U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997
Commission File No. 221355
ELECTRONIC TRANSMISSION CORPORATION
(Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2518619
(State of Incorporation) (I.R.S. Employer Identification No.)
5025 Arapaho Road, Suite 501 75248
Dallas, Texas (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (972) 980-0900
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 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____
As of May 14, 1997, 11,297,479 shares of the issuer's Common Stock were
outstanding.
1
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
PART I - FINANCIAL INFORMATION
------------------------------
BALANCE SHEET
-------------
(Unaudited)
ASSETS
------
March 31,
1997
----------
Current Assets:
Cash and cash equivalents $ 12,977
Accounts receivable
Trade 261,895
Employees 5,495
Current portion, capital lease
receivable 25,515
Prepaid assets 12,601
----------
Total Current Assets 318,483
----------
Property and Equipment, net 478,910
----------
Other Assets:
Capital lease receivable 23,292
Deposits and other 11,530
----------
Total Other Assets 34,822
----------
Total Assets $ 832,215
==========
1
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
BALANCE SHEETS (CONTINUED)
--------------------------
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
March 31,
1997
----------
Current Liabilities:
Accounts payable $ 390,299
Accrued expenses 300,619
Accrued payroll and taxes 203,372
Current portion, capital lease
obligations 97,606
----------
Total Current Liabilities 991,896
Debentures 52,500
Loan payable-stockholder 541,807
Long-term capital lease obligations 88,785
----------
Total Liabilities 1,647,985
----------
Stockholders' equity:
Preferred stock, $1 par value,
2,000,000 shares authorized;
no shares issued and outstanding --
Common stock, $.001 par value,
15,000,000 shares authorized;
11,297,479 shares issued and outstanding 11,297
Additional paid-in-capital 4,168,937
Additional paid-in-capital - stock options 488,435
Accumulated deficit (5,511,442)
----------
Total Stockholders' Equity (842,773)
----------
Total Liabilities & Stockholders' Equity $ 832,215
==========
2
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
STATEMENTS OF OPERATIONS
-----------------------
(Unaudited)
Three Months Ended March 31,
-----------------------------------------
1996 1997
------------------- --------------------
Service revenues $ 23,740 $ 312,774
Costs and Expenses:
Direct Costs $ 6,273 $ 191,027
Personnel Costs 264,145 450,581
Professional Fees 104,840 199,053
General and administrative 102,306 159,468
------------------- --------------------
Total Costs and Expenses 477,564 1,000,129
------------------- --------------------
Loss from operations (453,824) (687,355)
Other Income -- 864
Income tax expense -- --
------------------- --------------------
Net loss $ (453,824) $ (686,491)
=================== ====================
Loss per common share:
Primary and fully-diluted $ (0.04) $ (0.06)
================== ===================
Weighted average common
shares outstanding:
Primary and fully-diluted 10,586,542 11,695,854
================== ====================
3
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Add'l.
Paid-In
Capital
Common Stock Stock Accumulated
------------
Shares Amount Options Deficit Total
------------- -------------- ------------- -------------- --------------
Balance at December 31, 1996 10,949,146 $ 4,180,206 $ 322,067 $ (4,824,951) $ (322,678)
Issuance of shares for cash 28,333 28 -- -- 28
Issuance of shares for Compensation 320,000 -- 166,368 -- 166,368
expense
Net loss -- -- -- (686,491) (686,491)
------------- -------------- ------------- -------------- --------------
Balance at March 31, 1997 11,297,479 $ 4,180,234 $ 488,435 $ (5,511,442) $ (842,773)
============= ============== ============= ============== ===============
</TABLE>
4
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
Three Months Ended March 31,
----------------------------
1996 1997
------- -------
Cash Flows from Operations:
Net loss $ (453,824) $ (686,491)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by
Operations:
Non-cash issuance of common
stock for services rendered -- 100,000
Non-cash compensation from stock options 65,042 66,368
Depreciation and amortization 12,626 51,664
Increase in accounts receivable-trade (17,802) (25,539)
(Increase) decrease in employee advances (6,022) 22,707
(Increase) decrease in advances
to stockholders (28,157) 179,175
(Increase) decrease in prepaid expenses (8,347) 2,685
(Increase) decrease in deposits and (15,772) 2,067
other assets
Increase in accounts payable 38,357 91,021
Increase (decrease) in accrued expenses (5,626) 172,371
Increase (decrease) in accrued
payroll and taxes (13,681) 13,547
---------- ----------
Net Cash Used in Operations (433,206) (10,425)
---------- ----------
Cash Flows from Investing Activities:
Payments on capital leases receivable -- 4,011
Purchases of furniture and equipment (65,053) (7,985)
---------- ----------
Net Cash Used in Investing Activities (65,053) (3,974)
---------- ----------
Cash Flows from Financing Activities:
Payments on capital leases payable (1,506) (22,920)
Issuance of common stock for cash 438,375 28
---------- ----------
Net Cash Provided (Used) in
Financing Activities 436,869 (22,892)
---------- ----------
Net decrease in cash (61,390) (37,291)
Cash, beginning of period 115,028 50,268
---------- ----------
Cash, end of period $ 53,638 $ 12,977
=========== ==========
5
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - GENERAL
- ----------------
The unaudited financial statements included herein for Electronic Transmission
Corporation (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation. Certain information and footnote disclosures required by generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
NOTE 2 - OFFICE FURNITURE AND EQUIPMENT
- ---------------------------------------
The following is a summary of office furniture and equipment:
March 31, March 31,
1997 1996
---------- -----------
Furniture $ 104,349 $ 44,869
Computer & Office Equipment 465,344 173,772
Computer Software 94,580 66,946
Leasehold Improvements 7,866 --
---------- -----------
672,139 285,587
Less: accumulated depreciation (193,229) (44,799)
---------- -----------
$ 478,910 $ 240,788
=========== ===========
NOTE 3 - STOCK OPTIONS
- ----------------------
Compensation costs will be recognized as an expense over the periods of
employment attributable to the options at an amount equal to the excess of the
fair market value of the stock at the date of measurement over the amount the
employee must pay. The measurement date is generally the grant date.
Compensation cost totalling $166,368 was recognized as expense during the
quarter ended March 31, 1997. Had compensation cost for the Company's
stock-based compensation been determined on the fair value at the grant dates
for awards with the method of FASB Statement 123, the Company's net loss and
loss per share would have been unchanged.
During the quarter ended March 31, 1997, an additional 320,000 common stock
shares were issued as compensation costs to be expensed over 1997. Of the
320,000 shares, 220,000 were registered with the SEC pursuant to the filing of a
registration statement on Form S-8 dated April 8, 1997.
In the quarter ended March 31, 1997, L. Cade Havard, Chairman of the Board and
Chief Executive Officer, was given the option to purchase 800,000 additional
shares of the Company common stock at a price of $1.25 per share.
6
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 4- MERGER
- --------------
A special meeting of the stockholders of Electronic Transmission Corporation,
the non-surviving Texas corporation, ("ETC"), was held on January 31, 1997, at
which the stockholders ratified and approved the terms and conditions of the
Merger Agreement and authorized its Board of Directors of ETC to effect the
merger with the Company's predecessor (the "Merger"). ETC Transaction
Corporation, an Alberta, Canada corporation and the Company's predecessor
corporation, held its annual meeting on February 11, 1997, at which the
stockholders ratified and approved both the continuance of ETC Transaction
Corporation into Delaware (the "Continuance") and the Merger and authorized its
Board of Directors to effect the Merger. The Merger became effective on February
11, 1997 as the applicable Continuance and Merger documents were filed with the
appropriate authorities in the States of Delaware and Texas. ETC and ETC
Transaction Corporation intend for the merger transaction to be a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). ETC and ETC Transaction Corporation were each parties to
the reorganization and did not recognize any gain or loss as a result of the
Merger. The Merger was in effect a reverse acquisition and was accounted for as
a recapitalization of ETC with ETC as the acquirer. Effective February 11, 1997,
the name of ETC Transaction Corporation was changed to Electronic Transmission
Corporation.
The Merger was effected by ETC Transaction Corporation issuing 1.25 shares for
each issued and outstanding common share in ETC. As of the date of the Merger,
ETC had 7,153,601 shares issued and outstanding and accordingly, the Merger
resulted in the issuance of 8,942,001 shares in ETC Transaction Corporation.
Combined with the previously outstanding ETC Transaction shares, there were
10,949,146 issued and outstanding common shares of the Company after the Merger.
NOTE 5 - RELATED PARTY TRANSACTIONS
- -----------------------------------
As of March 31, 1997, the Company had a payable of $541,807, to Sterling
National Corporation, solely owned and controlled by L. Cade Havard, the
Chairman of the Board and Chief Executive Officer of the Company, for working
capital.
At March 31, 1997, the Company had a trade receivable due from Electra-Net,
L.C., a company wholly-owned and operated by L. Cade Havard, the Chairman of the
Board, Chief Executive Officer and majority stockholder of the Company. The
receivable totalling $52,770 relates to administrative fees for providing
computer processing for medical claims.
7
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 6-SUBSEQUENT EVENTS
- ------------------------
Effective April 1, 1997, the Company acquired the assets and business of
Electra-Net, L.C. in exchange for 400,000 shares of common stock valued at
$500,000. Electra-Net, L.C. is in the business of obtaining discounts and
repricing medical claims.
The Company obtained a $125,000 line of credit from Texas Community Bank in
April 1997. Advances will be made and principle plus any unpaid interest will be
due July 17, 1997. Accrued interest is payable on a monthly basis, beginning May
17, 1997, at a variable interest rate not to exceed 18% per annum. Interest will
be calculated from the date of each advance until repayment of each advance or
maturity, whichever occurs first.
Effective May 2, 1997, Elaine Boze, General Counsel and Director of the Company,
resigned to pursue her independent law practice. The resignation was not a
result of any dispute or disagreement between Ms. Boze and the Company.
In May 1997, the Company authorized the issuance of an aggregate offering of
$1,000,000 of its one-year 12% Convertible Subordinated Debentures in order to
fund new acquisitions, pay-off existing debts and for future working capital.
The Debentures are due in May 1998 with interest payable semi-annually. The
holder or holders of this Debenture may, at any time prior to maturity, convert
the principal amount of and the accrued interest on this Debenture into Common
Stock of the Company at varying conversion rates of Debenture principal and/or
accrued interest for one share of Common Stock. The offering is on a best
efforts basis and will terminate on June 1, 1997 unless otherwise extended.
8
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As ETC Transaction Corporation, the Company's predecessor, was a dormant entity
prior to the effectiveness of the Merger, the following comparative and analysis
assumes that the Merger was effective as of January 1, 1997 for the purpose of
comparing the financial condition and results of operations of ETC Transaction
Corporation and the Company for the noted periods.
Results of Operations of The Company
For the Three Months Ended March 31, 1996. For the three months ended
March 31, 1996, the results of operations were significant in that the Company
determined the types of clients to pursue and the nature of processing services
to be provided. Management secured its first substantial clients and began the
process of implementing its system for commercial use. Although no significant
revenues were generated from the electronic transmission of data, the process of
handling claims information was established.
The work flow process methodology was completed in the first quarter of
fiscal 1996, and the first clients to use this service on a commercial basis
were engaged. The first commercial operation utilizing the developed system
began operation in April 1996. Despite the extended development period, the
Company believed it was important to bring to market a service that was fully
functional. Also, management recognized that much of the Company's potential
market consisted of larger, more established companies, and that success and
credibility would be largely determined by the reliability of the Company's
systems and processes. The Company has not encountered significant technical or
procedural problems in any area of its claims processing operation since
implementation of its work flow process.
Direct expenses incurred for services provided during the development
stage in the first quarter of fiscal 1996 were $6,273 or 26% of total revenues
for the period. In addition to minimal revenues, the Company's lack of operating
history resulted in a reluctance by vendors to extend any credit to the Company
and any credit that was offered was on unfavorable terms. With the lack of
adequate trade credit to build its business, the Company relied on its ability
to generate additional capital through the issuance of debt and/or equity
securities to fund the operating expenses of the business.
For the Quarter Ended March 31,1997 Compared to the Quarter Ended March 31, 1996
For the quarter ended March 31, 1996, the Company was still a
development stage enterprise. Revenues were $23,740 and net loss was $453,824.
As the Company had not begun its ongoing operations, a detailed discussion of
comparative results of operations is not meaningful.
Revenues for the quarter ended March 31, 1997 were $312,774 and net
loss was $686,491. Principal expenses were personnel costs of approximately
$450,581 and legal and professional expenses of approximately $199,053. Legal
and professional expenses are primarily related to expenses incurred for general
corporate matters, preparation of the Merger Agreement and related documents,
the audit, and accounting and legal fees for the preparation of the Company's
Annual Report on Form 10-KSB.
9
<PAGE>
Operating Expenses
Direct costs for the quarter ended March 31, 1996 consisted primarily
of $4,036 in OCR costs.
Management believes that it has been able to manage the relationship
between cost and revenues up to the present with income increasing at a much
faster rate than expenses given the implementation of claims processing
services. Direct costs for the quarter ended March 31, 1997 consisted primarily
of $99,815 in data entry personnel costs, $60,774 in OCR costs and $9,117 in
electronic data line costs.
Net Loss
The Company incurred a net loss of $453,824 and $686,491 for the
quarters ended March 31, 1996 and 1997, respectively. The Company expects to
incur losses in future periods until it generates sufficient revenues from an
expanded client base to offset ongoing operating costs and expansion expenses.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash and cash equivalents of
approximately $12,977, and a working capital deficit of approximately $673,413.
Additionally, the Company has a $500,000 line of credit available from Ironwood
Leasing under which no borrowings were outstanding at March 31, 1997. In April
1997, the Company obtained a $125,000 line of credit from Texas Community Bank,
Dallas, Texas. Advances will be made and principle plus any unpaid interest will
be due July 17, 1997. Subsequent to the quarter ended March 31, 1997, the
Company authorized the issuance of an aggregate offering of $1,000,000 of its
one-year 12% Convertible Subordinated Debentures in order to fund new
acquisitions, pay-off existing debts and for working capital.
The Company believes that the Merger will have a positive effect on its
liquidity and capital resources. The Merger provides the Company with greater
capital resources and liquidity through the availability of public markets and
financing opportunities; however, its results of operations will be only
marginally improved as ETC Transaction Corporation had no significant
operations.
The Company has continued to expand its client base by adding new
claims automation and repricing clients, including a 90-day agreement with
Champion International.
10
<PAGE>
Research and development to be performed over the next twelve months
will be to enhance the current software programs used in automating clients by
increasing the speed of processing and developing value added services for
clients. It is not expected that costs associated with projected research and
development efforts will materially effect the financial condition and results
of operations of the Company for fiscal 1997.
Effective April 1, 1997, the Company acquired the assets and business
of Electra-Net, L.C. in exchange for 400,000 shares of common stock valued at
$500,000. Electra-Net, L.C. is a company wholly-owned and operated by L. Cade
Havard the Chairman of the Board and Chief Executive Officer of the Company.
Electra-Net is in the business of obtaining discounts and repricing medical
claims. It is estimated that the revenues from Electra-Net will increase the
current revenues 300%. The Company has not only offered this service to existing
clients, but has added five additional clients using just the discount and
repricing services.
There are no significant sales or purchases of plant and equipment
expected to occur in fiscal 1997, other than normal, recurring minor furniture
and small equipment purchases.
As the Company grows in the number of claims it processes, the number
of employees will also increase but not significantly. Personnel that is added
to handle the increase in volume will typically be added in the data perfection
and quality assurance departments. These are hourly employees and are readily
available in the marketplace.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
See Note 4 to the Financial Statements on page 7.
ITEM 5. OTHER INFORMATION
Not applicable.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Financial Statements and Exhibits Page
--------------------------------- ----
1. Financial Statements. The following financial statements are submitted
as a part of this report:
Balance Sheet - March 31, 1997............................................... F-1
Statements of Operations - Quarters Ended March 31, 1997 and 1996............ F-3
Statement of Stockholders' Equity - Quarter Ended March 31, 1997............. F-4
Statements of Cash Flows - Quarters Ended March 31, 1997 and 1996............ F-5
Notes to Financial Statements................................................ F-6
</TABLE>
2. Exhibits
Not applicable.
(b) Reports on Form 8-K.
Form 8-KSB was filed on February 11, 1997, disclosing the merger of ETC
Transaction Corporation and Electronic Transmission Corporation. The following
financial statements were filed with the Form 8-KSB:
(a)Audited Financial Statements of Electronic Transmission Corporation as
of and for the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996 and notes thereto together with the Report of
Independent Accountants.
(b)Pro-Forma Condensed Combined Financial Statements of ETC Transaction
Corporation and Electronic Transmission Corporation (unaudited):
(i)Pro-Forma Condensed Combined Balance sheet for the nine months ended
September 30, 1996 with Footnotes.
(ii) Pro-Forma Condensed Combined Statement of Operations for the nine
months ended September 30, 1996. (iii) Pro-Forma Condensed Combined
Statement of Operations for the 52 weeks ended December 31, 1995.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC TRANSMISSION CORPORATION
Signature Title Date
--------- ----- ----
/s/ L. CADE HAVARD Chairman, Chief Executive May 15, 1997
- ------------------------
L. Cade Havard Officer, President and
Director (Principal
Executive Officer)
/s/ LOUANN C. SMITH Controller (Principal May 15, 1997
- -----------------------
Louann C. Smith Accounting Officer)
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<NAME> Electronic Transmission Corporation
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 12977
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0
0
<COMMON> 4180234
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