U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Commission File No. 22135
ELECTRONIC TRANSMISSION CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2578619
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5025 Arapaho Road, Suite 501
Dallas, Texas 75248 (972) 980-0900
(Address of Principal Executive Offices) (Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 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
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 14,162,692 shares as of May
22, 1998
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
PART I - FINANCIAL INFORMATION
------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
ASSETS
------
March 31,
Current Assets: 1998
-----------
Cash and cash equivalents $ 113,662
Accounts receivable, Trade 464,914
Note receivable 25,000
Capital lease receivable 21,049
Prepaid assets 54,144
-----------
Total Current Assets 678,769
-----------
Property and Equipment, net 883,705
-----------
Other Assets 5,450
-----------
Total Assets $ 1,567,924
===========
Current Liabilities:
Accounts payable $ 668,553
Accrued expenses 520,141
Debenture 100,000
Note payable 124,448
Current portion, capital lease obligations 87,036
-----------
Total Current Liabilities 1,500,178
Long-term capital lease obligations 13,902
-----------
Total Liabilities $ 1,514,080
-----------
Stockholders' equity:
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued and outstanding --
Common stock, $.001 par value, 20,000,000
shares authorized; 14,109,358 shares issued
and outstanding 14,109
Additional paid-in-capital 7,249,762
Accumulated deficit (7,210,027)
-----------
Total Stockholders' Equity 53,844
-----------
Total Liabilities & Stockholders' Equity $ 1,567,924
===========
2
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1998
------------ ------------
Service revenues $ 312,774 $ 971,011
------------ ------------
Costs and Expenses:
Costs of revenues $ 184,738 $ 443,574
Selling, general and administrative 755,706 701,729
Depreciation and amortization 51,664 67,157
------------ ------------
Total Costs and Expenses 992,108 1,212,460
------------ ------------
Loss from operations (679,334) (241,449)
Other Income (Expense):
Interest expense, net (7,157) (8,670)
Other income -- 16,973
------------ ------------
Total Other Income (7,157) 8,303
------------ ------------
Net loss $ (686,491) $ (233,146)
============ ============
Loss per common share:
Basic $ (0.06) $ (0.02)
============ ============
Diluted $ (0.06) $ (0.02)
============ ============
Weighted average common shares outstanding:
Basic 11,695,854 14,035,469
============ ============
Diluted 11,695,854 14,035,469
============ ============
3
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
(Unaudited)
Additional
Common Stock Paid-In Accumulated
-------------------------
Shares Amount Capital Deficit Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C>
Balance at December 31, 1997 14,026,024 $ 14,026 $ 7,249,762 $(6,976,881) $ 286,907
Issuance of shares for cash 83,334 83 -- -- 83
Net loss -- -- -- (233,146) (233,146)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 14,109,358 $ 14,109 $ 7,249,762 $(7,210,027) $ 53,844
=========== =========== =========== =========== ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1998
----------- -----------
<S> <C>
Cash Flows from Operations:
Net loss $ (686,491) $ (233,146)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by
Operations:
Non-cash issuance of common
stock for services rendered 100,000 --
Non-cash compensation from stock options 66,368 --
Depreciation and amortization 51,664 67,157
Increase in accounts receivable-trade (25,539) (117,625)
(Increase) decrease in employee advances 22,707 (4,250)
Decrease in advances to stockholders 179,175 --
(Increase) decrease in prepaid expenses 2,685 (25,972)
(Increase) decrease in deposits and 2,067 (18,572)
other assets
Increase in accounts payable 91,021 103,064
Increase (decrease) in accrued payroll and taxes 13,547 (75,440)
----------- -----------
Net Cash Used in Operations (10,425) (304,784)
------------ -----------
Cash Flows from Investing Activities:
Payments on capital leases receivable 4,011 6,674
Purchases of furniture and equipment (7,985) (84,464)
------------ -----------
Net Cash Used in Investing Activities (3,974) (77,790)
------------ -----------
Cash Flows from Financing Activities:
Payments on capital leases payable (22,920) (26,890)
Payments on short-term loans -- (25,522)
Issuance of common stock for cash 28 83
----------- ----------
Net Cash Used in Financing Activities (22,892) (52,329)
------------ -----------
Net decrease in cash (37,291) (434,903)
Cash, beginning of period 50,268 548,565
----------- ----------
Cash, end of period $ 12,977 $ 113,662
=========== ==========
</TABLE>
5
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - GENERAL
- ----------------
The unaudited financial statements included herein for Electronic Transmission
Corporation (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation. Certain information and footnote disclosures required by generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
NOTE 2 - CONSOLIDATION
- ----------------------
During January 1998, the Company funded the capitalization of ETC Administrative
Services, Inc., a Texas corporation and wholly owned subsidiary. ETC
Administrative Services, Inc. became an active subsidiary upon funding and the
financial statements include the accounts of ETC Administrative Services, Inc.
since that time. All intercompany accounts and transactions have been
eliminated.
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
- ---------------------------------------
The following is a summary of office furniture and equipment:
March 31, March 31,
1998 1997
------------ ------------
Furniture $ 106,111 $ 104,349
Computer & Office Equipment 678,494 465,344
Computer Software 565,220 94,580
Leasehold Improvements 9,747 7,866
------------ ------------
1,359,572 672,139
Less: accumulated depreciation (475,867) (193,229)
------------ ------------
$ 883,705 $ 478,910
============ ============
NOTE 4 - SUBSEQUENT EVENTS
- --------------------------
On February 16, 1998, L. Cade Havard was terminated as Chief Executive Officer,
President and Chairman of the Board of the Company and W. Mack Goforth, the
Company's Chief Financial Officer, was appointed Chairman and Chief Executive
Officer.
On May 7, 1998, it was announced that Steven K. Arnold had been appointed as an
interim consultant scheduled to be elected Chairman and Chief Executive Officer
of the Company within 60 days after such appointment.
6
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 4 - SUBSEQUENT EVENTS CONTINUED
- ------------------------------------
The Company filed a registration statement on Form SB-2 on March 16, 1998. The
Company is currently responding to the comment letter received from the SEC as a
result of that filing. Certain of the comments received from the SEC will
require the Company to amend and restate its financial statements at December
31, 1997. To the extent that these year-end financial statements affect the
financial statements submitted with this Form 10Q-SB, the Company will file an
amendment to this Form 10Q-SB.
7
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's Financial Statements and Notes thereto, included elsewhere herein. The
information below should not be construed to imply that the results discussed
herein will necessarily continue into the future or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of management of the
Company.
Results of Operations of The Company
For the Quarter Ended March 31, 1998 Compared to the Quarter Ended March 31,
1997
Revenues. Revenues from automation services totaled $255,384 and
$312,774 for the quarters ended March 31, 1998 and 1997, respectively. Revenues
from repricing totaled $508,972 for the three months ended March 31, 1998. The
repricing division was not in place for the first quarter of 1997. The start-up
of the Third Party Administrator division on January 1, 1998 generated revenues
of $199,714 for the first quarter of 1998.
Cost of Revenues. Costs of automation services totaled $188,827 and
$184,738 for the quarters ended March 31, 1998 and 1997, respectively. The costs
for the first quarter of 1998 were comprised of $106,311 in data entry
personnel, $49,515 in imaging fees and $9,759 in communication expenses. In the
first quarter of 1997, these costs consisted of $99,815 in data entry personnel,
$60,774 in imaging fees and $9,117 in communication expenses. Costs of network
services were largely made up of $221,603 in third party network fees for the
quarter ended March 31, 1998. The repricing division began operations in the
second quarter of 1997, therefore, there is no comparative information
available.
Gross Profit. Gross profit for the quarter ended March 31, 1998 was
$527,437 as compared to $128,036 for the quarter ended March 31, 1997. The gross
profit margin for the quarter ended March 31, 1998 was 54% verses 41% for 1997.
Other Expenses. Selling, general and administrative costs decreased to
$701,729 for the quarter ended March 31, 1998, compared to $755,706 for the
quarter ended March 31, 1997. Selling, general and administrative expenses
consisted primarily of personnel costs, rent, telephone and professional fees.
For the quarter ended March 31, 1998, total personnel costs were $527,904, total
rent costs were $43,373, total telephone costs were $40,906 and total
professional fees were $7,223. For the quarter ended March 31, 1997, total
personnel costs were $456,870, total rent costs were $43,373, total telephone
costs were $12,006 and total professional fees were $199,053. Professional fees
were primarily incurred due to the preparation and filing of a registration
statement, year-end audit and legal matters.
8
<PAGE>
Net interest expense increased to $10,307 for the quarter ended March
31, 1998 compared to $7,978 for the quarter ended March 31, 1997. The increase
is primarily related to the Company's issuance of convertible debentures in May
1997.
Net Loss. The Company incurred a net loss of $686,491 and $233,146 for
the quarters ended March 31, 1997 and 1998, respectively. The Company expects to
incur losses in future periods until it generates sufficient revenues from an
expanded client base to offset ongoing operating costs and expansion expenses.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations, working
capital needs and capital expenditures principally through private placements of
equity securities. At March 31, 1998, the Company had cash and cash equivalents
of approximately $113,662, and a working capital deficit of approximately
$821,409. The Company has a note payable in the amount of $99,881 bearing
interest at 12% per annum. Payments of principal and interest are due and
payable monthly, with the remaining principal balance, plus accrued but unpaid
interest, due on May 19, 1998. The note is collateralized by an option to
purchase 113,333 shares of Common Stock at $1.50 per share. The Company is
currently attempting to renegotiate the terms of the note. A subordinated
convertible debenture in the amount of $100,000 was issued by the Company. This
debenture bears interest at the rate of 12% per annum, payable semi-annually
with principal due in full on May 12, 1998. The sum of the principal balance and
accrued but unpaid interest under the debenture is convertible into shares of
the Company's Common Stock at a conversion price of $1.25 per share. The Company
is currently attempting to renegotiate the terms of the debenture.
The Company entered into a Securities Purchase Agreement ("Purchase
Agreement") on December 17, 1997 pursuant to which, in pertinent part, the
Company agreed to sell to the "Investors" named therein an aggregate of up to
3,000,000 shares of Common Stock at a purchase price of $1.50 per share. The
first closing under the Purchase Agreement occurred on December 17, 1997 with an
issuance of 2,447,719 shares of Common Stock, representing gross proceeds to the
Company of $1,223,859.50. Proceeds from this closing have been used for working
capital. The Investors under the Purchase Agreement have elected not to purchase
any additional shares under the Purchase Agreement.
The Company's independent auditors have included a paragraph in their
report to the Company's Board of Directors and stockholders that states that the
Company's loss from operations and working capital deficiency raise substantial
doubt about its ability to continue as a going concern. The Company has reviewed
its cost structure and accomplished a reduction in the fixed cost portion of its
infrastructure. In April 1998, the Company reduced its personnel costs and is in
the process of attempting to negotiate with its landlord a reduction in its
rental expenditures. Software improvements have also been implemented that
management believes will enhance productivity.
9
<PAGE>
Research and development to be performed over the next twelve months
will attempt to enhance the current software programs used in automating clients
by increasing the speed of processing and developing value added services for
clients. It is not expected that costs associated with projected research and
development efforts will materially effect the financial condition and results
of operations of the Company for the 1998 fiscal year.
The Company is currently exploring several alternatives for obtaining
additional working capital, including both debt and equity financings. However,
at this time, the Company has not entered into any agreements to obtain
additional capital and, at this time, there can be no assurances that any
additional working capital will be obtained by the Company.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Ann C. McDearmon v. Electronic Transmission Corporation, District
Court, Dallas County, Texas, CA No. DV 98-3216-H. This lawsuit was filed by the
plaintiff, Ann C. McDearmon ("McDearmon"), against the Company in the 160th
Judicial District Court of Dallas County, Texas on April 21, 1998. In this
action, McDearmon alleges that the Company breached the employment agreement
McDearmon had with the Company. McDearmon's employment terminated on March 20,
1998. The Company has disputed that an event has occurred under McDearmon's
employment agreement that would entitle her to the liquidated damages she has
claimed in this action. McDearmon's original petition does not specify the
amount of damages McDearmon seeks to recover in the lawsuit.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of the stockholders of the Company was held on
February 25, 1998 approving an increase in authorized shares of the Company's
common stock, par value $.001 per share, from 15,000,000 shares to 20,000,000
shares. The stockholders of the Company also authorized at this special meeting
a one-for-four (1:4) reverse stock split of its outstanding common stock,
whereby every four shares of outstanding common stock will be exchanged for one
share of common stock upon the effective date of such reverse split. The number
of votes cast by the Company's stockholders for and against (i) the increase in
authorized shares of the Company was 10,919,559 and 152,174, respectively, and
(ii) the reverse stock split was 10,905,076 and 198,657, respectively. There
were not any votes withheld or broker non-votes with respect to such stockholder
action. The number of stockholders abstaining in the vote to increase the
authorized shares of the Company was 154,043 and the number of stockholder
abstaining in the vote of the reverse stock split was 122,043.
ITEM 5. OTHER INFORMATION
Not applicable.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits Page
---------------------------------
<S> <C> <C>
1. Financial Statements. The following financial statements are submitted
--------------------
as a part of this report:
Balance Sheet - March 31, 1998..................................................... 1
Statements of Operations - Quarters Ended March 31, 1998 and 1997.................. 2
Statement of Stockholders' Equity - Quarter Ended March 31, 1998................... 3
Statements of Cash Flows - Quarters Ended March 31, 1998 and 1997.................. 4
Notes to Financial Statements...................................................... 5
</TABLE>
2. Exhibits. Not applicable.
--------
(b) Reports on Form 8-K.
A report on Form 8-KSB was filed by the Company on February 16, 1998,
disclosing the termination of L. Cade Havard as Chief Executive Officer,
President and Chairman of the Board of the Company and the appointment of W.
Mack Goforth, the Company's Chief Financial Officer, as the Chairman of the
11
<PAGE>
Board and Chief Executive Officer. Also disclosed in this report were the
results of the special meeting of stockholders of the Company held on February
25, 1998, whereby an increase in the number of authorized shares of the
Company's common stock, par value $.001 per share, from 15,000,000 shares to
20,000,000 shares and a one-for-four (1:4) reverse stock split of the Company's
Common Stock were approved.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC TRANSMISSION CORPORATION
Signature Title Date
--------- ----- ----
/s/ W. MACK GOFORTH Chairman, Chief Executive May 22, 1998
- -------------------------- Officer, Chief Financial
W. Mack Goforth Officer and Director (Principal
Executive Officer)
/s/ LOUANN C. SMITH Controller (Principal May 22, 1998
- ----------------------- Accounting Officer)
Louann C. Smith
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001017586
<NAME> Electronic Transmission Corporation
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 113,662
<SECURITIES> 0
<RECEIVABLES> 489,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 678,769
<PP&E> 883,705
<DEPRECIATION> 475,867
<TOTAL-ASSETS> 1,567,924
<CURRENT-LIABILITIES> 1,500,178
<BONDS> 0
0
0
<COMMON> 14,109
<OTHER-SE> 7,249,762
<TOTAL-LIABILITY-AND-EQUITY> 1,567,924
<SALES> 0
<TOTAL-REVENUES> 971,011
<CGS> 0
<TOTAL-COSTS> 443,574
<OTHER-EXPENSES> 768,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,670
<INCOME-PRETAX> (250,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233,146)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
