<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-48001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
ELECTRONIC TRANSMISSION CORPORATION
(Name of Small Business Issuer in its Charter)
---------------
<TABLE>
<CAPTION>
DELAWARE 8099 75-2578619
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
---------------
5025 ARAPAHO ROAD, SUITE 501 STEVEN K. ARNOLD
DALLAS, TEXAS 75248 5025 ARAPAHO ROAD, SUITE 501
(972) 980-0900 DALLAS, TEXAS 75248
(Address and Telephone Number (972) 980-0900
of Principal Executive Offices (Name, Address and Telephone Number
and Principal Place of Business) of Agent for Service)
</TABLE>
---------------
COPY TO:
RICHARD B. GOODNER, ESQ.
JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75202
PHONE NO. (214) 953-6167
FAX NO. (214) 953-5822
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis, pursuant to Rule 415 under the Securities Act,
check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value . . . . . 642,968 $2.125 $1,366,307 $471.10
- --------------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $471.10(2)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the average of the bid and ask prices of the Common Stock on
March 9, 1998 as reported on The OTC Bulletin Board in accordance with
Rule 457(c) under the Securities Act of 1933, as adjusted for the
registrant's one-for-four reverse stock split effective July 1, 1998.
(2) The amount of $471.10 was previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
PROSPECTUS
ELECTRONIC TRANSMISSION CORPORATION
642,968 SHARES OF COMMON STOCK
The 642,968 shares (the "Shares") of common stock, $0.001 par value (the
"Common Stock"), of Electronic Transmission Corporation (the "Company"), offered
hereby, are being sold by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any proceeds from the sale of the
Shares by the Selling Stockholders. See "Selling Stockholders," "Plan of
Distribution" and "Agreements with Selling Stockholders."
The Shares may be offered by the Selling Stockholders from time to time in
open market transactions (which may include block transactions) or otherwise
through The OTC Bulletin Board of the Nasdaq Stock Market, Inc. ("The OTC
Bulletin Board"), or in private transactions at prices relating to prevailing
market prices or at negotiated prices. The Selling Stockholders may effect such
transactions at prices relating to prevailing market prices or at negotiated
prices. The Selling Stockholders may effect such transactions by selling the
Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or purchasers of the Shares, as the case may be, for
whom such broker-dealers may act as agent or to whom they sell as principal or
both. The Selling Stockholders and any broker-dealer acting in connection with
the sale of the Shares offered hereby may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"), in
which event any discounts, concessions or commissions received by them, which
are not expected to exceed those customary in the types of transactions
involved, or any profit on resales of the Shares by them, may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Selling
Stockholders" and "Plan of Distribution."
The costs, expenses and fees incurred in connection with the registration
of the Shares, which are estimated to be approximately $70,000 (excluding
selling commissions and brokerage fees incurred by the Selling Stockholders),
will be paid by the Company.
The Company's Common Stock is traded on The OTC Bulletin Board under the
symbol "ETSM". On June 29, 1998, the closing bid price of the Common Stock was
$0.25 per share. See "Prospectus Summary" and "Common Stock Price Ranges and
Dividends."
---------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8
OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is , 1998
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission (the
"SEC") a Registration Statement on Form SB-2 (together with all exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
shares of the Common Stock of the Company which may be sold by certain
stockholders of the Company. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits thereto. Copies of the Registration Statement and exhibits thereto are
available from the SEC upon payment of certain fees prescribed by the SEC.
Copies of the Registration Statement and exhibits thereto may be inspected at
the SEC's principal office, 450 Fifth Street, N.W., Washington, D.C. 20549.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information can be inspected, without
charge, and copies may be obtained, at prescribed rates, at the public reference
facilities of the SEC maintained at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies of the such reports may also be
inspected, without charge, at the SEC's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of such reports may be
obtained by mail, at prescribed rates, from the Public Reference Branch of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers of securities which file
electronically with the SEC.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including but not limited to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statement,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, there can be no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from the Company's expectations ("cautionary statements")
are disclosed in this Prospectus, including, but not limited to, the information
disclosed under "Risk Factors." All forward-looking statements are expressly
qualified by such cautionary statements.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY AND TO PARTICULARLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL SHARE
AND PER SHARE DATA AND INFORMATION RELATING TO THE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING IN THIS PROSPECTUS (i) HAVE BEEN ADJUSTED TO GIVE EFFECT TO A
ONE-FOR-FOUR REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTIVE JULY 1,
1998, (ii) ASSUME NO EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE AN
AGGREGATE OF 967,611 SHARES OF COMMON STOCK AT PRICES RANGING FROM $.004 TO
$6.00 PER SHARE AND (iii) NO CONVERSION OF THE COMPANY'S OUTSTANDING CONVERTIBLE
DEBENTURES INTO APPROXIMATELY 20,927 SHARES OF COMMON STOCK. See "-- Recent
Financings."
THE COMPANY
GENERAL
Electronic Transmission Corporation, a Delaware corporation (the
"Company"), is the survivor of a merger (the "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.
Unless otherwise indicated herein, all references to the Company include its
predecessors's, ETC-Canada and ETC-Texas. See "Business -- Organization."
The Company's core competencies include:
- claims automation services
- medical claims repricing
- third party administration
Given the above competencies, the Company is able to provide process and
systems solutions to the non-provider sector of the health care industry.
Process solutions are automated through a broad range of applications and
data base information systems. Information systems include software
solutions developed by the Company which are proprietary in nature. In order
to provide such process solutions, the Company contracts with health care
payors, self-insured companies and other payors, such as third party
administrators ("TPAs"), for automation and electronic data interchange
("EDI") services. The Company, through its Electra-Net division, also
contracts with various health care provider networks to provide cost
containment services to its customers. In January 1998, the Company, through
ETC Administrative Services, Inc., a wholly-owned subsidiary ("ETC
Services"), initiated the Company's TPA component to service its existing
clients. The Company, through ETC Services, provides a continuum of services
to self-insured corporate customers beginning with the scanning of the health
care provider's claim and concluding with the payment to the health care
provider. See "Business."
The Company has a limited operating history. Since inception, the Company
has incurred losses from operations and as of March 31, 1998 has an accumulated
deficit of $7,210,027. The Company's independent accountants, in their report
regarding the Company's financial statements for the fiscal year ended
December 31, 1997, stated that since the Company had a history of losses since
inception and had a significant working capital deficit, doubt existed as to the
Company's ability to continue as a going concern. See "Risk Factors --
Accumulated Deficit and Independent Accountants' Report Referring to Going
Concern Uncertainties; -- Working Capital Deficit; Lack of Liquidity and Capital
Resources" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RECENT FINANCINGS
On December 17, 1997, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") pursuant to which Special Situations
Private Equity Fund, L.P. and Special Situations Cayman Fund, L.P.
(collectively, the "Investors") obtained the right to purchase up to an
aggregate of 750,000 shares of
3
<PAGE>
Common Stock for total consideration of $1,500,000 or $2.00 per share. The
Purchase Agreement called for the sale and purchase of the available shares
to occur in two tranches. On December 17, 1997, the Investors purchased an
aggregate of 611,930 shares of Common Stock, which represent certain of the
Shares being registered in the registration statement of which this
Prospectus is a part, for total cash consideration of $1,223,859.50 (the
"First Closing"). The Investors, in accordance with the terms of the
Purchase Agreement, have advised the Company that they do not intend to
purchase the remaining 138,070 shares of Common Stock.
In connection with the First Closing, the Company committed to the
Investors to effect amendments to its Certificate of Incorporation for the
purpose of (i) increasing its authorized Common Stock from 15,000,000 to
20,000,000 shares and (ii) undertaking a reverse stock split (the "Reverse Stock
Split") whereby every four shares of outstanding Common Stock would be exchanged
for one share of Common Stock (the foregoing amendments to the Certificate of
Incorporation being collectively referred to herein as the "Amendments"). A
special meeting of the stockholders was held on February 25, 1998 at which time
the Amendments were approved by the requisite vote of the Company's
stockholders. The Certificate of Amendment to the Company's Certificate of
Incorporation increasing the authorized Common Stock to 20,000,000 shares was
filed with the State of Delaware on February 27, 1998, and a Certificate of
Amendment to the Company's Certificate of Incorporation effecting the Reverse
Stock Split was filed with the State of Delaware on June 16, 1998. See
"Description of Securities" and "Agreements with Selling Stockholders."
On June 25, 1998, David O. Hannah, a director of the Company, purchased
100,000 restricted shares of Common Stock for an aggregate purchase price of
$100,000 or $1.00 per share. Also on June 25, 1998, Mr. Hannah loaned to the
Company the principal amount of $100,000. The note is due and payable on
December 25, 1998. Furthermore, the Company issued to Mr. Hannah 25,000
restricted shares of Common Stock in lieu of payment of cash interest on the
principal amount of the debt. The obligation is secured by all of the assets of
the Company. The outstanding principal balance of the obligation to Mr. Hannah
is convertible by him at any time into restricted shares of Common Stock at a
rate of one share of Common Stock for every $2.00 of principal converted. See
"Certain Relationships and Related Transactions."
On June 29, 1998, the Company executed promissory notes in the principal
amounts of $20,000 and $5,000 payable to Scott Stewart, a director of the
Company, and to David Stewart, Mr. Stewart's brother, respectively. The notes
are due and payable on December 29, 1998. Scott Stewart received 5,000 shares
of Common Stock and David Stewart received 1,250 shares of Common Stock in lieu
of cash interest on the principal amount of their respective notes. The
obligations to the note holders are secured by all of the assets of the Company.
The outstanding principal balances of these obligations are convertible by the
note holders into shares of Common Stock at the rate of one share of Common
Stock for every $2.00 of principal converted. See "Certain Relationships and
Related Transactions."
CURRENT OPERATIONS AND RELATED MATTERS
For the three-month period ended March 31, 1998, the Company recorded
revenues of $971,011 and had a net loss of $233,146. For the fiscal year ended
December 31, 1997, the Company recorded revenues of $3,249,492 and had a net
loss of $1,999,404. As of March 31, 1998, the Company had an accumulated
deficit of $7,210,027 and a working capital deficit of $821,409. The Company
does not have a bank line of credit. The Company has funded its operating
losses and expansion costs primarily through a combination of private offerings
of debt and equity securities and the factoring of accounts receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On February 16, 1998, the Board of Directors of the Company terminated the
Amended and Restated Employment Agreement, dated December 17, 1997, of L. Cade
Havard, the former Chairman of the Board, Chief Executive Officer and President
of the Company. The decision to terminate the agreement was based in part upon
4
<PAGE>
the inability of the Board of Directors and Mr. Havard to resolve differences
regarding the Company's ongoing management and operational philosophy. On
February 16, 1998, Mr. Havard resigned from the Board of Directors. Also on
February 16, 1998, the Board of Directors elected W. Mack Goforth, the Company's
Chief Financial Officer, as a member of the Board of the Directors and to serve
as Chairman thereof, as well as electing Mr. Goforth as Chief Executive Officer
of the Company. See "Business" and "Management."
On March 20, 1998, the Employment Agreement between the Company and Ann C.
McDearmon, the Company's Executive Vice President -- Director of Marketing, was
terminated. Ms. McDearmon, in a lawsuit filed on April 20, 1998 in State
District Court of Dallas County, Texas, alleged that the Employment Agreement
was effectively terminated by the Company as a result of the change in the
Company's management in February 1998 and because of modifications to Ms.
McDearmon's work responsibilities. Ms. McDearmon has also alleged that as a
result of the termination of the employment agreement she is entitled to certain
liquidated damages identified in the agreement. The Company maintains that Ms.
McDearmon voluntarily terminated the employment agreement by submitting her
letter of resignation on March 20, 1998 and that she is not entitled to any
additional compensation or liquidated damages under the terms of such agreement.
The Company intends to vigorously defend this lawsuit and does not believe that
the outcome will have a material adverse effect upon its financial condition.
On May 7, 1998, Steven K. Arnold agreed to serve as a consultant to the
Company on an interim basis pending his formal election by the Board of
Directors as Chairman of the Board and Chief Executive Officer of the Company.
Effective on May 28, 1998, Mr. Arnold was elected Chairman of the Board and
Chief Executive Officer of the Company. Mr. Goforth continues to serve as the
Company's Chief Financial Officer, but resigned as a director of the Company
effective May 28, 1998. See "Management."
BUSINESS STRATEGY
The Company's current business strategy is to continue to increase cash
flows by extensively marketing its services to the non-provider sector of the
health care industry and enhance existing client relationships by offering a
broader range of services. See "Business -- Business Strategy."
The following are key elements of the Company's strategy:
- Continued use of two-tiered customer contracts.
- Rapid installation and enhanced processing capability.
- Enhanced marketing efforts.
The success of the Company's business strategy is dependent upon (i)
improving its claims processing operations through cost reductions and increased
market penetration; (ii) entering into long-term claims processing contracts
with self-insured companies, TPAs and management services organizations; (iii)
successful development and marketing of its claims repricing capabilities and
successful expansion of its existing service components; and (iv) its ability to
link the various medical claims processing activities of payees and payors.
However, even if the Company achieves all or a portion of its business strategy,
there can be no assurance that it will be able to generate sufficient revenues
to achieve significant profitable operations or fund its expansion plans. See
"Risk Factors -- Working Capital Deficit; Lack of Liquidity and Capital
Resources."
The Company maintains its executive offices at 5025 Arapaho Road, Suite
501, Dallas, Texas 75248, telephone (972) 980-0900.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED BY THE SELLING
STOCKHOLDERS...................... 642,968 shares of Common Stock. See
"Description of Securities -- Common
Stock," "Selling Stockholders," "Plan of
Distribution" and "Agreements with
Selling Stockholders."
OUTSTANDING SECURITIES
Securities
Presently
Outstanding
-----------
Common Stock(1).......... 3,671,923
----------
----------
RISK FACTORS......................... An investment in the Shares offered
hereby involves a high degree of risk.
See "Risk Factors."
TRADING SYMBOL....................... Common Stock -- ETSM
</TABLE>
- --------------------
(1) Unless otherwise indicated herein, the information contained in this
Prospectus regarding the Company's outstanding securities does not
include 135,750 shares reserved for issuance upon exercise of
outstanding warrants, 831,861 shares reserved for issuance upon exercise
of outstanding options or approximately 20,927 shares reserved for
issuance upon conversion of outstanding convertible debentures. See
"Description of Securities" and "Shares Eligible for Future Sale."
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information is presented on a
consolidated basis for the periods ended December 31, 1996 and December 31,
1997, respectively, and March 31, 1997 and March 31, 1998, respectively.
Information pertaining to the fiscal years ended December 31, 1996 and 1997
has been derived from the audited financial statements of the Company. In
the opinion of management, this financial information includes all material
adjustments necessary to present historical results of the Company. This
financial information does not purport to be indicative of the financial
position or results of operations that may be obtained in the future. This
financial information should be read in conjunction with the historical
financial statements and notes thereto of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Three Months
STATEMENT OF OPERATIONS DATA: Year Ended Year Ended Ended Ended
December 31, December 31, March 31, March 31,
1996 1997 1997 1998
------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C> <C> <C>
Service revenues . . . . . . . . . . . . . . . . . . . . . . . $831,323 $3,249,492 $312,774 $971,011
Costs of revenues. . . . . . . . . . . . . . . . . . . . . . . 568,474 1,682,083 184,738 443,574
Net income/(loss). . . . . . . . . . . . . . . . . . . . . . . (2,470,684) (1,999,404) (686,491) (233,146)
Net income/(loss) per weighted-average
share of common stock outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $(1.43) $(0.93) $(0.23) $(0.07)
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $(1.43) $(0.95) $(0.23) $(0.07)
Number of weighted-average shares of
common stock outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 1,726,648 2,240,181 2,923,964 3,508,867
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 1,726,648 2,187,881 2,923,964 3,508,867
December 31, December 31, March 31, March 31,
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
----------- -----------
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,125 $548,565 $12,977 $113,662
Working capital (deficit). . . . . . . . . . . . . . . . . . . (307,329) (562,394) (673,413) (821,409)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 918,974 2,054,531 832,215 1,567,924
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 1,895,283 1,767,624 1,647,985 1,514,080
Stockholders' equity/(deficit) . . . . . . . . . . . . . . . . (976,309) 286,907 (842,773) 53,844
</TABLE>
7
<PAGE>
RISK FACTORS
BEFORE DECIDING WHETHER TO PURCHASE THE SHARES OFFERED HEREIN,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND, IN PARTICULAR, THE FACTORS DISCUSSED BELOW.
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS
"BELIEVES," "EXPECTS," "INTENDS," "SEEKS TO," "MAY," "WILL," "SHOULD,"
"ANTICIPATES" AND SIMILAR WORDS OR THE NEGATIVE THEREOF, OTHER VARIATIONS
THEREON, COMPARABLE TERMINOLOGY OR BY DISCUSSIONS OF STRATEGY. THERE IS NO
ASSURANCE THAT FUTURE RESULTS OR EVENTS WHICH ARE COVERED BY FORWARD-LOOKING
STATEMENTS WILL BE ACHIEVED. THE FOLLOWING PARAGRAPHS OF THIS SECTION OF THE
PROSPECTUS IDENTIFY FACTORS WITH RESPECT TO CERTAIN FORWARD-LOOKING
STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM FUTURE
RESULTS TO WHICH SUCH FORWARD-LOOKING STATEMENTS REFER. OTHER FACTORS WHICH
ARE NOT DISCUSSED IN THIS SECTION ALSO COULD CAUSE ACTUAL RESULTS TO VARY
MATERIALLY FROM FUTURE RESULTS REFERRED TO IN FORWARD-LOOKING STATEMENTS. AN
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
ACCUMULATED DEFICIT AND INDEPENDENT ACCOUNTANTS' REPORT REFERRING TO
GOING CONCERN UNCERTAINTIES. Since inception, the Company has incurred
losses from operations, and as of March 31, 1998 the Company had an
accumulated deficit of $7,210,027. This history of recurring losses
indicates that the Company's continuation as a going concern is dependent
upon its ability to generate sufficient cash flows to meet its obligations on
a timely basis, to obtain additional financing or capital and ultimately to
attain profitable operations. The Company's independent accountants, in their
report regarding the Company's financial statements for the fiscal year ended
December 31, 1997, stated that since the Company had a history of losses
since inception and had a significant working capital deficit, doubt existed
as to the Company's ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WORKING CAPITAL DEFICIT; LACK OF LIQUIDITY AND CAPITAL RESOURCES. As of
March 31, 1998, the Company had total current assets of $678,769 and total
current liabilities of $1,500,178 resulting in a working capital deficit of
$821,409. The ability of the Company to sustain its working capital, and to
obtain the necessary capital resources to fund future costs associated with
its operations and expansion plans is dependent upon: (i) improving claims
processing operations through cost reductions and increased market
penetration; (ii) entering into long-term claims processing contracts with
self-insured companies, TPAs and management services organizations; (iii)
successful development and marketing of its claims repricing capabilities and
successful expansion of its existing service components; and (iv) its ability
to link the various medical claims processing activities of payees and
payors. Even if the Company achieves some success with its operational
strategy, there can be no assurance that it will be able to generate
sufficient revenues to sustain its working capital and have funds available
for growth. To achieve all of its objectives, the Company may be required to
raise additional working capital in the short term by issuing debt and/or
equity securities. If the Company is unable to raise additional capital as
needed, it could be forced to limit its expansion plans. The Company does not
currently maintain a bank line of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
POSSIBILITY OF CONTINUED LOSSES. For the three-month period ended March
31, 1997 and March 31, 1998, respectively, the Company incurred losses of
$686,491 and $233,146, respectively. The Company incurred losses of
$2,470,684 for the fiscal year ended December 31, 1996 and $1,999,404 for the
fiscal year ended December 31, 1997. In addition to the historical losses,
the Company expects to have continued losses in the short term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
DEPENDENCE ON QUALITY OF CLAIMS PROCESSING AND THIRD PARTY
ADMINISTRATION SERVICES. Substantially all of the Company's revenues are
currently derived from providing process and systems solutions to the
non-provider sector of the health care industry. There can be no assurances
that processing methodology will meet the future demands of the marketplace.
The Company's future success and financial performance will depend in part
upon its ability to provide an expanding product line that will meet the
functionality required by its customers through the linkage of payees, health
care cost containment companies and payors of medical claims. There can be
no assurance that the Company will successfully implement electronic
processing
8
<PAGE>
applications that will meet the requirements of health care providers and
payors and thereby achieve market acceptance. The Company's future success
and financial performance is also dependent upon its ability to develop its
TPA business component. Despite significant capital expenditures by the
Company, there can be no assurances given that the Company will be able to
successfully penetrate the highly competitive TPA market. Failure to either
meet the needs of health care providers and payors with regard to claims
processing services or to successfully develop and market its TPA component
will have a materially adverse effect upon the business operations of the
Company. See "Business."
DEPENDENCE ON MAJOR CLIENT; MATERIAL CONTRACTS. For the 12 months ended
December 31, 1997, services provided to Wal-Mart Stores, Inc. ("Wal-Mart"),
the Company's largest client, accounted for approximately 56% of revenues.
Revenues from Wal-Mart for the three-month period ended March 31, 1998
accounted for 61% of total revenues for the period. The Company's service
provider agreement with Wal-Mart expires in September 1998. For the twelve
months ended December 31, 1997, network and repricing services provided to
Champion International accounted for approximately 12% of its revenues.
Effective May 1, 1998, the Company ceased to provide network and repricing
services to Champion International. The loss of Wal-Mart as a client could
have a materially adverse effect on the Company and its business. No other
client accounted for as much as 10% of net revenue for the referenced period.
See "Management's Discussion and Analysis of the Financial Condition and
Results of Operations" and "Business."
The Company is a party to a Processing Agreement (the "Processing
Agreement") with Imaged Data, Inc. ("IDI") pursuant to which IDI provides
electronic claims conversion functions for the Company. Under the terms of
the Processing Agreement, IDI can only perform medical claim conversions for
the Company or pay the Company five percent of gross revenues generated by
IDI as a result of medical claims conversions done for the benefit of third
parties. The Processing Agreement is subject to automatic one year renewals
with the next renewal to occur in May 1999. Although the Company currently
has a good relationship with IDI and the Company has no reason to believe
otherwise, no assurances can be given that IDI will agree to an extension of
the term of the Processing Agreement. The loss of IDI's conversion services
could have a material adverse effect on the financial condition and results
of operations of the Company. The Company is, however, aware of other
providers of services similar to those performed by IDI, but no assurance can
be given that such services could be contracted for on mutually acceptable
terms.
COMPETITION. The non-provider sector of the health care industry is
intensely competitive and is characterized by companies that provide both
electronic automation and paper processing solutions. There are participants
in the industry that provide automation services, discount and repricing
services and TPA services in the market currently served by the Company. The
Company's competition in the market for electronic claims processing,
discount and repricing services and adjudication and payment services is
primarily concentrated in certain insurance companies, TPAs or management
services organizations which have greater financial and technical resources
and longer operating histories than the Company. The Company also believes
that its processing methodology is easily duplicated. In addition, the
Company may face substantial competition from new entrants into the
electronic claims processing industry. The Company'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, to adapt to changes in
the marketplace and produce sufficient profits to be able to finance its
ongoing operations.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY.
Consolidation of the payor and provider segments of the health care industry
could erode the Company's customer base and reduce the size of its target
market. In addition, the resulting enterprises could have greater bargaining
power, which could lead to price erosion of the Company's services. The
reduction in the size of the Company's target market or the failure of the
Company to maintain adequate price levels could have a materially adverse
effect on the Company's business, financial condition and results of
operations. The health care industry also is subject to change by political,
economic and regulatory influences that may affect the procurement of
contracts and the operation of health care industry participants. During the
past several years, the United States health care industry has been subject
to an increase in governmental regulation and reform proposals. These
reforms may increase governmental involvement in health care, lower
reimbursement rates, and otherwise change the operating environment for the
Company's
9
<PAGE>
customers. The failure of the Company to retain adequate processing
efficiency or price levels as a result of legislative or market driven
reforms could have a materially adverse effect on the Company's business,
financial conditions and results of operations. See "Business."
EFFECT OF GOVERNMENT REGULATION. The Company is not currently 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 Company. The failure by the Company 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 Company 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 Company. See "Business."
PROPRIETARY RIGHTS, RISK OF INFRINGEMENT. The Company will rely on
nondisclosure and other contractual provisions to protect its proprietary
rights and trade secrets. The Company has registered its service mark in the
States of Texas, Maryland and Arkansas. There can be no assurance that
measures taken by the Company to protect its intellectual property will be
adequate or that the Company's competitors will not independently develop
services that are substantially equivalent or superior to those of the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim. In addition, any such claim may
require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a materially adverse effect
on the Company's business, financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the efforts
and ability of Steven K. Arnold, Chairman of the Board and Chief Executive
Officer, W. Mack Goforth, Chief Financial Officer, and Timothy P. Powell,
Executive Vice President -- Data Services. The loss of the services of any
of these individuals could have a materially adverse effect on the Company.
Each of the foregoing individuals has entered into employment and
non-competition agreements with the Company. In addition, the Company's
future growth will be dependent to a significant degree upon its ability to
attract and retain additional skilled management personnel. See "Management."
AFFILIATED TRANSACTIONS. Certain officers, directors and related
parties have engaged in business transactions with the Company. The Company
has entered into consulting, leasing, loan and marketing agreements,
respectively, with certain of its directors and stockholders. Management of
the Company believes that the terms of the transactions with officers,
directors and related parties were or are as favorable as those that could
have been obtained from unaffiliated parties under similar circumstances. It
is the Company's policy that transactions between it and its affiliates will
be on terms no less favorable than could be obtained from unaffiliated third
parties and be approved by a majority of the disinterested members of the
Board of Directors. See "Certain Relationships and Related Transactions."
POSSIBLE DILUTION FOR FUTURE SALES OF COMMON STOCK. The issuance of
additional shares of Common Stock or the issuance of stock upon exercise of
outstanding options or warrants or conversion of the outstanding convertible
debentures may result in dilution of the equity represented by the then
outstanding shares of Common Stock held by other stockholders. The issuance
of additional shares of Common Stock, while potentially providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Board of Directors could issue large blocks of Common Stock to fend off
unwanted tender offers or hostile takeovers without further stockholder
approval. See "Description of Securities" and "Shares Eligible for Future
Sale."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Shares in the public
market could have an adverse effect on the market price of the Common Stock.
There are approximately 3,671,923 shares of Common Stock currently
outstanding. All of the Shares of Common Stock offered hereby and
approximately
10
<PAGE>
2,823,538 shares of Common Stock held by current stockholders of the Company
will be eligible for public sale without restrictions, except for
restrictions placed upon disposition of securities by affiliates (those
controlling or controlled by or under common control with the Company and
generally deemed to include officers and directors) of the Company. The
remaining approximately 848,385 shares of the Company's Common Stock are
"restricted securities" as defined under Rule 144 promulgated under the
Securities Act. Subject to the volume and holding period limitations of Rule
144, 25,000 currently outstanding shares of Common Stock will be eligible for
sale under Rule 144 within 90 days of the date of this Prospectus. None of
the Company's current outstanding restricted securities are eligible for sale
under Rule 144(k). No prediction can be made as to the effect, if any, that
future sales of additional shares of Common Stock or the availability of such
shares for sale under Rule 144, other applicable exemptions or otherwise will
have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing
market prices of the Common Stock. See "Principal Stockholders," "Shares
Eligible for Future Sale" and "Selling Stockholders."
PAYMENT OF DIVIDENDS. The Company has never declared or paid any cash
dividends on its capital stock. It is anticipated that future earnings of
the Company will be retained to finance the continuing development of its
business. The payment of any future dividends will be at the discretion of
the Board of Directors of the Company and will depend upon, among other
things, future earnings, the success of business activities, regulatory and
capital requirements, the general financial condition of the Company and
general business conditions.
NO ASSURANCE OF ACTIVE PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK
PRICE. Although the Common Stock is quoted on The OTC Bulletin Board, there
can be no assurance that an active public market for the Common Stock will
develop or be sustained. The trading price of the Common Stock is subject to
wide fluctuations in response to quarter to quarter variations in operating
results, announcements of innovations by the Company or its competitors, and
other events or factors. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations which affects the market
price of securities of publicly traded companies and which have often been
unrelated to the operating performance of these companies. Broad market
fluctuations may adversely affect the market price of the Common Stock. See
"Common Stock Price Ranges and Dividends," "Description of Securities," and
"Shares Eligible for Future Sale."
OVER-THE-COUNTER TRADING MARKET. As the Company's Common Stock is
traded on The OTC Bulletin Board, liquidity of the Company's securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts and news media coverage of the Company and lower prices for
the Company's securities than might otherwise be attained if such securities
were listed or traded on a national or regional exchange.
RISKS OF LOW-PRICED STOCK. The Company's securities are traded on The
OTC Bulletin Board and are subject to Rule 15(g)-9 under the Exchange Act,
which imposes additional sales practice requirements on broker/dealers who
sell securities to persons other than established customers and accredited
investors (generally, individuals with net worths in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouses).
For transactions covered by this rule, a broker/dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule
may adversely effect the ability of broker/dealers to sell the Company's
securities and may adversely effect the holder's ability to sell in the
secondary market.
The SEC's regulations define a penny stock to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 or
with an exercise price of less than $5.00 per share subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
SEC's rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about commissions to both the
broker/dealer and the registered representative in current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
11
<PAGE>
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW, CERTIFICATE OF
INCORPORATION AND BYLAWS. Certain provisions of Delaware law applicable to
the Company could delay or make more difficult mergers, tender offers or
proxy contests involving the Company. In addition, the Board of Directors of
the Company may issue shares of preferred stock without stockholder approval
on such terms as the Board of Directors may determine. The rights of all the
holders of Common Stock will be subject to, and may be adversely effected by,
the rights of the holders of any preferred stock that may be issued in the
future. In addition, the Company's Bylaws eliminate the right of
stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. All of the foregoing could
have the effect of delaying, deferring or preventing a change in control of
the Company and could limit the price that certain investors might be willing
to pay in the future for shares of the Common Stock. See "Description of
Securities."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Company's Bylaws, directors and officers are not liable for
monetary damages for breach of fiduciary duty, except in connection with a
breach of the duty of loyalty, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law.
Furthermore, the Bylaws provide that the Company may indemnify its directors,
officers, employees or agents to the full extent permitted by the Delaware
General Corporation Law (the "DGCL"). The Company has purchased insurance on
behalf of its directors and officers, and will maintain such insurance
regardless of whether or not the Company would have the power to indemnify
such person against liability.
YEAR 2000 MODIFICATIONS. The Company is currently reviewing its
computer systems in order to evaluate necessary modifications for the year
2000. The Company does not currently anticipate that it will incur material
expenditures to complete any such modifications.
CURRENT PROSPECTUS REQUIRED IN CONNECTION WITH SALE OF SHARES OFFERED
HEREBY. The Selling Stockholders will be able to sell the Shares offered
hereby only if (i) there is a current prospectus relating to the Shares under
an effective registration statement filed with the SEC, and (ii) such Shares
are then qualified for sale or exempt therefrom under applicable state
securities laws of the jurisdictions in which the various Selling
Stockholders reside. There can be no assurance, however, that the Company
will be successful in maintaining a current registration statement. After a
registration statement becomes effective, it may require updating by the
filing of a post-effective amendment. A post-effective amendment is required
(i) any time after nine months subsequent to the effective date when any
information contained in the prospectus is over 16 months old, (ii) when
facts or events have occurred which represent a fundamental change in the
information contained in the registration statement, or (iii) when any
material change occurs in the information relating to the plan or
distribution of the securities registered by such registration statement.
The Company anticipates that this registration statement will remain
effective for at least nine months following the date of this Prospectus,
assuming a post-effective amendment is not filed by the Company.
12
<PAGE>
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's Common Stock began trading on The OTC Bulletin Board on
April 4, 1997 under the symbol "ETSM". The following table sets forth the
high and low bid information for the Common Stock as reported on The OTC
Bulletin Board, which prices have not been adjusted to reflect the Reverse
Stock Split. The table reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
April 4 - June 30, 1997 $3.50 $1.25
July 1 - September 30, 1997 $1.44 $0.75
October 1, 1997 - December 31, 1997 $1.13 $0.53
January 1, 1998 - March 31, 1998 $0.69 $0.25
----- -----
April 1, 1998 - June 30, 1998 $0.31 $0.13
----- -----
</TABLE>
HOLDERS. As of June 17, 1998, there were approximately 340 record holders
of the Common Stock.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on its Common
Stock and does not anticipate or contemplate paying dividends on the Common
Stock in the foreseeable future. It is the present intention of management
to utilize all available funds for the development of the Company's business.
In addition, the Company may not pay any dividends on common equity unless
and until all dividend rights on outstanding preferred stock, if any, have
been satisfied. The only other restrictions that limit the ability to pay
dividends on common equity or that are likely to do so in the future, are
those restrictions imposed by law or by certain credit agreements.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Short-term debt. . . . . . . . . . . . . . . . . . . . . . $ 224,448
Current maturities of long-term debt . . . . . . . . . . . 87,036
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 13,902
-----------
Total debt and debt equivalents. . . . . . . . . . . . . $ 325,386
-----------
-----------
Common Stock, $0.001 par value; 3,527,340 shares
issued and outstanding . . . . . . . . . . . . . . . . . $3,527
Additional paid-in capital . . . . . . . . . . . . . . . . 7,260,344
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (7,210,027)
-----------
Total stockholders' equity . . . . . . . . . . . . . . . $ 53,844
-----------
-----------
Total capitalization . . . . . . . . . . . . . . . . . . $ 379,230
-----------
-----------
</TABLE>
14
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information is presented on
a consolidated basis for the periods ended December 31, 1996 and December 31,
1997, respectively, and March 31, 1997 and March 31, 1998, respectively.
Information pertaining to the fiscal years ended December 31, 1996 and 1997
has been derived from the audited financial statements of the Company. In
the opinion of management, this financial information includes all material
adjustments necessary to present historical results of the Company. This
financial information does not purport to be indicative of the financial
position or results of operations that may be obtained in the future. This
financial information should be read in conjunction with the historical
financial statements and notes thereto of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Three Months
STATEMENT OF OPERATIONS DATA: Year Ended Year Ended Ended Ended
December 31, December 31, March 31, March 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C> <C> <C>
Service revenues. . . . . . . . . . . . . . . . . . . . . . . $ 831,323 $ 3,249,492 $ 312,774 $ 971,011
Costs of revenues . . . . . . . . . . . . . . . . . . . . . . 568,474 1,682,083 184,738 443,574
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . (2,470,684) (1,999,404) (686,491) (233,146)
Net income/(loss) per weighted-average
share of common stock outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . $ (1.43) $ (0.93) $ (0.23) $(0.07)
Diluted . . . . . . . . . . . . . . . . . . . . . . . $ (1.43) $ (0.95) $ (0.23) $(0.07)
Number of weighted-average shares of
common stock outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . 1,726,648 2,240,181 2,923,964 3,508,867
Diluted . . . . . . . . . . . . . . . . . . . . . . . 1,726,648 2,187,881 2,923,964 3,508,867
December 31, December 31, March 31, March 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
----------- -----------
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,125 $ 548,565 $ 12,977 $ 113,662
Working capital (deficit) . . . . . . . . . . . . . . . . . . (307,329) (562,394) (673,413) (821,409)
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 918,974 2,054,531 832,215 1,567,924
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 1,895,283 1,767,624 1,647,985 1,514,080
Stockholders' equity/(deficit). . . . . . . . . . . . . . . . (976,309) 286,907 (842,773) 53,844
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, the notes thereto, and "Selected
Historical Financial Information" 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. Because of the Company's recent acquisitions and the limited
scale of the Company's operations prior to 1996, the results of operations
from period to period are not necessarily comparative.
OVERVIEW
The Company is the survivor of the Merger of ETC-Texas into ETC-Canada
in the first quarter of 1997. The Company and all of its predecessors
received going concern audit opinions for the fiscal years ended December 31,
1995, 1996 and 1997.
ETC-Canada was inactive from 1992 until it reorganized its affairs in
1995 in preparation of the Merger. In March 1996, ETC-Canada changed its
name from Solo Petroleums Ltd. ("Solo") to ETC-Canada and effected a
one-for-five consolidation of capital of the outstanding shares of common
stock to facilitate the effectiveness of the Merger. In June 1996,
ETC-Canada consummated a private offering of common stock for aggregate
proceeds of $779,575 which it loaned to ETC-Texas to facilitate the Merger.
Since ETC-Canada had no significant assets and was relatively inactive during
the period prior to the Merger, management of the Company does not believe
that a discussion of ETC-Canada's financial condition and results of
operations would be relevant. Therefore, any references to activity prior to
the Merger are activities of ETC-Texas, unless otherwise specifically
referenced.
The Company is in the business of providing process and systems
solutions to the non-provider sector of the health care industry. Process
solutions are automated through a broad range of applications and data base
information systems. Information systems include software solutions
developed by the Company which are proprietary in nature. In order to
provide such process solutions, the Company contracts with health care
payors, self-insured companies and other payors, such as TPAs, for automation
and EDI services. The Company, through its Electra-Net division, also
contracts with various health care provider networks to provide cost
containment services to its customers.
In January 1998, the Company, through ETC Services, initiated its TPA
component to service its existing clients. The Company, through ETC
Services, provides a continuum of services to self-insured corporate
customers beginning with the scanning of the health care provider's claim and
concluding with the payment to the health care provider.
The Company's revenues are generated by different methods for each
segment of its business. The Company is paid a set price for scanning and
automating each health care provider claim. Additionally, the Company is
paid a specific percentage of the "savings" generated by its re-pricing
activities. The TPA services are charged on a set price for each customer
employee that is serviced by the Company.
The Company has not generated sufficient revenues during its limited
operating history to repay its outstanding indebtedness, pay its existing
trade accounts, fund its ongoing operating expenses or service development
activities. At March 31, 1998, the Company had cash and cash equivalents of
approximately $113,662 and a working capital deficit of approximately
$821,409. Management, however, believes that cash, working capital and
available credit facilities are sufficient to fund operations of the Company
through the close of its fiscal year ending December 31, 1998.
16
<PAGE>
The Company plans to alleviate its current financial problems through
private offerings of debt or equity securities, borrowings and increased
profits from operations. Furthermore, the Company has reviewed its cost
structure and accomplished a reduction in the fixed cost portion of its
infrastructure. In April 1998, the Company substantially reduced its
personnel costs and in June 1998, successfully negotiated with the landlord
of its corporate office a reduction in rental expenditures. Software
improvements have also been implemented that management believes will enhance
productivity. Also, additional research and development expenditures are not
anticipated at this time. The Company also believes that new business
opportunities exist with (i) PPOs; (ii) claims processors, TPAs and small- to
medium-sized insurance companies; and (iii) large self-insured and
self-administered corporations. The Company believes these market segments
have immediate operational needs for the Company's automation and/or
repricing products. By leveraging the experience gained from the Company's
existing TPA operation, the Company believes it can now begin to focus on
selling its core competencies to these segments. The Company achieved a
positive cash flow for the month of June 1998 and anticipates that it will
remain cash flow positive if revenues and fixed costs remain constant.
At March 31, 1998, the Company had eight clients including self-insured
companies and medical provider networks. The Company experienced a reduction in
the number of clients it served as a result of the decision to no longer provide
worker's compensation claims processing services and the loss of certain network
repricing clients. The Company expended considerable effort and resources,
including 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
the Company will operate. As the Company expands its customer base, additional
computer equipment and personnel will be required and added. Such expansion
will be funded by the revenues derived from operations and other funding sources
that the Company may find from time to time.
RESULTS OF OPERATIONS OF THE COMPANY
QUARTER ENDED MARCH 31, 1998 COMPARED TO 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 startup of the TPA 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 for 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 Electra-Net repricing
division began operations in the second quarter of 1997, therefore, there is
no comparative information available.
17
<PAGE>
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% versus 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 incurred primarily due to the preparation and filing
of a registration statement, year-end audit and general corporate matters.
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.
CONSOLIDATED FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR
ENDED DECEMBER 31, 1996
REVENUES. Revenues from automation services totaled $1,286,251 and
$797,154 for the fiscal years ended December 31, 1997 and 1996, respectively.
With the initiation of the Electra-Net division in April 1997, revenues for
network services totaled $1,788,997 for the fiscal year ended December 31,
1997. The addition of Electra-Net caused total revenues to increase 300% when
comparing revenues of $312,774 for the first quarter ended March 31, 1997 and
$912,026 for the second quarter ended June 30, 1997. The Company's workers'
compensation division had revenues totaling $174,243 in fiscal 1997, with
fiscal 1996 revenues of $34,169 based on four months of operations.
For the fiscal year ended December 31, 1996, fees paid by Wal-Mart for
automation services were approximately 64% of total revenues. In fiscal
1997, Wal-Mart accounted for 56% of total revenues, which demonstrates the
diversification and growth of the Company's client base during the period.
COST OF REVENUES. Cost of automation services totaled $763,700 and
$568,474 for the fiscal years ended December 31, 1997 and 1996, respectively.
These costs for fiscal 1997 were comprised of $457,471 in data entry
personnel, $247,767 in imaging fees and $36,386 for communication expenses.
In fiscal 1996, these costs consisted of $324,466 in data entry personnel,
$151,383 in imaging fees and $28,469 in communication expenses. Cost of
network services were largely made up of $579,739 in third party network
fees. Cost of workers' compensation services were comprised primarily of
personnel costs of $65,772 and $25,000 for the fiscal years ended December
31, 1997 and 1996, respectively.
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<PAGE>
GROSS PROFIT. Gross profit for fiscal 1997 was $1,567,409 as compared
to $262,849 for fiscal 1996. The gross profit margin for fiscal 1997 was
48.3% verses 31.6% for fiscal 1996.
OTHER EXPENSES. The Company, in the fourth quarter of 1996, emerged
from the development stage with the signing of the long-term contract with
Wal-Mart. Therefore, no start-up costs or research and development costs were
recorded for the fiscal year ended December 31, 1997. The start-up and
research and development costs recorded for the year ended December 31, 1996
were comprised primarily of personnel costs and consulting fees. These costs
differ from sales, general and administrative costs as they were incurred
directly for the development of the business and services prior to the
Company becoming an operating entity. The Company no longer incurs research
and development costs as a long-term contract with Wal-Mart was executed,
given that prior to the execution of this long-term contract the Company was
categorized as a Developmental Stage Enterprise as planned principal
operations had commenced, but there had been no significant revenue
generated. In addition, the Company had been, until late 1996, devoting most
of its efforts to activities such as financial planning, raising capital and
development of services.
Sales, general and administrative costs increased to $3,406,709 for the
fiscal year ended December 31, 1997, compared to $826,285 for the fiscal year
ended December 31, 1996. The Company issued stock options to employees which
are considered compensatory. Compensation costs were expensed over the
vesting periods of the options at an amount equal to the excess of the fair
market value of the Common Stock underlying such options on the date of grant
over the exercise price thereof. In June 1997, the Company elected to vest
all employee stock options and recognize compensation expense for all
outstanding options. Compensation costs totaling $321,220 and $322,067 were
recognized as expense during the fiscal years ended December 31, 1997 and
1996, respectively. During the fiscal years ended December 31, 1997 and
1996, the Company issued 80,000 shares of Common Stock for services for a
total expense of $400,000, and 65,656 shares of Common Stock for a total
expense of $65,656, respectively.
Sales, general and administrative expenses consisted primarily of
personnel costs, rent, telephone and professional fees. Total personnel
costs for fiscal 1997 were $1,744,771, rent of $178,212, telephone of $95,814
and professional fees of $326,561. Professional fees were incurred due to
the preparation and filing of a registration statement, year-end audit,
general corporate matters and computer consulting.
Interest expense increased to $87,328 for the fiscal year ended December
31, 1997 compared to $34,230 for the fiscal year ended December 31, 1996.
The increase is primarily related to the Company's issuance of convertible
debentures and the factoring of its accounts receivable during fiscal 1997.
See "Description of Securities."
NET LOSS. The Company reported a net loss of $1,999,404 for the fiscal
year ended December 31, 1997 as compared to a net loss of $2,470,684 for the
fiscal year ended December 31, 1996 or ($0.93) and ($1.43) basic earnings per
share for fiscal 1997 and fiscal 1996, respectively. For the fiscal years
ended December 31, 1997 and 1996, the Company incurred non-cash employee
stock compensation expense and stock for consulting services expense totaling
$721,220 and $584,692, respectively, as discussed above. Such compensation
expenses materially increased the Company's net loss for the referenced
periods. It is not anticipated that the Company will incur similar expense
items in future periods.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995
REVENUES. During the fiscal year ended December 31, 1996, revenues
were $831,323 as compared to $66,612 for fiscal 1995. The Company did not
have any ongoing operations during fiscal 1995.
During fiscal 1996, the Company entered into an agreement to provide
electronic medical claims processing and repricing services for Wal-Mart.
For the fiscal year ended December 31, 1996, revenues produced by the
agreement were approximately $596,754 or approximately 64% of revenues.
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<PAGE>
COST OF REVENUES. Direct costs in fiscal 1996 were $568,474, consisting
primarily of $324,466 in data entry personnel costs, $151,383 in optical
character recognition costs and $28,469 in electronic data line costs.
Direct costs in fiscal 1995 were $40,764.
GROSS PROFIT. Gross profit for fiscal 1996 was $262,849 as compared to
$25,848 in fiscal 1995. The gross profit margin for fiscal 1996 was 31.6%
versus 38.8% for fiscal 1995.
OTHER EXPENSES. As the Company continued to develop, its start-up costs
declined. The start-up costs incurred in fiscal 1996 were $395,866 or 42.1%
of the $939,347 incurred in fiscal 1995. Likewise, research and development
expenses continued to increase. Research and development expenses in fiscal
1996 increased to $1,469,858 from $179,830. Sales, general and
administrative expenses in fiscal 1996 were $826,285 compared to zero in
fiscal 1995. Total other expenses in fiscal 1996 were $2,803,429 verses
$1,159,941 in fiscal 1995. Total expenses in fiscal 1996 included $1,254,094
in personnel costs verses $521,472 in fiscal 1995. Total expenses in fiscal
1996 also included $693,541 in legal and professional fees primarily related
to expenses incurred in seeking and identifying suitable merger candidates,
general corporate matters, preparation of the merger agreement and related
documents pertaining to the Merger, and the audit, accounting and legal fees
for the preparation of the joint proxy statement/prospectus used in
connection with the Merger.
NET LOSS. The Company incurred a net loss of $2,470,684 verses
$1,093,329 for the fiscal years ended December 31, 1996 and 1995,
respectively. The Company has approximately $2,886,000 in tax loss carry
forwards generated by these losses.
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. Cash and cash equivalents at March 31, 1998 were $113,662,
and the Company had a working capital deficit of $821,409. The Company has a
note payable in the amount of $99,881 bearing interest at 12% per annum.
Payments of $7,553 including interest are due monthly, with the remaining
balance plus interest due upon maturity on May 19, 1998. The note is
collateralized by an option to purchase 28,333 shares of Common Stock at $6.00
per share. The Company is in default on this obligation, but is presently in
negotiations with the lender to restructure the terms of the afore-referenced
obligation. A subordinated convertible debenture of $100,000 payable to a
corporation was issued in 1997. The debenture bears an interest rate of 12% per
annum, payable semi-annually with principal due upon maturity at May 12, 1998.
The debenture is convertible at $5.00 per common share including principal and
accrued interest. The Company is presently in default on this obligation but
believes it will be able to settle this matter with the debenture holder on
mutually acceptable terms. See "Description of Securities."
The Company signed the Purchase Agreement on December 17, 1997 in which it
agreed to sell to the Investors up to an aggregate of 750,000 shares of Common
Stock for total proceeds of $1,500,000. The First Closing occurred on December
17, 1997 with an issuance of 611,930 shares of Common Stock for $1,223,859.50 in
proceeds. Proceeds from the First Closing have been used for working capital.
The Investors have elected not to purchase any additional shares of Common Stock
available under the terms of the Purchase Agreement. See "Prospectus Summary --
The Company" and "Agreements with Selling Stockholders."
The Company's independent auditors have included a paragraph in their
report to the Company's Board of Directors and stockholders which 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
is currently reviewing its cost structure and has implemented a strategy for
reducing the fixed cost portion of its infrastructure,
20
<PAGE>
which included a reduction in personnel costs and rental expenditures. The
Company also intends to increase its current sales force by entering into
marketing agreements with certain consultants to provide additional clients
and increase revenues. As of the date of this Prospectus, the Company has
not entered into any such consulting agreements. Additionally, software
improvements have been implemented that management believes will enhance
productivity. The Company has no planned material working capital
expenditures over the next 12-month period. The Company believes that the
existing liquidity sources and the anticipated working capital provided from
improved operations will satisfy its cash requirements for the next 12 months.
YEAR 2000 MODIFICATIONS
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.
OTHER MATTERS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("SFAS 128"). SFAS 128 requires companies with complex capital structures
that have publicly held common stock or common stock equivalents to present
both basic and diluted earnings per share ("EPS") on the face of the income
statement. The presentation of basic EPS replaces the presentation of
primary EPS currently required by Accounting Principles Board Opinion No. 15
("APB No. 15"). Basic EPS is calculated as income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the "if
converted" method for convertible securities and the treasury stock method
for options and warrants as prescribed by APB No. 15. This statement is
effective for financial statements issued for interim and annual periods
ending after December 15, 1997. The Company adopted SFAS 128 as of December
31, 1997 for the period ended December 31, 1997 and all prior periods. The
adoption of SFAS 128 has not had a significant impact on the Company's
reported EPS to date.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, DISCLOSURES OF
INFORMATION ABOUT CAPITAL STRUCTURE ("SFAS 129") which establishes standards
for disclosing information about an entity's capital structure. The
disclosures are not expected to have a significant impact on the consolidated
financial statements of the Company. SFAS 129 is effective for financial
statements ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME
("SFAS 130") which established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for years beginning after December 15,
1997. The Company does not anticipate a material impact to its consolidated
financial statements upon adoption of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131") which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes the
related disclosures about products and services, geographic areas and major
customers. SFAS 131 replaces the "industry segment" concept of Financial
Accounting Standard No. 14 with a "management approach" concept as the basis
for identifying reportable segments. SFAS 131 is effective for financial
statements for periods beginning after December 15,
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<PAGE>
1997. The Company expects additional disclosures will be required, but
otherwise does not anticipate a material impact to its consolidated financial
statements upon adoption of this standard.
The Company does not anticipate that it will have to enhance its existing
operational software or develop additional software systems during fiscal 1998.
As such, the Company does not believe that SOP 98-1, ACCOUNTING FOR COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE will have any effect
upon its financial statements for periods beginning after December 15, 1998.
22
<PAGE>
BUSINESS
ORGANIZATION
The Company is the surviving entity of the Merger of ETC-Texas into
ETC-Canada during the first quarter of 1997. ETC-Texas was organized in
December 1994. ETC-Canada was originally incorporated as Solo in September
1986. ETC-Canada was inactive from 1992 until late 1995 when it reorganized
its affairs in preparation of the Merger. In March 1996, Solo changed its
name to ETC-Canada and effected a one-for-five consolidation of capital of
the outstanding shares of common stock to facilitate the effectiveness of the
Merger.
ETC-Texas and ETC-Canada jointly filed a registration statement with the
SEC to register the shares of stock issuable to the stockholders of ETC-Texas
under the terms of the Merger, subject to approval of the Merger by the
stockholders of the respective companies. The Merger was approved by
stockholders of ETC-Texas and ETC-Canada on January 31, 1997 and February 11,
1997, respectively. ETC-Canada, the surviving corporation, then continued into
Delaware and changed its name to Electronic Transmission Corporation, with the
stockholders of ETC-Texas receiving 1.25 shares of ETC-Canada common stock for
every one share of ETC-Texas common stock outstanding as of the time of the
Merger. The business operations of ETC-Texas were assumed by the survivor
following the Merger.
GENERAL
The Company is a provider of process and systems solutions to the
non-provider sector of the health care industry. Process solutions are
automated through a broad range of application and data base information
systems. Information systems include software solutions developed by the
Company which are proprietary in nature. The Company believes that the
solutions provide state-of-the-art methodology and technology to its
customers. The Company contracts with health care payors, self-insured
companies and other payors, such as TPAs, to provide automation and EDI
services. The Company, through its Electra-Net division, also contracts with
various health care provider networks to provide medical claims repricing
services to its clients. With the inauguration of TPA capabilities through
ETC Services, the Company can provide a continuum of services to a
self-insured corporate customer beginning with the scanning of the health
care provider's claim and concluding with the payment to the health care
provider.
The Company's revenues are generated by different methods for each segment
of its business. The Company is paid a set price for scanning and automating
each health care provider claim. Additionally, the Company is paid a specific
percentage of the "savings" generated by its re-pricing activities. The TPA
services are charged on a set price for each customer employee that is serviced
by the Company.
CORE COMPETENCIES
The Company's principal service areas include (i) claims automation, (ii)
medical claims repricing services, and (iii) TPA, each of which is discussed
below:
CLAIMS AUTOMATION SERVICES. The Company provides automation services of
healthcare claims for (i) self-insured companies that administer their own
healthcare plans and pay their own medical claims, (ii) TPAs that administer
healthcare 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. The claims automation process electronically captures and stores
electronic images of scanned paper documents. The Company scans more than one
million claims per year for clients, the majority of which are received from
self-insured employers. Utilizing its existing work flow process and available
imaging technology, the Company processes standardized claim forms by scanning
these forms at the client's facility, with the scanned data being transmitted to
the Company's imaging center. The two primary sources for the standardized
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<PAGE>
claim forms are from the physicians (HCFA's) and from health care facilities
such as clinics and hospitals (UB's). Once received at the Company's imaging
center, the data is processed using an optical character recognition process.
The Company then stores all available data from the scanned claim forms in
proprietary data bases maintained by the Company, manually reviews certain
portions of each claim, and transmits the claim information to a medical
provider network (including Electra-Net) or to a payor (including ETC Services)
for repricing adjudication and/or payment.
MEDICAL CLAIMS REPRICING. The Company, through its Electra-Net division,
provides medical provider network services to its clients. Electra-Net is made
up of over 40 regional and national networks, PPO's (Physician Provider
Organization), PHOs (Physician Hospital Organizations), IPAs (Independent
Physician Associations), and other provider groups that have joined with the
Company in providing true EDI claims processing in the managed care area.
Nationally, the number of provider networks with true EDI capabilities is very
small resulting in difficulties for payors looking to reduce costs and
streamline their operations. The Company's integrated solution has dramatically
reduced the time and effort required by payors to process repriced medical
claims.
THIRD PARTY ADMINISTRATION. The need for TPA services has dramatically
increased given that approximately 65% of nationwide group medical insurance is
provided through self-insured benefits, where the employer elects to self-insure
a percentage of the risk rather than pay a fully insured premium. The portion,
if any, which the employer elects not to self-insure is placed as stop loss
coverage with a reinsurance carrier. Self-insured benefit plans can be
administered either by the insurance company who underwrites the stop loss
coverage, self-administered by the employer, or administered by a TPA.
Approximately 50% of self-insured employers elect to use a TPA to administer
their benefit plan.
As a full service TPA, ETC Services, offers standard administration
services, including, but not limited to, marketing the reinsurance, writing plan
documents, processing medical, dental, vision and disability claims and ensuring
compliance with federal and state mandates. With the electronic data, the
Company can reprice electronically all of the claims prior to being loaded into
the Company's licensed claims system for auto-adjudication. The electronic
claims environment increases accuracy, reduces processing time, and decreases
staffing needs. The Company believes that both the insurance brokerage
community, which represents employers, and reinsurance carriers acknowledge the
benefits of the totally automated claims process system of ETC Services.
BUSINESS STRATEGY
Since inception, the Company has incurred losses from operations and as of
March 31, 1998, had an accumulated deficit of $7,210,027. Despite recurring
losses and a working capital deficit as of March 31, 1998 of $821,409, the
Company believes that the new business opportunities exist with (i) PPOs; (ii)
claims processors, TPAs, and small- to medium-sized insurance companies; and
(iii) large self-insured and self-administered corporations. The Company
believes these market segments have immediate operational needs for the
Company's automation and/or repricing products. By leveraging the experience
gained from the Company's existing TPA operation, the Company believes it can
now begin to focus on selling its core competencies to these segments. The
Company has developed a business strategy focused on increasing cash flows by
extensively marketing its services to the afore-referenced segments of the
health care industry and enhancing existing client relationships by offering a
broader range of services.
The following are key elements of the Company's strategy:
TWO TIERED CUSTOMER CONTRACTS. The Company typically enters into 90-day
service provider agreements which are cancelable by either the client or the
Company at any time. During this 90-day period, the Company evaluates the
needs of the client, develops a tailored claims processing system, initiates
claims processing procedures for the client's analysis and determines its
costs associated with the services provided to the client.
24
<PAGE>
Upon expiration of the 90-day review period, the Company will typically enter
into a long-term agreement, generally for a term of two years. The terms of
the extended contract will provide services that are developed and custom
designed to fit the needs of the client during the 90-day review period. The
pricing of these services is based on the Company's current pricing schedules
and its cost estimates developed from on-site review of the customer's
requirements. The Company utilizes 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. The Company
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 the Company'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 the Company or
the client notifies the other of its desire to terminate.
RAPID INSTALLATION AND ENHANCED PROCESSING CAPABILITY. The Company
provides and installs, at no cost to a client, claims processing equipment (the
"Processing Equipment"), including computer, telecommunications and scanning
equipment, for use at the client's facility. Upon termination of a contractual
relationship with a client, the Processing Equipment is returned to the Company.
Once the contractual relationship is entered into, it is the Company's intention
to initiate claims processing services within 20 days of the date that an
agreement is reached. The Company 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.
ENHANCED MARKETING EFFORT. Although the Company has utilized direct
marketing efforts to solicit customers in the past, new customers have been
generated through referrals from a small number of existing clients. Since the
Company's areas of service have grown and been enhanced, the Company will
supplement its direct sales force in the future. The sales force will be
compromised of employees of the Company and outside sales personnel with whom
the Company will have entered into specific marketing agreements. The Company
believes that to be successful in the future, it will have to expand the range
of existing services, its distribution channels and its sales force.
SALES AND MARKETING
The Company currently markets its services directly through its own
sales organization. The Company's services are focused towards medium to
large (more than 100 employees) businesses and institutions. Sales are
currently generated primarily by the Company's management group. The Company
intends to add full-time sales personnel.
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<PAGE>
The Company's sales professionals are supported by a team of computer
network technicians. These technicians support the clients during the system
installation process and after the sale, provide the clients with repair,
maintenance and support services to maintain the onsite scanning systems, if
applicable.
Referrals from existing clients and vendors, particularly Wal-Mart and Capp
Care, are a significant source of prospective clients and establish credibility
with potential clients. In fiscal 1997, revenues related to vendor referrals
were responsible for $573,921 (17%) of the Company's revenue. There are no
contractual requirements for such referrals and they could cease at any time.
CUSTOMERS
The Company markets its processing services primarily to self-insured
companies, TPAs and other provider networks or cost containment companies. The
Company's current customer base includes four self-insured and self-administered
customers and four health care provider networks.
Under the terms of its existing agreement with Wal-Mart, the Company is
obligated to provide electronic medical claims processing and repricing services
for a term ending in September 1998. The Company 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, the Company
will receive $.75 per additional claim processed during said month. As of
December 31, 1997 and 1996, the Company processed approximately 789,300 and
611,250 medical claims, respectively, for the benefit of Wal-Mart, resulting in
revenues to the Company of approximately $1,818,000 and $596,754, respectively.
Revenues generated from Wal-Mart represented approximately 56% and 64% of the
Company's revenues as of December 31, 1997 and 1996, respectively. For the
three-month period ended March 31, 1998, the Company had processed approximately
206,049 medical claims for Wal-Mart resulting in revenues of approximately
$593,242 (or 61% of total revenues for the period). See "Risk Factors --
Dependence on Major Clients; Material Contracts."
COMPETITION
The non-provider sector of the health care industry is intensely
competitive and is characterized by companies that provide both electronic
automation and paper processing solutions. There are participants in the
industry that provide discount and repricing services and TPA services in the
market currently served by the Company. The Company's competition in the market
for electronic claims processing, discount and repricing services and
adjudication and payment services is primarily concentrated in certain insurance
companies, TPAs or management services organizations which have greater
financial and technical resources and longer operating histories than the
Company. The Company also believes that its processing methodology is easily
duplicated. However, management of the Company believes that the Company's
competitors, while each providing segments of the services offered by the
Company, do not offer the interconnected array of services provided by the
Company. The Company believes that it possesses a competitive advantage by
offering its claims automation, discounting and repricing services in a format
that connects payors, payees and service providers. The service methodology of
the Company will allow it to compete against more established companies with
much greater financial and technical resources. However, there are no barriers
which would prohibit the Company's competitors from modifying their current
services to emulate those offered by the Company. In addition, the Company may
face substantial competition from new entrants into the electronic claims
processing industry. The Company'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, to adapt to changes in the marketplace and produce sufficient
profits to be able to finance its ongoing operations. See "Risk Factors --
Competition."
REGULATORY MATTERS
The Company 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
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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.
See "Risk Factors -- Effect of Government Regulation."
EMPLOYEES
Effective January 1, 1998, the Company canceled a Staff Leasing Services
Agreement with E3 Group, Inc., an employee leasing company. The Staff Leasing
Services Agreement had been in effect since January 1996. As of June 1998, the
Company had 35 full-time employees. None of the Company's employees are
represented by a labor union or subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and believes that its
relationship with its employees is good.
PROPERTIES
The Company owns no real property. The Company's offices are located in a
4,900 square foot office facility in Dallas, Texas. The lease for the Company's
offices expires September 30, 2001 and provides for monthly rental payments of
approximately $9,400.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of the names and ages of each of the Company's
directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ------------------ --- --------------------------------------------
<S> <C> <S>
Steven K. Arnold 51 Chairman of the Board of Directors and Chief
Executive Officer
W. Mack Goforth 53 Chief Financial Officer
Timothy P. Powell 40 Executive Vice President -- Data Services and
Director
Dennis Barnes 41 Director
Michael Eckstein 50 Director
David O. Hannah 73 Director
Scott A. Stewart 43 Director
</TABLE>
STEVEN K. ARNOLD has served as the Company's Chairman and Chief
Executive Officer since May 28, 1998. Mr. Arnold has 19 years of senior
management experience in the healthcare, systems and insurance industries.
From October 1997 to May 1998, he served as an independent management
consultant. From January 1997 to October 1997, he served as a Managing
Director, Global Human Resources, of Price Waterhouse. From 1992 to December
1996, he served as President of Care Systems Corporation and President of
IHDS Corp., a wholly-owned third party administrator. Prior to joining Care
Systems Corporation, Mr. Arnold was President, Chief Executive Officer and
co-founder of IntelliMed, Inc. which later merged into OccuSystems, a Nasdaq
listed company. Previously, he was Executive Vice President of Heritage
Health Systems, a managed care holding company that owned and managed HMOs,
PPOs and related companies. In addition, Mr. Arnold was President and Chief
Executive Officer of APT General Partnership, a joint venture formed to build
a managed health care company that would develop, market and manage two
fundamental product types: (1) health benefit plans and related lines of
insurance business and (2) PPO and/or multi-option products and management
services to local health provider organizations. Mr. Arnold was also
employed in executive capacities with Blue Cross & Blue Shield of Wisconsin.
In that capacity, he served as the Chief Executive Officer of the holding
companies that included United Wisconsin Services (now a NYSE listed
company), Compcare Health Services Insurance, Dentacare, Take Control, Inc.,
and Greater Marshfield Community Healthplan. Mr. Arnold also spent eight
years with Cigna in various management positions.
W. MACK GOFORTH has served as Chief Financial Officer of the Company since
November 1997. From February 1996 to October 1997, Mr. Goforth worked for
Electronic Data Systems Corp. as a Manager in the Global Purchasing Group. From
September 1994 to January 1996, Mr. Goforth was a self-employed financial
consultant performing due diligence procedures for individuals seeking companies
to purchase and working with fiduciaries associated with bankrupt entities.
From April 1989 to August 1994, Mr. Goforth was employed by MCorp as its
Managing Director -- Accounting and Control. Mr. Goforth is a graduate of
Southern Methodist University and is licensed in the State of Texas as a
Certified Public Accountant.
TIMOTHY P. POWELL has served as Executive Vice President -- Data Services
and as a director of the Company since February 1995. From 1981 to February
1995, Mr. Powell served as a self-employed computer consultant for individuals
and corporations. Mr. Powell contracted consulting projects with independent,
governmental organizations and Fortune 1000 companies, and provided services in
system design, implementation, applications development and procurement
specifications.
DENNIS BARNES has served as a director of the Company since June 1997. Mr.
Barnes is the Founder, President and Chief Executive Officer of Barnes Health
Group, Inc., a Dallas-based health care development
28
<PAGE>
company. Mr. Barnes has more than 12 years senior management experience in
health care, and served as Chief Executive Officer of Texas Back Institute,
one of the largest free standing spine clinics in the United States, from
1994 to 1996. From 1992 to 1994, Mr. Barnes served as Vice President of
Rehabilitation Services for Texas Back Institute. Prior to joining Texas
Back Institute, Mr. Barnes was co-owner and managing partner of Independent
Rehabilitation Ventures from 1990 to 1992. Mr Barnes has served as President
of PRIDE USA, a Dallas-based rehabilitation company and Chief Executive
Officer of MDC America Corporation, a multidisciplinary health care company.
He currently serves as the President of the Board of Directors of Athletes
Working for a Better Texas, a Dallas-based not-for profit company. Mr.
Barnes obtained Bachelors and Masters degrees from Midwestern State
University and completed the course work for a Ph.D. in Clinical Psychology
from the University of Texas Southwestern Medical School in Dallas, Texas.
MICHAEL ECKSTEIN has served as a director of the Company 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 the Company 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, with expertise in the purchase and development of real
estate for leasing to commercial entities.
SCOTT A. STEWART has served as a director of the Company since December
1997. For the past 20 years, Mr. Stewart has been a partner in the law firm of
Horsley & Stewart, Dallas, Texas. Mr. Stewart obtained his Juris Doctorate Law
degree from Southern Methodist University in 1978 and is a Board Certified civil
and personal injury trial lawyer.
DIRECTOR COMPENSATION AND COMMITTEES
The Company does not presently compensate its directors for serving in such
a capacity or attending either Board or Committee meetings.
The Board of Directors has created an Audit Committee and a Compensation
Committee; however, at the present time, all Board related matters are acted
upon by the members as a whole. The Audit Committee is charged with reviewing
the annual audit and meeting with independent accountants to review internal
controls and financial management practices. The Compensation Committee is
charged with recommending to the Board of Directors the compensation for key
employees.
FAMILY RELATIONSHIPS
There are no family relationships among the Company's directors or
executive officers.
29
<PAGE>
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the Company's directors or executive officers have been involved
during the past five years in any legal proceedings material to an evaluation of
such persons ability or integrity.
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 to the listed
current and former executive officers of the Company. No other executive
officer of the Company, or any predecessor entity, received salary and bonus
compensation in excess of $100,000 in the referenced fiscal years, nor did any
executive officer receive perquisites or other personal benefits exceeding
either $50,000 of 10% of their total annual salary for the referenced periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------ -------------------------------
Awards
--------------------------------
Securities
Other Annual Restricted Underlying
Name/Title Year Salary/Bonus Compensation Stock Awards Options/SARs
- ---------------------------------------------- ----- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <S>
L. Cade Havard, former Chairman of the 1997 $158,000 $ - 0 - - 0 - 70,000
Board, Chief Executive Officer and 1996 $184,000 $ - 0 - - 0 - - 0 -
President(1) 1995 $ 96,736 $ - 0 - - 0 - 100,000
W. Mack Goforth, Chief Financial 1997 $ 25,000 $ - 0 - - 0 - 50,000
Officer and former Chairman of the
Board and Chief Executive Officer(2)(3)
Timothy P. Powell, Executive Vice 1997 $101,500 $ - 0 - - 0 - - 0 -
President -- Data Services 1996 $ 73,000 $ - 0 - - 0 - - 0 -
1995 $ 41,450 $ - 0 - - 0 - - 0 -
Ann C. McDearmon, former Executive 1997 $134,399 $ - 0 - - 0 - 62,500
Vice President -- Director of 1996 $ 73,281 $ - 0 - - 0 - - 0 -
Marketing(4) 1995 $ 24,500 $ - 0 - - 0 - - 0 -
</TABLE>
______________________________
(1) Mr. Havard's employment with the Company ceased on February 16, 1998.
(2) Mr. Goforth became employed on October 14, 1997 and is entitled to base
compensation of $150,000 per year. See "-- Employment Agreements."
(3) Mr. Steven K. Arnold became Chairman of the Board and Chief Executive
Officer on May 28, 1998. See "Prospectus Summary" and "-- Employment
Agreements."
(4) Ms. McDearmon's employment with the Company ceased March 20, 1998.
EMPLOYMENT AGREEMENTS
On May 1, 1998, the Company and Steven K. Arnold, Chairman of the Board and
Chief Executive Officer, entered into a Consulting/Employment Agreement (the
"Agreement"). Under the terms of the Agreement, Mr. Arnold agreed to serve the
Company as an independent consultant until such time as the Company would have
in place director and officer liability insurance. The term of the Agreement is
for three years commencing on May 1, 1998. Under the consulting arrangement,
Mr. Arnold was paid a consulting fee of $20,833.34 each month plus a monthly
vehicle allowance of $750. On May 28, 1998, upon the binding of the director
and officer liability insurance, Mr. Arnold was elected Chairman of the Board
and Chief Executive Officer. Under the Agreement, Mr. Arnold is entitled to
receive as compensation for services rendered base salary ("Base Salary") at a
rate of Two Hundred Fifty Thousand and No/100 Dollars ($250,000) per year
payable in accordance with the Company's established payroll procedures. During
all or a portion of the twelve (12) month period commencing on the employment
date, twenty-eight percent (28%) of such Base Salary (the "Deferred Portion")
shall be deferred until the Company and Mr. Arnold mutually agree that the
Company's cash flow is sufficient to support the payment of the Deferred
Portion.
30
<PAGE>
Mr. Arnold is entitled to a monthly vehicle allowance of $750. Mr. Arnold is
entitled to participate in all benefits plans, including stock option plans,
provided by the Company on the same basis as other executive officers of the
Company. Furthermore, Mr. Arnold is entitled to four weeks of paid vacation.
Mr. Arnold also received options to purchase 454,398 of Common Stock at a
price of $.052 per share. These options vest at a rate of one-third at
employment date, one-third at December 31, 1998 and one-third at December 31,
1999. Mr. Arnold shall automatically be granted additional options (carrying
a purchase price of the dollar amount per share on the date of such issuance)
to purchase that number of shares of Common Stock which, when added to the
number of shares into which the options may be converted immediately prior to
such issuance, shall equal ten percent (10%) of the outstanding shares of
Common Stock of the Company on a fully diluted basis. The Agreement may be
terminated by the Company without cause, in which event Mr. Arnold is
entitled to receive his Base Salary and benefits provided by the Company to
Mr. Arnold for the remainder of the term then in effect. The Agreement may
also be terminated by the Company for cause at any time the Board of
Directors determines Mr. Arnold has been convicted of a felony or has engaged
in gross malfeasance or willful misconduct in performing his duties under the
Agreement. In the event Mr. Arnold is terminated for cause, he shall be
entitled to receive any accrued but unpaid Base Salary and bonus
compensation. All available options can be exercised on the date this
Agreement is terminated without cause.
On October 14, 1997, the Company and W. Mack Goforth, the Chief Financial
Officer of the Company, entered into an Employment and Settlement Agreement (the
"Agreement"). Under the terms of the Agreement, Mr. Goforth agreed to serve the
Company for a term of five years from November 1, 1997. As compensation for
services to be rendered by Mr. Goforth under the terms of the Agreement, he is
entitled to receive a base salary (the "Base Salary") at a rate of One Hundred
Fifty Thousand and No/100 Dollars ($150,000) per year payable in accordance with
the Company's established payroll procedures. Mr. Goforth is entitled to
participate in all benefit plans, including stock option plans, provided by the
Company on the same basis as other executive officers of the Company.
Furthermore, Mr. Goforth is entitled to four weeks of paid vacation. Mr.
Goforth also received options to purchase 50,000 shares of Common Stock at a
price of $4.25 per share. These options vest at a rate of 12,500 per year
beginning October 31, 1998. The Agreement may be terminated by the Company
without cause, in which event Mr. Goforth is entitled to receive one year's Base
Salary and any options that would have vested in that year will be accelerated
as full and final satisfaction of the Company's obligations to Mr. Goforth. If
Mr. Goforth is terminated after a change in control, Mr. Goforth will be
entitled to the amounts due through the end of the contract and all non-vested
options will become vested. The Agreement may also be terminated by the Company
for cause at any time the Board of Directors determines Mr. Goforth has been
convicted of a felony or has engaged in gross malfeasance or willful misconduct
in performing his duties under the Agreement. In the event Mr. Goforth is
terminated for cause, he shall be entitled to receive any accrued but unpaid
salary and bonus compensation. If Mr. Goforth's employment is terminated
without cause, Mr. Goforth has the right to include any shares purchased
pursuant to the exercise of the options granted in the Agreement in the next
registration statement filed by the Company with the SEC. Upon termination of
the Agreement, Mr. Goforth has agreed, for a period of two (2) years thereafter,
not to solicit for his own benefit, any business of the same or similar nature
to any business conducted by the Company or any subsidiary during the term of
the Agreement from any entities with which the Company conducted business during
the term of the Agreement. The term of the Agreement was extended by the Board
of Directors to March 31, 2003.
31
<PAGE>
On March 1, 1995, the Company and Timothy P. Powell, Executive Vice
President -- Data Services, entered into an Employment Agreement (the
"Agreement"). Under the terms of the Agreement, Mr. Powell agreed to serve in
the capacity of Executive Vice President -- Data Services of the Company for a
term of three years ending December 31, 1998. As compensation for services to
be rendered by Mr. Powell under the terms of the Agreement, he is entitled to
receive a base salary (the "Base Salary") at a rate of Seventy-two Thousand and
No/100 Dollars ($72,000) per year payable in accordance with the Company's
established payroll procedures and commission based compensation related to
client originations. Effective September 1997, Mr. Powell's Base Salary was
increased to $120,000. Mr. Powell is entitled to participate in all benefit
plans, including stock option plans, provided by the Company on the same basis
as other executive officers of the Company. Furthermore, Mr. Powell is entitled
to three weeks of paid vacation. The Agreement may be terminated by the Company
without cause, in which event Mr. Powell is entitled to receive 25% of all
salary due for the remainder of the Agreement. The Agreement may also be
terminated by the Company for cause at any time the Board of Directors
determines Mr. Powell has been convicted of a felony or has engaged in gross
malfeasance or willful misconduct in performing his duties under the Agreement.
In the event Mr. Powell is terminated for cause, he shall be entitled to receive
any accrued but unpaid salary and bonus compensation. The term of the Agreement
was extended by the Board of Directors to March 31, 2003.
STOCK OPTIONS
FISCAL 1997.
During fiscal 1997, W. Mack Goforth and Ann C. McDearmon, the former
Executive Vice President -- Director of Marketing of the Company, received
options to purchase 50,000 shares of Common Stock at $4.25 per share and
62,500 shares of Common Stock at $5.00 per share, respectively. Mr.
Goforth's options vest at a rate of 12,500 options per year beginning October
1998. See "-- Employment Agreements." L. Cade Havard, the former Chairman
of the Board, Chief Executive Officer and President of the Company, exercised
options to purchase an aggregate of 180,000 shares of Common Stock during
fiscal 1997. Mr. Havard's remaining options to purchase 70,000 shares of
Common Stock, at a purchase price of $5.00 per share, were canceled upon the
termination of Mr. Havard's employment agreement in February 1998. See
"Prospectus Summary --The Company."
During fiscal 1997, the Company granted options to purchase 12,500 shares
of Common Stock, at an exercise price of $6.00 per share, to an employee of the
Company. This option terminated upon said employee's resignation from the
Company on May 1, 1998.
32
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options/SARs Granted Exercise or
Underlying Options/ to Employees in Base Price
Name SARs Granted (#) Fiscal 1997 ($/Sh)
- ---------------------------------------- ------------------- ------------------- -------------
<S> <C> <C> <C>
L. Cade Havard, former Chairman of the
Board, Chief Executive Officer and
President 200,000 61.5% $5.00
W. Mack Goforth, Chief Financial Officer 50,000 15.4% $4.25
Timothy P. Powell, Executive Vice
President -- Data Services -0- -0- -0-
Ann C. McDearmon, former Executive
Vice President -- Director of Marketing 62,500 19.2% $5.00
</TABLE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At Fiscal Year-End At Fiscal Year-End
----------------------------- ---------------------------
Name/Title Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
L. Cade Havard, former Chairman of the
Board, Chief Executive Officer and
President 70,000 - 0 - $ - 0 - $ - 0 -
W. Mack Goforth, Chief Financial Officer - 0 - 50,000 N/A N/A
Timothy P. Powell, Executive Vice
President -- Data Services -0- -0- -0- -0-
Ann C. McDearmon, former Executive Vice
President -- Director of Marketing 62,500 - 0 - $ - 0 - $ - 0 -
</TABLE>
RECENT GRANTS. In March 1998, W. Mack Goforth and Timothy P. Powell each
received options to purchase 50,000 shares of Common Stock at $1.00 per share,
which options are exercisable immediately. Furthermore, the terms of the
options to purchase 50,000 shares of Common Stock granted to Mr. Goforth under
his employment agreement were modified to adjust the exercise price of such
options from $4.25 per share to $1.00 per share.
In May 1998, Mr. Arnold, pursuant to the terms of his employment agreement,
received options to purchase 454,398 shares of Common Stock at an exercise price
of $0.52 per share. The options vest at a rate of one-third on the date of
employment, one-third on December 31, 1998 and one-third on December 31, 1999.
See " -- Employment Agreements."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In early 1995, ETC-Texas purchased certain assets of Sterling National
Corporation ("Sterling"), a company wholly owned and operated by L. Cade Havard,
the former Chairman of the Board, Chief Executive Officer and President of the
Company, in exchange for a cash payment of $210,000 and the issuance of 991,275
shares of ETC-Texas common stock. Sterling is currently in the business of
factoring accounts receivable, and is the record owner of 1,556 shares of Common
Stock. There are no current arrangements between the parties and none are
presently contemplated.
On December 12, 1995, ETC-Texas entered into a marketing agreement (the
"Marketing Agreement") with MS3. Rick Snyder, the principal owner of MS3, is a
former director of the Company. Under the terms of the Marketing Agreement, MS3
is to assist the Company in identifying and bringing under contract clients
requiring claims processing services. As of March 31, 1998, MS3 was owed
$32,857 under the Marketing Agreement.
33
<PAGE>
On January 18, 1996, ETC-Texas entered into a consulting agreement with
Michael Eckstein, a director of the Company, pursuant to which Mr. Eckstein
agreed to assist ETC-Texas in identifying and placing under contract TPAs,
preferred provider organizations and other managed care companies which may be
able to utilize the Company's claims processing services. Under the terms of
this agreement, Mr. Eckstein is entitled to receive compensation on a monthly
basis equal to $3,500 and commissions equal to 8% of the "gross income from
revenue," as defined in the agreement, realized by the Company from clients
generated by Mr. Eckstein. Mr. Eckstein has agreed to only accept commission
based compensation under this agreement. It is anticipated that the Company
will enter into a modified consulting agreement with Mr. Eckstein within the
next 90 days.
On April 1, 1996, Solo issued 50,278 shares of its common stock to L. Cade
Havard, the then Chairman of the Board and Chief Executive Officer of Solo, in
satisfaction of $201,112 of debt owed by Solo to Mr. Havard.
The Company is a party to an equipment lease and stock option agreement
(the "Lease Agreement"), dated April 23, 1996, with Ironwood Leasing Ltd., a
Texas corporation ("Ironwood"). Principals of Ironwood, including Dennis
Barnes, a director of the Company, are also stockholders of the Company. Under
the terms of the Lease Agreement, the Company leases certain scanning equipment
necessary to scan paper claims and convert them into electronically
transmittable claims data information. Under the Lease Agreement, the Company
has granted to Ironwood the option to either (i) sell to the Company all the
equipment referenced in the Lease Agreement in exchange for the number of shares
of Common Stock equal to the purchase price for said equipment divided by 2.00
per share or (ii) purchase, at a per share price of $2.00, the number of shares
of Common Stock equal to the purchase price of the equipment divided by 2.00
whereby the Company 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 waived the escrow requirements imposed pursuant to the Lease Agreement
for the period ending June 30, 1996. Ironwood further agreed that the Company
would not have to comply with the escrow provisions of the Lease Agreement until
the Company had received 30-days written notice from Ironwood. 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. The
Company is currently negotiating a restructuring of the Lease Agreement.
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 Agreement the obligations of which
were assumed by the Company. Pursuant to the agreement, ETC-Texas issued to Mr.
Mers 30,000 shares of Common Stock and agreed to compensate him for his efforts
in assisting ETC-Texas in obtaining financing for its business ventures. The
agreement terminated on August 1, 1997 with no compensation being paid to Mr.
Mers.
Effective April 1, 1997, the Company completed a business combination with
Electra-Net, L.C. ("Electra-Net") by assuming its net liabilities. Electra-Net
is a limited liability company wholly owned and controlled by L. Cade Havard.
Mr. Havard received shares of Common Stock as additional consideration in the
transaction. In December 1997, Mr. Havard returned all shares of Common Stock
received in the transaction, pending a review by the Board of Directors of the
appropriateness of the consideration paid. After a review of the nature of the
business combination, it was determined by the Board that Mr. Havard was not
entitled to any additional consideration.
On May 2, 1997, the Company and Elaine Boze, the Company's General
Counsel and a member of the Board of Directors, entered into a Severance
Agreement and General Release (the "Severance Agreement") whereby Ms. Boze
resigned as General Counsel and a director of the Company. Under the terms
of the Severance Agreement, Ms. Boze received a $25,000 separation payment
and is entitled to a continuation of her health care benefits until such time
as Ms. Boze becomes employed by an entity providing similar benefits. In
consideration for the foregoing, Ms. Boze agreed to non-competition,
confidentiality and non-solicitation covenants which expire on May 2, 1999.
34
<PAGE>
On June 25, 1998, David O. Hannah, a director of the Company, purchased
100,000 restricted shares of Common Stock for an aggregate purchase price of
$100,000 or $1.00 per share. Also on June 25, 1998, Mr. Hannah loaned to the
Company the principal amount of $100,000. The note is due and payable on
December 25, 1998. Furthermore, the Company issued to Mr. Hannah 25,000
restricted shares of Common Stock in lieu of payment of cash interest on the
principal amount of the debt. The obligation is secured by all of the assets of
the Company. The outstanding principal balance of the obligation to Mr. Hannah
is convertible by him at any time into restricted shares of Common Stock at a
rate of one share of Common Stock for every $2.00 of principal converted.
On June 29, 1998, the Company executed promissory notes in the principal
amounts of $20,000 and $5,000 payable to Scott Stewart, a director of the
Company, and to David Stewart, Mr. Stewart's brother, respectively. The notes
are due and payable on December 29, 1998. Scott Stewart received 5,000 shares
of Common Stock and David Stewart received 1,250 shares of Common Stock in lieu
of cash interest on the principal amount of their respective notes. The
obligations to the note holders are secured by all of the assets of the Company.
The outstanding principal balances of these obligations are convertible by the
note holders into shares of Common Stock at the rate of one share of Common
Stock for every $2.00 of principal converted.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information based on the outstanding
securities of the Company as of June 30, 1998, with respect to each director,
executive officer and beneficial owner of more than 10% of the Common Stock and
all corporate officers and directors as a group.
<TABLE>
<CAPTION>
Amount of Percent of
Name and Address Beneficial Outstanding
of Beneficial Owner(1)(2) Ownership Common Stock
- ------------------------------------------------- ------------ ------------
<S> <C> <C>
Steven K. Arnold(3)(4) 151,466 4.0
W. Mack Goforth(5) 50,000 1.3
Timothy P. Powell(3)(6) 161,667 4.3
Dennis Barnes(3) 11,446 *
Michael Eckstein(3) 25,000 *
David O. Hannah(3)(7) 359,578 9.7
Scott A. Stewart(3)(8) 30,584 *
All executive officers and directors as a group
(7 persons as to the Company) 789,741 19.8
Special Situations Private Equity Fund, L.P.(9) 407,953 11.1
Special Situations Cayman Fund, L.P.(9) 203,977 5.6
L. Cade Havard(10) 716,757 19.5
</TABLE>
- -------------
* 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
Prospectus 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
Prospectus have been exercised. Unless otherwise noted, the Company
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 the Company, 5025 Arapaho Road, Suite 501, Dallas, Texas 75248.
(3) Director of the Company.
(4) Includes options to purchase 151,466 shares of Common Stock at an exercise
price of $0.52 per share.
(5) Includes options to purchase 50,000 shares of Common Stock at an exercise
price of $1.00 per share.
(6) Represents options to purchase 111,667 shares of Common Stock from the
Sterling National Corporation Trust. The options are fully vested and have
an exercise price of $.004 per share. Also includes options to purchase
50,000 shares of Common Stock at an exercise price of $1.00 per share.
(7) Includes the 50,000 shares of Common Stock issuable upon conversion by
Mr. Hannah of the principal amount of the $100,000 note payable of the
Company to Mr. Hannah. See "Prospectus Summary--Recent Financings" and
"Certain Relationships and Related Transactions."
(8) Includes the 10,000 shares of Common Stock issuable upon conversion by
Mr. Stewart of the principal amount of the $20,000 note payable of the
Company to Mr. Stewart. See "Prospectus Summary--Recent Financings" and
"Certain Relationships and Related Transactions."
(9) Special Situations Private Equity Fund, L.P. and Special Situations Cayman
Fund, L.P. are affiliated entities managed through investment advisors
principally owned by Austin W. Marxe and David M. Greenhouse. See "Selling
Stockholders" and "Agreements with Selling Stockholders."
(10) Includes (i) 125,054 shares of Common Stock issued in the name of Mr.
Havard's minor children over which Mr. Havard exercises sole voting and
investment power; (ii) 1,556 shares of Common Stock issued in the name of
Sterling, of which Mr. Havard is the sole stockholder and (iii) 125,000
shares of Common Stock issued in the name of Anneal O. Havard, the wife of
L. Cade Havard.
36
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital consists of 20,000,000 shares of Common
Stock, $0.001 par value, and 2,000,000 shares of preferred stock, $1.00 par
value (the "Preferred Stock").
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share in all
matters submitted to a vote of stockholders. The holders of Common Stock do not
have cumulative voting rights for the election directors. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of legally available funds. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company remaining after
provision for payment of liabilities in satisfaction of the liquidation
preference of any shares of Preferred Stock that may be issued and outstanding.
The holders of Common Stock have no preemptive, subscription, redemptive or
conversion rights. The rights, preferences and privileges of the holders of
Common Stock may be subject to those of holders of Preferred Stock, if such
securities should ever be issued. See "-- Preferred Stock."
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
stockholder action, to issue any of the undesignated shares of Preferred Stock
in one or more series and to fix the voting rights, liquidation preferences,
dividend rights, repurchase rights, conversion rights, redemption rights and
terms, including sinking fund provisions, and certain other rights and
preferences of such shares of the Preferred Stock.
WARRANTS
ANDREW WARRANTS. On June 10, 1995, the Company entered into a consulting
agreement with Ken Andrew. In connection with the consulting agreement, the
Company issued to Mr. Andrew 105,000 Common Stock Purchase Warrants (the "Andrew
Warrants") to purchase 105,000 shares of Common Stock at $5.00 per share until
February 28, 2004. At June 30, 1998, none of the Andrew Warrants had been
exercised.
TYLER WARRANTS. In February 1997, the Company issued to each of Craig
Tyler and Mark Tyler 12,500 Common Stock Purchase Warrants (the "Tyler
Warrants") to purchase 12,500 shares of the Company's Common Stock at $5.00 per
share until February 28, 2004. At June 30, 1998, none of the Tyler Warrants had
been exercised.
CONVERTIBLE DEBENTURES
In June 1997, the Company completed the private placement of $150,000 of
its 12% Subordinated Convertible Debentures (the "Convertible Debentures") to
two accredited investors. The proceeds from this offering were used for working
capital. The Convertible Debentures are due on May 12, 1998 and are unsecured.
The outstanding Convertible Debentures are convertible into approximately 20,927
shares of the Company's Common Stock, subject to adjustment upon certain events.
The conversion price is $5.00 per share which amount includes accrued and unpaid
principal plus accrued and unpaid interest. In September 1997, $50,000 of the
aggregate principal amount of the Convertible Debentures plus accrued but unpaid
interest thereon was converted into 10,413 shares of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Selling Stockholders."
REGISTRATION RIGHTS
Certain holders of the Company's securities have been granted registration
rights for their Common Stock. These include certain piggyback and demand
registration rights (i) held by the holders of the Convertible
37
<PAGE>
Debentures for shares of the Common Stock received upon conversion of the
Convertible Debentures, (ii) for shares upon exercise of options granted to
certain employees of the Company, and (iii) for shares acquired by the
Investors pursuant to the terms of the Purchase Agreement. See "Selling
Stockholders" and "Agreements with Selling Stockholders."
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248,
(972) 447-9890.
LIMITATION OF LIABILITY OF DIRECTORS
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER
Section 102 of the DGCL authorizes a Delaware corporation to include a
provision in its certificate of incorporation limiting or eliminating the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors exercise
an informed business judgment based on material information reasonably available
to them. Absent the limitations authorized by such provisions, directors are
accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Although Section 102 of the DGCL does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Pursuant to such provisions, the Company's Charter
limits the personal liability of the Company's directors, in their capacity as
directors (but not in their capacity as officers) to the Company or its
stockholders to the fullest extent permitted by the DGCL. Specifically, a
Company director will not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct and knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases, redemptions or other distributions, and
(iv) any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and discourage or deter
stockholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its stockholders. However, the
inclusion of this provision together with the provision which requires the
Company to indemnify its officers and directors against certain liabilities, is
intended to enable the Company to attract qualified persons to serve as
directors who might otherwise be reluctant to do so.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
have an adverse effect on the market price of the Common Stock. As of the date
of this Prospectus, there are approximately 3,671,923 shares of Common Stock
outstanding. The Shares offered hereby will be eligible for public sale without
restriction, except as may be sold or purchased by affiliates of the Company
(those controlling or controlled by or under common control with the Company and
generally deemed to include officers and directors). Of the 3,671,923 shares of
Common Stock outstanding, 848,385 shares are presently deemed "restricted
securities," as defined under Rule 144 promulgated under the Securities Act.
Additionally, there are outstanding options and warrants to purchase an
aggregate 967,611 shares of Common Stock which will be restricted shares under
the Securities Act. See "Management" and "Description of Securities."
Effective April 29, 1997, the SEC adopted amendments to Rule 144 to shorten
the holding period for restricted securities, generally being those securities
purchased in unregistered private placements. As a result of these amendments,
and subject to satisfaction of certain other conditions, a person, including an
affiliate of the Company (or persons whose shares are aggregated into such
affiliate), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within any three-month period, a number of
38
<PAGE>
shares that does not exceed the greater of one percent of the total number of
outstanding shares of the same class or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the sale. Subject to the
volume and holding period limitations of Rule 144, 25,000 outstanding shares of
Common Stock are eligible for sale under Rule 144. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least two
years is entitled to sell such shares under Rule 144(k) without regard to any of
the limitations described above. No restricted shares of Common Stock would be
eligible for sale under the provisions of Rule 144(k).
The possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect the prevailing market price for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
SELLING STOCKHOLDERS
The 642,968 Shares of Common Stock offered hereby are being sold pursuant
to this Prospectus by the Selling Stockholders. The Company will not receive
any proceeds from the sale of the Shares by the Selling Stockholders. See "Plan
of Distribution."
Except as described below and in "Agreements with Selling Stockholders"
herein, none of the Selling Stockholders has ever held any position or office
with the Company or had any other relationship with the Company or its
affiliates.
The table below sets forth the beneficial ownership of the Company's Common
Stock by the Selling Stockholders at June 30, 1998, and after giving effect to
the sale of the Shares offered hereby.
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership Percent Shares Ownership Percent
Selling Stockholder Prior to Offering of Class to be Sold After Offering of Class
- -------------------------------------------- ----------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Special Situations Private Equity Fund, L.P. 407,953 11.1% 407,953 -0- -0-
Special Situations Cayman Fund, L.P. 203,977 5.6% 203,977 -0- -0-
Teresa Herring 2,603 * 2,603 -0- -0-
Marilyn Hamrick 2,603 * 2,603 -0- -0-
Nancy Powell 5,207 * 5,207 -0- -0-
Queensland America Corp. 3,125 * 3,125 -0- -0-
Ethel C. Radzewicz 5,000 * 5,000 -0- -0-
Tammy L. Newman 5,000 * 5,000 -0- -0-
Robert L. Bonomi 7,500 * 7,500 -0- -0-
</TABLE>
_________________________
*Indicates less than 1%.
PLAN OF DISTRIBUTION
The Shares may be offered by the Selling Stockholders from time to time in
open market transactions (which may include block transactions) or otherwise
through The OTC Bulletin Board, or in private transactions at prices relating to
prevailing market prices or at negotiated prices. The Selling Stockholders may
39
<PAGE>
effect such transactions at prices relating to prevailing market prices or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or purchasers of the Shares, as the case may be,
from whom such broker-dealers may act as agent or to whom they sell as principal
or both. The Selling Stockholders and any broker-dealer acting in connection
with the sale of the Shares offered hereby may be deemed to be "underwriters"
within the meaning of the Securities Act, in which event any discounts,
concessions or commissions received by them, which are not expected to exceed
those customary in the types of transactions involved, or any profit on resales
of the Shares by them, may be deemed to be underwriting commissions or discounts
under the Securities Act.
AGREEMENTS WITH SELLING STOCKHOLDERS
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. AND SPECIAL SITUATIONS CAYMAN FUND,
L.P.
On December 17, 1997, the Company entered into the Purchase Agreement
pursuant to which the Investors obtained the right to purchase up to an
aggregate of 750,000 shares of Common Stock for total consideration of
$1,500,000 or $2.00 per share. On December 17, 1997, the Investors purchased an
aggregate of 611,930 shares of Common Stock, which represent certain of the
Shares being registered in this Prospectus, for total cash consideration of
$1,223,859.50 (the "First Closing"). The Investors, in accordance with the
terms of the Purchase Agreement, have advised the Company that they do not
intend to purchase the remaining 138,070 shares of Common Stock. See
"Prospectus Summary -- The Company."
Under the terms of the Purchase Agreement, the Company is obligated to file
a registration statement under the Securities Act for the purpose of effecting
the registration of the 611,930 shares acquired at the First Closing. The
Investors have extended the filing date for the registration statement required
as a result of the First Closing. Furthermore, the Selling Stockholders have
been granted piggyback registration rights with regard to all shares acquired
under the terms of the Purchase Agreement. See "Selling Stockholders."
12% SUBORDINATED CONVERTIBLE DEBENTURE HOLDERS
Under the terms of the Convertible Debentures, the holders thereof are
entitled to convert every $5.00 of the principal amount of accrued and unpaid
interest due on the Convertible Debentures into one share of Common Stock and
have such shares registered with the SEC pursuant to certain piggy-back
registration rights. In September 1997, Mary Margaret Cook converted $50,000 of
principal plus accrued and unpaid interest into 10,413 shares of Common Stock
(the "Cook Shares"). Ms. Cook then directed that the Cook Shares be distributed
as follows: 2,603 Cook Shares to Teresa Herring, 2,603 Cook Shares to Marilyn
Hamrick and 5,207 Cook Shares to Nancy Powell. The Company has agreed to
include the Cook Shares in the registration statement of which this Prospectus
is a part. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." and "Selling Stockholders."
SOLO DEBENTURE HOLDERS
In connection with the settlement of certain obligations owed to holders of
debentures originally sold by Solo, the Company issued 3,125 shares of Common
Stock to Queensland America Corp. and 5,000 shares of Common Stock to Ethel C.
Radzewicz. In connection with the issuance of the foregoing securities, the
Company granted piggy-back registration rights to the holders thereof. The
Company has agreed to register the shares held by Queensland America Corp. and
Ethel C. Radzewicz in the registration statement of which this Prospectus is a
part. See "Selling Stockholders."
40
<PAGE>
EMPLOYEES
The aggregate of 12,500 shares of Common Stock being registered for
Tammy L. Newman and Robert L. Bonomi were originally issued to said individuals
as a result of their exercise of employee stock options to purchase an identical
number of shares. The Company had agreed to register the shares underlying such
options in a registration statement on Form S-8; however, the referenced
employees exercised their options prior to the filing of such registration
statement. In light of the foregoing, the Company has agreed to register the
shares of Common Stock issued to Ms. Newman and Mr. Bonomi as a result of the
exercise of their options in the registration statement of which this Prospectus
is a part. See "Selling Stockholders."
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Jackson Walker L.L.P., 901 Main Street, Suite 6000,
Dallas, Texas 75202.
EXPERTS
The financial statements of the Company appearing in this Prospectus have
been audited by Simonton, Kutac & Barnidge, L.L.P., independent certified public
accountants, as set forth in their report appearing elsewhere in this
Prospectus, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
41
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
ELECTRONIC TRANSMISSION CORPORATION
Consolidated Balance Sheets
as of and December 31, 1997 and March 31, 1998 F-2
Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1998 F-3
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1998 F-4
Notes to Consolidated Financial Statements F-5
Independent Auditor's Report F-7
Consolidated Balance Sheets
as of December 31, 1996 and 1997 F-8
Consolidated Statements of Operations
for the years ended December 31, 1996 and 1997 F-10
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996 and 1997 F-11
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1997 F-12
Notes to Consolidated Financial Statements F-13
</TABLE>
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 548,565 $ 113,662
Accounts receivable, Trade 582,575 464,914
Note receivable -- 25,000
Capital lease receivable 27,723 21,049
Prepaid assets 20,780 54,144
---------- -----------
Total Current Assets 1,179,643 678,769
---------- -----------
Property and Equipment, net 866,398 883,705
---------- -----------
Other Assets 8,490 5,450
---------- -----------
Total Assets $2,054,531 $ 1,567,924
---------- -----------
---------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $1,161,070 $ 1,188,694
Notes payable and convertible debentures 478,727 224,448
Current portion, capital lease obligations 102,240 87,036
---------- -----------
Total Current Liabilities 1,742,037 1,500,178
Long-term capital lease obligations 25,587 13,902
---------- -----------
Total Liabilities 1,767,624 1,514,080
---------- -----------
Stockholders' Equity:
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.001 par value, 20,000,000
shares authorized; 3,506,506 and 3,527,340
shares issued and outstanding, respectively 3,507 3,527
Additional paid-in-capital 7,260,281 7,260,344
Accumulated deficit (6,976,881) (7,210,027)
---------- -----------
Total Stockholders' Equity 286,907 53,844
---------- -----------
Total Liabilities & Stockholders' Equity $2,054,531 $ 1,567,924
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1998
--------- ----------
<S> <C> <C>
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 $ (0.23) $ (0.07)
---------- ----------
---------- ----------
Diluted $ (0.23) $ (0.07)
---------- ----------
---------- ----------
Weighted average common shares outstanding:
Basic 2,923,964 3,508,867
---------- ----------
---------- ----------
Diluted 2,923,964 3,508,867
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1998
-------------------------
<S> <C> <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 79,175 --
(Increase) decrease in prepaid expense 2,685 (25,972)
(Increase) decrease in deposits and other assets 2,067 (18,572)
Increase in accounts payable and accrued expenses 263,392 103,064
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 lease 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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - GENERAL
Electronic Transmission Corporation (the "Company"), a Delaware corporation,
provides services to self-insured companies, third party administrators that
pay claims for self-insured companies and other medical provider networks or
cost containment companies providing services to self-insured companies. The
Company's automation capabilities encompass the entire workflow process
involved in processing and paying healthcare claims. Additionally, the
Company provides third party administrative services through its wholly owned
subsidiary. Revenues are derived primarily from commerce within the United
States.
During interim periods, the Company follows the accounting policies set forth
in its audited financial statements as of and for the year ended December 31,
1997 presented elsewhere in this section. The December 31, 1997 balance
sheet data was derived from audited financial statements of the Company, and
includes all disclosures required by generally accepted accounting
principles. Users of financial information provided for interim periods
should refer to the annual financial information and footnotes contained
elsewhere in this section when reviewing the interim financial results
presented herein.
In the opinion of management, the accompanying unaudited interim financial
statements have been prepared pursuant to the rules and regulations of the
SEC and contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal
year ending December 31, 1998.
Certain information and footnote disclosures required by generally accepted
accounting principles have been condensed or omitted. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - CONSOLIDATION
The financial statements include the accounts of the Company and ETC
Administrative Services. All intercompany accounts and transactions have
been eliminated.
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
<TABLE>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Furniture $105,473 $106,111
Computer & Office Equipment 615,521 678,494
Computer Software 544,368 565,220
Leasehold Improvements 9,747 9,747
--------- --------
1,275,109 1,359,572
Less: Accumulated Depreciation (408,711) (475,867)
--------- --------
$866,398 $883,705
--------- --------
--------- --------
</TABLE>
F-5
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following is a summary of accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Accounts payable $247,325 $445,317
Accrued expenses:
Deferred rent 67,032 64,841
Computer software acquisition costs 204,338 223,236
Legal and professional 233,779 202,214
Other 91,123 8,053
Accrued payroll and taxes 315,440 240,000
Accrued interest payable 2,033 5,033
------------ ---------
$1,161,070 $1,188,694
------------ ---------
------------ ---------
</TABLE>
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Electronic Transmission Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Electronic
Transmission Corporation and Subsidiary, a Delaware corporation, as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Electronic Transmission Corporation and Subsidiary as of December 31, 1996
and 1997, 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 3, the accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. The Company has experienced net losses of $2,470,684 and $1,999,404
for the years ended December 31, 1996 and 1997, respectively. Additionally,
the Company's current liabilities exceeded its current assets by $562,394 and
had an accumulated deficit of $6,976,881 at December 31, 1997. 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 3. Unless the Company can raise sufficient new capital and
increase its 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 consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
January 30, 1998,
except for Note 18 as to which the date is February 16, February 27,
March 20, May 7, and July 1, 1998 for paragraphs two, three,
four, five and six, respectively, and except for Note 15 as to which
the date is June 24, 1998, for paragraph seven.
F-7
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
---------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 50,125 $ 548,565
Accounts receivable 264,559 582,575
Current portion, capital lease receivable 25,095 27,723
Prepaid assets 15,286 20,780
--------- ----------
Total Current Assets 355,065 1,179,643
--------- ----------
Property and Equipment, net 521,576 866,398
--------- ----------
Capital lease receivable 27,723 --
Deposits and other 14,610 8,490
--------- ----------
42,333 8,490
--------- ----------
Total Assets $918,974 $2,054,531
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities $ 567,188 $ 1,161,070
Notes payable and convertible debentures -- 478,727
Current portion, capital lease obligations 95,206 102,240
------------ ------------
Total Current Liabilities 662,394 1,742,037
------------ ------------
Note payable - ETC Transaction Corporation 779,575 --
Due to shareholder 339,208 --
Long-term capital lease obligations 114,106 25,587
------------ ------------
Total Liabilities 1,895,283 1,767,624
------------ ------------
Stockholders' Equity:
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, no par and $0.001 par value,
respectively; 15,000,000 and 20,000,000
shares authorized, respectively; 1,788,401
and 3,506,506 shares issued and outstanding,
respectively 2,475,637 3,507
Additional paid-in-capital 322,067 7,260,281
Accumulated deficit (3,774,013) (6,976,881)
------------ ------------
Total Stockholders' Equity (976,309) 286,907
------------ ------------
Total Liabilities & Stockholders' Equity $ 918,974 $ 2,054,531
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-9
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1996 1997
----------- -----------
<C> <C>
Service revenues $ 831,323 $ 3,249,492
Costs and Expenses:
Costs of revenues 568,474 1,682,083
Selling, general and administrative 826,285 3,406,709
Depreciation and amortization 111,420 270,186
Start-up costs 395,866 --
Research and development 1,469,858 --
----------- -----------
Total Costs and Expenses 3,371,903 5,358,978
----------- -----------
Loss from operations (2,540,580) (2,109,486)
Other Income (Expense):
Interest expense, net (34,230) (87,328)
Other income 104,126 88,148
----------- -----------
Total Other Income 69,896 820
----------- -----------
Loss before income tax expense and
extraordinary item (2,470,684) (2,108,666)
Income tax benefit -- 36,000
----------- -----------
Loss before extraordinary item (2,470,684) (2,072,666)
Extraordinary item - extinguishment of debt, net of
applicable income taxes of $36,000 -- 73,262
----------- -----------
Net loss $(2,470,684) $(1,999,404)
----------- -----------
----------- -----------
Loss per common share:
Basic $(1.43) $(0.93)
----------- -----------
----------- -----------
Diluted $(1.43) $(0.95)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 1,726,648 2,240,181
----------- -----------
----------- -----------
Diluted 1,726,648 2,187,881
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,539,553 $1,494,023 $ -- $(1,303,329) $ 190,694
Issuance of shares for cash 183,192 718,989 -- -- 718,989
Issuance of shares for services 65,656 262,625 -- -- 262,625
Compensation expense -- -- 322,067 -- 322,067
Net loss -- -- -- (2,470,684) (2,470,684)
--------- ---------- ---------- ----------- ----------
Balance at December 31, 1996 1,788,401 2,475,637 322,067 (3,774,013) (976,309)
Merger with ETC
Transaction Corporation 501,786 1,704,569 -- (1,050,938) 653,631
Conversion of Electronic
Transmission Corporation
Stock on 1 for 1.25 Basis 447,100 -- -- -- --
Reclass for par value $0.001 -- (4,177,468) 4,177,468 -- --
Conversion of debentures 18,538 19 84,549 -- 84,568
Issuance of shares for cash 670,681 670 1,233,324 -- 1,233,994
Issuance of shares for services 80,000 80 399,920 -- 400,000
Capital contribution -- -- 721,733 -- 721,733
Compensation expense -- -- 321,220 -- 321,220
Deemed dividend -- -- -- (152,526) (152,526)
Net loss -- -- -- (1,999,404) (1,999,404)
--------- ---------- ---------- ----------- ----------
Balance at December 31, 1997 3,506,506 $3,507 $7,260,281 $(6,976,881) $ 286,907
--------- ---------- ---------- ----------- ----------
--------- ---------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these CONSOLIDATED financial
statements.
F-11
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1996 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operations:
Net loss $(2,470,684) $(1,999,404)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by Operations:
Non-cash issuance of common stock for services rendered 262,625 400,000
Non-cash compensation from stock options 322,067 321,220
Depreciation and amortization 111,420 270,186
Increase in accounts receivable-trade (229,298) (320,308)
Decrease (increase) in employee advances (22,469) 25,162
Increase in prepaid expenses (11,531) (5,493)
Decrease (increase) in deposits and other assets (10,174) 2,067
Increase (decrease) in accounts payable 172,020 (14,485)
Increase in accrued expenses 120,395 240,260
Increase in accrued payroll and taxes 80,695 125,615
Increase (decrease) in accrued interest payable 27,800 (46,870)
----------- -----------
Net Cash Used by Operating Activities (1,647,134) (1,002,050)
----------- -----------
Cash Flows from Investing Activities:
Payments on capital lease receivable 11,642 25,095
Purchases of furniture and equipment (312,580) (368,962)
----------- -----------
Net Cash Used in Investing Activities (300,938) (343,867)
----------- -----------
Cash Flows from Financing Activities:
Issuance of convertible debentures -- 150,000
Payments on convertible debentures -- (20,000)
Proceeds from notes payable 779,575 202,000
Net proceeds under factoring agreement -- 228,757
Payments on notes payable -- (52,030)
Payments on capital leases payable (37,202) (98,231)
Net proceeds (payment) of shareholder loans 421,949 (521,866)
Capital contribution -- 721,733
Issuance of common stock for cash 718,990 1,233,994
----------- -----------
Net Cash Provided by Financing Activities 1,883,312 1,844,357
----------- -----------
Net increase (decrease) in cash (64,760) 498,440
Cash and equivalents, beginning of period 114,885 50,125
----------- -----------
Cash and equivalents, end of period $50,125 $548,565
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Electronic Transmission Corporation ("ETC" or "Company"), a Delaware
corporation, provides services to self-insured companies, third party
administrators that pay claims for self-insured companies and other medical
provider networks or cost containment companies providing services to
self-insured companies. The Company's automation capabilities encompass the
entire workflow process involved in processing and paying healthcare claims.
Additionally, the Company provides third party administrative services which
it will operate through its wholly owned subsidiary in 1998. Revenues are
derived primarily from commerce within the United States.
Effective February 11, 1997, ETC completed a merger with and into ETC
Transaction Corporation, formerly known as Solo Petroleums Ltd. The merger is
in effect a reverse acquisition and is accounted for as a recapitalization of
ETC, with ETC as the acquirer (see Note 2). 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.
CONSOLIDATION -- The financial statements include the accounts of the Company
and ETC Administrative Services, Inc., a Texas corporation and wholly owned
subsidiary. All intercompany accounts and transactions have been eliminated.
DEVELOPMENT STAGE -- ETC 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. 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 costs incurred are
expensed as incurred in accordance with generally accepted accounting
principles.
REVENUE AND EXPENSE RECOGNITION -- The Company recognizes revenue when
services are performed. Expenses are recognized in the period in which
incurred.
The Company is engaged in a marketing strategy of utilizing a 90-day review
period for new clients. These agreements allow for a 90-day review period
for processing claims with no long-term contracts and the Company has been
successful in providing the service at a per claim fee. Revenues earned and
expenses incurred are recognized for the 90-day review services in the period
services are provided.
CASH AND CASH EQUIVALENTS -- For purposes of the statements of cash flows,
the Company considers any short-term cash investments with a maturity of
three months or less to be a cash equivalent.
F-13
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (CONTINUED)
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, 1996 and December 31, 1997.
OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Office furniture,
equipment 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:
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
<S> <C>
Office furniture 5 years
Computer and office equipment 3 years
Computer software 3 years
Leasehold improvements 5 years
</TABLE>
Certain claims processing and imaging equipment are furnished to customers
for off-site use at the customer's facility. This equipment is recorded at
adjusted cost basis as computer and office equipment on the Company's
financial statement. Maintenance, other repairs and significant improvements
are accounted for in accordance with the aforementioned policies.
Whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, the Company evaluates whether changes
have occurred that would require revision of the remaining estimated useful
lives of the equipment or render 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. Future cash
flows are the future cash inflows expected to be generated by an asset less
the future cash outflows expected to be necessary to obtain those inflows.
If an impairment loss is recognized, it is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset. The
fair value of an asset is the amount at which the asset could be bought or
sold in a current transaction between willing parties, that is, other than in
a forced or liquidation sale. Equipment as of December 31, 1997 is not
considered to be impaired.
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.
F-14
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1 - 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.
Certain common stock equivalents were excluded from the calculation, as such
inclusion would have had an anti-dilutive effect.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of cash,
receivables and accounts payable approximates fair value due to the short
maturity of these instruments. The carrying value of short and long-term
debt approximates fair value based on discounting the projected cash flows
using market rates available for similar maturities. None of the financial
instruments are held for trading purposes.
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 has issued incentive stock options.
Compensation costs arising from such options will be recorded as an expense.
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 date of grant over the amount the employee must pay to acquire
the stock. Compensation cost is recognized as an expense over the vesting
period of the option. The Company measures compensation costs using the
intrinsic value based method of accounting for stock issued to employees.
RECLASSIFICATIONS - Certain amounts for the year ended December 31, 1996, have
been reclassified to conform with the December 31, 1997 presentation. The
reclassifications have no effect on net income for the year ended December 31,
1996.
F-15
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 2 - MERGER
Effective February 11, 1997, ETC completed a merger with ETC Transaction
Corporation, formerly known as Solo Petroleums Ltd. A special meeting of the
shareholders of ETC was held on January 31, 1997, at which time shareholders
approved and ratified 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, at
which time 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. ETC and ETC
Transaction Corporation executed the merger transaction as 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 did not recognize
any gain or loss as a result of the merger. The merger is, in effect, a
reverse acquisition and is accounted for as a recapitalization of ETC, with
ETC as the acquirer.
The type and number of common shares outstanding at December 31, 1997
represent those of ETC Transaction Corporation. 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. The financial statements as of and
for the year ended December 31, 1996, represent the financial position,
operations and cash flows of Electronic Transmission Corporation prior to
merger with ETC Transaction Corporation and prior to the aforementioned name
change by ETC Transaction Corporation.
ETC Transaction Corporation was a non-operating entity that had nominal
assets at the date of the merger, except for a $779,575 note receivable from
ETC. This note receivable recorded by ETC Transaction Corporation was
eliminated against the related note payable recorded by ETC (see Note 15) at
the date of merger. No cash was involved in eliminating the note receivable
from ETC. On the transaction date, ETC Transaction Corporation had an
accumulated deficit of $1,050,938 which is in the acquirer's financial
statements as an increase in accumulated deficit.
The merger was effected by ETC Transaction Corporation issuing 1.25
pre-reverse stock split shares for each issued and outstanding common share
in ETC. At the date of merger, ETC had 7,153,601 pre-reverse stock split
shares issued and outstanding and accordingly, the merger resulted in the
issuance of 8,942,002 pre-reverse stock split shares in ETC Transaction
Corporation for all of the issued and outstanding common shares of Electronic
Transmission Corporation. At the date of merger, ETC Transaction Corporation
had 2,007,144 pre-reverse stock split shares issued and outstanding.
Accordingly, the effect of the merger resulted in the surviving entity having
10,949,146 pre-reverse stock split shares issued and outstanding at February
11, 1997.
F-16
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 2 - MERGER (CONTINUED)
Giving effect to the reverse stock split (see Note 18), the merger was
effected by ETC Transaction Corporation issuing 1.25 post-reverse stock split
shares for each issued and outstanding post-reverse stock split common share
in ETC. At the date of merger, ETC had 1,788,401 post-reverse stock split
shares issued and outstanding and accordingly, the merger resulted in the
issuance of 2,235,501 post-reverse stock split shares in ETC Transaction
Corporation for all of the issued and outstanding common shares of Electronic
Transmission Corporation. At the date of merger, ETC Transaction Corporation
had 501,786 post-reverse stock split shares issued and outstanding.
Accordingly, the effect of the merger resulted in the surviving entity having
2,737,287 post-reverse stock split shares issued and outstanding at February
11, 1997.
The following schedule represents the 1996 proforma effect of the combined
entities had the transaction occurred January 1, 1996:
<TABLE>
<CAPTION>
ETC
Transaction Proforma Proforma
ETC Corporation Adjustments Combined
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenue $ 831,323 $ -- $ -- $ 831,323
Costs and expenses (3,371,903) -- -- (3,371,903)
------------ ------- ------- ------------
Loss from operations (2,540,580) -- -- (2,540,580)
Other income (expense) 69,896 17,559 -- 87,455
------------ ------- ------- ------------
Income (loss) before
extraordinary item (2,470,684) 17,559 -- (2,453,125)
Extraordinary item -- -- -- --
------------ ------- ------- ------------
Net income (loss) $(2,470,684) $17,559 $ -- $(2,453,125)
------------ ------- ------- ------------
------------ ------- ------- ------------
Income (loss) per share:
Basic and diluted (0.96)
------------ ------- ------- ------------
------------ ------- ------- ------------
Weighted average common
shares outstanding (post-
reverse stock split):
Basic and diluted 2,559,395
------------ ------- ------- ------------
------------ ------- ------- ------------
</TABLE>
F-17
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
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. ETC
sustained a net operating loss of $2,470,684 and $1,999,404 during the years
ended December 31, 1996 and 1997, respectively. Cash used by operating
activities for the same periods aggregated $1,647,134 and $1,002,050,
respectively. Additionally, at December 31, 1997, ETC's current liabilities
exceeded its current assets by $562,394. ETC's continued existence depends
upon the success of management's efforts to raise sufficient new capital and
increase its customer base.
Management plans to mitigate the going concern issues by marketing its
services to (i) PPOs; (ii) claims processors, TPAs and small- to medium-size
insurance companies; and (iii) large self-insured and self-administered
corporations to expand 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 - ACCOUNTS RECEIVABLE
The following is a summary of accounts receivable:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Accounts receivable - trade $236,356 $578,870
Employee receivables 28,203 3,041
Accounts receivable - other -- 664
-------- --------
$264,559 $582,575
-------- --------
-------- --------
</TABLE>
F-18
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE 4 - ACCOUNTS RECEIVABLE (Continued)
In September 1997, the Company entered into an agreement whereby the Company has
the right to factor certain receivables, with recourse, to a financial
institution from time to time until September 1998. The maximum amount of
receivables that can be factored to the financial institution at any time is
$500,000. The receivables are discounted at 2.75% of the face value of the
receivables. The financial institution retains 20% of the face amount of
outstanding receivables in a cash reserve account in the name of the Company.
The Company is required to repurchase any receivables sold, which are in arrears
more than ninety days, at the receivables amount net of unearned interest. The
terms of the factoring agreement allow the Company to maintain effective control
over the receivables and therefore the agreement is recorded as a secured
borrowing in accordance with Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". During the year ended December 31, 1997, the
Company received $1,080,806 from the factoring of receivables. The factoring
obligation outstanding under the agreement at year-end amounted to $228,757.
Required cash reserves included in cash and cash equivalents amounted to $45,751
at December 31, 1997. Discounts on the factoring of receivables recorded as
interest expense in 1997 amounted to $38,500.
NOTE 5 - CAPITAL LEASE RECEIVABLE
The Company, as lessor, has entered into a non-cancelable lease for service
equipment. Future minimum lease payments receivable under the non-cancelable
lease at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital
Leases
-------
<S> <C>
Total minimum lease payments during the
years ended December 31, 1998 $29,248
Less: amount representing interest (1,525)
-------
Present value of minimum lease payments $27,723
-------
-------
</TABLE>
F-19
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE 6 - OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
-------- ----------
<S> <C> <C>
Furniture $104,349 $ 105,473
Computer & Office Equipment 458,178 615,521
Computer Software 92,836 544,368
Leasehold Improvements 8,791 9,747
-------- ----------
664,154 1,275,109
Less: accumulated depreciation (142,578) (408,711)
-------- ----------
$521,576 $ 866,398
-------- ----------
-------- ----------
</TABLE>
Depreciation expense was $110,405 and $266,133 for 1996 and 1997, respectively.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following is a summary of accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
-------- ----------
<S> <C> <C>
Accounts payable $221,315 $ 247,325
Accrued expenses:
Deferred rent 71,522 67,032
Computer software acquisition costs -- 204,338
Legal and professional 46,660 233,779
Other 10,066 91,123
Accrued payroll and taxes 189,825 315,440
Accrued interest payable 27,800 2,033
-------- ----------
$567,188 $1,161,070
-------- ----------
-------- ----------
</TABLE>
F-20
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE 8 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
The following is a summary of notes payable:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
----- --------
<S> <C> <C>
Obligation due under factoring agreement (see Note 4) $-- $228,757
Note payable to corporation, interest at 12.0%,
$7,553 principal including interest due monthly,
remaining balance plus interest due upon maturity
at May 19, 1998; collateralized by option to purchase
28,333 shares of common stock at $6.00 per share
(see Note 12). -- 121,654
Note payable to bank, interest at 10.5%,
$1,484 principal including interest due monthly,
maturing September 15, 1998; collateralized by
certain equipment and assignment of officer's life
insurance policy. -- 28,316
Subordinated convertible debenture payable to
corporation, interest at 12.0% payable semi-annually,
principal due upon maturity at May 12, 1998, convertible
at $5.00 per common share including principal and
accrued interest. -- 100,000
----- --------
$-- $478,727
----- --------
----- --------
</TABLE>
Under an agreement with Ironwood Leasing Ltd. discussed in Note 9, the Company
has a $500,000 line of credit of which funding is based on the leasing companies
ability to provide funds. As of December 31, 1997, the Company has made no
draws under this agreement.
During 1991 and 1992, ETC Transaction Corporation (formerly Solo Petroleums,
Ltd.) issued $52,500 in short-term convertible debentures which were due 180
days from issuance bearing an interest rate of 20%. The debentures provided for
the holder to receive 2.5 common shares of ETC Transaction Corporation stock for
each one U.S. dollar of debenture. In December 1997, the Company issued 8,125
shares of common stock on a $4-for-1 post-reverse stock split share basis in
full settlement of the agreements. The remaining $20,000 in debentures were
paid in cash to the holders in full settlement.
F-21
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE 8 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
On May 14, 1997, the Company issued $50,000 in short-term subordinated
convertible debentures which were due in one year. The debentures were
convertible at $5.00 per common share including principal and accrued interest.
On September 22, 1997, the holder converted $52,067 of principal and interest
into 10,413 of common stock.
NOTE 9 - LEASE OBLIGATIONS PAYABLE
The Company, as lessee, has entered into various non-cancelable leases for
service equipment, vehicles, and office facilities. Future minimum lease
payments under non-cancelable leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
For the Years Ending Capital Operating
December 31, Leases Leases
- ----------------------- --------- ---------
<S> <C> <C>
1998 $110,095 $183,680
1999 26,487 189,375
2000 -- 195,071
Thereafter -- 149,507
-------- --------
Total minimum lease payments 136,582 $717,633
--------
--------
Less: amount representing interest (8,755)
--------
Present value of minimum lease payments 127,827
Less: current portion (102,240)
--------
Long-term capital lease obligation $25,587
--------
--------
</TABLE>
Rent expense during the years ended December 31, 1996 and 1997 for operating
leases was $122,544 and $173,494, respectively, and is included in operating
expenses.
The cost of assets subject to capital leases included in office furniture and
equipment is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Computer & Office Equipment $182,053 $198,801
Less: accumulated depreciation (21,044) (84,520)
-------- --------
$161,009 $114,281
-------- --------
-------- --------
</TABLE>
F-22
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANNCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 9 - LEASE OBLIGATIONS PAYABLE (CONTINUED)
In April 1996, the Company entered into an equipment lease agreement and stock
option agreement with Ironwood Leasing Ltd. (a related party) which is recorded
as a capital lease by the Company. Principals of Ironwood Leasing, Ltd. are
also stockholders of ETC, including a director of ETC. The master lease
agreement is for a term of five years beginning April 23, 1996 through April 23,
2001 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, 1997, monthly payments required under the master lease agreement
amounted to $9,954 expiring in December 1999.
At any time during the term of the agreement, the leasing company has the right
to i) 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 price of the equipment divided by $5.00 per share or,
ii) purchase, at $5.00 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
5.00, 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 $5.00 per share,
the price payable to the leasing company will be reduced to such lower price.
During December 1997, the Company sold common stock at a price of $2.00 per
share; therefore, the leasing company has the option to purchase common stock at
this price as discussed in Note 12.
The Company accounted for this transaction using the "intrinsic value based
method" of accounting for stock options. The exercise price of the stock
options on the date of grant is equal to the fair market value of the underlying
common stock. The fair value of the stock underlying the stock options was
determined using information available from other stock sale transactions at or
near the grant date. In management's opinion, these transactions between
willing parties included the best information available at the time of grant to
estimate the market value of common stock of the Company. No compensation
expense was recognized in conjunction with these options for the year ended
December 31, 1996 and 1997.
F-23
<PAGE>
The leasing company agreement contains certain restrictive covenants which (i)
required ETC to escrow all accounts received which were derived from the use of
this equipment, less third party costs, through March 31, 1996 or until any
class of stock became registered with the Securities and Exchange Commission or
otherwise became publicly traded, or the funds in escrow equaled the total
purchase price of the equipment, and (ii) restricted ETC from issuing additional
securities before ETC merged with a public company. ETC was in violation of
each of these covenants and has obtained a waiver from the leasing company
releasing ETC from any claims under the escrow requirement and violations
relating to the issuance of securities.
NOTE 10 - INCOME TAXES
ETC has net operating loss carryforwards of approximately $4,519,000 that are
available to offset any future income tax liability. The net operating loss
carryforwards expire as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31, Expiring
------------------------ ----------
<S> <C>
2010 $880,000
2011 2,006,000
2012 1,633,000
----------
Total $4,519,000
----------
----------
</TABLE>
Deferred income taxes result from the book versus tax accounting difference
for net operating loss carryforwards, accrued payroll and stock option-based
compensation. The Company has deferred tax assets amounting to approximately
$1,115,000 and $1,627,000 at December 31, 1996 and 1997, respectively. The
realization of the benefits from these deferred tax assets appears uncertain
due to going concern questions. Accordingly, a valuation allowance has been
recorded which offsets the deferred tax assets at December 31, 1996 and 1997.
The components of the provision for federal income taxes are as follows as of
December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Currently payable $ -- $ --
Deferred -- (36,000)
-------- --------
Federal income tax expense (benefit) $ -- $(36,000)
-------- --------
-------- --------
</TABLE>
Deferred tax benefit results from the difference in extraordinary gain on
extinguishment of debt which reduced the benefit of the net operating loss
carryforwards and decreased the valuation allowance recorded against the
deferred tax assets.
F-24
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANNCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 11 - BUSINESS COMBINATION
Effective April 1, 1997, the Company completed a business combination with
Electra-Net, L.C. ("Electra-Net") by assuming their net liabilities.
Electra-Net, L.C. is a company wholly owned and controlled by ETC's former
Chairman of the Board, Chief Executive Officer, President and current
shareholder.
The transaction was accounted for using the purchase method as follows:
<TABLE>
<S> <C>
Assets Acquired:
Cash $ 2,065
Accounts receivable 76,061
Computer hardware 20,908
----------------
Total assets $ 99,034
----------------
Liabilities Assumed:
Accounts payable $ 15,711
Loans payable 235,849
----------------
Total liabilities $ 251,560
----------------
Net Liabilities Assumed $ 152,526
Consideration Paid:
Cash $ --
----------------
Total consideration --
----------------
Dividend paid to shareholder $ 152,526
----------------
----------------
</TABLE>
Treatment of the excess consideration (net liabilities assumed) for the
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 1, 1997), in
accordance with generally accepted accounting principles.
NOTE 12 - STOCK OPTIONS
The Company has issued various stock options to employees of the Company
which are considered compensatory. Vesting varies by employee agreement
ranging from 2 to 5 years. The contractual life of outstanding stock options
at December 31, 1997 is the term of employment of the holder.
F-25
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANNCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 12 - STOCK OPTIONS (CONTINUED)
A summary of the status of employee stock options is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1997
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 167,750 $0.004 172,917 $0.004
Granted 65,000 $0.004 350,000 $4.572
Exercised (29,583) $0.004 (58,750) $0.160
Forfeited/expired (31,250) $0.004 (216,250) $3.120
Outstanding, end of period 172,917 $0.004 247,917 $3.832
------- --------
------- --------
Options exercisable, end of period 4,583 $0.004 185,417 $3.576
------- --------
------- --------
</TABLE>
The following table summarizes information about stock options granted during
the years ended
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------------- -----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Fair Exercise Fair Exercise
Value Price Value Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Option price = fair market value $0.000 $0.000 $4.924 $4.924
Option price < fair market value $4.000 $0.004 $4.000 $0.400
Total $4.000 $0.004 $4.856 $4.572
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
F-26
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FIANNCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 12 - STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------------
Options Weighted Average
Outstanding at Remaining Weighted Average Options Exercisable Weighted Average
Exercise Prices 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------------- ---------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
$0.000 to $.004 52,917 Term of Employ $.004 52,917 $.004
$0.005 to $4.252 50,000 Term of Employ $4.252 0 $4.252
$4.253 to $5.00 132,500 Term of Employ $5.000 132,500 $5.000
$5.001 to $6.00 12,500 Term of Employ $6.000 0 $6.000
------- -------
247,917 $3.832 185,417 $3.576
------- -------
------- -------
</TABLE>
Fair value for the stock underlying stock options and stock warrants was
determined, prior to the Company trading on the over-the-counter market,
using information available from other stock sale transactions at or near the
grant date. In management's opinion, these transactions between willing
parties included the best information available at the time of grant to
estimate the market value of the common stock of the Company. No quoted
market prices existed due to the non-public status of the Company. Fair
values for the stock underlying stock options and stock warrants subsequent
to becoming publicly traded consisted of quoted market prices as listed in
stock-trading business journals. These fair values were used to determine
the compensatory components of the stock options and stock warrants granted
during the years ended December 31, 1996 and 1997. The Company's common
stock became publicly traded in April 1997.
Compensation costs will be recognized as an expense over the vesting period
of 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. Future compensation
expense to be recorded in subsequent periods as of December 31, 1996 and
1997, was $555,897 and $0, respectively. During 1997, the Company elected to
rescind specific compensatory stock options of an officer of the Company.
Accordingly, compensation costs associated with these options were not
expensed due to the officer retroactively forfeiting any rights under the
original option agreement. Effective June 30, 1997, the Company elected to
vest all employee stock options and recognize compensation expense for all
outstanding options. Compensation cost totalling $322,067 and $321,220 was
recognized as expense during the years ended December 31, 1996 and 1997,
respectively.
F-27
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 12 - STOCK OPTIONS (CONTINUED)
Using the fair value method, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997: dividend yield
of 0.0 percent; expected volatility of 40.0 percent; risk free interest rates of
5.0 percent; expected lives of two years. Using the fair value method, the fair
value of each option grant is estimated on the date of grant using the Binomial
Method with the following weighted-average assumptions used for grants in 1996:
dividend yield of 0.0 percent; risk free interest rates of 4.5 percent; expected
lives of three years. 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 in 1997 would have
been $2,289,902. Basic and diluted loss per share would have been $(1.04) AND
$(1.08) In 1997, Respectively. In 1996, net loss and loss per share data would
have not been significantly changed using the fair value method.
As discussed in Note 8, the Company issued 28,333 options to purchase common
stock at $6.00 per share to a corporation as collateral to secure a note
payable. The Company accounted for this transaction using the "intrinsic value
based method" of accounting for stock options. The exercise price of the stock
options on the date of grant is equal to fair market value of the underlying
common stock. The fair value was determined based upon available market quotes
on the date of grant. No compensation expense was recognized in conjunction
with these options for the year ended December 31, 1997. The options expire on
May 19, 1998.
Under an agreement with a leasing company discussed in Note 9, the leasing
company has 52,652 options to purchase common stock at $2.00 per share. These
options have no fixed maturity.
Of 100,000 stock options granted in 1995 to a shareholder, and officer of the
Company, 50,000 were rescinded and forfeited in 1997. The Company and
shareholder, by mutual agreement, elected to rescind the stock options and
return all rights under the agreement. The financial statements of the Company
only include compensation expense for shares vested prior to the rescission.
The compensation expense adjustment due to the rescission was recorded as a 1997
adjustment, and, net of the adjustment, no compensation expense was recognized
in 1997 from these stock options.
F-28
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 12 - STOCK OPTIONS (CONTINUED)
Total compensation expense of $339,600 was measured at the date of grant of
the 100,000 options. The Company used the straight-line method to recognize
stock-based compensation expense for these options over their three year
vesting period, even though the options vested on various dates during that
period. This method was not materially different than the method prescribed
by APB 25: ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Stock-based
compensation expense of $199,800 was recognized in 1996 under these options.
The remaining $199,800 of compensation expense will not be recognized by the
Company due to the rescission. Because the Company recognized stock-based
compensation expense using the straight-line method, and 50,000 of the
100,000 stock options granted in 1995 were rescinded in 1997, no adjustment
is necessary in the period of forfeiture to reverse stock-based compensation
recognized in previous periods.
NOTE 13 - STOCK WARRANTS
Effective June 1, 1996, the Company issued 55,000 stock warrants to a
shareholder which expired on June 15, 1997, and allowed the holder of each
warrant to purchase one share of common stock at a price of $6.00 per share.
Fair value of the stock underlying the warrants issued was determined based upon
the selling price to a willing buyer at or near the date of grant. In
management's opinion, these transactions included the best information available
at the time of grant to estimate the fair value of the common stock of the
Company. No compensation expense was recognized during the year. Fair value of
common stock was equal to the exercise price of warrants on the date of grant.
The warrants issued to the shareholder were for services rendered for consulting
in obtaining equity capital and marketing the Company's common stock. As of
December 31, 1996, no warrants had been exercised. This agreement was
superceded by the following agreement dated February 28, 1997.
Effective February 28, 1997, the Company issued 130,000 stock warrants to
shareholders which expire on February 28, 2004, and allow the holder of each
warrant to purchase one share of common stock at a price of $5.00 per share.
Fair value of the stock underlying the warrants issued was determined based upon
the selling price to a willing buyer at or near the date of grant. In
management's opinion, these transactions included the best information available
at the time of grant to estimate the fair value of the common stock of the
Company. No compensation expense was recognized during the year. Fair value of
common stock was equal to the exercise price of warrants on the date of grant.
The warrants issued to the shareholder were for services rendered for consulting
in obtaining equity capital and marketing the Company's common stock. As of
December 31, 1997, no warrants have been exercised.
Effective June 1, 1997, the Company issued 5,750 stock warrants to shareholders
which expire on June 1, 1998, and allow the holder of each warrant to purchase
one share of common stock at a price of $6.00 per share. Fair value was
determined based on quoted market prices. Fair value at the date of grant was
equal to exercise price and no expense was recognized at the date of grant. As
of December 31, 1997, no warrants have been exercised.
F-29
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 14 - CUSTOMER CONCENTRATION
For the years ended December 31, 1996 and 1997, revenues from one customer
amounted to approximately 64% and 56% of total revenues. For the years ended
December 31, 1996 and 1997, revenues from a separate customer amounted to
approximately 0% and 13% of total revenues, respectively.
Trade accounts receivable included $76,395 and $86,717 relating to these
customers at December 31, 1996 and 1997, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
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 former member of the Board of Directors. Compensation for services rendered
to the Company will be paid through November 1997. At December 31, 1997, the
Company was indebted to the former director in the amount of $32,857. During
the years ended December 31, 1996 and 1997, the Company incurred expenses under
this agreement amounting to $12,985 and $19,872, respectively.
On May 15, 1996, the Company executed a note payable of $779,575 with ETC
Transaction Corporation of which the proceeds were used as working capital to
fund its post-merger business plan. The note payable to ETC Transaction
Corporation and related accrued interest of $27,800 eliminated upon completion
of the merger.
As of December 31, 1996 and 1997, the Company had a payable of $339,207 and $0,
respectively, to Sterling National Corporation ("SNC") for working capital
loans. The former Chairman of the Board, Chief Executive Officer and
shareholder of ETC is the sole officer, director and shareholder of SNC.
At December 31, 1996, the Company had a trade receivable due from Electra-Net,
L.C., a company wholly owned and operated by the former Chairman of the Board,
C.E.O. and majority shareholder of ETC. The receivable of $103,026 relates to
administrative fees for providing computer processing for medical claims.
The Company had an agreement to purchase equipment from SNC. The relationship
exists through SNC's purchase contract with an equipment wholesaler which
allowed SNC to purchase equipment at a significant discount. The Company
recorded the equipment purchases at SNC's cost. As of December 31, 1997, the
agreement had been cancelled. During the years ended December 31, 1996 and
1997, the Company purchased equipment totaling $127,709 and $20,291,
respectively.
F-30
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 15 - RELATED PARTY TRANSACTIONS (CONTINUED)
On May 2, 1997, Elaine Boze resigned as the Company's General Counsel and
member of the Board of Directors. The Company and Ms. Boze entered into a
Severance Agreement and General Release whereas she received a $25,000
separation payment which was charged to expense. Ms. Boze was also entitled
to a continuation of her healthcare benefits until such time as Ms. Boze
becomes employed by an entity providing similar benefits. The Company paid
$1,120 in 1997 for maintenance and continuation of her healthcare benefits.
On January 18, 1996, ETC entered into a consulting agreement with Michael
Eckstein, a director of the Company, pursuant to which Mr. Eckstein agreed to
assist ETC in identifying and placing under contract TPAs, preferred provider
organizations and other managed care companies which may be able to utilize the
Company's claims processing services. Under the terms of this agreement, Mr.
Eckstein is entitled to receive compensation on a monthly basis equal to $3,500
and commissions equal to 8% of the "gross income from revenue," as defined in
the agreement, realized by the Company from clients generated by Mr. Eckstein.
In June 24, 1998, Mr. Eckstein agreed to receive only commission based
compensation under the terms of the agreement. During the years ended December
31, 1996 and 1997, the Company expensed $37,500 and $0, respectively, under this
consulting agreement.
Effective May 1, 1996, Roy W. Mers ("Mers") resigned from his position as
President and director of ETC. As a consequence to his resignation, ETC and
Mers entered into a Settlement Agreement whereas Mr. Mers received 30,000 shares
of common stock valued at $4.00 per share for total compensation of $120,000
(see Note 16). Pursuant to the agreement, ETC agreed to compensate Mers for his
future efforts in assisting ETC in obtaining financing for its business
ventures. The agreement terminated on August 1, 1997 with no additional
compensation being paid or due to Mers since no services were performed by him
subsequent to his resignation.
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1997, the Company paid $9,021 and
$79,202 for interest, respectively. During the years ended December 31, 1996
and 1997, the Company made no payments for income taxes.
Non-cash investing and financing activities include the following:
The Company acquired assets valued at $246,513 and $16,747 through capital lease
obligations during the year ended December 31, 1996 and 1997, respectively. The
Company disposed of assets with a carrying value of $64,460 through a capital
lease receivable during the year ended December 31, 1996.
F-31
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
During the year ended December 31, 1996, the Company issued an aggregate of
65,656 shares of common stock for services rendered at $4.00 per share in the
total amount of $262,625. These shares were comprised of 2,656 shares issued to
Mr. Dennis Barnes, a director and shareholder of the Company, in exchange for
his efforts in assisting the Company in obtaining equity financing from third
parties. Additionally, 20,000 shares were issued to Ms. Ann Mooney, a
shareholder of the Company, in exchange for her efforts in marketing the
Company's services. The Company issued 30,000 to Mr. Roy Mers, former President
of the Company, in connection with his severance package (See Note 15). The
remaining 13,000 shares were issued to third parties for services rendered
including 3,000 shares issued to an individual for a business valuation of the
Company and 5,000 each issued to two separate individuals for their efforts in
marketing the Company's services in 1996.
During the year ended December 31, 1997, the Company issued an aggregate of
80,000 shares of common stock for services rendered at $5.00 per share in the
total amount of $400,000. These shares were comprised of 12,500 shares issued
to two separate third parties (total of 25,000 shares) for services rendered for
public relations.
Additionally, the Company issued the remaining 55,000 shares to a separate
third party for services rendered in connection with assisting the Company in
raising equity capital.
Fair value of the common stock issued for services were determined based upon
recent sales to willing parties at or near the date of issuance. In
management's opinion, fair value on the date of issuance of common stock and
compensation cost recognized in the financial statements is commensurate with
the cost of the services provided to the Company in 1996 and 1997.
F-32
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 17 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the year ended December 31, 1996
--------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ -------------- -----------
<S> <C> <C> <C>
Net loss $(2,470,684) 1,726,648 $(1.43)
Less: extraordinary item -- --
------------ ---------- ------
------
Loss before extraordinary item $(2,470,684)
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(2,470,684) 1,726,648 $(1.43)
------
------
EFFECT OF DILUTIVE SECURITIES
Employee stock options -- --
DILUTED EARNINGS PER SHARE
----------- ---------
Loss available to common stockholders
plus assumed conversions (2,470,684) 1,726,648 $(1.43)
----------- --------- ------
----------- --------- ------
</TABLE>
F-33
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
For the year ended December 31, 1997
---------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ----------
<S> <C> <C> <C>
Net loss $(1,999,404) 2,240,181 $(0.89)
Less: extraordinary item (73,262) --
------------ ---------- -------
-------
Loss before extraordinary item $(2,072,666)
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(2,072,666) 2,240,181 $(0.93)
------
------
EFFECT OF DILUTIVE SECURITIES
12% convertible debentures 5,077 (5,129)
Warrants -- (27,852)
Employee stock options -- (6,677)
Non-employee options -- (12,642)
----------- ---------
DILUTED EARNINGS PER SHARE
Loss available to common stockholders
plus assumed conversions (2,067,589) 2,187,881 $(0.95)
----------- --------- ------
----------- --------- ------
</TABLE>
The following is a summary of loss per share data:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Basic loss per share:
Loss before extraordinary item $(1.43) $(0.93)
Extraordinary item 0.00 0.04
------ ------
Net loss $(1.43) $(0.89)
------ ------
------ ------
Diluted loss per share:
Loss before extraordinary item $(1.43) $(0.95)
Extraordinary item 0.00 0.04
Effect of dilutive securities 0.00 0.02
------ ------
Net loss $(1.43) $(0.89)
------ ------
------ ------
</TABLE>
F-34
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 17 -- EARNINGS PER SHARE (CONTINUED)
Options to purchase 172,917 shares of common stock at $0.004 per share were
outstanding at December 31, 1996, but were not included in the computation of
diluted earnings per share because the options had an antidilutive effect on
earnings per share. As of December 31, 1997, options to purchase 185,417 shares
of common stock at $0.004 per share were outstanding but were not included in
the computation of diluted earnings per share because the options had an
antidilutive effect on earnings per share.
NOTE 18 - SUBSEQUENT EVENTS
The Company is in the process of amending its June 30, 1997, and September 30,
1997, quarterly financial statement filings with the Securities and Exchange
Commission to reflect the correction of an error in recording the Electra-Net
business combination (see Note 11) during those quarters. The transaction is
properly recorded in these annual financial statements.
On February 16, 1998, L. Cade Havard, the Company's Chairman of the Board, Chief
Executive Officer and President, was terminated by the Company's Board of
Directors. The Board of Directors appointed W. Mack Goforth, the Company's
Chief Financial Officer, as its Chief Executive Officer and Chairman of the
Board.
On February 27, 1998, the Company amended its Certificate of Incorporation with
the State of Delaware by increasing the authorized common stock from 15,000,000
to 20,000,000.
On March 20, 1998, the Employment Agreement between the Company and Ann C.
McDearmon, the Company's Executive Vice President - Director of Marketing, was
terminated. Ms. McDearmon, in a lawsuit filed on April 20, 1998 in State
District Court of Dallas County, Texas, alleged that the Employment Agreement
was effectively terminated by the Company as a result of the change in the
Company's management in February 1998 and because of modifications to Ms.
McDearmon's work responsibilities. Ms. McDearmon has also alleged that as a
result of the termination of the employment agreement she is entitled to certain
liquidated damages identified in the agreement. The Company maintains that Ms.
McDearmon voluntarily terminated the employment agreement by submitting her
letter of resignation on March 20, 1998 and that she is not entitled to any
additional compensation or liquidated damages under the terms of such agreement.
The Company intends to vigorously defend this lawsuit and does not believe that
the outcome will have a material adverse effect upon its financial condition.
On May 7, 1998, Steven K. Arnold agreed to serve as a consultant to the Company
on an interim basis pending his formal election by the Board of Directors as
Chairman of the Board and Chief Executive Officer of the Company. Effective May
28, 1998, Mr. Arnold was elected Chairman of the Board and Chief Executive
Officer of the Company. Mr. Goforth has agreed to continue to serve as the
Company's Chief Financial Officer.
F-35
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 18 - SUBSEQUENT EVENTS (CONTINUED)
The Board of Directors authorized a 1-for-4 reverse stock split of the
company's $0.001 par value common stock to be effective on July 1, 1998. As
a result of the split, the Company' issued and outstanding shares decreased
to 3,560,506 shares, and additional paid-in capital increased by $10,519.
All references in the accompanying financial statements to the number of
common shares and per-share amounts for 1996 and 1997 have been restated to
reflect the stock split.
F-36
<PAGE>
- --------------------------------------- -----------------------------------
- --------------------------------------- -----------------------------------
NO DEALER, SALESPERSON, OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES TO WHICH IT RELATES IN
ANY STATE TO ANY PERSON WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH STATE. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL, UNDER ANY ELECTRONIC TRANSMISSION
CIRCUMSTANCES, CREATE ANY IMPLICATION CORPORATION
THAT THERE HAS NOT BEEN ANY CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
---------------
642,968 SHARES OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary.................. 3
Risk Factors........................ 8
Common Stock Price Ranges and
Dividends......................... 13
P R O S P E C T U S
Dividend Policy..................... 13
Capitalization...................... 14
Selected Historical Financial
Information....................... 15
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations........................ 16
Business............................ 22 July ___, 1998
Management.......................... 26
Certain Relationships and Related
Transactions...................... 31
Principal Stockholders.............. 33
Description of Securities........... 34
Limitation of Liability of
Directors......................... 35
Shares Eligible for Future Sale..... 35
Selling Stockholders................ 36
Plan of Distribution................ 36
Agreements with Selling
Stockholders...................... 37
Legal Matters....................... 38
Experts............................. 38
Financial Statements................ F-1
---------------
- --------------------------------------- -----------------------------------
- --------------------------------------- -----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has a contract that insures a controlling person, director or
officer of the Company which affects his or her liability in that capacity. The
Company's bylaws provide for indemnification, subject to applicable law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the registration of the Shares pursuant to this
registration statement are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Filing Fee $ 471
Accounting Fees and Expenses 15,000
Legal Fees and Expenses 30,000
Printing and Engraving 20,000
Fees of Transfer Agent and Registrar -0-
Blue Sky Fees and Expenses -0-
Miscellaneous 2,000
-------
Total $67,471*
-------
-------
</TABLE>
----------------------
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
a. PRIVATE OFFERINGS
1. PRIVATE OFFERING COMPLETED JUNE 1997.
Effective June 1997, the Company closed the private placement of its
12% Subordinated Convertible Debentures (the "Convertible Debentures") for total
proceeds of $150,000. Information concerning the sale of such debentures is as
follows:
<TABLE>
<CAPTION>
Purchaser Principal Amount Purchased
----------------------------- --------------------------
<S> <C>
Mission Society International $100,000
Mary Margaret Cook $50,000
</TABLE>
The principal balance of the Convertible Debentures is due upon
maturity at May 12, 1998, with accrued interest being payable semi-annually.
All principal plus accrued and unpaid interest due and owing under the
Convertible Debentures may be converted at the option of the holder into shares
of Common Stock at the rate of one share of Common Stock for each $5.00 of
principal and interest converted. In September 1997, Mary Margaret Cook
converted the $50,000 principal amount of her Convertible Debenture plus all
accrued and unpaid interest thereon into 10,413 shares of Common Stock.
The sale of the above securities was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving a public offering. The Purchasers of the securities described
above acquired them for their own account and not with a view to any
distribution thereof to the public. The Convertible Debentures bear legends
stating that they may not be offered, sold or transferred other than pursuant to
an effective registration statement under the Securities Act or an exemption
from such registration requirements.
II-1
<PAGE>
2. PRIVATE OFFERING COMPLETED DECEMBER 17, 1997
On December 17, 1997, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") pursuant to which Special Situations
Private Equity Fund, L.P. and Special Situations Cayman Fund, L.P.
(collectively, the "Investors") obtained the right to purchase up to an
aggregate of 750,000 shares of Common Stock for total consideration of
$1,500,000 or $2.00 per share. The Purchase Agreement calls for the sale and
purchase of the available shares to occur in two tranches. On December 17,
1997, the Investors purchased an aggregate of 611,930 shares of Common Stock,
which represent certain of the Shares being registered in this Prospectus, for
total cash consideration of $1,223,859.50 (the "First Closing"). The Investors,
in accordance with the terms of the Purchase Agreement, have advised the Company
that they do not intend to purchase the remaining 138,070 shares of Common
Stock.
The sale of the above securities was made in reliance upon Rule 506
promulgated under Regulation D of the Securities Act, which provides an
exemption for transactions not involving a public offering. The Investors
acquired the referenced securities for their own account and not with a view to
any distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the shares are not to be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act or an exemption from such registration requirements.
3. PRIVATE OFFERING COMPLETED JUNE 25, 1998
On June 25, 1998, David O. Hannah, a director of the Company, purchased
100,000 restricted shares of Common Stock for an aggregate purchase price of
$100,000 or $1.00 per share. Also on June 25, 1998, Mr. Hannah loaned to the
Company the principal amount of $100,000. The note is due and payable on
December 25, 1998. Furthermore, the Company issued to Mr. Hannah 25,000
restricted shares of Common Stock in lieu of payment of cash interest on the
principal amount of the debt. The obligation is secured by all of the assets of
the Company. The outstanding principal balance of the obligation to Mr. Hannah
is convertible by him at any time into restricted shares of Common Stock at a
rate of one share of Common Stock for every $2.00 of principal converted.
The sale of the above securities was made in reliance upon Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving a public offering. The securities referenced above were acquired
by the holder for his own account and not with a view to any distribution
thereof to the public.
4. PRIVATE OFFERING COMPLETED JUNE 29, 1998
On June 29, 1998, the Company executed promissory notes in the principal
amounts of $20,000 and $5,000 payable to Scott Stewart, a director of the
Company, and to David Stewart, Mr. Stewart's brother, respectively. The notes
are due and payable on December 29, 1998. Scott Stewart received 5,000 shares
of Common Stock and David Stewart received 1,250 shares of Common Stock in lieu
of cash interest on the
II-2
<PAGE>
principal amount of their respective notes. The obligations to the note
holders are secured by all of the assets of the Company. The outstanding
principal balances of these obligations are convertible by the note holders
into shares of Common Stock at the rate of one share of Common Stock for
every $2.00 of principal converted. See "Certain Relationships and Related
Transactions."
The issuance of the above securities was made in reliance upon Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving a public offering. The holders of the securities described above
acquired them for their own account and not with a view to any distribution
thereof to the public. The warrants bear legends stating that they may not be
offered, sold or transferred other than pursuant to an effective registration
statement under the securities act or an exemption from such registration
requirements.
b. WARRANTS
ANDREW WARRANTS. On June 10, 1995, the Company entered into a consulting
agreement with Ken Andrew. In connection with the consulting agreement, the
Company issued to Mr. Andrew 105,000 Common Stock Purchase Warrants to purchase
105,000 shares of Common Stock at $5.00 per share until February 28, 2004. At
June 30, 1998, none of the warrants had been exercised.
TYLER WARRANTS. In February 1997, the Company issued to each of Craig
Tyler and Mark Tyler 12,500 Common Stock Purchase Warrants to purchase 12,500
shares of the Company's Common Stock at $5.00 per share until February 28, 2004.
At June 30, 1998, none of the warrants had been exercised.
The issuance of the above securities was made in reliance upon Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving a public offering. The holders of the securities described above
acquired them for their own account and not with a view to any distribution
thereof to the public. The warrants bear legends stating that they may not be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
II-3
<PAGE>
c. OPTIONS
Prior to January 1997, the Company issued options to purchase a total of
227,000 shares of Common Stock to certain employees and affiliates. Information
concerning such options is as follows:
<TABLE>
<CAPTION>
Date of No. of Exercise Price
Grant Options Issued To Per Share
-------- -------- ------------------ --------------
<S> <C> <C> <C>
01/02/95 100,000 L. Cade Havard $0.004
09/22/95 12,500 Scott Vu 0.004
12/07/95 2,500 Derek Dzung Pham 0.004
02/15/96 15,000 Kip Altman 0.004
02/20/96 7,500 Marsha Wilcox 0.004
04/04/96 2,000 Dennis Bissonnette 0.004
05/28/96 2,500 Lyndel McGee 0.004
06/96 25,000 Michael Eckstein 0.400
06/12/96 6,250 Marsha Wilcox 5.000
06/15/96 11,250 Dan Doughty 0.004
06/17/96 11,250 Mark Roden 0.004
07/01/96 11,250 Robert Bonomi 0.004
07/01/96 7,500 Tammy Newman 0.004
08/01/96 12,500 Julie Krueger 0.004
</TABLE>
Each of the foregoing options was granted pursuant to the authority of the
Board of Directors of the Company, or its predecessors, and are or were subject
to a written option agreement between the Company, or its predecessors, and the
respective option holder. With regard to the issuances of the options discussed
above, the Company, or its predecessor, relied upon Rule 701 under the
Securities Act for an exemption from applicable registrant requirements, as at
the time the options were granted neither the Company nor its predecessors were
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended.
During Fiscal 1997, the company issued options to purchase a total of
330,750 shares of Common Stock to certain employees and affiliates. Information
concerning such options is as follows:
<TABLE>
<CAPTION>
Date of No. of Exercise Price
Grant Options Issued To Per Share
-------- ------- ---------------- --------------
<S> <C> <C> <C>
02/24/97 100,000 L. Cade Havard $5.00
03/01/97 62,500 Ann McDearmon 5.00
06/01/97 2,500 Kelly McDonald 6.00
06/01/97 3,250 Edward Bollinger 6.00
06/02/97 12,500 Lloyd Roberts 6.00
10/14/97 50,000 W. Mack Goforth 4.25
</TABLE>
The issuance of the above securities was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving a public offering. The holders of the securities described above
acquired them for their own account and not with a view to any distribution
thereof to the public. The securities bear legends stating that they may not be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
II-4
<PAGE>
Since January 1998, the Company has issued options to purchase a total of
554,398 shares of common stock to certain employees of the Company. Information
concerning such options is as follows:
<TABLE>
<CAPTION>
Date of No. of Exercise Price
Grant Options Issued To Per Share
-------- ------- ----------------- --------------
<S> <C> <C> <C>
03/31/98 50,000 W. Mack Goforth $1.00
03/31/98 50,000 Timothy P. Powell 1.00
03/31/98 454,398 Steven K. Arnold 0.52
</TABLE>
The Issuance of the above securities was made in reliance upon
section 4(2) of the securities act, which provides an exemption for transactions
not involving a public offering. The holders of the securities described above
acquired them for their own account and not with a view to any distribution
thereof to the public. The securities bear legends stating that they may not be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirements.
d. EXERCISE OF OPTIONS
Since January 1996, option holders have exercised their right to purchase
a total of 122,000 shares of Common Stock. Information concerning the exercise
of such options and the issuance of shares thereunder is as follows:
<TABLE>
<CAPTION>
Date of No. of
Exercise Options Issued To
-------- ------- ---------------
<S> <C> <C>
01/02/96 25,000 L. Cade Havard
04/30/96 2,083 Scott Vu
04/30/96 2,000 Dennis Bissonnette
01/31/97 1,250 Lyndel McGee
02/20/97 2,500 Marsha Wilcox
02/20/97 1,250 Derek Dzung Pham
02/20/97 2,083 Scott Vu
06/30/97 3,750 Mark Roden
06/30/97 3,750 Don Doughty
07/15/97 2,500 Tammy Newman
07/15/97 3,750 Robert Bonomi
08/15/97 1,250 Lyndel McGee
08/18/97 4,167 Julie Krueger
10/01/97 25,000 Michael Eckstein
10/01/97 7,500 Mark Roden
01/05/98 5,000 Tammy Newman
01/09/98 8,334 Julie Krueger
02/23/98 7,500 Robert Bonomi
04/22/98 8,333 Scott Vu
04/22/98 5,000 Kip Altman
</TABLE>
The issuance of the above securities was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving a public offering. The holders of the securities described above
were acquired by them for their own account and not with a view to any
distribution thereof to the public. The securities bear legends stating that
they may not be offered, sold or transferred other than pursuant to an effective
registration statement under the Securities Act or an exemption from such
registration requirements.
II-5
<PAGE>
E. OTHER ISSUANCES
To securitize an indebtedness, the Company issued to TDC Partners,
Inc. options to acquire 28,333 shares of Common Stock at an exercise price of
$6.00 per share. The options expire on May 19, 1998. As of June 30, 1998, none
of the options has been exercised.
The issuance of the above securities was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving a public offering. The holders of the securities
described above, if acquired, shall have acquired same for their own account
and not with a view to any distribution thereof to the public.
ITEM 27. EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ----------- --------------------------------------------------------------------------
<S> <C>
2.1*** Agreement and Plan of Merger dated as of May 1, 1996, by and
among the Company and Electronic Transmission Corporation.
3.1*** Articles of Incorporation of the Company, dated September 5,
1986.
3.2*** Articles of Amendment to the Articles of Incorporation of the
Company, dated March 26, 1996.
3.3*** Bylaws of the Company, dated September 5, 1986.
3.4*** Form of Certificate of Incorporation of the Company, as continued
and domesticated into the State of Delaware
3.5*** Form of Bylaws of the Company, as continued and domesticated into
the State of Delaware.
3.6** Certificate of Amendment of Certificate of Incorporation of the
Company, dated February 25, 1998.
3.7* Certificate of Amendment of Certificate of Incorporation of the
Company, dated June 16, 1998.
4.1*** Specimen of Common Stock Certificate.
5.1+ Opinion of Jackson Walker L.L.P. regarding the legality of the
securities being registered.
9.1*** Voting Trust Agreement, dated January 26, 1995, between Sterling
National Corporation and holders of Sterling Options.
9.2**** Voting Agreement, dated December 17, 1997, between L. Cade
Havard, Anneal O. Havard, Doug Havard, Amanda Havard, Sterling
National Corporation, Sterling National Trust, Hannah Family
Trust, Michael Eckstein, Special Situations Private Equity Fund,
L.P. and Special Situations Cayman Fund, L.P.
10.1*** Bill of Sale, dated effective January 1, 1995, by and between
Electronic Transmission Corporation, a Texas 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, a Texas corporation, and Wal-Mart
Stores, Inc.
10.3*** Equipment Lease and Stock Option Agreement, effective April 23,
1996, by and between Electronic Transmission Corporation, a Texas
corporation, and Ironwood Leasing Limited.
<PAGE>
Exhibit
Number Description of Exhibits
- ----------- --------------------------------------------------------------------------
10.4*** Letter Agreement, dated June 20, 1996, between Electronic
Transmission Corporation, a Texas 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 Company by Electronic
Transmission Corporation, a Texas corporation.
10.6*** Staff Leasing Services Agreement, dated effective December 15,
1995, by and between Network Employers Group, Inc. and Electronic
Transmission Corporation, a Texas corporation.
10.7*** Employment and Settlement Agreement, dated January 2, 1995,
between Electronic Transmission Corporation, a Texas corporation,
and L. Cade Havard.
10.8*** Employment and Settlement Agreement, dated December 4, 1995,
between Electronic Transmission Corporation, a Texas corporation,
and Elaine Boze.
10.9*** Employment and Settlement Agreement, dated March 1, 1995, between
Electronic Transmission Corporation, a Texas corporation, and
Timothy P. Powell.
10.10*** Employment Agreement, dated May 1, 1996, between Electronic
Transmission Corporation, a Texas corporation, and Ann C.
McDearmon.
10.11*** Employment Agreement, dated April 1, 1996, between Electronic
Transmission Corporation, a Texas corporation, and Louann Smith.
10.12*** Settlement and Employment Agreement, dated May 1, 1996, between
Electronic Transmission Corporation, a Texas corporation, and Roy
W. Mers.
10.13*** Office Lease, dated January 5, 1995, by and between Natron
Limited Partnership and Electronic Transmission Corporation, a
Texas corporation,, including amendments thereto.
10.14*** Agreement for Processing and Repricing Medical Claims, effective
September 1, 1996, by and between Electronic Transmission
Corporation, a Texas corporation, and Wal-Mart Stores, Inc.
10.15***** Contract of Sale, dated April 1, 1997, between L. Cade Havard and
the Company as to the sale of the business of Electra-Net, L.C.
to the Company.
10.16**** Securities Purchase Agreement, dated December 17, 1997, by and
among Special Situations Private Equity Fund, L.P., Special
Situations Cayman Fund, L.P. and the Company (schedules and
exhibits have been omitted).
10.17**** Amended and Restated Employment and Settlement Agreement, dated
December 17, 1997, by and between L. Cade Havard and the Company.
10.18** Employment and Settlement Agreement, dated October 14, 1997, by
and between W. Mack Goforth and the Company.
10.19** Amended and Restated Employment and Settlement Agreement, dated
March 1, 1997, by and between Ann C. McDearmon and the Company.
10.20** Severance Agreement and General Release, dated May 2, 1997, by
and between Elaine Boze and the Company.
10.21** Processing Agreement, dated November 15, 1995, between Imaged
Data, Inc. and the Company.
10.22** License and Maintenance Agreement, dated July 7, 1997, by and
between FACTS Services, Inc. and the Company.
<PAGE>
Exhibit
Number Description of Exhibits
- ----------- --------------------------------------------------------------------------
10.23* Processing Agreement dated May 1, 1998, between Imaged Data, Inc.
and the Company, and related Promissory Note payable to Imaged
Data, Inc..
10.24++ Consulting and Employment Agreement, dated May 1, 1998, by and
between Steven K. Arnold and the Company.
10.25* Promissory Note, dated June 25, 1998, in the principal amount of
$100,000 executed in favor of David O. Hannah by the Company.
10.26* ETC Stock Purchase Agreement, dated June 25, 1998, by and between
David O. Hannah and the Company.
10.27* Promissory Note, dated June 29, 1998, in the principal amount of
$20,000 executed in favor of Scott Stewart by the Company.
21.1** List of Subsidiaries.
23.1+ Consent of Jackson Walker L.L.P. (set forth in Exhibit 5.1)
23.2* Consent of Simonton, Kutac & Barnidge, L.L.P. as to the financial
statements of the Company.
24.1* Power of Attorney. (See page II-9 of the Registration
Statement).
27.1* Financial Data Schedule
</TABLE>
- ----------------------------------
+ To be filed by amendment.
* Filed herewith.
** Previously filed as an Exhibit to the Company's Registration Statement on
Form SB-2, dated March 16, 1998 (SEC File No. 333-48001).
*** Previously filed as an Exhibit to the Company's Registration Statement on
Form S-4, as declared effective on January 7, 1997 (SEC File
Number 333-07069), and incorporated herein by this reference..
**** Previously filed as an Exhibit to the Company's Current Report on
Form 8-KSB, dated December 29, 1997, and incorporated herein by this
reference.
***** Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1997, and incorporated
herein by this reference.
++ Previously filed as an Exhibits to the Company's Current Report on
Form 8-KSB dated June 10, 1998.
ITEM 28. UNDERTAKINGS.
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
<PAGE>
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Company under the Securities Exchange Act of 1934.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the company pursuant to the provisions described under
item 17 above, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the securities act and is, therefore, unenforceable. in
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
securities act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that for purposes of
determining any liability under the Securities Act, (i) the information
omitted from the Prospectus filed as part of this Registration Statement, as
permitted by Rule 430A of the Securities Act and to be contained in the form
of prospectus to be filed by the Company pursuant to Rule 424(b)(1) or (4) OR
497(h) under the Securities Act, shall be deemed to be incorporated by
reference into this Registration Statement at the time it is declared
effective, and (ii) each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Amendment No. 1 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on June 30, 1998.
ELECTRONIC TRANSMISSION CORPORATION
By: /s/ Steven K. Arnold
---------------------------------
Steven K. Arnold, Chairman
of the Board and Chief
Executive Officer
POWER OF ATTORNEY
We, the below signed directors and officers of Electronic Transmission
Corporation, do hereby constitute and appoint Steven K. Arnold, with full
power of substitution our true and lawful attorney and agent, to do any and
all acts and things in our names in the capacities indicated which Steven K.
Arnold may deem necessary or advisable to enable the Company to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with
this Registration Statement, including specifically, but not limited to, the
power and authority to sign for us, or any of us in our names in the
capacities indicated and any and all amendments (including post-effective
amendments) to this Registration Statement; and we do hereby ratify and
confirm all that Steven K. Arnold shall do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement on Form SB-2 has been signed by
the following persons on behalf of the Company and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Steven K. Arnold Chairman of the Board and Chief June 30, 1998
- --------------------------------- Executive Officer
Steven K. Arnold
/s/ W. Mack Goforth Chief Financial Officer June 30, 1998
- ---------------------------------
W. Mack Goforth
/s/ Timothy P. Powell Executive Vice President -- Data June 30, 1998
- ---------------------------------
Timothy P. Powell Services and Director
/s/ Dennis Barnes Director June 30, 1998
- ---------------------------------
Dennis Barnes
/s/ Michael Eckstein Director June 30, 1998
- ---------------------------------
Michael Eckstein
/s/ David O. Hannah Director June 30, 1998
- ---------------------------------
David O. Hannah
/s/ Scott Stewart Director June 30, 1998
- ---------------------------------
Scott Stewart
By: /s/ Steven K. Arnold June 30, 1998
- ---------------------------------
Steven K. Arnold, Attorney-in-fact
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------
<S> <C>
2.1*** Agreement and Plan of Merger dated as of May 1, 1996, by and among
the Company and Electronic Transmission Corporation.
3.1*** Articles of Incorporation of the Company, dated September 5, 1986.
3.2*** Articles of Amendment to the Articles of Incorporation of the
Company, dated March 26, 1996.
3.3*** Bylaws of the Company, dated September 5, 1986.
3.4*** Form of Certificate of Incorporation of the Company, as continued
and domesticated into the State of Delaware
3.5*** Form of Bylaws of the Company, as continued and domesticated into
the State of Delaware.
3.6** Certificate of Amendment of Certificate of Incorporation of the
Company, dated February 25, 1998.
3.7* Certificate of Amendment of Certificate of Incorporation of the
Company, dated June 16, 1998.
4.1*** Specimen of Common Stock Certificate.
5.1+ Opinion of Jackson Walker L.L.P. regarding the legality of the
securities being registered.
9.1*** Voting Trust Agreement, dated January 26, 1995, between Sterling
National Corporation and holders of Sterling Options.
9.2**** Voting Agreement, dated December 17, 1997, between L. Cade Havard,
Anneal O. Havard, Doug Havard, Amanda Havard, Sterling National
Corporation, Sterling National Trust, Hannah Family Trust, Michael
Eckstein, Special Situations Private Equity Fund, L.P. and Special
Situations Cayman Fund, L.P.
10.1*** Bill of Sale, dated effective January 1, 1995, by and between
Electronic Transmission Corporation, a Texas 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, a Texas Corporation, and Wal-Mart
Stores, Inc.
10.3*** Equipment Lease and Stock Option Agreement, effective April 23,
1996, by and between Electronic Transmission Corporation, a Texas
Corporation, and Ironwood Leasing Limited.
10.4*** Letter Agreement, dated June 20, 1996, between Electronic
Transmission Corporation, a Texas 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 Company by Electronic
Transmission Corporation, a Texas Corporation.
10.6*** Staff Leasing Services Agreement, dated effective December 15,
1995, by and between Network Employers Group, Inc. and Electronic
Transmission Corporation, a Texas Corporation.
10.7*** Employment and Settlement Agreement, dated January 2, 1995,
between Electronic Transmission Corporation, a Texas Corporation,
and L. Cade Havard.
10.8*** Employment and Settlement Agreement, dated December 4, 1995,
between Electronic Transmission Corporation, a Texas Corporation,
and Elaine Boze.
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- ------------------------------------------------------------------
10.9*** Employment and Settlement Agreement, dated March 1, 1995, between
Electronic Transmission Corporation, a Texas Corporation, and
Timothy P. Powell.
10.10*** Employment Agreement, dated May 1, 1996, between Electronic
Transmission Corporation, a Texas Corporation, and Ann C.
Mcdearmon.
10.11*** Employment Agreement, dated April 1, 1996, between Electronic
Transmission Corporation, a Texas Corporation, and Louann Smith.
10.12*** Settlement and Employment Agreement, dated May 1, 1996, between
Electronic Transmission Corporation, a Texas Corporation, and Roy
W. Mers.
10.13*** Office Lease, dated January 5, 1995, by and between Natron Limited
Partnership and Electronic Transmission Corporation, a Texas
corporation, including amendments thereto.
10.14*** Agreement for Processing and Repricing Medical Claims, effective
September 1, 1996, by and between Electronic transmission
corporation, a Texas Corporation, and Wal-Mart Stores, Inc.
10.15***** Contract of Sale, dated April 1, 1997, between L. Cade Havard and
the Company as to the sale of the business of Electra-Net, L.C. to
the Company.
10.16**** Securities Purchase Agreement, dated December 17, 1997, by and
among Special Situations Private Equity Fund, L.P., Special
Situations Cayman Fund, L.P. and the Company (schedules and
exhibits have been omitted).
10.17**** Amended and Restated Employment and Settlement Agreement, dated
December 17, 1997, by and between L. Cade Havard and the Company.
10.18** Employment and Settlement Agreement, dated October 14, 1997, by
and between W. Mack Goforth and the Company.
10.19** Amended and Restated Employment and Settlement Agreement, dated
March 1, 1997, by and between Ann C. Mcdearmon and the Company.
10.20** Severance Agreement and General Release, dated May 2, 1997, by and
between Elaine Boze and the Company.
10.21** Processing Agreement, dated November 15, 1995, between Imaged
Data, Inc. and the Company.
10.22** License and Maintenance Agreement, dated July 7, 1997, by and
between Facts Services, Inc. and the Company.
10.23* Processing Agreement dated May 1, 1998, between Imaged Data, Inc.
and the Company, and related Promissory Note payable to Imaged
Data, Inc..
10.24++ Consulting and Employment Agreement, dated May 1, 1998, by and
between Steven K. Arnold and the Company.
10.25* Promissory Note, dated June 25, 1998, in the principal amount of
$100,000 executed in favor of David O. Hannah by the Company.
10.26* ETC Stock Purchase Agreement, dated June 25, 1998, by and between
David O. Hannah and the Company.
10.27* Promissory Note, dated June 29, 1998, in the principal amount of
$20,000 executed in favor of Scott Stewart by the Company.
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- ------------------------------------------------------------------
21.1** List of Subsidiaries.
23.1+ Consent of Jackson Walker L.L.P. (set forth in Exhibit 5.1)
23.2* Consent of Simonton, Kutac & Barnidge, L.L.P. as to the financial
statements of the Company.
24.1* Power of Attorney. (see page II-9 of the Registration Statement).
27.1* Financial Data Schedule
</TABLE>
- --------------------------
+ To be filed by amendment.
* Filed herewith.
** Previously filed as an Exhibit to the Company's Registration Statement
on Form SB-2, dated March 16, 1998 (SEC File No. 333-48001).
*** Previously filed as an Exhibit to the Company's Registration Statement
on Form S-4, as declared effective on January 7, 1997 (SEC File Number
333-07069), and incorporated herein by this reference..
**** Previously filed as an Exhibit to the Company's Current Report on Form
8-KSB, dated December 29, 1997, and incorporated herein by this
reference.
***** Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1997, and incorporated
herein by this reference.
++ Previously filed as an Exhibits to the Company's Current Report on
Form 8-KSB dated June 10, 1998.
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "ELECTRONIC TRANSMISSION CORPORATION", FILED IN THIS OFFICE ON
THE SIXTEENTH DAY OF JUNE, A.D. 1998, AT 2 O'CLOCK P.M.
AND I DO HEREBY FURTHER CERTIFY THAT THE EFFECTIVE DATE OF THE AFORESAID
CERTIFICATE OF AMENDMENT IS THE TWENTY-FOURTH DAY OF JUNE, A.D. 1998.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
[SEAL] -------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2709640 8100 AUTHENTICATION: 9141638
DATE: 06-16-98
981232120
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:00 PM 06/16/1998
981232120 - 2709640
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
ELECTRONIC TRANSMISSION CORPORATION (the "Corporation"), a corporation
organized and existing under and by virtue of the Delaware General Corporation
Law, DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Electronic Transmission
Corporation.
SECOND: The first paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended in its entirety to read as
follows:
"FOURTH. The Corporation shall have authority to issue two
classes of shares to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the Corporation
is authorized to issue is Twenty-Two Million (22,000,000) shares of
which Twenty Million (20,000,000) shall be Common Stock and Two
Million (2,000,000) shall be Preferred Stock. Each share of Common
Stock shall have a par value of $0.001, and each share of Preferred
Stock shall have a par value of $1.00. Upon the amendment of this
Article, every four (4) issued and outstanding shares of Common
Stock $0.001 par value per share ("Old Common Stock"), shall be
automatically and without any action on the part of the stockholders
converted into reconstituted as one (1) share of Common Stock $0.001
par value per share ("New Common Stock"), subject to the treatment
of fractional interests as described below. Each holder of a
certificate or certificates which immediately prior to the Amendment
of the Certificate of Incorporation becoming effective, pursuant to
the General Corporation Law of the State of Delaware (the "Effective
Date"), represented outstanding shares of Old Common Stock shall be
entitled to receive a certificate for the number of shares of New
Common Stock they own by presenting their old certificate(s) to the
Corporation's transfer agent for cancellation and exchange.
No scrip or fractional certificates will be issued. In lieu of
fractional shares, the Corporation will issue one additional share
of New Common Stock, or cash if it so elects. If the Corporation
elects to make a cash payment in lieu of fractional shares, such
payment will be based on the average closing price of the New Common
Stock on the OTC Bulletin Board of the Nasdac Stock Market, Inc. for
the five trading days preceding the Effective Date. Such cash
payment if elected by the Corporation, would be made upon surrender
to the Corporation's transfer agent of stock certificates
representing a fractional share interest. The ownership of a
fractional interest will not give the holder thereof any voting,
dividend of other rights except the right to receive payment
therefor as described herein."
THIRD: This Certificate of Amendment of Certificate of Incorporation
shall be effective as of June 24, 1998.
FOURTH: This Certificate of Amendment of Certificate of Incorporation
was duly adopted by the requisite vote of the Board of Directors of the
Corporation.
-1-
<PAGE>
FIFTH: That at a special meeting of stockholders held on February 25,
1998, in accordance with Section 222 of the General Corporation Law of the
State of Delaware, the necessary number of shares as required by statute were
voted in favor the amendment.
SIXTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its duly authorized officers this 15th day of June, 1998.
ELECTRONIC TRANSMISSION CORPORATION
By: /s/ STEVEN K. ARNOLD
---------------------------------------------
Steven K. Arnold, Chairman of the Board and
Chief Executive Officer
ATTEST:
By: /s/ LOUANN C. SMITH
----------------------------
Louann C. Smith Secretary
-2-
<PAGE>
EXHIBIT 10.23
PROCESSING AGREEMENT
This Processing Agreement is effective as of May 1, 1998 (the
"Effective Date"), between Imaged Data, Inc., a Texas corporation ("IDI"),
having an address of 3150 Premier Drive, Suite 120, Irving, Texas 75063 and
the facsimile number 972-751-7708, and Electronic Transmission Corporation a
Delaware corporation ("ETC"), having an address of 5025 Arapaho, Suite 515,
Dallas, Texas 75248, and the facsimile number 972-980-0929.
ETC is in the business of receiving, processing, editing and
transmitting medical claims of all types electronically to organizations that
reprice, adjudicate, and otherwise pay these claims (collectively, "Medical
Payors"). In order for ETC to pursue more clients and build its claims
network between payors and managed care organizations, ETC must have a
resource that can convert paper claims and images into electronic data by
extracting the data from various claim forms. IDI is in the business of
imaging forms, including medical claims, and extracting the data from these
claims by means of a technology known in the computer industry as OCR
(Optical Character Recognition). Both ETC and IDI acknowledge that all claims
received by ETC and/or IDI cannot be processed using OCR and same will
require manual data entry.
Both ETC and IDI acknowledge that the accuracy of the data extracted is
the single most important part of the claim conversion process and are thus
dedicated to accuracy above all else. ETC wishes to engage IDI to convert
paper medical claims and images of medical claims and to extract the data
from these claims accurately from machine-printed HCFA 1500 and UB-92 forms.
IDI agrees to accept paper claims or scanned images from ETC or its clients
and to extract as much of the data as is required by any given client of ETC.
The information extracted will be checked for accuracy and then transmitted
to ETC on a timely basis, in a format agreed to by both parties. The time
allowed to process any given group of claims will be determined by the need
of the clients and will be approved in advance by IDI. ETC will pay IDI $0.20
per claim sheet to image printed claim forms or to accept an image of a claim
form and extract the data and transmit the data to ETC for further
processing. Subsequent pricing arrangements will be submitted to IDI in
writing by ETC and approved by IDI in advance and will be subject to the
terms and conditions of this Agreement.
ETC will pay to IDI the amount of $8,000.00 each month, due no later
than the fifteenth day of that month, to represent fixed-fee payment in
advance for the first 40,000 claims processed by IDI. This monthly advance
amount shall be due from ETC without any further notice or invoice needed
from IDI. At the end of each month, IDI will reconcile the actual number of
claims processed during that month against the 40,000 claim budget, and shall
issue an invoice to ETC which wall show either: (a) if the actual number of
claims processed is less than 40,000, a credit due to ETC for $0.20
multiplied by the difference between 40,000 and the actual number of claims
processed that month, which credit may be applied by ETC against the
following month's fixed-fee payment in advance; or (b) if the actual number
of claims processed is greater than 40,000, a balance due from ETC to IDI for
$0.20 multiplied by the difference between 40,000 and the actual number of
claims processed that month. If the end-of-the-month invoice reflects a
balance due from ETC to IDI, ETC will pay IDI the full amount of the invoice
within 30 days of the date of the invoice,
-1-
<PAGE>
without regard to any payment arrangements between ETC and its clients. Any
fixed-fee payment in advance which remains unpaid after the fifteenth of the
month, and/or any invoice, or any portion thereof, which remains unpaid after
30 days, will constitute a breach of this Agreement, and will entitle IDI, in
addition to any other remedies set forth herein, to interest on the unpaid
amount at the rate of prime as of the date of the invoice. For any month in
which interest is due, "prime" shall be defined for that entire month as the
prime rate of interest published in the Wall Street Journal on the first
business day of that month.
ETC and IDI agree that, during the term of this Agreement, ETC will be
the exclusive agent for medical claims for IDI. For all medical forms
processed, imaged, archived, or otherwise processed by IDI for any customer
other than ETC, IDI will pay to ETC a royalty of five percent (5%) of the
gross revenue paid to IDI. The parties expressly agree that ETC's entitlement
to this royalty will end with the termination of this Agreement.
This Agreement shall be effective for a term of one year following the
Effective Date (the "Term"). Such Term shall be automatically extended for
successive one year periods unless IDI or ETC gives at least 60 days advance
written notice to the other party prior to the annual anniversary of the
Effective Date that the Agreement will not be so extended. This Agreement may
only be terminated by either party hereto as follows. WITHOUT CAUSE: Either
party may give notice of non-renewal to the other party as provided herein,
and the Agreement will terminate automatically on the annual anniversary of
its Effective Date. WITH CAUSE: (a) If any party breaches any provision of
this Agreement, the non-breaching party, after written notice of breach and
upon failure of the breaching party to cure the breach within 10 business
days after the notice of breach, may immediately terminate this Agreement; or
(b) If either party files for bankruptcy, becomes insolvent, or makes an
assignment for the benefit of any creditor, the other party may immediately
terminate this Agreement. Any indulgence, forbearance, or delay by the party
entitled to terminate the Agreement shall not constitute a waiver of that
party's right to terminate the Agreement. A party's termination of this
Agreement shall not effect that party's right to enforce the terms of the
Agreement up to the time of termination, including but not limited to
recovery of payment for any services rendered thereunder.
BREACH. In addition to any other rights hereunder, if any party breaches
any provision of this Agreement, the non-breaching party shall be entitled to
institute a lawsuit to recover its damages caused by the breach, plus
reasonable attorney's fees and costs. However, the parties agree that the
liability for any error in the processing of any medical claim shall be
limited to the cost paid by or due from ETC to IDI for processing the
disputed claim. At its sole option, ETC may seek to have IDI re-process the
disputed claim at no additional charge hereunder, in lieu of seeking damages
hereunder. In any event, neither party shall be entitled to exemplary,
special, or consequential damages, or future lost profits, alleged to have
been caused by the other party's breach.
All notices hereunder shall be in writing and delivered personally or
sent by: the U.S. Mail; any nationally-recognized express package delivery
service (such as Federal Express, UPS, Airborne, etc.); facsimile with
written confirmation of receipt by the other party; or any recognized
-2-
<PAGE>
local courier service with written confirmation of receipt by the other
party, to the address set forth above or to any other address as any party
may hereafter set for itself in writing to the other party.
This Agreement constitutes the entire agreement between the parties, and
supersedes and replaces any and all prior, contemporaneous, or existing
agreements, understandings, or arrangements between the parties, including
but not limited to that Processing Agreement dated November 15, 1995 (the
"Prior Processing Agreement"), except as follows: (a) that Promissory Note
given to IDI by ETC, dated May 4, 1998, shall remain in full force and
effect and is incorporated herein by reference thereto; and (b) IDI's invoice
to ETC for all work performed in April, 1998, under the Prior Processing
Agreement shall survive and shall be subject to the terms and conditions of
this Agreement, including the payment terms for end-of-the-month invoices.
This Agreement may be amended, waived, or supplemented in whole or in
part only by written instrument executed by both parties hereto. No party may
assign this Agreement or its rights or responsibilities hereunder without the
advance written consent of the other party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, heirs, administrators, and assigns,
and any other entity in which they have or may acquire a monetary interest.
This Agreement may be executed by the parties in multiple counterparts,
including by facsimile, each of which shall be an original but all of which
together shall constitute a single instrument. This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
duly executed and delivered by its duly authorized representatives, on and
effective as of the Effective Date.
ELECTRONIC TRANSMISSION IMAGED DATA, INC.
CORPORATION
By: /s/ TIM POWELL By: /s/ EDWARD S. ARNING
------------------------------ -------------------------------------
(Signature Of Representative) (Signature of Representative)
Name: /s/ TIM POWELL Name: /s/ EDWARD S. ARNING
----------------------------- -----------------------------------
(Typed or Printed Name (Typed or Printed Name
of Representative) of Representative)
Its: Executive Vice President Its: President
----------------------------- -----------------------------------
(Title of Representative) (Title of Representative)
-3-
<PAGE>
PROMISSORY NOTE
$20,757.70 County of Dallas
4-May-98 State of Texas
For value received, Electronic Transmission Corporation (ETC)
hereinafter referred to as "Maker" promises to pay to the order of IMAGED
DATA, INC. (IDI) located at 3150 Premier Dr. Suite 120, Irving, TX, Dallas
County, hereinafter referred to as "Payee," the principal sum of Twenty
Thousand Dollars ($20,757.70), (reflecting processing services Payee
completed on behalf of Maker during the first three months of 1998) with
interest accruing at a rate of 9% per annum. This note is to be paid in 6
equal installments of $3,551 payable on the first day of each month starting
on the 1st day of June, 1998.
Demand, presentment, protest, notice of protest and notice of dishonor
are hereby waived.
This Note shall be governed by and construed in accordance with the laws
of the State of Texas. This Promissory Note shall be non-negotiable, and
shall remain exclusively in the hands of Payee, or Payee's successor,
assigns, heirs, or beneficiaries.
On the happening of any of the following events, each of which shall
constitute an Event of Default under this Note, all liabilities of Maker to
Payee shall be accelerated, and become immediately due and payable, at the
option of Payee:
1) failure of Maker to perform under the Processing Agreement executed on or
about this date;
2) filing of any petition in bankruptcy by or against Maker;
3) application for appointment of a receiver for, making of a general
assignment for the benefit of creditors by, or insolvency of Maker; or
4) determination by Payee that a material adverse change has occurred in the
financial condition of Maker.
On occurrence of any such event or at any time thereafter, payee shall
have the remedies to which Payee would be entitled under the Uniform
Commercial Code of the State of Texas. Payee may waive any default before or
after default has been declared without impairing its right to declare
subsequent default under this Note, this right being a continuing one.
Maker waives protest to this Note. If this Note is not paid as due,
Maker agrees to pay all costs and expenses of collection, including
reasonable attorney's
<PAGE>
fees. Payee shall in no event be liable to any party for failure to collect
this Note, in whole or in part.
Executed under hand and seal with 11th day of May, 1998.
MAKER:
Electronic Transmission Corporation
By:
/s/ TIM POWELL
------------------------------------
Name(print) Tim Powell
-------------------------
Title: Executive Vice President
------------------------------
------------------------------------
(Corporate Seal)
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
DALLAS, TEXAS
JUNE 25, 1998
Promissory Note
Due December 25, 1998
Electronic Transmission Corporation, a Delaware corporation (the
"Company"), for value received, promises to pay to David Hannah (the
"Lender") or registered assigns, the sum of $100,000 on December 25,1998 (the
"Maturity Date"), upon presentation and surrender of this Promissory Note at
the office of the Company in Dallas, Texas. Interest owed to the Lender of
this Promissory Note will be pre-paid in cash equivalent value of 100,000
shares of Common Stock, par value $.001 per share (the "Common Stock").
Payment of principal and interest shall be made at the offices of the Company
and shall be mailed to the registered owner or owners hereof at the address
appearing on the books of the Company.
1. SECURITY. For valuable consideration, the Company grants to Lender
a security interest in the Collateral to secure the indebtedness.
2. COLLATERAL. The word "Collateral" means the following described
property of the Company, whether now owned or hereafter acquired, whether now
existing or hereafter arising and wherever located:
All assets for ETC/Electra-Net, ETC and ETC Administrative
Services, Inc.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
a. All accessions, accessories, increases, and additions to and all
replacements of and substitutions for any property described above.
b. All products and produce of any of the property described in this
Collateral section.
c. All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or
other disposition of any of the property described in this Collateral
section.
d. All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the. property
described in this Collateral section.
e. All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing,
photograph, microfilm, microfiche, or electronic media, together with
all of the Company's right, title, and interest in and to all
computer software required to utilize, create, maintain, and process
any such records or data on electronic media.
3. INTEREST. Interest on this indebtedness shall be pre-paid and shall
be in the form of Common Stock of the Company. The Company shall issue
100,000 shares of
<PAGE>
Common Stock to Lender in full payment of the interest due for this
indebtedness. The shares of Common Stock issued shall be subject to the same
equitable adjustments described under Section 6 below.
4. CONVERSION. The Lender may, at any time prior to the maturity
hereof, convert the principal amount of this Promissory Note into Common
Stock of the Company at the conversion ratio of $.50 (the "Conversion Price")
of principal for one share of Common Stock; provided that if the Company has
called this Promissory Note for redemption, the right to convert shall
terminate at the close of business on the fifth business day prior to the
date fixed as the date for the redemption.
To convert this Promissory Note, the Lender must surrender same at the
office of the Company, accompanied by a written notice of conversion and by a
written instrument of transfer in a form reasonably satisfactory to the
Company, properly completed and executed by the registered Lender or Lenders
hereof or a duly authorized attorney.
5. FRACTIONAL SHARES. In lieu of issuing any fraction of a share upon
the conversion of this Promissory Note, the Company shall pay to the Lender
hereof, for any fraction of a share otherwise issuable upon the conversion,
cash equal to the same fraction of the then closing bid price of the Common
Stock quoted on The OTC Electronic Bulletin Board or any other national or
regional exchange on which the Company's securities are traded on the trading
day preceding such conversion.
6. EQUITABLE ADJUSTMENTS AGREEMENTS. The Lender shall be subject to
equitable adjustment to reflect any stock dividend, stock split, reverse
stock splits, share combination, exchange of shares, recapitalization,
merger, consolidation, separation, reorganization, liquidation or similar
transaction of or in any manner involving the Company.
7. DEFAULT. If any of the following events occur ("Event of Default"),
the entire unpaid principal amount of this Promissory Note shall immediately
be due and payable:
a. The Company fails to pay the principal of this Promissory Note at its
maturity.
b. The Company commences any voluntary proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution, or liquidation law or statute, of any
jurisdiction, whether now or subsequently in effect; or the Company
is adjudicated insolvent or bankrupt by a court of competent
jurisdiction; or the Company petitions or applies for, acquiesces in,
or consents to, the appointment of any receiver or trustee of the
Company or for all or substantially all of its property or assets; or
the Company makes an assignment for the benefit of its creditors; or
the Company admits in writing its inability to p# its debts as they
mature; or
c. There is commenced against the Company any proceeding relating to the
Company under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, receivership, dissolution, or
liquidation law or statute, of any jurisdiction, whether now or
subsequently in effect, and the proceeding remains undismissed for
a period of sixty (60) days or the
<PAGE>
Company by any act indicates its consent to, approval of, or
acquiescence in, the proceedings; or a receiver or trustee is
appointed for the Company or for all or substantially all of its
property or assets, and the receivership or trusteeship remains
undischarged for a period of sixty (60) days; or a warrant of
attachment, execution or similar process is issued against any
substantial part of the property or assets of the Company, and
the warrant or similar process is not dismissed or bonded within
sixty (60) days after the levy.
8. COMPANY OBLIGATION. The holder of this Promissory Note shall not
have any recourse for the payment in whole or of any part of the principal of
this Promissory Note against any incorporator, or present or future
stockholder of the Company by virtue of any law, or by the enforcement of any
assessment, or otherwise, or against any officer or director of the Company
by reason of any matter prior to the delivery of this Promissory Note, or
against any present or future officer or director of the Company. The holder
of this Promissory Note, by the acceptance hereof and as a part of the
consideration for this Promissory Note, expressly agree that the Promissory
Note is an obligation solely of the Company and expressly release all claims
and waive all liability against the foregoing persons in connection with this
Promissory Note, other than claims based on actual fraud.
IN WITNESS WHEREOF, the Company has sided this Promissory Note this 25th
day of June, 1998.
ELECTRONIC TRANSMISSION CORPORATION
By: /s/ Steven K. Arnold
-----------------------------------
Steven K. Arnold, Chairman and
Chief Executive Officer
<PAGE>
Ex. 10.26
ETC STOCK PURCHASE AGREEMENT
This ETC Stock Purchase Agreement (the "Agreement") is effective June
25, 1998 by and between Electronic Transmission Corporation ("ETC"), a
Delaware corporation having principal offices at 5025 Arapaho Road, Suite
501, Dallas, Texas 75248, and David Hannah ("Investor") whose residence is
2079 West Grayson Road, Modesto, California 95358.
ETC hereby agrees to issue and sell Four Hundred Thousand (400,000)
shares of ETC Common Stock (the "Purchased Shares") to Investor, and Investor
hereby subscribes for and purchases the same, for a purchase price of
twenty-five cents ($.25) for each Purchased Share or One Hundred Thousand
Dollars ($100,000.00) for all such Purchased Shares, all on the terms and
conditions set forth herein. Together with this Agreement, Investor is
delivering to ETC immediately available funds, payable to the order of ETC,
in the fall amount of such purchase price for all such Purchased Shares.
Investor will receive a certificate evidencing ownership of all such
Purchased Shares, which will be fully paid, validly issued, and
nonassessable, transferable when issued in accordance with applicable law.
Investor represents and warrants that:
a. Investor has received and carefully read this Agreement and the
materials prepared by ETC regarding the business and status, is
familiar with and understands them, has based Investor's investment
decision on the information contained therein, and has not asked any
questions or requested any materials of ETC which have not been
answered or supplied; and
b. Investor (i) is acquiring the Purchased Shares for Investor's own
account for investment and not with a view to distribution or resale
thereof, (ii) meets the suitability stands for an investment in the
Purchased Shares as set forth in the Securities Act of 1933, all
applicable U.S. state securities laws, and all applicable regulations
under any of the foregoing (collectively the "Securities Laws and
Regulations"), (iii) understands that the Purchased Shares, and the
issuance thereof, have not been registered under the Securities Laws
and Regulations and are not expected to be so registered, (iv) will
not sell or otherwise transfer the Purchased Shares except in
compliance with the Securities Laws and Regulations, and (v) resides
at his address as set forth above.
Any notices hereunder shall be in writing and delivered personally or by U.S.
Mail or recognized courier service, addressed to the respective addresses set
forth above or to such other address for itself as either party may specify
hereunder. This Agreement expresses the complete understanding of the parties
with respect to the subject matter hereof and may be amended only by an
instrument in writing executed by the parties. This Agreement may be executed
in multiple counterparts, each of which shall be an original but all of which
together shall constitute one and the same instrument. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors, representatives, and assigns, and shall be
governed by and construed in accordance with the laws of the State of Texas.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first set forth above.
Investor Electronic Transmission Corporation
/s/ STEPHEN K. ARNOLD
-------------------------- -----------------------------------
David Hannah Stephen K. Arnold
Chairman and CEO
Tax I.D. ###-##-####
Phone: (209) 537-9856 Phone: (972) 980-0900
Facsimile: (209) 537-7155 Facsimile: (972) 980-0929<PAGE>
<PAGE>
EX 10.27
ELECTRONIC TRANSMISSION CORPORATION
DALLAS, TEXAS
JUNE 29, 1998
Promissory Note
Due December 29, 1998
Electronic Transmission Corporation, a Delaware corporation (the
"Company"), for value received, promises to pay to Scott Stewart (the
"Lender") or registered assigns, the sum of $20,000 on December 29, 1998 (the
"Maturity Date"), upon presentation and surrender of this Promissory Note at
the office of the Company in Dallas, Texas. Interest owed to the Lender of
this Promissory Note will be pre-paid in cash equivalent value of 20,000
shares of Common Stock, par value $.001 per share (the "Common Stock").
Payment of principal and interest shall be made at the offices of the Company
and shall be mailed to the registered owner or owners hereof at the address
appearing on the books of the Company.
1. SECURITY. For valuable consideration, the Company grants to Lender
a security interest in the Collateral to secure the indebtedness.
2. COLLATERAL. The word "Collateral" means the following described
property of the Company, whether now owned or hereafter acquired, whether now
existing or hereafter arising and wherever located:
All assets for ETC/Electra-Net, ETC and ETC Administrative
Services, Inc.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter.arising, and
wherever located:
a. All accessions, accessories, increases, and additions to and all
replacements of and substitutions for any property described above.
b. All products and produce of any of the property described in this
Collateral section.
c. All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
d. All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
e. All records and data relating to any of the property described in this
Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of the
Company's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
3. INTEREST. Interest on this indebtedness shall be pre-paid and shall
be in the form of Common Stock of the Company. The Company shall issue
20,000 shares of
<PAGE>
Common Stock to Lender in full payment of the interest due for this
indebtedness. The shares of Common Stock issued shall be subject to the same
equitable adjustments described under Section 6 below.
4. CONVERSION. The Lender may, at any time prior to the maturity
hereof, convert the principal amount of this Promissory Note into Common
Stock of the Company at the conversion ratio of $.50 (the "Conversion Price")
of principal for one share of Common Stock; provided that if the Company has
called this Promissory Note for redemption, the right to convert shall
terminate at the close of business on the fifth business day prior to the
date fixed as the date for the redemption.
To convert this Promissory Note, the Lender must surrender same at the
office of the Company, accompanied by a written notice of conversion and by a
written instrument of transfer in a form reasonably satisfactory to the
Company, properly completed and executed by the registered Lender or Lenders
hereof or a duly authorized attorney.
5. FRACTIONAL SHARES. In lieu of issuing any fraction of a share upon
the conversion of this Promissory Note, the Company shall pay to the Lender
hereof, for any fraction of a share otherwise issuable upon the conversion,
cash equal to the same fraction of the then closing bid price of the Common
Stock quoted on The OTC Electronic Bulletin Board or any other national or
regional exchange on which the Company's securities are traded on the trading
day preceding such conversion.
6. EQUITABLE ADJUSTMENTS AGREEMENTS. The Lender shall be subject to
equitable adjustment to reflect any stock dividend, stock split, reverse stock
splits, share combination, exchange of shares, recapitalization, merger,
consolidation, separation, reorganization, liquidation or similar transaction
of or in any manner involving the Company.
7. DEFAULT. If any of the following events occur ("Event of Default"),
the entire unpaid principal amount of this Promissory Note shall immediately
be due and payable:
a. The Company fails to pay the principal of this Promissory Note at its
maturity.
b. The Company commences any voluntary proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution, or liquidation law or statute, of any
jurisdiction, whether now or subsequently in effect; or the Company is
adjudicated insolvent or bankrupt by a court of competent
jurisdiction; or the Company petitions or applies for, acquiesces in,
or consents to, the appointment of any receiver or trustee of the
Company or for all or substantially all of its property or assets; or
the Company makes an assignment for the benefit of its creditors; or
the Company admits in writing its inability to pay its debts as they
mature; or
c. There is commenced against the Company any proceeding relating to the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, receivership, dissolution, or liquidation law or
statute, of any jurisdiction, whether now or subsequently in effect,
and the proceeding remains undismissed for a period of sixty (60)
days; or the
<PAGE>
Company by any act indicates its consent to, approval of,
or acquiescence in, the proceedings; or a receiver or trustee is
appointed for the Company or for all or substantially all of its
property or assets, and the receivership or trusteeship remains
undischarged for a period of sixty (60) days; or a warrant of
attachment, execution or similar process is issued against any
substantial part of the property or assets of the Company, and the
warrant or similar process is not dismissed or bonded within sixty
(60) days after the levy.
8. COMPANY OBLIGATION. The holder of this Promissory Note shall not
have any recourse for the payment in whole or of any part of the principal of
this Promissory Note against any incorporator, or present or future
stockholder of the Company by virtue any law, or by the enforcement of any
assessment, or otherwise, or against any officer or director of the Company
by reason of any matter prior to the delivery of this Promissory Note, or
against any present or future officer or director of the Company. The holder
of this Promissory Note, by the acceptance hereof and as a part of the
consideration for this Promissory Note, expressly agree that the Promissory
Note is an obligation solely of the Company and expressly release all claims
and waive all liability against the foregoing persons in connection with this
Promissory Note, other than claims based on actual fraud.
IN WITNESS WHEREOF, the Company has signed this Promissory Note this
29th day of June, 1998.
ELECTRONIC TRANSMISSION CORPORATION
By: /s/ STEVEN K. ARNOLD
--------------------------------
Steven K. Arnold, Chairman
and Chief Executive Officer
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our
report dated January 30, 1998, relating to the financial statements of
Electronic Transmission Corporation for the years ended December 31, 1996 and
1997, and the reference of our firm under the captions "EXPERTS" in the
Prospectus.
/s/ Simonton, Kutac & Barnidge, L.L.P.
- ----------------------------------------
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
July 2, 1998
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<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> 3,527
<OTHER-SE> 7,260,344
<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> (0.07)
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