued in one or more series, on such terms
and with such rights, preferences and designations as our board of directors may
determine, without action by stockholders. The issuance of any preferred stock

<PAGE>16

could adversely affect the rights of the holders of common stock, and therefore
reduce the value of the common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge
with or sell our assets to a third party, thus making it more difficult for a
third party to acquire a majority of our outstanding voting stock. We have no
current plans to issue more shares of preferred stock.

We have not paid dividends, and expect to retain our earnings for the
foreseeable future.

We have not paid cash dividends on our common stock since our
inception. We do not intend to pay cash dividends on our common stock in the
foreseeable future so that we may reinvest earnings, if any, in the development
of our business.

Item 2. Description of Property

ATR'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. ("Cameron"), the Company's Chairman of the Board and
majority shareholder, 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.

Item 3. Legal Proceedings

The Company is not currently a party to any pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the quarter ended June 30, 2000 to a
vote of security holders.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

ATR's common stock is quoted on the OTC Bulletin Board under the symbol
"ATEK." Transactions in ATR's common stock are subject to the "penny stock"
disclosure requirements of Rule 15g-9 under the Exchange Act.

The table below sets forth the high and low closing prices for the
common stock of the Company for each of the last eight quarters.

Period High Low
----------------------------------- ------- -----
Quarter ended September 30, 1998 $1.03 $0.44
Quarter ended December 31, 1998 $0.50 $0.28
Quarter ended March 31, 1999 $0.75 $0.28
Quarter ended June 30, 1999 $0.75 $0.38

Quarter ended September 30, 1999 $5.53 $0.25
Quarter ended December 31, 1999 $4.44 $1.88
Quarter ended March 31, 2000 $10.44 $4.13
Quarter ended June 30, 2000 $7.75 $3.00

<PAGE>17

As of September 11, 2000, the Company had approximately 214 holders of
its shares of common stock, excluding holders of the Company's common stock held
in street name.

Dividend Policy

The Company has never paid a cash dividend on its common stock and does
not anticipate paying cash dividends on its common stock in the foreseeable
future. ATR's 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, the Company declared accrued dividends of
$759,110 in the aggregate. Of the $759,110 in accrued dividends, two of the
Series D preferred stockholders agreed to accept 158,638 shares of common stock
for $475,915 in accrued dividends based on a $3.00 per share value.

Its Board of Directors on the basis of various factors, including the
Company's results of operations, financial condition, capital requirements and
other relevant factors, will determine ATR's future dividend policy.

Item 6. Selected Financial Data

The following table presents a summary of unaudited selected financial
data for each of the five years ended June 30, 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 the
Company's outstanding common stock which became 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 June 30, 2000 presentation.

Years Ended June 30
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- -------------- -------------- ------------- -------------

Statement of Operations Data:

Contract programming revenue $ 1,280,303 $ 2,018,064 $ 5,250,002 $ 6,340,235 $ 2,561,101
Contract programming gross profit (loss) 301,908 (74,275) 530,379 1,030,893 422,062
Product Development Costs -- -- -- -- (1,154,244)
Selling, general and administrative 1,313,116 1,160,015 1,336,342 1,223,539 1,276,726
(1,695,096) (990,579) (805,963) (192,646) (2,008,908)
Loss from operations
Total other income (expense) (152,716) 342,392 (437,981) (524,101) (2,806,733)
(1,847,812) (648,187) (1,243,944) (716,747) (4,815,641)
Net loss
Preferred stock dividends in arrears (122,500) (122,500) (122,500) (122,500) (122,500)
Net loss applicable to common stockholders (1,970,312) (770,687) (1,366,444) (839,247) (4,938,141)
Basic and diluted net loss per share $ (0.12) $ (0.03) $ (0.05) $ (0.03) $ (0.10)
Shares used in per share calculations 16,124,056 25,369,315 25,964,142 26,127,730 50,329,614

Balance Sheet Data:

<PAGE>18

Years Ended June 30
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------------- -------------- -------------- ------------- -------------

Total assets $ 366,347 $ 298,142 $ 837,353 $ 599,440 $ 2,502,703
Long-term obligations 738,752 2,787,262 4,006,565 4,258,090 3,567,424
Accrued preferred stock dividends 245,000 367,500 490,001 612,501 735,001
Redeemable Preferred Stock, Series D $ 1,225,002 $ 1,225,002 $ 1,225,002 $ 1,225,002 $ 1,225,002

</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

The following discussion provides information to facilitate the
understanding and assessment of significant changes in trends related to the
financial condition of the Company and its results of operations. It should be
read in conjunction with the audited financial statements and footnotes
appearing elsewhere in this annual report.

Results of Operation

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. Two events in the last half of
fiscal year 1999 began to impact ATR's results of operations: customers moved
toward utilizing individual programmers or small (2 to 4 people) programming
teams rather than large programming teams, and several customers chose to
exercise a contract termination provision which allowed them to convert, for a
fee, ATR'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, (see Part I, Item 1, "Description
of Business").

Contract Termination Fees. Contract termination fees are amounts
received from customers when they exercise the contract provision which allows
them to convert ATR'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.

Programmer Costs. Programmer costs are the salary and other wage and
benefit costs of ATR'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".

<PAGE>19

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 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 ATR 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, ATR, 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.

ATR expenses start-up 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 ATR'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 start-up costs occur late in one reporting period and the
revenues appear in subsequent periods.

Start-up 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 are primarily the salary and other wage and
benefit costs of ATR's employees involved in recruiting the network of
healthcare providers.

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 start-up development fees payable to
Healtheon/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").

<PAGE>20

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 ATR'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 anti-dilutive. 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.

Year ended June 30, 1999 compared to year ended June 30, 1998

Contract Programming

During the last half of fiscal 1999, two events impacted ATR's results
of operations: 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 ATR'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.

<PAGE>21

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.

Programmer Costs. Programmer costs are the salary and other wage and
benefit costs of ATR'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. Start-up 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 ATR
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, ATR, 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.

ATR expenses start-up 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 ATR's case because of
its relatively small revenue base and because of its growth. The effect may be
particularly noticeable whenever the timing of placement of employees is such
that the major start-up 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.

<PAGE>22

Selling, General and Administrative Expenses

SG&A expense decreased $113,000 or 8% in fiscal 1999 compared to
fiscal 1998 primarily due to a decrease in non-cash 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
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
anti-dilutive. 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 $40,632,218 at June 30, 2000. In addition,
at June 30, 2000 the Company had a stockholders' deficit of $2,974,406.

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
January 1, 2000, Mr. Cameron and the other stockholder extended the maturity

<PAGE>23

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.

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 ATR's common stock (the
"Convertible Note") in a principal amount equal to the Straight Note and bearing
interest at the same rate. The conversion price of the Convertible Note was
equal to 20% of the average trading price of the Company's common stock over the
period of ten trading days ending on the trading day next preceding the date of
issuance of such Convertible Note.

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 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 ATR'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.

ATR's Internet Exchange development efforts will require substantial
funds prior to generating revenues. Therefore, ATR 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. 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 the next 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

<PAGE>24

such stock was less than the public trading price on the date of purchase, the
Company expects to record compensation expense of approximately $1,458,332 in
the first fiscal quarter ending September 30, 2000.

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.

Item 7A. A Quantitative and Qualitative Disclosures About Market Risk

The Company has long-term debt in the aggregate amount of $3,567,424 as
of June 30, 2000 to two stockholders of the Company. The debt bears interest at
10.25% per annum and is due December 31, 2000. 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 stockholder 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. 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.

Item 8. Financial Statements and Supplementary Data

The financial statements of the Company, including the notes thereto
and report of the independent auditors thereon, are attached hereto.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Company

The information required by this item is incorporated by reference to
the Captions "Election of Directors ", "Further Information concerning the Board
of Directors " and "Section 16(a) Information" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders which will be filed within 120
days of the of the Company's fiscal year end.

<PAGE>25

Item 11. Executive Compensation

The information required by this item is incorporated by reference to
the Caption "Executive Compensation" of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders which will be filed within 120 days of
the Company's fiscal year end.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to
the Caption "Principal Stockholders" of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders which will be filed within 120 days of
the Company's fiscal year end.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to
the Caption "Certain Relationships and Related Transactions" of the Company's
definitive Proxy Statement which will be filed within 120 days of the Company's
fiscal year end.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Exhibit
Number Description of Document

3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement on
Form S-18, Reg. No. 33-48666).

3.2 Amendment to Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1994).

3.3 Amended and Restated Certificate of Incorporation of the Registrant.

4.1 Amended and Restated Certificate of Incorporation of Registrant, including
Certificates of Designation with respect to Series A, Series B, Series C,
Series D, and Series E Preferred Stock, including any amendments thereto
(incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-3, Reg. No. 33-86962).

10.1 Form of Director and Executive Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.19 to Registration Statement on
Form S-18, Reg. No. 33-48666).

10.2 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 10-KSB 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
10-KSB for the fiscal year ended June 30, 1994).

<PAGE>26

10.4 Form of Stock Purchase Warrant issued April 22, 1993 (Class B Warrant)
(incorporated by reference to Exhibit 10.32 to Form 10-KSB 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 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 10.34 to Form 10-KSB 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 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 10.35 to Form 10-KSB 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 10-KSB 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 10-KSB 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 10-KSB 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 10-KSB 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 10-KSB for the fiscal year ended June 30, 1994).

10.12+ Stock Option Agreement, dated August 11, 1993, between the Registrant and
Russell J. Harrison (incorporated by reference to Exhibit 10.51 to Form
10-KSB for the fiscal year ended June 30, 1994).

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 10-KSB 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 10-KSB for
the year ended June 30, 1996).

10.15 Agreement with Technical Directions, Inc. (incorporated by reference to
Exhibit 10.47 to Form 10-KSB for the year ended June 30, 1996).

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).

<PAGE>27

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
10-QSB for the quarter ended December 31, 1996).

10.19 Note Payable between the Registrant and the Negri Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.61 to Form
10-QSB for the quarter ended December 31, 1996).

10.20 Note Payable between the Registrant and the Max Negri Trust dated December
31, 1996 (incorporated by reference to Exhibit 10.62 to Form 10-QSB for the
quarter ended December 31, 1996).

10.21 Note Payable between the Registrant and the Cameron Foundation dated
December 31, 1996 (incorporated by reference to Exhibit 10.63 to Form
10-QSB for the quarter ended December 31, 1996).

10.22 Note Payable between the Registrant and the James W. Cameron, Jr., as an
individual, dated December 31, 1996 (incorporated by reference to Exhibit
10.64 to Form 10-QSB for the quarter ended December 31, 1996).

10.23 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 16, 1997 (incorporated by reference to Exhibit
10.65 to Form 10-QSB for the quarter ended December 31, 1996).

10.24 Note Payable between the Registrant and James W. Cameron, Jr., as an
individual, dated January 31, 1997 (incorporated by reference to Exhibit
10.66 to Form 10-QSB for the quarter ended December 31, 1996).

10.25 Note ayable between the Registrant and James W. Cameron, Jr., as an
individual, dated February 7, 1997 (incorporated by reference to Exhibit
10.67 to Form 10-QSB for the quarter ended December 31, 1996).

10.26 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).

<PAGE>28

10.29 Note Payable between the Registrant and James W. Cameron, Jr., dated April
21, 1997 (incorporated by reference to Exhibit 10.29 to Form 10-KSB for the
year ended June 30, 1997).

10.30 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 10-KSB for the year
ended June 30, 1998).

10.34 Memorandum regarding rent reduction on that Lease between James W.
Cameron, Jr., and the Registrant, dated July 15, 1998 (incorporated by
reference to Exhibit 10.34 to Form 10-KSB for the year ended June 30,
1998).

10.35 Fourth Addendum to Lease between James W. Cameron, Jr., and the
Registrant, effective January 1, 1999 (incorporated by reference to Exhibit
10.35 to Form 10-QSB for the quarter ended March 31, 1999).

10.36 Fifth Addendum to Lease between James W. Cameron, Jr., and the Registrant,
effective January 1, 2000 (incorporated by reference to Exhibit 10.36 to
Form 10-KSB for the year ended June 30, 2000).

10.37 Healtheon Customer Agreement effective September 16, 1999.

23.1 Consent of Ernst & Young LLP, Independent Auditors

+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).

Reports on Form 8-K

There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.

<PAGE>29
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: September 22, 2000 ALTERNATIVE TECHNOLOGY RESOURCES, INC.

By /S/ JEFFREY S. MCCORMICK.
--------------------------
Jeffrey S. McCormick.
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.

Signature Title Date

/S/ JAMES W. CAMERON, JR. Chairman of the Board September 22, 2000
--------------------------- and Director
James W. Cameron, Jr.

/S/ W. ROBERT KEEN Director September 22, 2000
--------------------------
W. Robert Keen

/S/ EDWARD L. LAMMERDING Chief Financial Officer September 22, 2000
-------------------------- and Director,
Edward L. Lammerding (Principal Financial Officer)

/S/ THOMAS W. O'NEIL, JR. Director September 22, 2000
---------------------------
Thomas W. O'Neil, Jr.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

Alternative Technology Resources, Inc.

Page

Report of Ernst & Young LLP, Independent Auditors........................................................F-1
Balance Sheets as of June 30, 2000 and 1999..............................................................F-2
Statements of Operations for the Years Ended June 30, 2000, 1999 and 1998................................F-3
Statements of Stockholders' Deficit for the Years Ended June 30, 2000, 1999 and 1998.....................F-4
Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998................................F-5
Notes to Financial Statements............................................................................F-7

</TABLE>

<PAGE>F-1

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, 2000 and 1999, 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, 2000 and 1999, 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.

<PAGE>F-2

Alternative Technology Resources, Inc.

Balance Sheets
<TABLE>
<S> <C> <C>

June 30,
2000 1999
------------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 1,909,421 $ 32,642
Trade accounts receivable 98,128 472,136
Accounts and notes receivable from employees and officers - 88,956
Other current assets 84,183 5,706
------------------- ------------------
Total current assets 2,091,732 599,440
------------------- ------------------
Property and equipment:
Equipment and software 175,415 148,445
Accumulated depreciation and amortization (14,444) (148,445)
------------------- ------------------
Property and equipment, net 160,971 -
------------------- ------------------
Prepaid annual service fee 250,000 -
------------------- ------------------
$ 2,502,703 $ 599,440
=================== ==================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued interest payable to stockholders $ 613,630 $ 761,541
Notes payable to directors 23,324 41,609
Trade accounts payable 97,205 84,294
Accrued payroll and related expenses 167,507 304,287
Accrued preferred stock dividends 735,001 612,501
Other current liabilities 273,018 124,593
------------------- ------------------
Total current liabilities 1,909,685 1,928,825
------------------- ------------------

Notes payable to stockholders 3,567,424 4,258,090
------------------- ------------------
Commitments and contingencies (Notes 1, 3, 4 and 6)

Stockholders' deficit:
Convertible preferred stock, $6.00 par value - 1,200,000 shares
authorized,204,167 shares designated Series D issued and
outstanding; liquidation preference value of $1,960,003 at June 30, 2000 1,225,002 1,225,002

Common stock, $0.01 par value - 100,000,000 shares authorized;
55,329,605 shares issued and outstanding at June 30, 2000 (26,169,728 at
June 30, 1999) 553,297 261,697
Additional paid-in capital 35,879,513 28,742,403
Accumulated deficit (40,632,218) (35,816,577)
------------------- ------------------
Total stockholders' deficit (2,974,406) (5,587,475)
------------------- ------------------
$ 2,502,703 $ 599,440
=================== ==================
See accompanying notes.

</TABLE>

<PAGE>F-3

Alternative Technology Resources, Inc.

Statements of Operations

Years Ended June 30,
2000 1999 1998
--------------- ---------------- ---------------
Contract Programming:
Contract programming revenue $ 2,561,101 $ 6,340,235 $ 5,250,002
Contract termination fees 5,453 253,179 --
Programmer costs (1,745,011) (4,513,673) (3,860,641)
Start-up and other costs (399,481) (1,048,848) (858,982)
--------------- ---------------- ---------------
Contract programming gross profit 422,062 1,030,893 530,379

Product development costs (1,154,244) -- --

Selling, general and administrative (1,276,726) (1,223,539) (1,336,342)
--------------- ---------------- ---------------
Loss from operations (2,008,908) (192,646) (805,963)
--------------- ---------------- ---------------
Other income (expense):
Interest income 87,672 -- --
Interest expense to stockholders
and directors (2,894,405) (524,101) (437,981)
--------------- ---------------- ---------------
Total other income (expense) (2,806,733) (524,101) (437,981)
--------------- ---------------- ---------------

Net loss $ (4,815,641) $ (716,747) $ (1,243,944)
=============== ================ ===============

Preferred stock dividends in arrears (122,500) (122,500) (122,500)
--------------- ---------------- ---------------

Net loss applicable to common stockholders $ (4,938,141) $ (839,247) $ (1,366,444)
=============== ================ ===============

Basic and diluted net loss per share $ (0.10) $ (0.03) $ (0.05)
=============== ================ ===============

Shares used in per share calculations 50,329,614 26,127,730 25,964,142
=============== ================ ===============

</TABLE>

See accompanying notes.

<PAGE>F-4

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)
============ ============= ========== ============= ============= ============ ============= =============

</TABLE>

See accompanying notes.

<PAGE>F-5

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (decrease) in Cash and Cash Equivalents

Years ended June 30,
--------------------------------------------------------
2000 1999 1998
-------------- -------------- ----------------
Cash flows from operating activities:
Net loss $(4,815,641) $ (716,747) $(1,243,944)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 14,444 -- 8,525
Interest expense resulting from amendment to
conversion terms of notes payable 2,415,223 -- --
Interest expense included in notes payable
to stockholders 309,334 273,647 177,303
Non-cash employee compensation -- 77,343 161,720
Changes in operating assets and liabilities:
Accounts receivable 374,008 167,221 (420,099)
Other current assets (239,521) 13,638 (99,746)
Accounts payable to stockholders 73,509 199,296 286,016
Accounts payable 12,911 (27,302) (38,545)
Accrued payroll and related expenses (136,781) (42,215) 70,755
Other current liabilities 157,329 16,372 25,884
-------------- -------------- ----------------
Net cash used in operating activities (1,835,185) (38,747) (1,072,131)
-------------- -------------- ----------------
Cash flows from investing activities:
Purchase of equipment (175,415) -- --
Disposal of equipment -- -- 2,063
-------------- -------------- ----------------
Net cash provided (used) in investing activities (175,415) -- 2,063
-------------- -------------- ----------------
</TABLE>

(Continued on next page)

<PAGE>F-6

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (decrease) in Cash and Cash Equivalents
(continued)

<TABLE>
<S> <C> <C> <C>
Years ended June 30,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from private sale of common stock $ 3,712,348 -- --
Proceeds from exercise of warrants and options 193,319 $ 125 $ 43,641
Proceeds from notes payable to stockholders 33,500 992,543 1,317,000
Payments on notes payable to stockholders (33,500) (1,014,665) (275,000)
Proceeds from notes payable to directors 3,361 72,690 37,919
Payments on notes payable to directors (21,649) (69,000) --
Payments on other notes payable -- -- (23,539)
----------- ----------- -----------
Net cash provided (used) by financing activities 3,887,379 (18,307) 1,100,021
----------- ----------- -----------

Net increase (decrease) in cash and cash equivalents 1,876,779 (57,054) 29,953
Cash and cash equivalents at beginning of year 32,642 89,696 59,743
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,909,421 $ 32,642 $ 89,696
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 54,926 $ 89,699 $ 73,448

Supplemental disclosure of non-cash financing activities:
Conversion of Notes payable to common stock $ 1,000,000 -- --

</TABLE>

See accompanying notes.

<PAGE>F-7

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2000, 1999 AND 1998

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. ("ATR") 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. ATR'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, ATR 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).

<PAGE>F-8

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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.

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.

<PAGE>F-9

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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 ATR'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

<PAGE>F-10

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

statements. The Company maintains substantially all of its cash in the form of
short-term commercial paper from several companies.

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.

<PAGE>F-11

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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.

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

<PAGE>F-12

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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 ATR's common stock (the "Convertible Note") in a principal
amount equal to the Straight Note and bearing interest at the same rate. The
conversion price of the Convertible Note was equal to 20% of the average trading
price of the Company's common stock over the period of ten trading days ending
on the trading day next preceding the date of issuance of such Convertible Note.

<PAGE>F-13

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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 ATR'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.

ATR's Internet Exchange development efforts will require substantial funds prior
to generating revenues. Therefore, ATR 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 ATR'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. Healtheon/WebMD Corp. Agreement

In September 1999 the Company entered into an agreement with Healtheon/WebMD
Corp. to allow under insured and uninsured healthcare consumers to register to
use ATR's Internet Exchange, when (and if) it is developed, through the use of
Healtheon/WebMD Corp.'s Internet consumer portal. The agreement provides for
start up development fees to Healtheon/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 Healtheon/WebMD Corp. of $250,000 upon a
promotional announcement of ATR's Internet Exchange program on Healtheon/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

<PAGE>F-14

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

services by Healtheon/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 Healtheon/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
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:

<PAGE>F-15

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

<TABLE>
<S> <C> <C>
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 $ - $ -
====================== =======================

</TABLE>

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.

<PAGE>F-16

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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.

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.

<PAGE>F-17

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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
============

</TABLE>

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.

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

<PAGE>F-18

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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
=============

</TABLE>

<PAGE>F-19

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 2000:

Weighted Average
Range of Exercise Options Weighted Average Remaining Options Weighted Average
Prices Outstanding Exercise Price Contractual Life Exercisable Exercise 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
============== ==========

</TABLE>

The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 1999:

Weighted Average
Range of Exercise Options Weighted Average Remaining Options Weighted Average
Prices Outstanding Exercise Price Contractual Life Exercisable Exercise 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
------------- -------------
594,919 $0.98 572,919 $ 0.98
============= =============

</TABLE>

<PAGE>F-20

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 1998:

Weighted Average
Range of Exercise Options Weighted Average Remaining Options Weighted Average
Prices Outstanding Exercise Price Contractual Life Exercisable Exercise 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
------------ -----------------
569,919 $ 1.01 164,252 $ 1.56
============ =================

</TABLE>

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
ATR 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,

<PAGE>F-21

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)

</TABLE>

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.

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

<PAGE>F-22

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2000, 1999 AND 1998

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 ended 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.