U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File No. 221355
ELECTRONIC TRANSMISSION CORPORATION
(Name of Small Business Issuer in Its Charter)
Delaware 75-2578619
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value per share
(Title of Class)
Preferred Stock, $1.00 par value per share
(Title of Class)
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its fiscal year ended on December 31, 1996 were
$935,449.
As of March 24, 1997, 10,949,146 shares of the issuer's Common Stock and
- -0- shares of the issuer's Preferred Stock were outstanding, respectively.
Documents Incorporated By Reference
No documents, other than certain exhibits, have been incorporated by
reference in this report.
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ITEM 1. DESCRIPTION OF BUSINESS.
Business Information Concerning Electronic Transmission Corporation
Generally. Electronic Transmission Corporation ("ETC"), a Delaware
corporation, is the survivor of a merger of Electronic Transmission Corporation,
a Texas corporation ("ETC-Texas"), into ETC Transaction Corporation, a Delaware
corporation (originally incorporated in the Province of Alberta, Canada),
("ETC-Canada") in the first quarter of 1997. ETC-Texas and ETC-Canada jointly
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission which was declared effective as of January 7, 1997 to register the
shares of stock issuable to the shareholders of ETC-Texas under the terms of the
Merger Agreement, subject to approval of said merger by the shareholders of the
respective companies. On January 31, 1997, ETC-Texas shareholders approved the
merger as set out in the S-4. On February 11, 1997, the shareholders of
ETC-Canada approved the merger as set out in the S-4. ETC Transaction
Corporation, the surviving corporation, then continued into Delaware and changed
its name to Electronic Transmission Corporation, with the shareholders of
ETC-Texas receiving 1.25 shares of ETC for every one share of ETC-Texas
outstanding as of the time of the merger. The business operations of ETC-Texas
were assumed by ETC following the merger.
Claims Automation. The primary business of ETC is that of providing
automated processing services of health care claims for (i) self-insured
companies that administer their own health care plans and pay their own medical
claims, (ii) TPAs that administer health care plans and pay medical claims for
self-insured companies, (iii) PPOs, and (iv) other managed care organizations
that offer discounts on medical claims and who reprice those claims to reflect
discounts offered by providers to payors. ETC processes more than one million
claims per year for clients, the majority of which are generated by a
self-insured employer. Utilizing its existing work flow process and imaging
technology, ETC processes standardized claim and plan enrollment forms by
scanning these forms at the client's facilities, with the scanned data being
transmitted to ETC' imaging center. Once received at ETC' imaging center, the
data is processed using an optical character recognition process. ETC then
extracts all available data from the scanned claim form, manually reviews each
claim, and transmits the claim to the respective payor for adjudication and
payment.
Contracting for Discounts. Health care providers may contract with various
managed care organizations, and those contracts may limit the amount that
providers may charge for a particular service. ETC utilizes provider information
directly from the medical claim in order to contact either the managed care
organization or a provider directly to secure a discount for medical services
for the benefit of self-insured clients.
Repricing. Many PPOs cannot receive or send medical claims electronically
despite the fact that electronic transmission is required by an increasing
number of payors. ETC provides electronic processing and repricing to these
organizations on a contract basis.
Growth Strategy. ETC intends to grow by consolidating its position in its
existing market by expanding its base of self-insured, TPA and PPO clients. The
objective of ETC is to become the dominant provider of electronic medical claims
processing services. ETC intends to implement its strategy in the following
manner:
o Internal Market Development. The majority of ETC's growth is driven
from its claims automation processing activities. ETC's internal
growth initiatives consist of marketing its existing claims
automation, contracting for discounts and repricing services to
self-insured, TPA and PPO clients. ETC's relationships with existing
clients in various geographic regions allow it to engage additional
clients through referrals generated from its client base. ETC hopes to
utilize the interrelationships between various self-insured companies,
TPAs and PPOs for the purpose of enhancing its reputation in the
marketplace and in turn increasing its client base through referrals
within medical claims payor networks.
o Long-Term Customer Contracts. ETC typically enters into 90-day service
provider agreements which are cancelable by either the client or ETC
at any time. During this 90-day period, ETC evaluates the needs of the
client, develops a tailored claims processing system and initiates
claims processing procedures for the client's analysis. Upon
expiration of the 90-day period, ETC will enter into a long-term
agreement, generally for a term of two years, under the terms of which
ETC will provide claims automation processing services to the client
on a per-claim processed fee basis.
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ETC intends to utilize the 90-day review process, which is risk free
to the client, as a proving ground for its services thereby allowing
it to enter into more lucrative long-term provider contracts. ETC
believes that long-term contracts provide benefits to both itself and
its clients. Clients are able to realize the cost savings associated
with the processing of medical claims through an electronic medium,
while long-term contracts add stability to ETC's revenue base and may
deter potential competition. After the expiration of the initial term
of a long-term contract, the term of the contract continues in effect
until either ETC or the client notifies the other of its desire to
terminate. To date, ETC has only entered into a long-term contract
with Wal-Mart.
o Superior Customer Service. ETC seeks to differentiate itself through
its attention to client service. Clients receive the necessary
training in implementing the automated claims processing system and
have the ability to consult with an ETC representative via a help line
which is operational during normal business hours. ETC responds to
service calls on a timely basis and the experience level of its
personnel aids in the resolution of clients' concerns. Recognizing the
public visibility of its clients, ETC carefully maintains the
professional image of its employees.
o Rapid Installation and Enhanced Processing Capability. ETC installs
claims processing equipment, including computer, telecommunications
and scanning equipment, for use at the client's facility. Once the
contractual relationship is entered into, it is ETC's intention to
initiate claims processing services within 20 days of the date that an
agreement is reached. ETC believes its ability to rapidly install a
processing system at a client's location with minimal disruption gives
it a significant advantage in the marketplace. ETC intends to enhance
its claims processing capabilities by increasing its number of
scanners and retaining the services of additional claims processors,
both of which will afford ETC the capability of increasing the volume
of claims processed while reducing the time involved in doing so.
o Expanded Automated Enrollment. One of the most time-consuming parts of
initiating claims automation services for a new client is that of
acquiring "Eligibility Data," which consists of all of the enrollment
data gathered at the time the insured person makes application for
medical coverage. ETC has developed an enrollment form which when
filled out can be scanned and processed in much the same way medical
claim forms are processed for the insurer. The result is that
enrollment forms can be processed daily as they are received, with the
data extracted from the forms being used by ETC in claims processing.
ETC intends to utilize the availability of this form of enrollment to
market its services to potential clients.
o Expanded Repricing or Discounting of Medical Claims for PPOs. ETC
developed its own electronic medical claim repricing system which is
now used to do the work of repricing for PPO networks that do not have
Electronic Data Interchange ("EDI") capabilities. With the agreement
of the PPO networks the data used to reprice or discount the medical
claims is provided to ETC and the repricing or discounting procedures
are completed as a part of the existing claims automation services
offered by ETC. While PPOs are the main focus of this service, the new
entities that are forming in the medical community such as independent
professional associations ("IPAs"), physician hospital organizations
("PHOs") and even some health maintenance organizations ("HMOs") are
offering products that resemble those offered by PPOs and they have
the same need to automate the repricing or discounting procedures and
are potential clients for this service.
o Providing Repricing or Discounting of Medical Claims for Payors. ETC
has developed a value added service to the claims automation service
which will allow ETC to become actively involved with acquiring
discounts on medical claims for its existing clients as well as for
all new clients. This new service offers discounts on many medical
claims which have heretofore not been covered by traditional PPO
arrangements. Traditionally, PPOs have offered significant discounts
on services from their provider members, but fail to provide discounts
on other claims because patients tend to see their physician of choice
regardless of whether they are members of the particular PPO utilized
by the primary insurer. With the information on medical providers
which PPO networks are affiliated with, ETC has been able to direct
its payor clients where to go for the best source of discounts from
medical providers being used by the insured individuals. ETC has
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now contracted with several networks to lease access to the provider
members for a fee and this service is resold to the payor clients of
ETC. ETC is paid a percentage of the total discounts delivered to the
insurer which the insurer would otherwise not have been able to
access.
o Workers' Compensation Automation Service. During the development of
the work flow process by ETC, a common request by potential clients
was the automation of the process for handling workers' compensation
claims. The process in almost all cases has heretofore been done
manually. The terminology of this business segment is completely
different from healthcare as are the procedures for seeking treatment.
However, most of the claims (called bills for workers' compensation)
are the same claim forms used by medical providers for healthcare. As
with healthcare claims, the problems with workers' compensation is the
use of manual data entry to process the forms. As ETC had already
developed a system for automated data entry, ETC may link the
automation work flow process to an existing system for processing
workers' compensation claims.
Clients and Marketing. ETC markets its processing services primarily to
self-insured health plans, TPAs and PPOs. ETC generally enters into 90-day
service provider agreements, which are cancelable either by the client or ETC at
any time. During the 90-day period, ETC evaluates the needs of the client,
develops a tailored claims processing system and initiates claims processing
procedures for the client's analysis. Following the 90-day period, long-term
service contracts are entered into. The long-term agreements are generally for a
period of two years and detail the services to be provided for the benefit of
the client.
On March 5, 1996, ETC and Wal-Mart entered into an Agreement for Processing
Medical Claims on a Temporary Basis (the "Wal-Mart Agreement") pursuant to which
ETC was retained to evaluate the manner in which Wal-Mart processed its medical
claims and to implement an electronic claims processing system for claims
generated from medical services provided to Wal-Mart employees. Under the terms
of the Wal-Mart Agreement, ETC installed all necessary equipment on-site to scan
all machine-printed medical claim forms submitted by health care providers who
rendered services for the benefit of Wal-Mart employees. ETC has trained
Wal-Mart employees in scanning the machine-printed medical claims for the
purpose of transmitting an effective image to ETC for processing. As of December
31, 1996, ETC electronically processed approximately 611,250 medical claims for
the benefit of Wal-Mart, resulting in revenues to ETC of approximately $596,754.
Revenues generated from the Wal-Mart Agreement represent approximately 64% of
ETC revenues as of December 31, 1996. ETC has entered into an Agreement for
Processing and Repricing Medical Claims with Wal-Mart (the "Long-Term Wal-Mart
Agreement"), effective September 1, 1996. Under the terms of the Long-Term
Wal-Mart Agreement, ETC has agreed to provide electronic medical claims
processing and repricing services for Wal-Mart under the terms and conditions
set forth therein for a term of two years from the effective date. ETC will
receive $1.00 per claim processed for the first 50,000 claims processed in a
given month, which amount will be reduced by $.10 for every additional 50,000
claims processed in that month. Once 150,000 claims have been processed in a
given month, ETC will receive $.75 per additional claim processed during said
month.
ETC utilizes direct marketing efforts to solicit new clients and retain the
business of existing clients. ETC's marketing department consists of two
employees who focus on identifying and preparing presentations for the benefit
of self-insured companies, TPAs and PPOs. The efforts of ETC's marketing staff
are supplemented by ETC's executive officers. Also, ETC relies upon referrals
within the network of medical claims payors to expand its client base. ETC does
not anticipate that it will be required to expand its marketing efforts beyond
the strategies currently in place in order to achieve a client base necessary to
attain profitability.
Regulatory Matters. ETC is not subject to any direct federal or state
government regulation because of the nature of its business. There can be no
assurance that federal or state authorities will not in the future impose
restrictions on its activities that might adversely effect the Corporation's
business. The failure by the Corporation to obtain or retain any applicable
licenses, certifications or operational approvals could adversely effect its
existing operations and professional performance. There can be no assurance that
in the future the Corporation will be able to acquire all the necessary
licenses, permits or approvals, if any, necessary to conduct its business or
that the costs associated with complying with laws and regulations affecting its
business will not have a materially adverse effect on the Corporation.
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Competition. The medical claims processing industry is intensely
competitive and is characterized by providers of electronic claims automation
and paper claims processing services. There are also participants in the
industry which provide contracting for discount and repricing services for the
benefit of participants in the market currently served by ETC. ETC competition
in the market for electronic claims processing, contracting for discount and
repricing services is primarily derived from certain insurance companies or
other TPAs and management services organizations which are substantially larger
than ETC with much greater financial and technical resources and longer
operating histories than ETC. ETC also believes that its processing methodology
is easily duplicated. However, management of ETC believes that ETC's
competitors, while each provides only segments of the services offered by ETC,
do not offer the interconnected array of services provided by ETC. ETC believes
that it possesses a competitive advantage by offering its claims automation,
contracting for discounts and repricing services in a format that connects
payors, payees and service providers. The service methodology of ETC will allow
it to compete against more established companies with much greater financial and
technical resources. However, there is no barrier which would prohibit ETC's
competitors from modifying their current services to emulate those offered by
ETC. In addition, ETC may face substantial competition from new entrants into
the electronic claims processing industry. ETC's ability to compete successfully
with current and potential competitors will depend to a significant extent on
its ability to continue developing processing methodologies which are superior
to its competitors and to adapt to changes in the marketplace. ETC believes it
will be able to do so by developing its current clients and using their
recommendations to engage additional clients in order to compete effectively
despite ETC's current financial condition.
Leased Employees. Since January 1, 1996, ETC has been a party to a Staff
Leasing Services Agreement with Network Employers Group, Inc. ("Network"). The
Staff Leasing Services Agreement, with the consent of Network, which is not
expected to be denied, will be assigned to and assumed by the Surviving
Corporation upon completion of the Merger. Under such agreement, all personnel
working for ETC, including its executive officers (totaling 67 persons as of
December 31, 1996), are actually employed by Network and "leased" to ETC. Under
such contract, the "leased" employees perform services for ETC in a manner
substantially identical to being directly employed by ETC; however, Network is
their actual employer and provides such employees with their medical,
unemployment, worker's compensation and liability insurance through group
insurance plans maintained by Network for ETC and other clients of Network. More
specifically, ETC pays Network's service fees, for each payroll period, based
upon gross payroll and a fee rate percentage. Pursuant to the terms of the
contract, the cost of the aforesaid insurance as well as the payroll obligations
for the leased employees is funded by ETC to Network, and Network is required to
then apply such proceeds to cover the payroll and administrative costs of the
employees. Although Network is required to provide the insurance coverage
outlined above, ETC must keep in force comprehensive general liability insurance
(including products/completed operations coverage) and comprehensive automobile
liability insurance.
The agreement may be terminated by either party by giving 30 days prior
written notice to the non- terminating party. As of December 31, 1996, ETC-Texas
had 56 full-time employees and 11 part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
Properties. ETC-Texas owns no real property. ETC-Texas' principal executive
office is located in a 12,176 square foot office space facility in Dallas,
Texas. The lease (the "Lease") for the ETC-Texas' offices expires September 30,
2001 and provides for monthly rental payments of $15,662. The Lease, as amended,
has been assumed by the Surviving Corporation.
ITEM 3. LEGAL PROCEEDINGS.
Legal Proceedings. ETC is not currently a party to any litigation. Should
ETC become a party to any litigation pursuant to which ETC would be required to
pay damages, the payment of such damage award may have a material adverse effect
upon ETC's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public trading market at this time for the common or preferred
stock. The Company is awaiting approval of its application to have its common
stock quoted on the Electronic Bulletin Board of the National Association of
Securities Dealers, Inc. There are approximately 450 holders of record of the
common stock. No cash dividends have been declared and there are no restrictions
that would limit ETC's ability to pay dividends now or in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ETC Transaction Corporation (The Company)
The Company was an inactive Canadian based public company previously listed
on the ASE. The Company received a Going Concern audit opinion for the years
ended December 31, 1996 and 1995. The Company plans to overcome its financial
difficulties through its merger with ETC-Texas. In June 1996, the Company raised
$779,575 through a private offering of its Common Stock. Proceeds of the
offering were loaned to ETC-Texas. The Company was inactive and had minimal cash
needs. The major focus of the Company during the last two years has been to
merge with a commercially viable private company in exchange for the additional
liquidity and financing opportunities that are available in the public markets.
As of December 31, 1996, the Company had no assets, other than its rights under
an unsecured promissory note in the principal amount of $779,575 executed in
favor of the Company by ETC-Texas, and had no continuing operations during
fiscal 1995. Substantially all of management's efforts during fiscal 1995 and
during the first quarter of fiscal 1996 were directed toward identifying a
suitable merger candidate, preparing for such merger and obtaining capital
through the issuance of equity securities to pay the legal, accounting and other
expenses associated with such merger. As a result of the contemplated merger
with ETC-Texas, the Company continued out of Canada and domesticated into the
State of Delaware.
The Company, in 1991 and 1992, issued $605,000 in convertible debentures.
The proceeds of these offerings were used to fund costs and expenses incurred in
identifying and negotiating acquisition or merger transactions with
privately-held entities and for working capital. The Company did identify and
conduct preliminary negotiations with two entities during 1993 and 1994. As a
result of the Company's inability to consummate an acquisition or merger
transaction, the debentures went into default. In April 1996, the Company issued
552,500 shares of Company Common Stock to the debenture holders in satisfaction
of $552,500 of debt. Also in April 1996, the Company issued 284,928 shares of
Company Common Stock in satisfaction of loans to the Company primarily from L.
Cade Havard and certain non-affiliated parties. Mr. Havard, the Chairman of the
Board and Chief Executive Officer of the Company and the Chairman of the Board,
President and Chief Executive Officer of ETC-Texas, received 201,112 shares of
Company Common Stock as a result of this debt to equity conversion.
In connection with the proposed merger, the Company, on March 21, 1996,
changed its name from Solo Petroleums Ltd. to ETC Transaction Corporation. Also,
on March 21, 1996, the shareholders of the Company approved a one-for-five
consolidation of capital of the outstanding shares of the Company Common Stock.
On June 5, 1996, the Company consummated a private offering of Company
Common Stock pursuant to which the Company issued 519,717 shares of Company
Common Stock at a per share price of $1.50 for aggregate proceeds of $779,575.
The proceeds of this offering were loaned to ETC-Texas to fund (i) its business
operations, (ii) costs associated with the Merger, including legal, accounting
and related proxy statement preparation costs, and (iii) for general working
capital. As a result of the Merger, the loan has been forgiven.
Since the Company has no significant assets and has been relatively
inactive during the past two years, management of the Company does not believe
that a discussion of the Company's financial condition and results of operations
would be relevant.
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Development Stage Activities
ETC-Texas, founded December 22, 1994, is engaged in the business of
electronic collection, manipulation and transmission of health care claims
information. ETC-Texas' primary customers are self-insured companies that
administer and pay their own claims, TPAs that assist self-insured companies,
PPOs and certain managed care organizations. ETC-Texas has not generated
sufficient revenues during its limited operating history to repay its
outstanding indebtedness, pay its existing trade accounts or fund its ongoing
operating expenses or service development activities. ETC-Texas received a Going
Concern audit opinion for the fiscal years ended December 31, 1996 and 1995.
ETC, as the survivor of the merger between ETC-Canada and ETC-Texas, plans to
alleviate its current financial problems through private offerings of debt or
equity securities, borrowings and increased revenues from operations. ETC-Texas
has historically been able to raise capital through the private sales of its
common stock. At December 31, 1996, ETC-Texas had cash and cash equivalents of
approximately $50,125, and a working capital deficit of approximately $307,329.
Management believes that cash, working capital and available credit facilities
are sufficient to fund operations of ETC through the close of its fiscal year
ending December 31, 1997. During the first quarter of fiscal 1996, ETC-Texas
completed development of its operating systems. Significant additional research
and development expenditures are not anticipated at this time. ETC, through the
assumption of the business operations of ETC-Texas, currently provides three
specific types of services to its clients:
Automation services for health care claims for self-insured companies.
Self-insured companies typically employ an in-house staff or TPA that
manually processes medical claim forms. ETC assists companies in
automating this process. Through ETC's systems and processes, claim
forms are scanned at the client's location, then electronically
captured, sent to any applicable managed care organization for
repricing, and returned to the payor in an acceptable format for
evaluation and payment. As a result, claims are paid faster, a greater
degree of control over data integrity is maintained, and the
customers' in-house claims processing costs are dramatically reduced.
Locating and contracting for discounts from medical providers. Health
care providers may contract with various managed care organizations,
and those contracts may limit the amount that providers may charge for
a particular service. ETC utilizes provider information directly to
secure a discount for medical services. The cost savings realized
further reduces costs to ETC self-insured customers.
Processing medical claims on behalf of PPOs that are not automated.
Many PPOs cannot receive or send medical claims electronically despite
the fact that electronic transmission is required by an increasing
number of payors. ETC provides electronic processing to these
organizations on a contract basis. This service is currently provided
to and paid for entirely by the PPO networks.
At December 31, 1996, ETC-Texas had seventeen clients. The market includes
self-insured companies, their TPAs and the managed care organizations that serve
them. ETC-Texas expended considerable effort and resources, including operating
briefly as a TPA and hiring personnel with extensive experience in paying
medical claims, to develop its current work flow process. Additional resources
were devoted to (i) defining the exact services that were needed by the market
segment and (ii) developing, testing and ultimately implementing these services.
While expensive and time consuming, these activities serve as the basis on which
the business of ETC will operate. As ETC expands its customer base, additional
computer equipment and personnel will be required. Additional personnel and
equipment will be added as needed to service new customers, which may contribute
to increased revenues. Such expansion will be funded by (i) the revenues derived
from operations, and (ii) ETC's $500,000 line of credit from Ironwood. ETC also
has an agreement with Ironwood, under which Ironwood will fund capital equipment
expenditures.
ETC believes that the merger will have a positive effect on its liquidity
and capital resources. The merger provides ETC 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 the Company had no significant operations. ETC has continued to
expand its client base by adding new claims automation and repricing clients,
including a 90-day agreement with Champion International.
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Results of Operations of ETC-Texas
For the Twelve Months Ended December 31, 1995. For the twelve months ended
December 31, 1995, the results of the operations were significant in that
ETC-Texas determined the types of clients to pursue and the nature of processing
services to be provided. The development of the work flow process was virtually
completed and tested to determine its ultimate feasibility. A comprehensive
marketing effort was begun in the last quarter of fiscal 1995. Management
secured its first substantial clients and began the process of implementing its
system for commercial use. Although no revenues were generated from the
electronic transmission of data, the process of handling claims information was
established.
Revenues and Cost of Revenues -- 1995. Revenues earned during the year
ended December 31, 1995 were $66,612, resulting primarily from the sale of
ETC-Texas' Automated Medical Practice Solution ("AMPS") system and from
electronic claims processing for military clients. ETC-Texas ceased sales of its
AMPS system on December 31, 1995 due to the fact that a viable market never
developed for the product. During fiscal 1995, management activity was focused
on programming, research and development, and staffing.
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,
ETC-Texas believed it was important to bring to market a service that was fully
functional. Also, management recognized that much of ETC-Texas' potential market
consisted of larger, more established companies, and that success and
credibility would be largely determined by the reliability of ETC-Texas' systems
and processes. ETC-Texas 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 fiscal 1995 were $40,764 or 61% of total revenues for the period. In addition
to minimal revenues, ETC-Texas' lack of operating history resulted in a
reluctance by vendors to extend any credit to ETC-Texas and any credit that was
offered was on unfavorable terms. With the lack of adequate trade credit to
build its business, ETC-Texas 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 Year Ended December 31,1996 Compared to the Year Ended December 31, 1995
During the year ended December 31, 1995, ETC-Texas was still a development
stage enterprise. Revenues were $66,612 and net loss was $1,093,329. As
ETC-Texas had not begun its ongoing operations, a detailed discussion of
comparative results of operations is not meaningful.
Revenues for the year ended December 31, 1996 were $935,449 and net loss
was $2,470,684. Principal expenses were personnel costs of approximately
$1,254,094, and legal and professional expenses of approximately $693,541. Legal
and professional expenses are primarily related to expenses incurred in seeking
and identifying suitable merger candidates, general corporate matters,
preparation of the Merger Agreement and related documents, the audit, accounting
and legal fees for the preparation of this Proxy Statement/Prospectus.
During March 1996, ETC-Texas entered into an agreement to provide medical
claims processing for Wal-Mart. For the year ended December 31, 1996, revenues
produced by the agreement were approximately $596,754 or approximately 64% of
revenues. ETC-Texas has entered into the Long-Term Wal-Mart Agreement, effective
September 1, 1996, which agreement has been assigned to and assumed by ETC.
Under the terms of the Long-Term Wal-Mart Agreement, ETC-Texas agreed to provide
electronic medical claims processing and repricing services for Wal-Mart under
the terms and conditions set forth therein for a term of two years from the
effective date. ETC-Texas will receive $1.00 per claim processed for the first
50,000 claims processed in a given month, which amount will be reduced by $.10
for every additional 50,000 claims processed in that month. Once 150,000 claims
have been processed in a given month, ETC-Texas will receive $.75 per additional
claim processed during said month. Loss of the Long-Term Wal-Mart Agreement
would have a materially adverse effect on ETC's results of operations, and may
require ETC to temporarily reduce staff, curtail operations and delay expansion
plans.
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Operating Expenses
Start-up costs in fiscal 1995 consisted of $424,301 in employee costs and
benefits, $245,526 in general and administrative expenses, and $37,613, $39,000
and $144,717 in legal, marketing and general consulting fees, respectively.
Travel and entertainment costs were $71,469 and costs incurred in financing the
reorganization and restructuring of the Company were $23,281. Research and
development expenses in fiscal 1995 primarily consisted of $97,171 in
programming personnel and benefits, $47,525 in professional computer fees and
$35,135 from an investment in a TPA.
Direct costs in fiscal 1996 consisted primarily of $324,366 in data
entry personnel costs, $151,383 in OCR costs and $28,469 in electronic
data line costs. Start-up costs for the year ended December 31, 1996 were
comprised of $698,884 in employee costs and benefits, $845,483 in general
and administrative and $614,816 in professional fees that were incurred in
financing efforts and in preparation and filing of the S-4 Registration
Statement. Research and development expenses in fiscal 1996 consisted of
$562,272.00 in programming personnel and benefits and $39,414 in professional
computer fees. Management believes that it has been able to manage the
relationship between cost and revenues during fiscal 1996 with income increasing
at a much faster rate than expenses given the implementation of claims
processing services.
Net Loss
ETC-Texas incurred a net loss of $1,093,329 and $2,470,684 for the fiscal
years ended December 31, 1995 and 1996, respectively. ETC 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 December 31, 1996, ETC-Texas had cash and cash equivalents of
approximately $50,125, and a working capital deficit of approximately $307,329.
Additionally, ETC-Texas has a $500,000 line of credit available from Ironwood
under which no borrowings were outstanding at December 31, 1996. Under the terms
of the line of credit arrangement, ETC-Texas and now ETC may draw from the line
up to 80% of its accounts receivable that are under 65 days due. As security for
borrowings against the line of credit, ETC-Texas was required to pledge shares
of ETC-Texas Common Stock based upon a ratio whereby for every dollar borrowed
ETC-Texas would pledge that number of shares of ETC-Texas Common Stock having
two dollars worth of value. Upon consummation of the Merger, ETC will be
required to pay a loan origination fee in an amount equal to 10% of Ironwood's
exposure under the line of credit. Management believes that cash, working
capital and available credit facilities are sufficient to fund operations
through the twelve-month period ending December 31, 1997. ETC-Texas has funded
its initial capital needs and operations largely with funds provided by private
debt and equity financing. For the fiscal year ended December 31, 1995,
ETC-Texas issued an aggregate of $120,000 principal amount of debentures bearing
interest at 12%. At various times throughout fiscal 1995, holders of $120,000 of
debentures accepted ETC-Texas' offer to convert such debentures into shares of
ETC-Texas Common Stock at a conversion rate of one share of common stock for
each $1.25 of principal. All debentures were converted into a total of 96,000
shares of ETC-Texas Common Stock. This conversion allowed management to operate
ETC-Texas without debt, which management believes was essential to the success
of the venture. Management's decision to eliminate debt and to operate by
increasing capital was necessary due to the sporadic nature and overall lack of
revenue generated by ETC-Texas.
During fiscal 1995, ETC-Texas paid $210,000 and issued 3,965,100 shares of
ETC-Texas Common Stock in exchange for certain assets related to Sterling
National Corporation's ("Sterling") electronic medical claims processing
business, which was developed by Sterling as a segment of its overall business
operations. ETC-Texas acquired from Sterling certain software used in Sterling's
efforts to file medical claims electronically for physicians and medical
facilities. The software used was purchased by Sterling from an independent
software company. Upon its acquisition by ETC-Texas, the software was materially
altered to the extent that ETC-Texas effectively designed and developed its own
software program for use in its current operations. The only similarity between
the two software programs is that both are designed for the medical claims
business. However, the type of software, the intended use, the clients served,
the workflow process requirements, the storage, archival and retrieval of data
or images and the hardware required to operate the software distinguish ETC's
current software from the software purchased from Sterling.
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<PAGE>
During 1995, ETC-Texas raised $1,335,098 by issuing 2,077,110 shares of
ETC-Texas Common Stock to private investors. Also during this period, ETC-Texas
issued an aggregate of 20,000 shares of ETC-Texas Common Stock for a sum total
of $37,925 representing payment for services to a former employee of ETC-Texas
valued at $4,000 and furniture and office equipment valued at $33,925. For the
year ended December 31, 1996, ETC-Texas raised $718,989 by issuing 732,766
shares of ETC-Texas Common Stock. An aggregate of 262,625 shares were issued for
a total of $262,625 representing payment for services rendered. All of the
offering proceeds were used to fund capital expenditures, research and
development and general start-up costs.
ETC-Texas has incurred losses from operations since its inception. At
present, ETC-Texas is able to meet its funding needs as a result of borrowings
available under the line of credit and from revenues generated from current
operations. The ability of ETC-Texas to fund future costs associated with its
operations is dependent upon its ability to increase revenues from operations
and to raise additional capital through private offerings of ETC-Texas
securities. ETC-Texas may require capital principally for the enhancement of its
existing services and to fund its marketing efforts to existing and prospective
clients.
The availability of future sources of external capital are not known.
Internal sources of capital are limited to the line of credit, successfully
achieving profitable operations in future periods, or raising additional
contributions of capital from shareholders and private investors.
ETC believes it has sufficient operating capital for fiscal 1997 to operate
the business without constraint. However, the capital on hand does not allow for
expenditures deemed necessary for ETC to keep pace with its expansion plans. The
plans for expansion include adding an additional five clients by the end of the
year and expanding the office facilities to accommodate the growth which will be
encountered with the addition of the new clients. Other plans are to expand the
scope of services offered and the market segments to which the existing services
are offered. ETC will expand its service for acquiring discounts on medical
claims by entering into joint venture or revenue sharing agreements with
existing PPO networks. Also, ETC intends to expand its services for medical
claims to the workers' compensation segment of the market. This will be
facilitated by first automating its Workers Compensation Bill Audit Review
service and then offering these automated services to ETC's existing client base
which have already expressed an interest in utilizing the new services. ETC may
also seek to expand its business through acquisitions. The goal of management in
such cases will be to make prudent decisions before embarking on any acquisition
and to negotiate agreements which will insure that any acquisition candidate
will be financially self-sufficient in minimal time so as to not be a drain on
the assets of ETC. Management will also evaluate in any such cases the ability
to develop a product, service or block of business before attempting an
acquisition. ETC has no commitment, understanding or agreement with any other
party relating to a proposed acquisition. In order to fund expenditures deemed
necessary for proper growth and expansion, it will be necessary to acquire
additional operating capital by increasing equity capital and possibly the use
of debt financing, which ETC believes is available.
ETC has focused its efforts thus far on developing, refining and perfecting
its medical claim work flow process for its existing clients. While the
development of these services is now complete and working properly, the
information generated while performing these services has given rise for
additional service areas which ETC intends to develop in order to bolster its
financial condition and results of operations, including automated enrollment
procedures, repricing or discounting of medical claims for PPOs, repricing or
discounting of medical claims for payors and workers' compensation automation
services.
ETC believes that existing resources, cash flow from operations and current
credit facilities will be sufficient to fund current operations through December
31, 1997. It is anticipated that over the next twelve months, ETC will be able
to increase its client base by offering new value added services such as
Workers' Compensation automation and bill audit review and repricing for PPOs.
These added services will first be offered to ETC's existing client base and
then to all new clients. The process to engage additional clients will be to
utilize the interrelationships between various self-insured companies, TPAs and
PPOs and referrals from existing clients. ETC is currently in negotiations with
several new clients which will contribute materially to revenues in 1997. ETC
may also seek to raise additional capital through the private placement of debt
or equity securities during the first quarter of fiscal 1997.
Subsequent to December 31, 1996, a special meeting of the shareholders of
ETC-Texas was held on January 31, 1997, the shareholders ratified and approved
the terms and conditions of the Merger Agreement and authorized the Board of
Directors of ETC-Texas to effect the merger. ETC-Canada held its annual meeting
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<PAGE>
on February 11,1997, the shareholders ratified and approved both the continuance
into Delaware and the Merger Agreement and authorized the 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-Texas and ETC-Canada
intended 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-Texas and ETC- Canada are each parties to the reorganization and will not
recognize any gain or loss as a result of the merger. The Merger is in effect a
reverse acquisition and was accounted for as a recapitalization of ETC-Texas
with ETC-Canada as the acquirer. Effective February 11, 1997, the name of ETC
Transaction Corporation changed to Electronic Transmission Corporation, with the
Certificate of Incorporation being duly amended to reflect the change of name.
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 ETC for fiscal 1997.
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 ETC 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.
ITEM 7. FINANCIAL STATEMENTS.
The financial information required by this Item is found beginning at page
F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants or accounting
and financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT.
Directors and Executive Officers of ETC
The following table sets forth the names and ages of the directors
(including committee members) and executive officers (including positions) of
ETC.
<TABLE>
<CAPTION>
<S> <C>
Name Age Position
---- --- --------
L. Cade Havard(1)(2)........................ 45 Chairman, President and Chief Executive Officer and Director
Elaine Boze(2).............................. 48 General Counsel and Director
Louann C. Smith............................. 38 Controller, Treasurer, Corporate Secretary
Ann C. McDearmon............................ 46 Executive Vice President-- Director of Marketing
Timothy P. Powell........................... 38 Executive Vice President-- Data Services and Director
Michael Eckstein(1). . . . . . . . . . . . 49 Director
David O. Hannah(1).......................... 72 Director
Rick L. Snyder(2)........................... 45 Director
</TABLE>
(1) Member of Compensation Committee of ETC.
(2) Member of Audit Committee of ETC.
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<PAGE>
L. Cade Havard has served as Chairman of the Board and Chief Executive
Officer of ETC-Canada since 1992. Mr. Havard has also served as Chairman of the
Board and Chief Executive Officer of ETC-Texas since December 1994 and has
served as President of ETC-Texas since April 1996. Mr. Havard also is the sole
officer, director and shareholder of Sterling, a factoring company. From 1990
through 1992, Mr. Havard served as an independent venture capitalist providing
financing for various companies, while also serving as Chairman of the Board of
the Regional Missouri Bank, Marceline, Missouri.
Elaine Boze has served as General Counsel and a Director of ETC-Texas since
July 1995. For the nine years prior to her affiliation with ETC-Texas, Ms. Boze
was involved in the private practice of law in Dallas, Texas. From 1977 to 1986,
Ms. Boze was employed in the General Counsel's office of Sun Exploration and
Production Company in Dallas, Texas. Ms. Boze received her Doctor of
Jurisprudence degree from Texas Tech School of Law in 1973. Ms. Boze is Board
Certified -- Oil, Gas and Mineral Law, Texas Board of Legal Specialization.
Louann C. Smith has served as Controller, Treasurer and Corporate Secretary
of ETC-Texas since its inception in 1994. From March 1994 to the present, Ms.
Smith has served as Controller, Treasurer and Corporate Secretary of Sterling.
Prior to 1994, Ms. Smith worked as an accountant for Jonmar Services, attended
the University of Texas at Dallas, served as Assistant Controller for Remington
Companies and Senior Accounting Manager for Southmark Public Syndications. At
Southmark, Ms. Smith was responsible for SEC reporting for 10 public
partnerships.
Ann C. McDearmon has served as Executive Vice President and Director of
Marketing of ETC-Texas since June 1995. From November 1989 to May 1995, Ms.
McDearmon worked for Tucker and Clark, a third party administrator, as the
claims manager. Her responsibilities included claims processing, employee
management and subrogation. While serving as claims manager, Ms. McDearmon wrote
the claims logic for automated claims, created a budget and new filing system,
and wrote plan benefit designs to comply with ERISA and the ADA. Ms. McDearmon
has successfully completed the Health Insurance Association of America courses
as well as the International Claims Administration course on Medical and Dental
claims and LOMA I. Ms. McDearmon obtained a Bachelor of Arts degree from
Arkansas State in 1973.
Timothy P. Powell has served as Executive Vice President -- Data Services
and as a Director of ETC-Texas since February 1995. From 1981 to February 1995,
Mr. Powell served as a self-employed computer consultant for individuals and
corporations in the State of California. Mr. Powell contracted consulting
projects with independent, governmental organizations and Fortune 1000
companies. He provided services in system design, implementation, applications
development and procurement specifications.
Michael Eckstein has served as a Director of ETC-Texas since January 1996.
Mr. Eckstein is the President of EDI For Healthcare, a Pennsylvania-based
technology company specializing in systems, networking and EDI applications for
health care and insurance industries. Mr. Eckstein's personal experience
includes over 20 years of designing and implementing data processing and
information management solutions for health care providers and payors. He is an
active member of the ANSI Standards Committee for EDI Insurance and Healthcare
Applications, and participates in numerous EDI initiatives including the
National Information Infrastructure task force for health care and medical
applications.
David O. Hannah has served as a Director of ETC-Texas since February 1995.
For the proceeding five years, Mr. Hannah has managed his personal investments.
Mr. Hannah has spent most of his professional career in real estate development.
His area of expertise is in the purchasing and development of real estate for
the sole purpose of leasing to commercial entities.
Rick L. Snyder has served as a Director of ETC-Texas since January 1996.
Mr. Snyder is the principal owner of MS3 located in Fairfax, Virginia. MS3 is an
independent provider of Section 125, COBRA, Qualified Retirement Plan, and
Automated Payroll Processing administrative services. From 1985 to October 1996,
Mr. Snyder served as President of The L.P. BAIER Company located in Fairfax,
Virginia. The L.P. BAIER Company is an independent provider of Section 125,
COBRA, Qualified Retirement Plan, and Automated Payroll Processing
administrative services. Mr. Snyder also serves as the firm's Senior Consultant
for the Section 125 and COBRA administration practice. Mr. Snyder also lectures
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<PAGE>
on issues related to Section 125 and COBRA compliance. His courses are approved
by various State Insurance and Certified Public Accounting Departments for
continuing education credits.
Each director of ETC will hold office until the next annual meeting of
shareholders and until a successor has been elected and qualified or until his
earlier resignation or removal.
None of the Directors of ETC is a party to any material pending legal
proceedings nor have there been any legal proceedings during the last five years
that are material to an evaluation of the ability or integrity of any of the
Directors or anyone nominated to become a director of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act, as amended (the "Exchange
Act"), requires ETC's directors, executive officers and persons who own more
than ten percent of a registered class of ETC's equity securities ("10%
holders"), to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of ETC. Directors, officers and 10% holders are
required by SEC regulation to furnish the Company with copies of all of the
Section 16(a) reports they file.
Based solely on a review of reports furnished to ETC or written
representatives from ETC's directors and executive officers during the fiscal
year ended December 31, 1996, all Section 16(a) filing requirements applicable
to its directors, officers and 10% holders for such year were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for ETC-Canada
and ETC-Texas to L. Cade Havard, Chief Executive Officer of both companies. No
other executive officer of ETC- Canada or ETC-Texas received salary and bonus
compensation in excess of $100,000 in the referenced fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Annual Compensation Long-Term Compensation
Awards
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
- ---------- ---- ------------ ------------ ------------ ------------
L. Cade Havard, Chairman of the Board, 1996 $184,000 $ - 0 - - 0 - - 0 -
President and Chief Executive Officer 1995 $96,736 $ - 0 - - 0 - 400,000
</TABLE>
ETC Transaction Corporation paid no compensation to any Directors or Officers in
1996 and 1995.
Stock Options
Mr. Havard owns options to purchase 300,000 shares of ETC common stock at a
purchase price of $0.001 per share, which options vest as follows: 100,000
shares upon the consummation of the Merger, 100,000 shares on January 1, 1997
and 100,000 on January 1, 1998. Mr. Havard exercised options to purchase 100,000
shares of ETC-Texas Common Stock on April 30, 1996. The options expire upon the
termination of Mr. Havard's employment with ETC. On February 24, 1997, Mr.
Havard was granted an option to purchase 800,000 shares of ETC Common Stock at
$1.25 per share.
In addition to Mr. Havard's stock options, ETC has granted options to
purchase an aggregate of 366,667 shares of ETC Common Stock, at an exercise
price of $0.001 per share, to certain other
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<PAGE>
employees of ETC. The options vest over the period commencing October 1996 and
ending August 1999 and expire upon the termination of the holder's employment
with ETC.
On June 1, 1996, the Company issued options (the "Company Options") to
purchase an aggregate of 220,000 shares of common stock at an exercise price of
$1.50 per share on or before June 15, 1997 to two affiliated and three
unaffiliated parties in consideration for services provided to ETC- Canada. Upon
completion of the merger, the holders of the ETC-Canada Options will continue to
have the right to acquire the identical number of shares of common stock upon
payment of the $1.50 per share exercise price.
Option/SAR Grants in Last Fiscal Year by ETC-Texas
<TABLE>
<CAPTION>
<S> <C> <C>
Percent of Total
Number of Securities Options/SARs Granted Exercise or
Underlying Options/ to Employees in Base Price
SARs Granted (#) Fiscal 1996 ($/Sh) Expiration Date
------------------ ------------- -------- ---------------
Name
L. Cade Havard, Chairman of 400,000 87% $0.001 Upon
the Board, President and termination of
Chief Executive Officer employment
See "Stock
Options"
</TABLE>
Aggregated Fiscal Year-End Option Values
(Options Granted by ETC-Texas)
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Securities Underlying
Unexercised Options Value of Unexercised
at Fiscal Year-End in-the-Money Options-no market
at Fiscal Year-End
Name/Title Exercisable Unexercisable Exercisable Unexercisable
L. Cade Havard, Chairman of the Board, 200,000 100,000 $8,232 $4,116
President and Chief Executive Officer
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table provides certain information based on the outstanding
securities of ETC as of March 24, 1997, and gives effect to the Merger with
respect to each director, each beneficial owner of more than 10% of the ETC
Common Stock and all corporate officers and directors of ETC as a group.
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<PAGE>
Amount of Percent of
Name and Address Beneficial Outstanding
of Beneficial Owner(1)(2) Ownership Common Stock
- ----------------------------------- ---------- ------------
L. Cade Havard(3)(4)(5) 3,053,082 27.88
Sterling National Corporation(5) 243,868 2.23
Anneal Osbon Havard(6) 500,000 4.57
Elaine Boze(3)(7) 165,465 1.51
Louann C. Smith(8) 32,034 *
Ann C. McDearmon(9) 33,334 *
Timothy P. Powell(3)(10) 375,000 3.42
David O. Hannah(3) 944,208 8.62
Michael Eckstein(3) -0- -0-
Rick L. Snyder(3) -0- -0-
Edward Bollinger(11)(12) 13,000 *
Katherine L. MacDonald(11)(12) 10,000 *
All executive officers and directors as a 4,626,123 42.25
group (ten persons as to the Company)
* Indicates less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days following the date of this
Current Report upon the exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by
any other person) and which are exercisable within 60 days from the
date of this Current Report have been exercised. Unless otherwise
noted, the Registrant believes that all persons named in the table have
sole voting and investment power with respect to all common shares
beneficially owned by them.
(2) Unless otherwise indicated, the address of each beneficial owner
identified is: c/o ETC, 5025 Arapaho Road, Suite 501, Dallas, Texas
75248.
(3) Director of ETC.
(4) Includes (i) options to purchase 100,000 shares of common stock at an
exercise price of $0.001 per share upon the effectiveness of the
merger; (ii) 500,000 shares of Common Stock issued in the name of Mr.
Havard's minor children over which Mr. Havard exercises sole voting and
investment power; and (iii) 243,868 shares of Common Stock issued in
the name of Sterling, of which Mr. Havard is the sole shareholder.
(5) Includes 243,668 shares of ETC Common Stock issued in the name of
Sterling, but which are held for the benefit of certain former
employees of Sterling who are presently employed by ETC pursuant to
options (the "Sterling Options") to purchase such shares at an exercise
price of $0.001 per share over various vesting periods. The Sterling
Options have no expiration date, but are cancelable upon the
termination of the holder as an employee of ETC. Mr. Havard has been
designated trustee of the shares underlying the Sterling Options
pursuant to a Voting Trust Agreement, dated January 26, 1995, between
Sterling and the holders of the Sterling Options and, therefore, has
sole voting and investment control over said shares until such time as
the Sterling Options are exercised. Any shares subject to the Sterling
Option which are not exercised will revert to Sterling.
(6) Anneal Havard is the wife of L. Cade Havard. Ms. Havard exercises sole
voting and investment control over the 500,000 shares of ETC Common
Stock of which she is the record holder.
(7) Does not include options to purchase 83,334 shares of Common Stock
under Sterling Options granted to Ms. Boze which vest on March 1, 1998.
(8) Does not include options to purchase 16,667 shares of Common Stock
under Sterling Options granted to Ms. Smith which vest on March 1,
1998.
(9) Does not include options to purchase 16,667 shares of Common Stock
under Sterling Options granted to Ms. McDearmon which vest on March 1,
1998.
(10) Includes Sterling Options to purchase 375,000 shares of Common Stock at
$0.001 per share which became exercisable on March 1, 1996 and May 10,
1996 and which will become exercisable on March 31, 1997; all options
expire upon Mr. Powell's termination as an employee of ETC. Does not
include Sterling Options to purchase 125,00 shares of Common Stock
which vest on March 1, 1998.
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<PAGE>
(11) Former Directors of ETC-Canada.
(12) Includes options to purchase 10,000 shares of Company Common Stock at an
exercise price of $1.50 per share, which options expire on June 15, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company
On April 1, 1996, the Company issued 201,112 shares of ETC-Canada common
stock to L. Cade Havard, the Chairman of the Board and Chief Executive Officer
of ETC-Canada, in satisfaction of $201,112 of debt owed by ETC-Canada to Mr.
Havard. Mr. Havard transferred 121,612 of such shares in satisfaction of debt
obligations owed by Mr. Havard to unaffiliated third parties.
On June 1, 1996, ETC-Texas executed an unsecured promissory note (the
"Note") in the principal amount of $779,575 in favor of the ETC-Canada. The Note
accrued interest at the rate of 6% per annum and was due and payable on July 1,
1997. The obligation of ETC-Texas under the Note was forgiven upon the
consummation of the merger.
ETC-Texas
In early 1995, ETC-Texas purchased certain of the assets of Sterling,
including the claims processing business currently operated by ETC-Texas, in
exchange for a cash payment of $210,000 and the issuance of 3,965,100 shares of
ETC-Texas Common Stock. Sterling is currently in the business of factoring
accounts receivable. L. Cade Havard, the Chairman of the Board, President and
Chief Executive Officer of ETC-Texas and the Chairman of the Board and Chief
Executive Officer of the Company, is the sole shareholder of Sterling. Sterling
is currently the record owner of 745,368 shares of ETC-Texas Common Stock, of
which 594,368 shares are subject to the Sterling Options, representing
approximately 14% of all issued and outstanding shares of ETC-Texas Common
Stock. Sterling and ETC-Texas periodically advance and repay funds to one
another. Net payables to Sterling as of December 31, 1996 were $339,208, which
amount is due on demand and without interest. It is not anticipated that the
Surviving Corporation will enter into any further agreements with Sterling for
the purpose of borrowing or lending funds. Sterling may provide certain computer
hardware equipment to the Surviving Corporation at below market prices as the
result of contractual arrangements Sterling has with third party suppliers.
Should such transactions be undertaken, they will be effected on terms and
conditions similar to those available to the Surviving Corporation as if dealing
with an independent third party.
On December 12, 1995, ETC-Texas entered into a marketing agreement (the
"Marketing Agreement") with MS3. Rick Snyder, the principal owner of MS3, is
also a director of ETC. Under the terms of the Marketing Agreement, MS3 will
assist ETC in identifying and bringing under contract clients requiring ETC's
claims processing services. As compensation for these marketing services, MS3
shall receive an amount equal to 15% of the "gross income from revenue," as
defined in the Agreement, realized by ETC from accounts credited to MS3. Also
under the terms of the Marketing Agreement, ETC has agreed to assist MS3 in
marketing its flexible benefits and COBRA administrative services. In
consideration for this marketing assistance, MS3 has agreed to pay ETC, on a
monthly basis, an amount equal to 10% of the gross income of revenue realized by
MS3 from the services provided to clients introduced to MS3 by ETC which are
brought under contract. The Marketing Agreement is for a term ending on November
30, 1997 and shall be extended automatically for additional two-year rollover
periods unless either party desires to terminate its rights under same with at
least 60-days notice to the non-terminating party prior to the scheduled
expiration date.
On January 18, 1996, ETC entered into a consulting agreement with Michael
Eckstein, a director of ETC, pursuant to which Mr. Eckstein agreed to assist ETC
in identifying and placing under contract third party administrators ("TPAs"),
preferred provider organizations ("PPOs") and other managed care companies which
may be able to utilize ETC's claims processing services. Under the terms of this
agreement, Mr. Eckstein was entitled to receive compensation on a monthly basis
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<PAGE>
equal to $3,500 and commissions equal to8% of the "gross income from revenue,"
as defined in the agreement, realized by ETC from clients generated by Mr.
Eckstein. The obligation to receive monthly compensation of $3,500 has been
voluntarily terminated by both parties. The consulting agreement expires on
January 20, 1998, and will automatically renew for additional one-year periods
unless canceled by either ETC or Mr. Eckstein on 30-days notice prior to the
applicable expiration date.
ETC is a party to an equipment lease and stock option agreement, dated
April 23, 1996 (the "Lease Agreement") with Ironwood Leasing Ltd., a Texas
corporation ("Ironwood"). Principals of Ironwood are also shareholders of ETC.
Under the terms of the Lease Agreement, ETC leases the scanning equipment
necessary to scan paper claims and convert them into electronically
transmittable claims data information. The Lease Agreement is for a term of five
years and automatically renews for consecutive one-year periods unless a party
thereto notifies the other of its intent to terminate the Lease Agreement 90
days prior to the end of the renewal term.
Also under the Lease Agreement, ETC has granted to Ironwood the option to
either (i) sell to ETC all the equipment referenced in the Lease Agreement in
exchange for the number of shares of ETC Common Stock, or an equivalent number
of shares of an entity with which ETC may merge, equal to the purchase price for
said equipment divided by 1.25 per share or (ii) purchase, at a per share price
of $1.25, the number of shares of ETC Common Stock equal to the purchase price
of the equipment divided by 1.25 whereby ETC may in turn purchase the equipment
referenced in the Lease Agreement at the expiration of the lease term for $1.00.
On June 20, 1996, Ironwood and ETC-Texas entered into a letter agreement
whereby Ironwood waived the escrow requirements imposed upon ETC-Texas pursuant
to the Lease Agreement for the period ending June 30, 1996. Ironwood further
agreed that ETC-Texas would not have to comply with the escrow provisions of the
Lease Agreement until ETC-Texas had received 30-days written notice from
Ironwood. Furthermore, Ironwood acknowledged that any option to purchase shares
of the common capital stock of ETC-Texas pursuant to the Lease Agreement would
have an exercise price of $1.25 per share.
Effective May 1, 1996, Roy W. Mers ("Mers") resigned from his position as
President and Director of ETC-Texas. As a consequence to his resignation,
ETC-Texas and Mers entered into a Settlement and Employment Agreement. Pursuant
to that agreement, ETC-Texas has agreed to pay to Mers, as compensation for his
efforts in assisting ETC-Texas to obtain financing for ETC-Texas' business
ventures, a commission of: (a) 10% of all capital invested by private investors
for which no commission is due to any other funding source, (b) the following
percentages based upon a "Lehman Formula" for additional capital provided by an
investment banking or brokerage group to which a commission is due, 5% on the
first $1,000,000, 4% on the second $1,000,000, 3% on the third $1,000,000, 2% on
the fourth $1,000,000 and 1% on the capital raised in excess of $5,000,000; (c)
2% of the loan amount or maximum amount used on any credit line for any loans
generated or credit lines established by Mers on behalf of ETC-Texas. Mers is
also entitled to receive ETC-Texas stock at the rate of 100,000 shares for the
first $1,000,000 of capital raised, 75,000 shares for the second $1,000,000 of
capital raised, 50,000 shares for the third $1,000,000 of capital raised and
25,000 shares for the fourth $1,000,000 and each additional $1,000,000 in
capital raised. The stock may be earned pro rata beginning at $500,000. If less
than $500,000 in capital is provided, then no shares will be earned.
Furthermore, ETC-Texas shall continue to provide medical insurance to Mers for
the term of the agreement. The agreement terminated on July 31, 1996. However,
ETC-Texas has agreed to pay Mers' compensation and stock bonuses should any
financial institution that Mers introduces to ETC-Texas subsequently provide
financing to ETC-Texas or the Surviving Corporation prior to August 1, 1997.
-17-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-K.
(a) Financial Statements and Exhibits Page
1. Financial Statements. The following financial statements are
submitted as part of this report:
ETC - Canada
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . . .. . . . . . . . F-2
Statements of Operations - Years Ended December 31, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity - Years Ended December 31,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 .
Statement of Cash Flows - Years Ended December 31, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
ETC - Texas
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . . .. . . . . . . . . F-12
Statements of Operations - Years Ended December 31, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Statements of Stockholders' Equity - Years Ended December 31,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15.
Statement of Cash Flows - Years Ended December 31, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
ETC-Canada and ETC-Texas Pro-Forma
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
Balance Sheet - December 31, 1996 . . . . . . . . . . . . . .. . . . . . . . . . . . F-30
Statement of Operations - Year Ended December 31, 1996 . . . . . . . . . . . . . . . . F-32
Balance Sheet - December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33
Statement of Operations - Year Ended December 31, 1995 . . . . . . . . . . . . . . . . . F-34
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
</TABLE>
2. Exhibits
Exhibit
Number Description of Exhibits
2.1* Agreement and Plan of Merger dated as of
May 1, 1996, By and among the Registrant
and Electronic Transmission Corporation.
3.1* Articles of Incorporation of the Registrant,
dated September 5, 1986.
-18-
<PAGE>
3.2* Articles of Amendment to the Articles of
Incorporation of The Registrant, dated March 26,
1996.
3.3* Bylaws of the Registrant, dated September 5,1986.
3.4* Form of Certificate of Incorporation of the
Registrant, as Continued and domesticated into
the State of Delaware.
3.5* Form of Bylaws of the Registrant, as continued
and Domesticated into the State of Delaware.
4.1* Specimen of Continued Common Stock Certificate.
9.1* Voting Trust Agreement, dated January 26, 1995,
between Sterling National Corporation and
holders of Sterling Options.
10.1* Bill of Sale, dated effective January 1, 1995,
by and between Electronic Transmission
Corporation and Sterling National Corporation
10.2* Agreement for Processing Medical Claims on a
Temporary Basis, dated effective March 5, 1996
by and between Electronic Transmission
Corporation and Wal-Mart.
10.3* Equipment Lease and Stock Option Agreement,
effective April 23, 1996, by and between
Electronic Transmission Corporation and
Ironwood Leasing Limited.
10.4* Letter Agreement, dated June 20, 1996, between
Electronic Transmission Corporation and Ironwood
Leasing Limited.
10.5* Promissory Note, dated June 1, 1996, in the
principal amount of $779,574.50, executed in
favor of the Registrant by Electronic
Transmission Corporation.
10.6* Staff Leasing Services Agreement, dated
effective December 15, 1995, by and between
Network Employers Group, Inc. and Electronic
Transmission Corporation.
10.7* Employment and Settlement Agreement, dated
January 2, 1995, Between Electronic Transmission
Corporation and L. Cade Havard.
10.8* Employment and Settlement,dated December 4,1995,
between Electronic Transmission Corporation and
Elaine Boze.
10.9* Employment and Settlement Agreement, dated
March 1, 1995, between Electronic
Transmission Corporation and Timothy P. Powell.
10.10* Employment Agreement, dated May 1, 1996, between
Electronic Transmission Corporation and Ann C.
McDearmon.
10.11* Employment Agreement, dated April 1, 1996,
between Electronic Transmission Corporation and
Louann Smith.
-19-
<PAGE>
10.12* Settlement and Employment Agreement,dated May 1,
1996, between Electronic Transmission
Corporation and Roy W. Mers.
10.13* Office Lease, dated January 5, 1995, by and
between Natron Limited Partnership and
Electronic Transmission Corporation, including
amendments thereto.
10.14* Agreement for Processing and Repricing
Medical Claims, effective September 1, 1996
by and between Electronic Transmission
Corporation and Wal-Mart.
16.1* Form of Notice of Change of Auditor.
16.2* Letter of Hans P. Cremers, Chartered Accountant,
dated June 24, 1996.
16.3* Letter of Simonton, Kutac & Barnidge, L.L.P.,
dated June 24, 1996.
27.1* Financial Data Schedule
*Previously filed as an exhibit to ETC's Registration
Statement on Form S-4, declared effective on January 7, 1997,
and incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
-20-
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 10, 1997
To the Board of Directors
of Electronic Transmission Corporation:
We have audited the accompanying balance sheets of Electronic Transmission
Corporation ("Company"), a Texas corporation, as of December 31, 1995 and 1996,
and the related statements of operations, stockholders' equity and cash flows
for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Electronic Transmission
Corporation as of December 31, 1995 and 1996, and the results of operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
As described in Note 2, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced accumulated net losses of $3,564,013 since its inception.
Additionally, the Company's current liabilities exceeded its current assets by
$307,329 at December 31, 1996. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding those matters are also described in Note 2. Unless the Company obtains
an increased customer base, it will not be able to meet its obligations as they
come due and it will be unable to execute its long-term business plan. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
<PAGE>
The accompanying notes are an integral part of these financial statements.
ELECTRONIC TRANSMISSION CORPORATION
BALANCE SHEETS
ASSETS
December 31, December 31,
1995 1996
------------- -----------
Current Assets:
Cash and cash equivalents $ 114,885 $ 50,125
Accounts receivable
Trade 7,059 236,356
Shareholder 82,744 --
Employees 5,734 28,203
Current portion, capital lease
receivable -- 25,095
Prepaid assets 9,204 15,286
------------ ----------
Total Current Assets 219,626 355,065
------------ ----------
Property and Equipment, net 137,348 521,576
------------ ----------
Other Assets:
Capital lease receivable -- 27,723
Deposits and other -- 14,610
------------ ----------
Total Other Assets -- 42,333
------------ ----------
Total Assets $ 356,974 $ 918,974
============ ==========
<PAGE>
BALANCE SHEETS (CONTINUED)
LIABILITIES & STOCKHOLDERS' EQUITY
December 31, December 31,
1995 1996
----------- -----------
Current Liabilities:
Accounts payable $ 56,340 $ 221,315
Accrued expenses 809 128,248
Accrued payroll and taxes 109,131 189,825
Accrued interest payable -- 27,800
Current portion, capital lease
obligations -- 95,206
---------- ----------
Total Current Liabilities 166,280 662,394
Note payable -- 779,575
Loan payable-shareholder -- 339,208
Long-term capital lease obligations -- 114,106
---------- ----------
Total Liabilities 166,280 1,895,283
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, no par value,
2,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value,
8,000,000 shares authorized;
6,158,210 and 7,153,601
shares issued and outstanding,
respectively 1,494,023 2,475,637
Additional paid-in-capital - stock options -- 322,067
Accumulated deficit (1,303,329) (3,774,013)
---------- ----------
Total Stockholders' Equity 190,694 (976,309)
---------- ----------
Total Liabilities & Stockholders' Equity $ 356,974 $ 918,974
========== ==========
<PAGE>
STATEMENTS OF OPERATIONS
For the Years
Ended December 31,
1995 1996
Service revenues $ 66,612 $ 935,449
---------- -----------
Costs and Expenses:
Direct costs 40,764 549,422
Start-up costs 939,347 395,866
Research and development 179,830 1,469,858
General and administrative -- 953,775
---------- -----------
Total Costs and Expenses 1,159,941 3,368,921
---------- -----------
Loss from operations (1,093,329) (2,433,472)
Other Income (Expense):
Interest Expense -- (37,212)
---------- -----------
Loss before income tax expense (1,093,329) (2,470,684)
Income tax expense -- --
---------- -----------
Net loss $(1,093,329) $ (2,470,684)
========== ===========
Loss per common share:
Primary and fully-diluted $ (0.32) $ (0.36)
========== ===========
Weighted average common shares outstanding:
Primary and fully-diluted 3,377,069 6,906,593
========== ===========
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Add'l.
Paid-In
Common Stock Capital
---------------------- Stock Accumulated
Shares Amount Options Deficit Total
-------------- ------------- -------------- ------------- --------------
Balance at December 31, 1994 1,000 $ 1,000 $ -- $ -- $ 1,000
Issuance of shares for business 3,965,100 20,751 -- -- 20,751
Deemed dividend paid -- -- -- (210,000) (210,000)
Issuance of shares for cash 1,916,110 1,201,659 -- -- 1,201,659
Issuance of shares for cash
to related party 160,000 112,688 -- -- 112,688
Issuance of shares for services
to related party 4,000 4,000 -- -- 4,000
Issuance of shares for furniture
and equipment 16,000 33,925 -- -- 33,925
Issuance of shares on conversion
of convertible debentures 96,000 120,000 -- -- 120,000
Net loss -- -- (1,093,329) (1,093,329)
-------------- -------------- --------------- -------------- ---------------
Balance at December 31, 1995 6,158,210 1,494,023 -- (1,303,329) 190,694
Issuance of shares for cash 732,766 718,989 -- -- 718,989
Issuance of shares for services 262,625 262,625 -- -- 262,625
Compensation expense -- -- 322,067 -- 322,067
Net loss -- -- - (2,470,684) (2,470,684)
-------------- -------------- --------------- ---------- ----------
Balance at December 31, 1996 7,153,601 2,475,637 $ 322,067 $ (3,774,013) $ (976,309)
============== ============== =============== ============== ===============
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
For the Years
Ended December 31,
1995 1996
--------------------------------------
Cash Flows from Operations:
Net loss $ (1,093,329) $ (2,470,684)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by Operations:
Non-cash issuance of common stock for services rendered 4,000 262,625
Non-cash compensation from stock options -- 322,067
Depreciation and amortization 32,173 111,419
Increase in accounts receivable-trade (7,059) (229,297)
Increase in employee advances (5,734) (22,469)
(Increase) decrease in advances to shareholders (82,744) 421,949
Increase in prepaid expenses (9,204) (11,531)
Increase in deposits and other assets -- (10,174)
Increase in accounts payable 56,340 172,020
Increase in accrued expenses 809 120,395
Increase in accrued payroll and taxes 109,131 80,695
Increase in accrued interest payable -- 27,800
---------------- ---------------
Net Cash Used in Operations (995,617) (1,225,185)
---------------- ---------------
Cash Flows from Investing Activities:
Payments on capital leases receivable -- 11,642
Purchases of furniture and equipment (114,845) (312,580)
----------------- ---------------
Net Cash Used in Investing Activities (114,845) (300,938)
---------------- ---------------
Cash Flows from Financing Activities:
Issuance of convertible debentures 120,000 --
Dividend paid (210,000) --
Proceeds from note payable -- 779,575
Payments on capital leases payable -- (37,202)
Issuances of common stock for cash 1,314,347 718,990
---------------- ---------------
Net Cash Provided by Financing Activities 1,224,347 1,461,363
---------------- ---------------
Net increase (decrease) in cash 113,885 (64,760)
Cash, beginning of period 1,000 114,885
---------------- ---------------
Cash, end of period $ 114,885 $ 50,125
================ ===============
</TABLE>
<PAGE>
ELECTRONIC TRANMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND
Electronic Transmission Corporation ("ETC" or "Company") was in the development
stage until the last quarter of 1996, as it had no significant revenues. In the
last quarter, a long-term contract was executed with a large national
self-insured corporation and operations commenced. ETC's business plan is to
provide electronic transaction processing services to the health care market.
The principal service is the electronic capture and transfer of medical claims
for on-line eligibility verification and adjudication between health care
providers, self-insured organizations, third party administrators and other
managed care organizations.
Background -- ETC was incorporated in the state of Texas on December 22, 1994.
On April 19, 1995, the Company entered into an agreement to purchase the rights
to the technology and business of electronically editing and transmitting
medical claims from providers to payment organizations (the Purchased Business)
from Sterling National Corporation ("SNC") by issuing 3,965,100 common shares
and a cash payment of $210,000. SNC is a company wholly-owned and controlled by
ETC's Chairman of the Board, C.E.O. and majority shareholder. The transaction
was accounted for using the purchase method as follows:
Assets Acquired:
Accounts receivable $ 5,630
Computer hardware 1,403
Computer software 13,718
------------
Total tangible assets 20,751
Consideration Paid:
Cash $ 210,000
3,965,100 common shares 20,751
------------
Total consideration 230,751
Dividend paid to shareholder $ 210,000
============
Treatment of the excess cash consideration paid for the acquired business is
accounted for as a deemed dividend in accordance with generally accepted
accounting principles. Goodwill was not recorded since this transaction was
consummated with a related party and this treatment would have constituted a
step-up in basis. The transaction is reflected in the financial statements on
the date the transaction occurred (April 19, 1995), in accordance with generally
accepted accounting principles.
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (Continued)
Cash Equivalents -- For purposes of the statements of cash flows, the Company
considers any short-term cash investment with a maturity of three months or less
to be a cash equivalent.
Accounts receivable -- The Company's trade receivables arise from sales in the
normal course of business. ETC uses the allowance method to account for
uncollectible accounts; in management's opinion, all accounts are collectible
and no allowance is necessary at December 31, 1995 and December 31, 1996.
Revenue recognition - The Company recognizes revenue when services are
performed.
Office Furniture and Equipment -- Office furniture, computer and office
equipment, software and leasehold improvements are stated at cost. Maintenance
and repairs are charged to operating expense. Costs of significant improvements
and renewals are capitalized. Depreciation is provided on the straight-line
basis over the following useful lives:
Useful
Lives
-------
Office furniture 5 years
Computer and office equipment 3 years
Computer software 3 years
Leasehold improvements 5 years
Periodically, the Company evaluates whether changes have occurred that would
require revision of the remaining estimated useful lives of the equipment or
rendered the value of the equipment not recoverable. The recoverability is
evaluated by estimating the future cash flows expected to result from use of the
asset and its eventual disposition. Equipment as of December 31, 1996, is not
considered to be impaired.
Start-Up Costs -- Start-up costs incurred during the period of developing ETC's
business plan are expensed as incurred in accordance with generally accepted
accounting principles.
Research and Development -- Research and development costs incurred are expensed
as incurred in accordance with generally accepted accounting principles.
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (Continued)
Income Taxes -- ETC utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Loss Per Share -- Loss per common share was calculated by dividing the Company's
net loss by the weighted average common shares outstanding. Common stock
equivalents were excluded from the calculation as such inclusion would have had
an anti-dilutive effect; therefore, fully diluted earnings per share is
considered to be the same as primary earnings per share. Loss per common share
assuming full dilution was calculated in the same manner as described above,
except that those shares that were issued in connection with debt conversions
were assumed to be outstanding for the entire period.
Use of Estimates and Assumptions -- Management uses estimates and assumptions in
preparing its financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses. Actual
results could vary from the estimates that were used.
Stock-based Compensation -- The Company compensated certain employees for
services rendered by issuing shares of common stock to these individuals during
1995. The measurement date for determining compensation costs is the date of the
grant. Compensation cost is the excess, if any, of the quoted market price of
the stock at grant date over the amount the employee must pay to acquire the
stock. Compensation cost is recognized as an expense over the period of
employment attributable to the option.
New Accounting Standards -- In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123), was
issued. This statement requires the fair value of stock options and other
stock-based compensation issued to employees to either be included as
compensation expense in the income statement or the pro forma effect on net
income and earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements commencing with the
Company's 1996 fiscal year. ETC adopted SFAS 123 on January 1, 1996. The Company
will continue to measure compensation costs using the "intrinsic value based
method" of accounting for stock issued to employees.
<PAGE>
NOTE 2 - GOING CONCERN AND CONTINUED OPERATIONS
The financial statements have been prepared on the assumption that the Company
will continue as a going concern. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or classification of liabilities which may result from
the inability of the Company to continue as a going concern. ETC sustained a net
operating loss of $1,093,329 and $2,470,684 during the years ended December 31,
1995 and 1996, respectively, and has accumulated losses of approximately
$3,564,013 since inception. Cash used by operating activities and dividends for
the same periods aggregated $995,617 and $1,225,185, respectively. Additionally,
at December 31, 1996, ETC's current liabilities exceeded its current assets by
$307,329. ETC's continued existence depends upon the success of management's
efforts to raise sufficient capital and increase its customer base to execute
its business plan.
Management plans to mitigate the going concern issues by marketing its services
to large self-insured insurance companies to develop its customer base and
increase profitability. Management believes that it will be successful in
generating sufficient cash to support its operations. There can be no degree of
assurance that the Company will be successful in raising additional working
capital or executing its business plan to the extent that it will be profitable.
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
December 31, December 31,
1995 1996
------------- --------------
Furniture $ 43,056 $ 104,349
Computer & Office Equipment 68,752 458,178
Computer Software 57,713 92,836
Leasehold Improvements -- 8,791
----------- -----------
169,521 664,154
Less: accumulated depreciation (32,173) (142,578)
----------- -----------
$ 137,348 $ 521,576
=========== ===========
Depreciation expense was $32,173 and $110,405 for 1995 and 1996, respectively.
<PAGE>
NOTE 4 - LEASE OBLIGATIONS RECEIVABLE
The Company, as lessor, has entered into a non-cancelable lease for service
equipment. Future minimum lease payments receivable under non-cancelable leases
at December 31, 1996 are as follows:
For the Years Ending Capital
December 31, Leases
1997 $ 29,248
1998 29,248
-----------
Total minimum lease payments 58,496
Less: amount representing interest (5,678)
-----------
Present value of minimum lease payments 52,818
Less: current portion (25,095)
-----------
Long-term capital lease obligation $ 27,723
===========
NOTE 5 - CONVERTIBLE DEBENTURES
At various times throughout 1995 the Company issued convertible debentures
totalling $120,000. These debentures bore interest at 12% per annum and were
convertible into common shares at the option of the holder at a conversion rate
of one common share per $1.25 of debenture being converted. As of December 31,
1995, all debenture holders had exercised their options and converted their
debentures into a total of 96,000 common shares.
NOTE 6 - LEASE OBLIGATIONS PAYABLE
The Company, as lessee, has entered into various non-cancelable leases for
service equipment, vehicles, and office facilities. The cost of assets subject
to capital leases included in office furniture and equipment amounted to
$182,053 less accumulated depreciation of $21,044 at December 31, 1996.
<PAGE>
NOTE 6 - LEASE OBLIGATIONS PAYABLE (Continued)
Future minimum lease payments under non-cancelable leases at December 31, 1996,
are as follows:
For the Years Ending Capital Operating
December 31, Leases Leases
1997 $ 111,852 $ 177,984
1998 102,495 183,680
1999 18,890 189,375
2000 -- 195,071
Thereafter -- 149,507
--------- ----------
Total minimum lease payments 233,237 $ 895,617
========= ==========
Less: amount representing interest (23,925)
----------
Present value of minimum lease payments 209,312
Less: current portion (95,206)
----------
Long-term capital lease obligation $ 114,106
==========
Rent expense during the years ended December 31, 1995 and 1996 for all operating
leases was $49,988 and $122,544, respectively, and is included in operating
expenses.
In April 1996, The Company entered into an equipment lease agreement and stock
option agreement with a leasing company which is recorded as a capital lease by
the Company. The agreement is for a term of five years and allows the Company to
lease certain equipment for amounts specified in the agreement with rental
payments due on the first of each month. As of December 31, 1996, monthly
payments required under the lease agreement amounted to $9,321 expiring in 1998.
At any time during the term of the agreement, the leasing company has the right
to 1) sell to ETC any or all of the equipment in exchange for the number of
shares of ETC common stock, or stock of any company with which ETC merges, that
is equal to the purchase of the equipment divided by $1.25 per share or, 2)
purchase, at $1.25 per share, the number of shares of ETC stock, or stock of the
merged company, equal to the purchase price of the equipment divided by 1.25,
and give ETC the option to purchase the equipment at the end of the lease for
$1.00; provided, that if ETC issues, agrees to issue or grants an option to
purchase ETC stock to any other person for a price less than $1.25 per share,
the price payable to the leasing company will be reduced to such lower price.
<PAGE>
NOTE 6 - LEASE OBLIGATIONS PAYABLE (Continued)
The leasing company agreement contains certain restrictive covenants which (i)
require ETC to escrow all accounts received which are derived from the use of
this equipment, less third party costs, through March 31, 1996 or until any
class of stock is registered with the SEC are otherwise becomes publicly traded,
or the funds in escrow equal the total purchase price of the equipment, and (ii)
restrict ETC from issuing additional securities before ETC merges with a public
company. ETC is in violation of each of these covenants and has obtained a
waiver from the leasing company which releases ETC from any claims under the
escrow requirement and violations relating to the issuance of securities.
NOTE 7 - LINE OF CREDIT
Under the agreement with the leasing company discussed in Note 6, ETC has
obtained a $500,000 line of credit from the leasing company to be used as
working capital. ETC may draw from this line up to 80% of its accounts
receivable that are under 65 days past due. To secure this line of credit, ETC
will pledge shares of its common stock on a two for one basis (i.e., two dollars
trade value of its stock for every one dollar drawn from the line of credit).
ETC will pay a loan origination fee, beginning three months after ETC merges
with a public company, in an amount equal to 10% of the leasing company's
exposure under this agreement including the amount spent to purchase equipment
and the amount drawn on the line of credit. This fee will be a cumulative amount
calculated each quarter. As of December 31, 1996, the Company has made no draws
on this line of credit.
NOTE 8 - INCOME TAXES
ETC has net operating loss carryforwards approximately $3,160,000 that are
available to offset its future income tax liability. The net operating loss
carryforwards expire in the year 2010 and 2011. The realization of the benefits
from these net operating loss carryforwards appears uncertain due to going
concern questions and the possible effects of the ETC Transaction Corporation
merger. Accordingly, a valuation allowance of $372,000 and $1,115,000 has been
recorded at December 31, 1995 and December 31, 1996, respectively, against the
deferred tax asset resulting from the net operating loss carryforward. There are
no other significant temporary differences for financial and income tax
reporting purposes at December 31, 1995 and 1996.
<PAGE>
NOTE 9 - STOCK OPTIONS
The Company has issued various stock options to employees of the Company which
are considered compensatory. Stock options were initially granted by the Company
during 1995 and no stock options were vested as of December 31, 1995. Additional
stock options were granted in 1996 with 134,666 vesting as of December 31, 1996.
Vesting varies by employee agreement ranging from 2 to 3 years.
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ended Year ended
December 31, 1995 December 31, 1996
---------------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- ------------- -------------- ------------- -------------- ---------------
Outstanding, beginning of period -- -- 675,000 $0.001
Granted 675,000 $0.001 260,000 $0.001
Exercised -- -- (118,333) $0.001
Forfeited/expired -- -- (125,000) $0.001
-------------- --------------
Outstanding, end of period 675,000 $0.001 691,667 $0.001
============== =============
Options exercisable, end of period -- -- 18,333 $0.001
============== =============
Weighted average fair value of
options granted during the year $ 1.25 $ 1.12
============== =============
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Range of exercise prices $0.001 per common share
Weighted average remaining contractual life 2.99 years
Weighted average exercise price $0.001 per common share
<PAGE>
NOTE 9 - STOCK OPTIONS (Continued)
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. As of
December 31, 1995, no compensation cost was recognized as expense. Future
compensation expense to be recorded in subsequent periods as of December 31,
1995 and 1996, was $474,540 and $555,897, respectively. Compensation cost
totalling $322,067 was recognized as expense during the year ended December 31,
1996. 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.
NOTE 10 - COMMITMENTS
On April 19, 1995, ETC entered into an agreement with Texas Administrators, Inc.
("TAI"), a third party administrator for medical claims. The agreement called
for TAI to assign the rights to third party administrator accounts for a total
purchase price of $75,000, representing 1.15 times one year's contracted
revenue. Of the purchase price, $35,000 was paid to TAI subsequent to year end.
Additionally, ten (10) monthly payments of $4,000 commencing June 10, 1995, are
payable to TAI under an executed promissory note.
The agreement called for ETC to enter into consulting agreements with each of
the 3 key employees/ sole shareholders of TAI. The consulting agreements called
for each of the individuals to assist ETC in retaining and servicing the
assigned accounts and to seek out new third party administrator accounts for
which the individuals would be paid commissions. The consulting agreements were
for a period of one year commencing April 30, 1995. The Company intended to use
TAI's third party administrator accounts as a basis to test ETC's electronic
processing work flow system for processing self-insured medical claims.
On June 1, 1995, ETC terminated the agreement for breach of contract, claiming
the medical claims accounts assigned were not in full force and effect. As of
December 31, 1995, ETC has received $26,232 as third party administrator fees
from accounts assigned by TAI. ETC does not expect to be successful in
recovering the $35,000 paid to TAI for the accounts, and accordingly, the amount
has been expensed in 1995 as research and development third party administrator
fees. During 1996, ETC settled with TAI for the net amount of $5,000.
On April 22, 1995, ETC also purchased office furniture from TAI having an
estimated value of $33,925, with the issuance of 16,000 common shares of ETC to
TAI. The stock was subsequently returned to ETC as part of the settlement.
<PAGE>
NOTE 10 - COMMITMENTS (Continued)
In December 1995, the Company entered into an agreement with a marketing firm to
assist in obtaining and servicing customers. A member of the marketing firm is a
member of the Board of Directors. Compensation for services rendered to the
Company will be paid through November 1997 on a monthly basis equal to 15% of
the gross realized revenue from new accounts obtained on behalf of the Company
by the firm. In return, the Company has agreed to market the services offered by
the marketing representative and will be paid monthly over the same term an
amount equal to 10% of the gross realized revenue from new accounts obtained on
behalf of the firm by the Company.
In September 1996, the Company made a two-year agreement with a large national
self-insured company to provide electronic transaction processing services for
insurance claims. As of December 31, 1996, revenues from this customer amounted
to approximately 64% of total revenues and trade accounts receivable include
$76,395 of accounts receivable from this customer.
The Company is engaged in a marketing strategy of utilizing a 90-day trial
period with other organizations. These agreements allow for a 90-day trial
period for processing claims and the Company has been successful in providing
the service at a fee of $1 per claim.
Effective June 1, 1996, the Company issued 220,000 stock warrants which expire
on June 15, 1997, and allow the holder of each warrant to purchase one share of
common stock at a price of $1.50 per share. As of December 31, 1996, no warrants
have been exercised.
NOTE 11 - PROPOSED MERGER
As of December 31, 1996, ETC is negotiating a merger with ETC Transaction
Corporation, formerly known as Solo Petroleum Ltd. ETC Transaction Corporation
is presently attempting to reorganize its affairs and is primarily inactive. The
merger would be effected by ETC Transaction Corporation issuing 1.25 shares for
each issued and outstanding common share in ETC. At December 31, 1996, ETC has
7,153,601 shares issued and outstanding and accordingly, the merger would result
in the issuance of 10,949,146 shares in ETC Transaction Corporation for all of
the issued and outstanding common shares of Electronic Transmission Corporation.
The merger is in effect a reverse acquisition and will be accounted for as a
recapitalization of Electronic Transmission Corporation, with Electronic
Transmission Corporation as the acquirer. Accordingly, no goodwill or other
intangible assets will be recorded.
<PAGE>
NOTE 12 - RELATED PARTY TRANSACTIONS
On May 15, 1996, the Company received a cash advance of $779,575 from ETC
Transaction Corporation to be used as working capital to fund its post-merger
business plan. The capital for the ETC Transaction Corporation cash advance was
raised in a private placement offering of ETC Transaction Corporation common
stock.
The Company advanced funds for working capital infusions to SNC during 1995 of
$82,744. As of December 31, 1996, the Company had a payable of $339,207, to SNC
for working capital loans.
At December 31, 1996, the Company has a trade receivable due from Electra-Net,
L.C., a company wholly-owned and operated by the Chairman of the Board, C.E.O.
and majority shareholder of ETC. The receivable totalling $103,026 relates to
administrative fees for providing computer processing for medical claims.
The Company has an agreement to purchase equipment from SNC. The relationship
exists through SNC's purchase contract with an equipment wholesaler which allows
SNC to purchase equipment at a significant discount. Since the Company is able
to purchase the equipment from SNC at the discounted price, the Company intends
to utilize this relationship for capital expenditures as deemed necessary in the
future. The Company will record the equipment purchases at SNC's cost.
NOTE 13 - CASH FLOW SUPPLEMENTAL INFORMATION
The following is a schedule of required supplemental cash flow information:
1995 1996
----------------- ----------------
Interest paid $ 6,424 $ 9,021
========= =========
Income taxes paid $ -- $ --
========= =========
Non-cash investing and financing activities include the following:
The Company purchased assets valued at $246,513 through capital lease
obligations during the year ended December 31, 1996. The Company disposed of
assets with a carrying value of $64,460 through a capital lease receivable
during the year ended December 31, 1996.
During the year ended December 31, 1995 and 1996, the Company issued common
stock shares for services rendered at $1 per share in the total amount of $4,000
and $262,625, respectively.
<PAGE>
NOTE 14-SUBSEQUENT EVENTS
Merger - A special meeting of the shareholders of ETC was held on January 31,
1997, the shareholders ratified and approved the terms and conditions of the
Merger Agreement and authorized the Board of Directors of ETC to effect the
merger. ETC Transaction Corporation held its annual meeting on February 11,
1997, the shareholders ratified and approved both the Continuance of ETC
Transaction Corporation into the State of Delaware and the Merger Agreement and
authorized the 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 are each parties to the reorganization and will not recognize any
gain or loss as a result of the Merger. The Merger is in effect a reverse
acquisition and will be 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, with the
Certificate of Incorporation being duly amended to reflect the change of name.
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 23, 1997
To the Board of Directors and Shareholders of ETC Transaction Corporation
(formerly known as "Solo Petroleums Ltd.")
We have audited the balance sheets of ETC Transaction Corporation as of December
31, 1995 and 1996, and the statements of operations and accumulated deficit and
statement of cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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
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 ETC Transaction Corporation as
of December 31, 1995 and 1996 and the results of its operations and cash flows
for the years then ended in accordance with generally accepted accounting
principles.
As described in Note 6, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has been
inactive since 1992 and has accumulated a deficit of $1,050,938 as well as a
working capital deficiency of $125,944. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding those matters are also described in Note 6. Unless the Company obtains
additional financing, it will not be able to meet its obligations as they come
due. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Simonton, Kutac & Barnidge, L.L.P.
<PAGE>
ETC TRANSACTION CORPORATION
The accompanying notes are an integral part of these financial statements.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1995 1996
Current assets:
Cash $ $ 143 $ 142
Accrued interest receivable -- 27,800
---------------- ---------------
Total current assets 143 27,942
Note receivable -- 779,575
---------------- ---------------
Total Assets $ 143 $ 807,517
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 110,845 $ 26,991
Due to shareholder 201,111 --
Loan payable 23,647 23,425
Accrued debenture interest payable 40,470 50,970
Short term debentures 605,000 52,500
---------------- ---------------
Total current liabilities 981,073 153,886
---------------- ---------------
Stockholders' equity:
Preferred stock, no par value, unlimited shares
authorized; no shares issued and outstanding -- --
Common stock, no par value, unlimited shares
authorized; 3,250,000 and 2,007,144 shares
issued and outstanding, respectively 87,567 1,704,569
Accumulated deficit (1,068,497) (1,050,938)
---------------- ---------------
Total Stockholders' Equity (980,930) 653,631
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 143 $ 807,517
================ ===============
</TABLE>
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
For the Years Ended
December 31,
1995 1996
Income:
Interest income $ -- $ 27,800
Expenses:
Interest on debentures $ 93,375 $ 10,500
Other expense (income) 807 (259)
---------------- ---------------
Total expenses 94,182 10,241
---------------- ---------------
Income (loss) before extraordinary items (94,182) 17,559
Extraordinary item:
Gain on forgiveness of interest 392,573 --
---------------- ---------------
Net income $ 298,391 $ 17,559
================= ===============
Earnings per share:
Primary $ 0.09 $ 0.01
================= ==============
Fully diluted $ 0.06 $ 0.01
================= ==============
Weighted average number of shares outstanding:
Primary 3,250,000 2,087,337
================= ===============
Fully diluted 4,821,784 2,303,694
================== ===============
</TABLE>
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Common Stock Accumulated
Shares Amount Deficit Total
Balance at December 31, 1994 3,250,000 $ 87,567 $ (1,366,888) $(1,279,321)
Net income -- -- 298,391 298,391
---------- ------------- ------------ -----------
Balance at December 31, 1995 3,250,000 87,567 (1,068,497) (980,930)
Reverse Stock Split (5-for-1) (2,600,000) -- -- --
Conversion of indebtedness
to common shares 837,427 837,427 -- 837,427
Issuance of common stock 519,717 779,575 -- 779,575
Net income -- -- 17,559 17,559
------------- -------------- -------------- -----------------
Balance at December 31, 1996 2,007,144 $ 1,704,569 $ (1,050,938) $ 653,631
============= ============== ============== =================
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
For the Years Ended
December 31,
1995 1996
Cash Flows from Operating Activities:
Net income $ 298,391 $ 17,559
Adjustments to reconcile net income to
net cash used in operating activities:
Non-cash change in working capital (298,388) 17,560
---------------- ---------------
Net cash provided (used) by operating activities 3 (1)
Cash Flows from Investing Activities:
Proceeds from note receivable -- 779,575
---------------- ---------------
Net cash used by investment activities -- 779,575
---------------- ---------------
Cash Flows from Financing Activities:
Issuance of common stock -- (779,575)
---------------- ---------------
Net cash provided by financing activities -- (779,575)
---------------- ---------------
Net increase (decrease) in cash 3 (1)
Cash, beginning of year 140 143
---------------- ---------------
Cash, end of year $ 143 $ 142
================ ===============
</TABLE>
<PAGE>
ETC TRANSACTION CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1996
NOTE 1 - HISTORY
History -- The Company was incorporated in September 1986, in Alberta, Canada.
The Company was substantially inactive from 1992 to 1996 at which time it
reorganized its affairs.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Earnings (Loss) Per Share -- Primary earnings (loss) per share data is based
upon the weighted average number of common shares outstanding during the year.
Fully diluted earnings (loss) per share is calculated on the weighted average
number of shares that would have been outstanding during the year had the trade
creditor debt and short-term debentures outstanding been converted into common
shares at the beginning of the period.
NOTE 3 - PROPOSED MERGER
On May 1 1996, the Company entered into an agreement and plan of Merger with
Electronic Transmission Corporation ("ETC-Texas"), a Texas-based private
company, whereby ETC-Texas would be merged with and into the Company, with the
Company being the surviving company. The merger provides that each share of
issued and outstanding common stock of ETC-Texas, no par value, shall be
converted into the right to receive one and one-fourth shares of common stock,
$0.001 par value, of the surviving Company. As of December 31, 1996, the Company
had 2,007,145 shares of common stock issued and outstanding, while ETC-Texas had
7,153,601 shares issued and outstanding of ETC-Texas common stock. As a result
of the merger, the shareholders of ETC-Texas would receive 8,942,001 shares of
common stock in exchange for all of the shares issued and outstanding of the
Company. Upon completion of the merger and exchange of shares, the surviving
company would have 10,949,146 shares of common stock issued and outstanding.
The merger is in effect a reverse acquisition and will be accounted for as a
recapitalization of ETC-Texas, with ETC-Texas as the acquirer. Accordingly, no
goodwill or other intangible assets will be recorded. ETC-Texas is in the
business of providing an electronic medical claims-flow process whereby paper
medical claims are electronically scanned and transposed into images formatted
for the claims payer to utilize for adjudication and payment.
<PAGE>
NOTE 4 - REORGANIZATION
At December 31, 1995, the Company was subject to a "Cease Trade Order" issued by
the Alberta Securities Commission, the "ASC" for failing to file annual audited
financial statements for the year ended December 31, 1991, and the first quarter
interim unaudited statements for the period ended March 31, 1992 and further
that ETC Transaction Corporation failed to concurrently send the foregoing
financial statements to each holder of its securities. Pursuant to this
violation, the Company's common shares were automatically removed from the
Alberta Stock Exchange ("ASE") on January 12, 1993, due to trading in its
securities being suspended for six months. The Company has no intention to apply
to relist on the ASC. The following is a summary of the Company's activities in
connection with the reorganization of its affairs which occurred during 1996:
(i) Consolidated common share capital on a 1-for-5 basis on March 21, 1996;
(ii) Changed its name to "ETC Transaction Corporation" on March 26, 1996;
(iii)Settled $552,500 of convertible debenture debt by the issuance of 552,500
shares of common stock (see Note 7) on April 1, 1996;
(iv) Settled $83,816 of trade creditor debt and $201,111 of shareholder debt by
the issuance of 284,927 shares of common stock on April 1, 1996;
On January 8, 1996 ETC Transaction Corporation filed with the ASC and sent its
shareholders annual audited financial statements for each of the years ending
December 31, 1991 to 1994 and its interim unaudited quarterly financial
statements for the periods ending March 31, 1995, June 30, 1995 and September
30, 1995.
On March 12, 1996, in accordance with an order from the Court of Queen's Bench
of Alberta allowing ETC Transaction Corporation to hold its 1990 through 1994
annual meetings in 1996, ETC Transaction Corporation held a special and annual
meeting of its shareholders at which time items (i), (iii) and (iv) were voted
and approved.
<PAGE>
NOTE 4 - REORGANIZATION, continued
On March 21, 1996, the ASC varied its Cease Trade Order for the purpose of
completing the proposed merger of ETC Transaction Corporation and ETC-Texas. The
ASC also ordered that its Cease Trade Order would be revoked forty-eight (48)
hours after the ASC received:
(i) verification that the United States Securities and Exchange Commission
("SEC") had declared effective the Registration Statement on S-4;
(ii) confirmation by ETC Transaction Corporation of the issuance of a press
release setting out the material terms of the merger with ETC-Texas
and the continuance of ETC Transaction Corporation out of the Province
of Alberta into the State of Delaware.
NOTE 5 - COMMON STOCK OFFERING
On May 15, 1996, the Company sold 519,717 shares in a private placement offering
of common stock to raise working capital to fund its post-merger business plan.
The private placement issued common stock at a price of $1.50 per share and
raised $779,575 in capital. Upon completion of the offering, the capital was
advanced to ETC-Texas for use as a working capital loan with interest accruing
at 6% per annum.
NOTE 6 - GOING CONCERN AND CONTINUED OPERATIONS
These financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern. Accordingly, they
do not reflect adjustments that would be necessary should the Company be unable
to continue as a going concern and therefore be required to realize its assets
and liquidate its liabilities and commitments in other than the normal course of
business. Because of the working capital deficiency of $125,944 as of December
31, 1996, the Company's ability to continue as a going concern is dependent upon
its ability to obtain adequate financing and/or complete its proposed merger. It
is not possible to predict whether financing efforts will be successful or if
the Company will attain profitable levels of operation.
Management plans to mitigate the going concern issues by completing a merger
with ETC-Texas as described in Note 3. Upon completion of the merger, management
believes that it will be successful in generating sufficient cash to support its
operations. There can be no degree of assurance that the Company will be
successful in raising additional working capital or executing its business plan
after the merger to the extent that it will be profitable.
<PAGE>
NOTE 7 - CONVERTIBLE SHORT-TERM DEBENTURES
During 1991 and 1992, the Company issued $500,000 and $105,000, respectively,
for a total of $605,000 in short-term convertible debentures. These were due 180
days from issuance bearing an interest rate of 20%. The debentures provided for
the holder to receive ten common shares of common stock for each one U.S. dollar
of debenture.
During 1995, debenture holders formally agreed to forgive all accrued interest
on the debentures and convert the debentures into 552,500 post-consolidated
shares of common stock in settlement of all obligations under the $552,500 of
outstanding debt. The accrued interest was charged to income in 1995 as an
extraordinary item for early extinguishment of debt. On April 1, 1996, the
Company issued 552,500 post-consolidated common shares in the Company to
Debenture Holders representing $552,500 of debt in full and final settlement of
all obligations under the debentures. At December 31, 1996, outstanding
debentures amounted to $52,500.
NOTE 8 - RELATED PARTY TRANSACTIONS
Included in accounts payable at December 31, 1995 and 1996, is accounts payable
to previous officers totaling $26,500 and $0, respectively. Amounts due to
shareholders are for prior services rendered and working capital infusions.
NOTE 9 - INCOME TAXES
The Company has Canadian net operating loss carryforwards for Canadian tax
purposes totaling Cdn$214,000 that are available to offset its future Canadian
income tax liability. The Canadian loss carryforwards expire in 1997.
The Company has U.S. net operating loss carryforwards for U.S. tax purposes
totaling approximately $789,000 that are available to offset its future U.S.
income tax liability. The net U.S. operating loss carryforwards expire as
follows:
<TABLE>
<CAPTION>
<S> <C>
2006 $ 170,000
2007 362,000
2008 117,000
2009 120,000
2010 10,000
2011 10,000
----------------
Total $ 789,000
================
</TABLE>
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
Realization of the benefit of these net operating loss carryforwards appears
uncertain, accordingly, a valuation allowance of $127,500 and $403,000 has been
recorded against the deferred tax asset resulting from the net operating loss
carryforwards as of December 31, 1995 and 1996, respectively. There are no other
significant temporary differences for financial and income tax reporting
purposes at December 31, 1995 or 1996.
NOTE 10 - CASH FLOW SUPPLEMENTAL INFORMATION
The following is a schedule of required supplemental cash flow information:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1996
--------------- -------------
Interest paid $ -- $ --
=============== ==============
Income taxes paid $ -- $ --
=============== ==============
</TABLE>
NOTE 11 - SUBSEQUENT EVENT
ETC Transaction Corporation and ETC-Texas filed with the SEC a S-4 Registration
Statement for the purpose of registering the Common Shares to be issued and
outstanding in ETC-Transaction Corporation, after giving effect to the merger.
The registration statement was declared effective on January 7, 1997.
The shareholders of ETC-Texas held a special meeting on January 31, 1997
approving the terms and conditions of the merger. The shareholders of ETC
Transaction Corporation held a special meeting on February 10, 1997 and also
approved the merger.
On February 11, 1997, the following occurred in relation to the merger with
ETC-Texas:
(i) Completed the merger with ETC-Texas. The merger became effective in
consideration of ETC Transaction Corporation issuing 1.25 post merger
shares of common stock for each issued and outstanding share of common
stock in ETC-Texas.
(ii) Continued out of the Province of Alberta, Canada and into the State of
Delaware;
(iii)ETC Transaction Corporation (formerly known as "Solo Petroleums Ltd.")
changed its name to "Electronic Transmission Corporation".
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 23, 1997
To the Board of Directors and Shareholders of ETC Transaction Corporation
(formerly known as "Solo Petroleums Ltd."):
We have audited the special-purpose balance sheets of ETC Transaction
Corporation ("Company") and Electronic Transmission Corporation (a Texas
corporation) as of December 31, 1995 and 1996 and the related special-purpose
statements of operations for the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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
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.
The accompanying special-purpose financial statements were prepared for the
purpose of presenting the pro-forma effect of the merger (consummated February
11, 1997) between ETC Transaction Corporation and Electronic Transmission
Corporation.
In our opinion, the special-purpose financial statements referred to above
present fairly, in all material respects, the pro-forma financial position of
ETC Transaction Corporation as of December 31, 1995 and 1996 and the results of
its pro-forma operations for the years then ended in accordance with generally
accepted accounting principles.
As described in Note 3, the accompanying special-purpose financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company had been substantially inactive from 1992 through 1996. The Company
has an accumulated deficit of $4,824,951 as well as a working capital deficiency
of $433,273 at December 31, 1996. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 3. Unless the Company obtains
additional financing, it will not be able to meet its obligations as they come
due and it will be unable to execute its long-term business plan. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/Simonton, Kutac & Barnidge, L.L.P.
<PAGE>
PRO-FORMA BALANCE SHEET
December 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
ETC Electronic Pro Forma
Transaction Transmission Adjustments
Corporation Combined Corporation
Current Assets:
Cash and cash equivalents $ 142 $ 50,125 $ -- $ 50,267
Accounts receivable
Trade -- 236,356 -- 236,356
Employees -- 28,203 -- 28,203
Accrued interest receivable 27,800 -- (27,800) --
Current portion, capital lease
receivable -- 25,095 -- 25,095
Prepaid assets -- 15,286 -- 15,286
Total Current Assets 27,942 355,065 (27,800) 355,207
Property and Equipment, net -- 521,576 -- 521,576
Other Assets:
Note receivable 779,575 -- (779,575) --
Current portion, capital lease
receivable -- 27,723 -- 27,723
Deposits and other -- 14,610 -- 14,610
Total Other Assets 779,575 42,333 (779,574) 2,333
Total Assets $ 807,517 $ 918,974 $ (80,379) 919,116
</TABLE>
<PAGE>
PRO-FORMA BALANCE SHEET, CONTINUED
December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
ETC Electronic
Transaction Transmission
Corporation Combined Corporation Pro Forma
Adjustments
Current Liabilities:
Accounts payable $ 26,991 $221,315 $ -- $ 248,306
Accrued expenses 50,970 128,248 -- 179,218
Accrued payroll and taxes -- 189,825 -- 189,825
Accrued interest payable -- 27,800 (27,800) --
Current lease obligations -- 95,206 -- 95,206
Loan payable 23,425 -- -- 23,425
Short term debentures 52,500 -- -- 52,500
Total Current Liabilities 153,886 662,394 (27,800) 788,480
Note payable -- 779,575 (779,575) --
Note payable-shareholder -- 339,208 -- 339,208
Long-term capital leases -- 114,106 -- 114,106
Total Liabilities 153,886 1,895,283 (807,375) 1,241,794
Stockholders' equity:
Preferred stock, $1 par value,
2,000,000 shares authorized;
no shares issued and outstanding -- -- -- --
Common stock, $0.001 par value,
15,000,000 shares authorized;
10,949,146 shares issued
and outstanding 1,704,569 2,475,637 (4,169,257) 10,949
Additional paid-in capital
4,169,257 -- -- 4,169,257
Additional paid-in capital -
stock options -- 322,067 -- 322,067
Accumulated deficit (1,050,938) (3,774,013) -- (4,824,951)
Total Stockholders' Equity 653,631 (976,309) -- (322,678)
Total Liabilities and
Stockholders' Equity $ 807,517 $918,974 $(807,375) $ 919,116
</TABLE>
<PAGE>
PRO-FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
ETC Electronic
Transaction Transmission
Corporation Combined Corporation Pro Forma
Adjustments
Service revenues $ -- $ 935,449 $ -- $ 935,449
Costs and Expenses:
Direct costs -- 549,422 -- 549,422
Start up costs -- 395,866 -- 395,866
Research and development -- 1,469,858 -- 1,469,858
General and administrative -- 953,775 -- 953,775
Total Costs and Expenses -- 3,368,921 -- 3,368,921
Loss from operations -- (2,433,472) -- (2,433,472)
Other Income (Expense):
Other income 259 -- -- 259
Interest income 27,800 -- (27,800) --
Interest expense (10,500) (37,212) 27,800 (19,912)
Total Other Income (Expense) 17,559 (37,212) -- (19,653)
Loss before income tax expense 17,559 (2,470,684) -- (2,453,125)
Income tax expense -- -- -- --
Net income (loss) $ 17,559 (2,470,684) $ -- $ (2,453,125)
Loss per common share:
Primary and fully-diluted $ (0.24)
Weighted average common shares outstanding:
Primary and fully-diluted 10,237,578
</TABLE>
<PAGE>
PRO-FORMA BALANCE SHEET
December 31, 1995
ASSETS
<TABLE>
<CAPTION>
<C> <C> <C>
ETC Electronic
Transaction Transmission
Corporation Combined Corporation Pro Forma
Adjustments
Current Assets:
Cash and cash equivalents $ 143 $ 114,885 $ -- $ 115,028
Accounts receivable
Trade -- 7,059 -- 7,059
Shareholder -- 82,744 -- 82,744
Employees -- 5,734 -- 5,734
Prepaid assets -- 9,204 -- 9,204
Total Current Assets 143 219,626 -- 219,769
Property and Equipment, net -- 137,348 -- 137,348
Total Assets $ 143 $ 356,974 $ -- $ 357,117
</TABLE>
<PAGE>
PRO-FORMA BALANCE SHEET, CONTINUED
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
ETC Electronic
Transaction Transmission Pro Forma
Corporation Combined Corporation Adjustments
Current Liabilities:
Accounts payable $ 110,845 $ 56,340 $ -- $ 167,185
Accrued expenses 40,470 809 -- 41,279
Due to shareholder 201,111 -- -- 201,111
Accrued payroll and taxes -- 109,131 -- 109,131
Loan payable 23,647 -- -- 23,647
Short term debentures 605,000 -- -- 605,000
Total Current Liabilities 981,073 166,280 -- 1,147,353
Stockholders' equity:
Preferred stock, $1 par value,
2,000,000 shares authorized;
no shares issued and outstanding -- -- -- --
Common stock, $0.001 par value,
unlimited shares authorized;
8,302,751 shares issued
and outstanding 87,567 1,494,023 (1,573,287) 8,303
Additional paid-in-capital -- -- 1,573,287 1,573,287
Accumulated deficit (1,068,497)(1,303,329) -- (2,371,826)
Total Stockholders' Equity (980,930) 190,694 -- (790,236)
Total Liabilities and
Stockholders' Equity $ 143 $ 356,974 $ -- $ 357,117
</TABLE>
<PAGE>
PRO-FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ETC Electronic
Transaction Transmission Pro Forma
Corporation Combined Corporation Adjustments
Service revenues earned during
development stage $ -- $ 66,612 $ -- $ 66,612
Costs and Expenses:
Direct costs incurred during
development stage -- 40,764 -- 40,764
Start up costs -- 939,347 -- 939,347
Research and development -- 179,830 -- 179,830
Total Costs and Expenses -- 1,159,941 -- 1,159,941
Loss from operations -- (1,093,329) -- (1,093,329)
Other Income (Expense):
Other income (807) -- -- (807)
Interest expense (93,375) -- -- (93,375)
Total Other Income (Expense) (94,182) -- -- (94,182)
Loss before income tax expense (94,182) (1,093,329) -- (1,187,511)
Income tax expense -- -- -- --
Net loss $ (94,182) $ (1,093,329) $ -- $ (1,187,511)
Loss per common share:
Primary and fully-diluted $ (0.21)
Weighted average common shares outstanding:
Primary and fully-diluted 5,708,763
</TABLE>
<PAGE>
NOTE 1 - BASIS OF PRESENTATION
On February 12, 1997, Electronic Transmission Corporation merged with and into
ETC Transaction Corporation.
The balance sheets show pro-forma adjustments reflect the effects of a related
intercompany loan which was eliminated when the two entities were combined and
the adjustment to reflect common stock at par value of the merged entities.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND
ETC Transaction Corporation ("Company") was incorporated in September 1986, in
Alberta, Canada. The Company was substantially inactive from 1992 to 1996 at
which time it reorganized its affairs.
Electronic Transmission Corporation ("ETC-Texas") was incorporated in the state
of Texas on December 22, 1994. ETC-Texas was in the development stage until the
last quarter of 1996, as it had no significant revenues. In the last quarter, a
long-term contract was executed with a large national self-insured corporation
and operations commenced. ETC-Texas's business plan is to provide electronic
transaction processing services to the health care market. The principal service
is the electronic capture and transfer of medical claims for on-line eligibility
verification and adjudication between health care providers, self-insured
organizations, third party administrators and other managed care organizations.
Background -- On April 19, 1995, ETC-Texas entered into an agreement to purchase
the rights to the technology and business of electronically editing and
transmitting medical claims from providers to payment organizations (the
Purchased Business) from Sterling National Corporation ("SNC") by issuing
3,965,100 common shares and a cash payment of $210,000. SNC is a company
wholly-owned and controlled by ETC's Chairman of the Board, C.E.O.
and majority shareholder.
The transaction was accounted for using the purchase method as follows:
Assets Acquired:
Accounts receivable $ 5,630
Computer hardware 1,403
Computer software 13,718
Total tangible assets 20,751
Consideration Paid:
Cash $ 210,000
3,965,100 common shares 20,751
Total consideration 230,751
Dividend paid to shareholder $ 210,000
<PAGE>
Treatment of the excess cash consideration paid for the acquired business is
accounted for as a deemed dividend in accordance with generally accepted
accounting principles. Goodwill was not recorded since this transaction was
consummated with a related party and this treatment would have constituted a
step-up in basis. The transaction is reflected in the financial statements on
the date the transaction occurred (April 19, 1995), in accordance with generally
accepted accounting principles.
Cash Equivalents -- For purposes of the statements of cash flows, the Company
considers any short-term cash investment with a maturity of three months or less
to be a cash equivalent.
Accounts receivable -- The Company's trade receivables arise from sales in the
normal course of business. The Company uses the allowance method to account for
uncollectible accounts; in management's opinion, all accounts are collectible
and no allowance is necessary at December 31, 1995 and December 31, 1996.
Revenue recognition -The Company recognizes revenue when services are performed.
Office Furniture and Equipment -- Office furniture, computer and office
equipment, software and leasehold improvements are stated at cost. Maintenance
and repairs are charged to operating expense. Costs of significant improvements
and renewals are capitalized. Depreciation is provided on the straight-line
basis over the following useful lives:
Useful
Lives
Office furniture 5 years
Computer and office equipment 3 years
Computer software 3 years
Leasehold improvements 5 years
Periodically, the Company evaluates whether changes have occurred that would
require revision of the remaining estimated useful lives of the equipment or
rendered the value of the equipment not recoverable. The recoverability is
evaluated by estimating the future cash flows expected to result from use of the
asset and its eventual disposition. Equipment as of December 31, 1996, is not
considered to be impaired.
Start-Up Costs -- Start-up costs incurred during the period of developing
ETC-Texas' business plan are expensed as incurred in accordance with generally
accepted accounting principles.
Research and Development -- Research and development costs incurred are expensed
as incurred in accordance with generally accepted accounting principles.
Income Taxes -- The Company utilizes the asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (Continued)
Loss Per Share -- Loss per common share was calculated by dividing the Company's
net loss by the weighted average common shares outstanding. Common stock
equivalents were excluded from the calculation as such inclusion would have had
an anti-dilutive effect; therefore, fully diluted earnings per share is
considered to be the same as primary earnings per share. Loss per common share
assuming full dilution was calculated in the same manner as described above,
except that those shares that were issued in connection with debt conversions
were assumed to be outstanding for the entire period.
Use of Estimates and Assumptions -- Management uses estimates and assumptions in
preparing its financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses. Actual
results could vary from the estimates that were used.
Stock-based Compensation -- ETC-Texas compensated certain employees for services
rendered by issuing shares of common stock to these individuals during 1995. The
measurement date for determining compensation costs is the date of the grant.
Compensation cost is the excess, if any, of the quoted market price of the stock
at grant date over the amount the employee must pay to acquire the stock.
Compensation cost is recognized as an expense over the period of employment
attributable to the option.
New Accounting Standards -- In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123), was
issued. This statement requires the fair value of stock options and other
stock-based compensation issued to employees to either be included as
compensation expense in the income statement or the pro forma effect on net
income and earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements commencing with the
Company's 1996 fiscal year. ETC-Texas adopted SFAS 123 on January 1, 1996. The
Company will continue to measure compensation costs using the "intrinsic value
based method" of accounting for stock issued to employees.
NOTE 3 - GOING CONCERN AND CONTINUED OPERATIONS
The financial statements have been prepared on the assumption that the Company
will continue as a going concern. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or classification of liabilities which may result from
the inability of the Company to continue as a going concern. The combined
entities sustained a net operating loss of $1,187,511 and $2,453,125 during the
years ended December 31, 1995 and 1996, respectively. Additionally, at December
31, 1996, ETC's current liabilities exceeded its current assets by $433,273. The
Company's continued existence depends upon the success of management's efforts
to raise sufficient capital and increase its customer base to execute its
business plan.
<PAGE>
Management plans to mitigate the going concern issues by marketing its services
to large self-insured insurance companies to develop its customer base and
increase profitability. Management believes that it will be successful in
generating sufficient cash to support its operations. There can be no degree of
assurance that the Company will be successful in raising additional working
capital or executing its business plan to the extent that it will be profitable.
NOTE 4 - OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
December 31,
1995 1996
Furniture $ 43,056 $ 104,349
Computer & Office Equipment 68,752 458,178
Computer Software 57,713 92,836
Leasehold Improvements -- 8,791
169,521 664,154
Less: accumulated depreciation (32,173) (142,578)
$ 137,348 $ 521,576
Depreciation expense was $32,173 and $110,405 for 1995 and 1996, respectively.
NOTE 5 - LEASE OBLIGATIONS RECEIVABLE
The Company, as lessor, has entered into a non-cancelable lease for service
equipment. Future minimum lease payments receivable under non-cancelable leases
at December 31, 1996 are as follows:
For the Years Ending Capital
December 31, Leases
1997 $ 29,248
1998 29,248
Total minimum lease payments 58,496
Less: amount representing interest (5,678)
Present value of minimum lease payments 52,818
Less: current portion (25,095)
Long-term capital lease obligation $ 27,723
<PAGE>
NOTE 6 - CONVERTIBLE DEBENTURES
At various times throughout 1995 the ETC-Texas issued convertible debentures
totalling $120,000. These debentures bore interest at 12% per annum and were
convertible into common shares at the option of the holder at a conversion rate
of one common share per $1.25 of debenture being converted. As of December 31,
1995, all debenture holders had exercised their options and converted their
debentures into a total of 96,000 common shares.
During 1991 and 1992, the Company issued $500,000 and $105,000, respectively,
for a total of $605,000 in short-term convertible debentures. These were due 180
days from issuance bearing an interest rate of 20%. The debentures provided for
the holder to receive ten common shares of common stock for each one U.S. dollar
of debenture.
During 1995, the Company's debenture holders formally agreed to forgive all
accrued interest on the debentures and convert the debentures into 552,500
post-consolidated shares of common stock in settlement of all obligations under
the $552,500 of outstanding debt. The accrued interest was charged to income in
1995 as an extraordinary item for early extinguishment of debt. On April 1,
1996, the Company issued 552,500 post-consolidated common shares in the Company
to Debenture Holders representing $552,500 of debt in full and final settlement
of all obligations under the debentures.
NOTE 7 - LEASE OBLIGATIONS PAYABLE
ETC-Texas, as lessee, has entered into various non-cancelable leases for service
equipment, vehicles, and office facilities. The cost of assets subject to
capital leases included in office furniture and equipment amounted to $182,053
less accumulated depreciation of $21,044 at December 31, 1996.
<PAGE>
Future minimum lease payments under non-cancelable leases at December 31, 1996,
are as follows:
For the Years Ending
Capital Operating
December 31, Leases Leases
1997 $ 111,852 $ 177,984
1998 102,495 183,680
1999 18,890 189,375
2000 -- 195,071
Thereafter -- 149,507
Total minimum lease payments 233,237 $ 895,617
Less: amount representing interest (23,925)
Present value of minimum lease payments 209,312
Less: current portion (95,206)
Long-term capital lease obligation $ 114,106
Rent expense during the years ended December 31, 1995 and 1996 for all operating
leases was $49,988 and $122,544, respectively, and is included in operating
expenses.
In April 1996, ETC-Texas entered into an equipment lease agreement and stock
option agreement with a leasing company which is recorded as a capital lease by
ETC-Texas. The agreement is for a term of five years and allows ETC-Texas to
lease certain equipment for amounts specified in the agreement with rental
payments due on the first of each month. As of December 31, 1996, monthly
payments required under the lease agreement amounted to $9,321 expiring in 1998.
At any time during the term of the agreement, the leasing company has the right
to 1) sell to ETC-Texas any or all of the equipment in exchange for the number
of shares of ETC-Texas common stock, or stock of any company with which
ETC-Texas merges, that is equal to the purchase of the equipment divided by
$1.25 per share or, 2) purchase, at $1.25 per share, the number of shares of ETC
stock, or stock of the merged company, equal to the purchase price of the
equipment divided by 1.25, and give ETC-Texas the option to purchase the
equipment at the end of the lease for $1.00; provided, that if ETC-Texas issues,
agrees to issue or grants an option to purchase ETC-Texas stock to any other
person for a price less than $1.25 per share, the price payable to the leasing
company will be reduced to such lower price.
<PAGE>
The leasing company agreement contains certain restrictive covenants which (i)
require ETC-Texas to escrow all accounts received which are derived from the use
of this equipment, less third party costs, through March 31, 1996 or until any
class of stock is registered with the SEC are otherwise becomes publicly traded,
or the funds in escrow equal the total purchase price of the equipment, and (ii)
restrict ETC-Texas from issuing additional securities before ETC-Texas merges
with a public company. ETC-Texas is in violation of each of these covenants and
has obtained a waiver from the leasing company which releases ETC-Texas from any
claims under the escrow requirement and violations relating to the issuance of
securities.
NOTE 8 - LINE OF CREDIT
Under the agreement with the leasing company discussed in Note 7, ETC-Texas has
obtained a $500,000 line of credit from the leasing company to be used as
working capital. ETC-Texas may draw from this line up to 80% of its accounts
receivable that are under 65 days past due. To secure this line of credit,
ETC-Texas will pledge shares of its common stock on a two for one basis (i.e.,
two dollars trade value of its stock for every one dollar drawn from the line of
credit). ETC-Texas will pay a loan origination fee, beginning three months after
ETC-Texas merges with a public company, in an amount equal to 10% of the leasing
company's exposure under this agreement including the amount spent to purchase
equipment and the amount drawn on the line of credit. This fee will be a
cumulative amount calculated each quarter. As of December 31, 1996, the Company
has made no draws on this line of credit. NOTE 9 - INCOME TAXES
The Company has Canadian net operating loss carryforwards for Canadian tax
purposes totaling Cdn $214,000 that are available to offset its future Canadian
income tax liability. The Canadian loss carryforwards expire in 1997.
The Company and ETC- Texas have net operating loss carryforwards for U.S. tax
purposes totaling approximately $3,949,000 that are available to offset its
future U.S. income tax liability. The net U.S. operating loss carryforwards
expire as follows:
2006 $ 170,000
2007 362,000
2008 117,000
2009 120,000
2010 1,103,000
2011 2,077,000
Total $ 3,949,000
<PAGE>
The realization of the benefits from these net operating loss carryforwards
appears uncertain due to going concern questions and the possible effects of the
merger. Accordingly, a valuation allowance of $499,500 and $1,518,000 has been
recorded against the deferred tax asset resulting from the net operating loss
carryforwards as of December 31, 1995 and 1996, respectively. There are no other
significant temporary differences for financial and income tax reporting
purposes at December 31, 1995 or 1996.
NOTE 10 - STOCK OPTIONS
ETC-Texas has issued various stock options to employees which are considered
compensatory. Stock options were initially granted by the Company during 1995
and no stock options were vested as of December 31, 1995. Additional stock
options were granted in 1996 with 134,666 vesting as of December 31, 1996.
Vesting varies by employee agreement ranging from 2 to 3 years.
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ended Year ended
December 31, 1995 December 31, 1996
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
Outstanding, beginning of period -- -- 675,000 $0.001
Granted 675,000 $0.001 260,000 $0.001
Exercised -- -- (118,333) $0.001
Forfeited/expired -- -- (125,000) $0.001
Outstanding, end of period 675,000 $0.001 691,667 $0.001
Options exercisable, end of period -- -- 18,333 $0.001
Weighted average fair value of
options granted during the year $ 1.25 $ 1.12
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Range of exercise prices $0.001 per common share
Weighted average remaining contractual life 2.99 years
Weighted average exercise price $0.001 per common share
<PAGE>
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. As of
December 31, 1995, no compensation cost was recognized as expense. Future
compensation expense to be recorded in subsequent periods as of December 31,
1995 and 1996, was $474,540 and $555,897, respectively. Compensation cost
totalling $322,067 was recognized as expense during the year ended December 31,
1996. 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, ETC-Texas' net loss and loss per share would have been
unchanged.
NOTE 11 - COMMITMENTS
On April 19, 1995, ETC-Texas entered into an agreement with Texas
Administrators, Inc. ("TAI"), a third party administrator for medical claims.
The agreement called for TAI to assign the rights to third party administrator
accounts for a total purchase price of $75,000, representing 1.15 times one
year's contracted revenue. Of the purchase price, $35,000 was paid to TAI
subsequent to year end. Additionally, ten (10) monthly payments of $4,000
commencing June 10, 1995, are payable to TAI under an executed promissory note.
The agreement called for ETC to enter into consulting agreements with each of
the 3 key employees/ sole shareholders of TAI. The consulting agreements called
for each of the individuals to assist ETC-Texas in retaining and servicing the
assigned accounts and to seek out new third party administrator accounts for
which the individuals would be paid commissions. The consulting agreements were
for a period of one year commencing April 30, 1995. The Company intended to use
TAI's third party administrator accounts as a basis to test ETC-Texas'
electronic processing work flow system for processing self-insured medical
claims.
On June 1, 1995, ETC-Texas terminated the agreement for breach of contract,
claiming the medical claims accounts assigned were not in full force and effect.
As of December 31, 1995, ETC-Texas has received $26,232 as third party
administrator fees from accounts assigned by TAI. ETC-Texas does not expect to
be successful in recovering the $35,000 paid to TAI for the accounts, and
accordingly, the amount has been expensed in 1995 as research and development
third party administrator fees. During 1996, ETC settled with TAI for the net
amount of $5,000.
On April 22, 1995, ETC-Texas also purchased office furniture from TAI having an
estimated value of $33,925, with the issuance of 16,000 common shares of
ETC-Texas to TAI. The stock was subsequently returned to ETC as part of the
settlement.
<PAGE>
In December 1995, ETC-Texas entered into an agreement with a marketing firm to
assist in obtaining and servicing customers. A member of the marketing firm is a
member of the Board of Directors. Compensation for services rendered to
ETC-Texas will be paid through November 1997 on a monthly basis equal to 15% of
the gross realized revenue from new accounts obtained on behalf of ETC-Texas by
the firm. In return, ETC-Texas has agreed to market the services offered by the
marketing representative and will be paid monthly over the same term an amount
equal to 10% of the gross realized revenue from new accounts obtained on behalf
of the firm by ETC-Texas.
In September 1996, ETC-Texas made a two-year agreement with a large national
self-insured company to provide electronic transaction processing services for
insurance claims. As of December 31, 1996, revenues from this customer amounted
to approximately 64% of total revenues and trade accounts receivable include
$76,395 of accounts receivable from this customer.
ETC-Texas is engaged in a marketing strategy of utilizing a 90-day trial period
with other organizations. These agreements allow for a 90-day trial period for
processing claims and ETC-Texas has been successful in providing the service at
a fee of $1 per claim.
Effective June 1, 1996, ETC-Texas issued 220,000 stock warrants which expire on
June 15, 1997, and allow the holder of each warrant to purchase one share of
common stock at a price of $1.50 per share. As of December 31, 1996, no warrants
have been exercised.
NOTE 12 - PROPOSED MERGER
On May 1 1996, the Company entered into an agreement and plan of Merger with
ETC-Texas whereby ETC-Texas would be merged with and into the Company, with the
Company being the surviving company. The merger provides that each share of
issued and outstanding common stock of ETC-Texas, no par value, shall be
converted into the right to receive one and one-fourth shares of common stock,
$0.001 par value, of the surviving Company. As of December 31, 1996, the Company
had 2,007,145 shares of common stock issued and outstanding, while ETC-Texas had
7,153,601 shares issued and outstanding of ETC-Texas common stock. As a result
of the merger, the shareholders of ETC-Texas would receive 8,942,001 shares of
common stock in exchange for all of the shares issued and outstanding of the
Company. Upon completion of the merger and exchange of shares, the surviving
company would have 10,949,146 shares of common stock issued and outstanding.
The merger is in effect a reverse acquisition and will be accounted for as a
recapitalization of ETC-Texas, with ETC-Texas as the acquirer. Accordingly, no
goodwill or other intangible assets will be recorded. ETC-Texas is in the
business of providing an electronic medical claims-flow process whereby paper
medical claims are electronically scanned and transposed into images formatted
for the claims payer to utilize for adjudication and payment.
<PAGE>
NOTE 13 - COMMON STOCK OFFERING
On May 15, 1996, the Company sold 519,717 shares in a private placement offering
of common stock to raise working capital to fund its post-merger business plan.
The private placement issued common stock at a price of $1.50 per share and
raised $779,575 in capital. Upon completion of the offering, the capital was
advanced to ETC-Texas for use as working capital.
NOTE 14 - RELATED PARTY TRANSACTIONS
On May 15, 1996, ETC-Texas received a cash advance of $779,575 from ETC
Transaction Corporation to be used as working capital to fund its post-merger
business plan. The capital for the ETC Transaction Corporation cash advance was
raised in the private placement offering described in Note 13.
ETC-Texas advanced funds for working capital infusions to SNC during 1995 of
$82,744. As of December 31, 1996, ETC-Texas had a payable of $339,207, to SNC
for working capital loans.
At December 31, 1996, ETC-Texas has a trade receivable due from Electra-Net,
L.C., a company wholly-owned and operated by the Chairman of the Board, C.E.O.
and majority shareholder of ETC. The receivable totalling $103,026 relates to
administrative fees for providing computer processing for medical claims.
ETC-Texas has an agreement to purchase equipment from SNC. The relationship
exists through SNC's purchase contract with an equipment wholesaler which allows
SNC to purchase equipment at a significant discount. Since ETC-Texas is able to
purchase the equipment from SNC at the discounted price, ETC-Texas intends to
utilize this relationship for capital expenditures as deemed necessary in the
future. ETC-Texas will record the equipment purchases at SNC's cost.
Included in accounts payable at December 31, 1995 and 1996, is accounts payable
to previous officers totaling $26,500 and $0, respectively. Amounts due to
shareholders are for prior services rendered and working capital infusions.
<PAGE>
NOTE 15 - CASH FLOW SUPPLEMENTAL INFORMATION
The following is a schedule of required supplemental cash flow information:
1995 1996
Interest paid $ 6,424 $ 9,021
Income taxes paid $ -- $ --
Non-cash investing and financing activities include the following:
ETC-Texas purchased assets valued at $246,513 through capital lease obligations
during the year ended December 31, 1996. ETC-Texas disposed of assets with a
carrying value of $64,460 through a capital lease receivable during the year
ended December 31, 1996.
During the year ended December 31, 1995 and 1996, the Company issued common
stock shares for services rendered at $1 per share in the total amount of $4,000
and $262,625, respectively.
NOTE 16-SUBSEQUENT EVENTS
Merger - A special meeting of the shareholders of ETC-Texas was held on January
31, 1997, the shareholders ratified and approved the terms and conditions of the
Merger Agreement and authorized the Board of Directors of ETC-Texas to effect
the merger. ETC Transaction Corporation held its annual meeting on February 11,
1997, the shareholders ratified and approved both the Continuance of ETC
Transaction Corporation into the State of Delaware and the Merger Agreement and
authorized the 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 are each parties to the reorganization and will not recognize any
gain or loss as a result of the Merger.
Effective February 11, 1997, the name of ETC Transaction Corporation was changed
to Electronic Transmission Corporation, with the Certificate of Incorporation
being duly amended to reflect the change of name.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ELECTRONIC TRANSMISSION CORPORATION
By /s/ L. CADE HAVARD
--------------------------------
L. Cade Havard
Chairman, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ L. CADE HAVARD Chairman, Chief Executive March 31, 1997
- -----------------------------
L. Cade Havard Officer, President and
Director (Principal
Executive Officer)
/s/ LOUANN C. SMITH Controller (Principal March 31, 1997
- -----------------------------
Louann C. Smith Accounting Officer)
/s/ ELAINE BOZE Director March 31, 1997
Elaine Boze
/s/ TIMOTHY P. POWELL Director March 31, 1997
- -----------------------------
Timothy P. Powell
/s/ DAVID O. HANNAH Director March 31,1997
------------------- -------- -------------
David O. Hannah
/s/ MICHAEL ECKSTEIN Director March 31, 1997
- --------------------------
Michael Eckstein
/s/ RICK SNYDER Director March 31, 1997
- --------------------------
Rick Snyder
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