U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
Commission File No. 22135
ELECTRONIC TRANSMISSION CORPORATION
(Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2578619
(State of Incorporation) (I.R.S. Employer Identification No.)
5025 Arapaho Road, Suite 501 75248
Dallas, Texas (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (972) 980-0900
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No____
As of August 7, 1997, 3,694,423 shares of the issuer's Common Stock
were outstanding.
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ELECTRONIC TRANSMISSION CORPORATION
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
------
June 30,
1998
----------
Current Assets:
Cash and cash equivalents $ 271,432
Accounts receivable, Trade 378,666
Note receivable 16,100
Capital lease receivable 14,207
Prepaid assets 155,361
----------
Total Current Assets 835,766
Property and Equipment, net 797,084
----------
Other Assets 6,750
----------
Total Assets $1,639,600
==========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 1,064,503
Notes payable and convertible debentures 444,301
Current portion, capital lease obligations 76,414
-----------
Total Current Liabilities 1,585,218
Long-term capital lease obligations 32,933
-----------
Total Liabilities 1,618,151
-----------
Stockholders' equity:
Preferred stock, $1 par value,
2,000,000 shares authorized;
no shares issued and outstanding --
Common stock, $.001 par value,
20,000,000 shares authorized;
3,679,423 shares issued and outstanding 3,679
Additional paid-in-capital 7,500,166
Accumulated deficit (7,482,396)
-----------
Total Stockholders' Equity 21,449
-----------
Total Liabilities & Stockholders' Equity $ 1,639,600
===========
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<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
------------ ----------- ----------- -----------
<S> <C> <C>
Service revenues $ 912,026 $ 816,934 $ 1,224,800 $ 1,787,945
------------ ----------- ----------- -----------
Costs and Expenses:
Costs of revenues $ 438,454 $ 311,112 $ 623,192 $ 754,686
Selling, general and administrative 1,097,432 629,438 1,861,157 1,331,167
Depreciation and amortization 53,146 99,425 104,812 166,582
------------ ----------- ----------- -----------
Total Costs and Expenses 1,589,032 1,039,975 2,589,161 2,252,435
------------ ----------- ----------- -----------
Loss from operations (677,006) (223,041) (1,364,361) (464,490)
Other Income (Expense):
Interest expense, net -- (9,564) -- (18,234)
Other income 1,525 62,651 2,389 79,624
------------ ----------- ----------- -----------
Total Other Income 1,525 53,087 2,389 61,390
------------ ----------- ----------- -----------
Net loss $ (675,481) $ (169,954) $(1,361,972) $ (403,100)
============ =========== =========== ===========
Loss per common share:
Basic $ (0.23) $ (0.06) $ (0.47) $ (0.14)
============ =========== =========== ===========
Diluted $ (0.23) $ (0.06) $ (0.47) $ (0.15)
============ =========== =========== ===========
Weighted average common shares outstanding:
Basic 2,887,563 2,798,838 2,887,563 2,798,838
============ =========== =========== ===========
Diluted 2,887,563 2,712,384 2,887,563 2,712,384
============ =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
------------ ---------- ---------- -------
Cash Flows from Operations:
Net loss $ (675,481) $ (169,954) $ (1,361,972) (403,100)
Adjustments to Reconcile Net Loss
to Net Cash Provided (Used)
by Operations:
Non-cash issuance of common
stock for services rendered 333,632 -- 400,000 --
Non-cash compensation from
stock options 221,220 -- 321,220 --
Depreciation and amortization 53,146 99,425 104,812 166,582
(Increase) decrease in
accounts receivable (205,084) 85,584 (258,423) 203,909
(Increase) decrease in employee
advances (2,768) 1,340 19,939 578
Increase in advances
to stockholders (581,653) -- (323,312) --
Increase in prepaid expenses (3,845) (65,158) (1,160) (91,130)
(Increase) decrease in deposits
and other assets -- 7,700 2,067 (14,360)
Increase (decrease) in
accounts payable (56,641) (83,402) 85,350 104,740
Increase (decrease) in accrued
expenses 61,380 (122,336) 131,556 (457,976)
Increase in client deposit 75,531 -- 75,531 --
Increase (decrease) in accrued
payroll and taxes (133,471) 11,833 (119,924) (63,607)
-------- -------- -------- --------
Net Cash Used in Operations (914,034) (234,968) (924,316) (554,364)
-------- -------- -------- --------
Cash Flows from Investing Activities:
Purchases of furniture and equipment (77,489) (11,790) (85,474) (96,254)
Proceeds on capital lease receivable 8,225 6,842 12,236 13,517
-------- -------- -------- --------
Net Cash Used in Investing Activities (69,264) (4,948) (73,238) (82,737)
-------- -------- -------- --------
</TABLE>
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<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ---------- ----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of common 30 152 58 172
Stock
Capital Contribution 721,537 99,906 721,537 99,970
Proceeds from capital lease 16,747 37,066 16,747 37,066
Proceeds from note payable 170,000 301,159 170,000 301,159
Proceeds from line of credit 125,000 -- 125,000 --
Proceeds from issuance of debentures 150,000 -- 150,000 --
Principal payments on note payable (6,702) (39,508) (6,702) (59,670)
Payments on capital leases payable (23,498) (1,089) (46,418) (18,729)
----------- ----------- ----------- -----------
Net Cash Provided by Financing
Activities 1,153,114 397,686 1,130,222 359,968
----------- ----------- ----------- -----------
Net increase (decrease) in cash 169,816 157,770 132,668 (277,133)
Cash, beginning of period 12,977 113,662 50,125 548,565
----------- ----------- ----------- -----------
Cash, end of period $ 182,793 $ 271,432 $ 182,793 $ 271,432
=========== =========== =========== ===========
</TABLE>
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. Users of financial information provided for
interim periods should refer to the annual financial information and footnotes
contained in the Company's Annual Report on From 10-KSB/A 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.
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
June 30,
1998
----------------
Furniture $ 106,111
Computer & Office Equipment 678,105
Computer Software 577,400
Leasehold Improvements 9,747
----------------
1,371,363
Less: accumulated depreciation (574,279)
----------------
$ 797,084
================
NOTE 4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following is a summary of accounts payable and accrued liabilities:
June 30,
1998
---------------
Accounts payable $ 558,828
Accrued expenses:
Computer software acquisition costs 132,567
Legal and professional 24,010
Other 89,198
Accrued payroll and taxes 251,833
Accrued interest payable 8,067
---------------
$ 1,064,503
NOTE 5 - STOCK OPTIONS
Compensation costs will be recognised as an expense over the vesting periods
attributable to the options at an amount equal to the excess of the fair market
value of the stock at the date of measurement over the amount the employee must
pay. The measurement date is generally the grant date. During June 1997, the
Board of Directors unanimously passed a resolution accelerating the vesting of
certain stock options. Also, the Company elected to rescind specific stock
options of a former officer of the Company. Accordingly, compensation costs
associated with these options were not expensed due to the former officer
retroactively forfeiting any rights under the original option agreement.
Therefore, stock compensation costs totalling $321,220 were recognised as
expense during the quarter ended June 30, 1997. Had compensation cost for the
Company's stock-based compensation been determined on the fair value at the
grant dates for awards with the method of FASB Statement 123, the Company's net
loss and loss per share would have been unchanged.
6
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - 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 that was wholly owned and controlled by ETC's
Chairman of the Board, Chief Executive Officer, and President at the time of the
combination. The individual no longer holds those titles and is currently only a
shareholder.
The transaction was accounted for using the purchase method as follows:
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
=================
The excess of the consideration over the related party predecessor cost (net
liabilities assumed) is treated as a reduction of equity (i.e., a deemed
dividend). Goodwill resulting from market value adjustments to assets and
liabilities of the entity was not recorded since this transaction was
consummated with a related party, and that 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.
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - FINANCING ACTIVITIES
The Company obtained a $125,000 line of credit in April 1997 of which principal
and interest were due July 17, 1997. Accrued interest was payable on a monthly
basis, beginning May 17, 1997, at a variable interest rate not to exceed 18% per
annum. Interest was calculated from the date of each advance until repayment of
each advance or maturity, whichever occurs first. This line of credit was
cancelled in September 1997.
In May 1997, the Company authorized an aggregate offering of $1,000,000 of its
one-year 12% Convertible Subordinated Debentures to fund new acquisitions,
pay-off existing debts and supply future working capital. The Debentures were
due in May 1998 with interest payable semi-annually. The holder or holders of
these Debentures may, at any time prior to maturity, convert the principal
amount and the accrued interest on these Debentures into Common Stock of the
Company at varying conversion rates of Debenture principal and/or accrued
interest for one share of Common Stock. The offering terminated on June 1, 1997
raising $150,000. The Company is currently in default on $100,000 of principal
amount of the Debentures but believes it will be able to settle this matter with
the holder on mutually agreeable terms.
Also in May 1997, the Company obtained a short-term working capital loan of
$170,000. Eighty-five thousand dollars of the principal amount plus interest was
to be repaid in twelve monthly payments. Interest only was due monthly on the
remaining eighty-five thousand dollars of the principal amount, which was due on
May 19, 1998. The loan will incur an interest rate of twelve percent per annum
from date of funding. The lender has the option to purchase up to 28,333 shares
of common stock in the Company at a price of $6.00 per share on or before May
19, 1998. The Company is currently in default on $99,881 of principal amount of
the loan but believes it will be able to settle this matter with the holder on
mutually agreeable terms.
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 is obligated to issue 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 prior to the maturity date into restricted shares
of Common Stock at a rate of one share of Common Stock for every $2.00 of
principal converted.
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - FINANCING ACTIVITIES CONTINUED
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 is entitled to receive 5,000 shares
of Common Stock and David Stewart is entitled to receive 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 notes are convertible
at any time prior to the maturity date of the obligations by the holders into
shares of Common Stock at the rate of one share of Common Stock for every $2.00
of principal converted.
In late June and early July 1998, the Company executed two promissory notes
payable to unaffiliated third parties in the aggregate principal amount of
$45,000. The notes are due and payable six months from the execution date. The
holders of the notes are entitled to receive an aggregate of 10,250 shares of
Common Stock in lieu of receipt of cash interest on the principal amount of the
respective obligations. The obligations to the note holders are secured by all
of the assets of the Company. The outstanding principal balances of the notes
are convertible at any time prior to the maturity thereof into shares of Common
Stock at the rate of one share of Common Stock for every $2.00 of principal
converted.
NOTE 8 - BOARD OF DIRECTORS
Effective June 1, 1997, Rick Snyder, Director of the Company, resigned to pursue
other business interests. The resignation was not a result of any dispute or
disagreement between Mr. Snyder and the Company. Mr. Dennis Barnes was elected
Director until the next annual stockholder's meeting.
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, who was serving as the Company's interim
Chairman of the Board and Chief Executive Officer, continues to serve as the
Company's Chief Financial Officer, but resigned as a director of the Company
effective May 28, 1998.
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - SUBSEQUENT EVENTS
On July 28, 1998, the Company, each of the Company's directors, in
their individual capacity and as members of the Board of Directors, W. Mack
Goforth, the Company's Chief Financial Officer, L. Cade Havard and Sterling
National Corporation ("Sterling") entered into the Compromise Settlement
Agreement and Mutual Release (the "Settlement Agreement") for the purpose of
resolving all disputes between the Company, its directors, Mr. Havard and
Sterling. Under the terms of the Settlement Agreement, Mr. Havard and Sterling,
a corporation wholly owned by Mr. Havard, agreed to transfer to the Company an
aggregate of 462,500 shares of Common Stock. Furthermore, Sterling agreed to
assign and transfer all of its rights and obligations as trustee under the
Sterling National Corporation Trust to the Company, thereby allowing the Company
to serve as trustee for such voting trust. The Settlement Agreement also
provides that Mr. Havard will agree to continue to be bound by the
non-competition and non-disclosure covenants of his Amended and Restated
Employment and Settlement Agreement dated December 17, 1997, except with regard
to certain services to be provided by Mr. Havard for the benefit of Electronic
Data System in the worker's compensation marketplace. The parties to the
Settlement Agreement also have agreed to release each other from any and all
claims or causes of action, whether known or unknown, which have arisen or may
arise from acts or actions undertaken by the parties prior to July 28, 1998.
On July 9, 1998, the Company sold to an unaffiliated individual 10,000
shares of Common Stock for an aggregate purchase price of $10,000 or $1.00 per
share.
The Company's registration statement on Form SB-2 was declared
effective on August 12, 1998. The registration statement registered 642,968
shares of Common Stock for certain investors.
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ITEM 2. - 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 and the notes thereto contained in
the Company's Annual Report on From 10-KSB/A. 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.
Overview
The Company is the survivor of the Merger of Electronic Transmission
Corporation, a Texas corporation ("ETC-Texas"), into ETC Transaction
Corporation, an Alberta, Canada corporation ("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 incorporated as Solo Petroleums Ltd. ("Solo") on
September 5, 1986 for the purpose of undertaking oil and gas exploration
efforts. In 1987, Solo completed a public offering of common stock as a Junior
Capital Pool Company under the policies of the Alberta Stock Exchange (the
"ASE") and the Alberta Securities Commission. Solo common stock was subsequently
listed for trading on the ASE under the trading symbol "SOP". By 1990, revenues
from oil and gas exploration efforts had substantially declined and Solo began
experiencing financial difficulties. As a result, Solo liquidated substantially
all of its assets and underwent a significant change in management during 1990.
Since Solo had no significant assets or operations, its principal potential for
profits came solely from operations received in a merger. On March 21, 1996,
Solo changed its name to ETC-Canada. On May 19, 1996, prior to the Merger,
ETC-Canada sold 519,717 shares of its common stock in a private placement
offering. ETC-Canada then loaned the $779,575 offering proceeds (the "ETC-Texas
Note") to fund its marketing and product development efforts and costs
associated with the Merger. Since ETC-Canada had no significant assets, except
for the ETC-Texas Note, 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 claims automation, medical
claims repricing and third party administration services to the non-provider
sector of the health care industry. Such services are automated through a broad
range of applications and data base information systems. In order to provide
such services, 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.
11
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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 June 30, 1998, the Company had cash and cash equivalents of approximately
$271,432 and a working capital deficit of approximately $749,452.
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 of approximately $96,000 in annual 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. The Company has submitted several proposals to potential clients in
each of the afore-referenced business sectors. As of the date of this report,
the Company has not entered into any binding agreements to provide services to
any potential client which has received a written proposal from the Company. 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.
In fiscal 1996 and 1997, Wal-Mart accounted for approximately 64% and
56% of the Company's revenues, respectively. The Wal-Mart contract expires in
September 1998. The Company is currently negotiating a renewal of this
agreement. The failure to renew the Wal-Mart contract will have a material
adverse effect on the Company's financial condition.
At June 30, 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.
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<PAGE>
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
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Revenues. Revenues from automation services totaled $530,741 and
$693,533 for the six months ended June 30, 1998 and 1997, respectively. Revenues
from repricing totaled $864,026 and $531,267 for the six months ended June 30,
1998 and 1997, respectively. The TPA division generated revenues of $393,178 for
the six months ended June 30, 1998.
Cost of Revenues. Costs of automation services totaled $348,463 and
$385,831 for the six months ended June 30, 1998 and 1997, respectively. The
costs for the six months of 1998 were comprised of $220,395 in data entry
personnel, $94,672 in imaging fees and $18,322 for communication expenses. In
the six months of 1997, these costs consisted of $228,618 in data entry
personnel, $129,118 in imaging fees and $18,135 in communication expenses. Costs
of repricing services were largely made up of $353,439 and $207,434 in third
party network fees for the six months ended June 30, 1998 and 1997,
respectively. Costs of TPA services for the six months ended June 30, 1998 were
$38,089. No TPA services were provided by the Company during the comparable
period in fiscal 1997.
Gross Profit. Gross profit for the six months ended June 30, 1998 was
$1,033,259 as compared to $601,608 for the six months ended June 30, 1997. The
gross profit margin for the six months ended June 30, 1998 was 58% versus 49%
for 1997.
Other Expenses. Selling, general and administrative costs decreased to
$1,272,969 for the six months ended June 30, 1998, compared to $1,861,156 for
the six months ended June 30, 1997. Selling, general and administrative expenses
consisted primarily of personnel costs, rent, telephone and professional fees.
For the six months ended June 30, 1998, total personnel costs were $925,930,
total rent costs were $152,700, total telephone costs were $70,159 and total
professional fees were $51,982. For the six months ended June 30, 1997, total
personnel costs were $1,342,727, total rent costs were $86,747, total telephone
costs were $32,101 and total professional fees were $270,287. 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 was $18,234 for the six months ended June 30, 1998
compared to $21,009 for the six months ended June 30, 1997.
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Net Loss. The Company incurred a net loss of $1,361,972 and $403,100
for the six months ended June 30, 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.
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Revenues. Revenues from automation services totaled $276,289 and
$380,759 for the quarters ended June 30, 1998 and 1997, respectively. Revenues
from repricing totaled $347,194 and $531,267 for the three months ended June 30,
1998 and 1997, respectively. The TPA division generated revenues of $193,451 for
the second quarter of 1998.
Cost of Revenues. Costs of automation services totaled $159,636 and
$214,857 for the quarters ended June 30, 1998 and 1997, respectively. The costs
for the second quarter of 1998 were comprised of $105,783 in data entry
personnel, $45,157 in imaging fees and $8,563 for communication expenses. In the
second quarter of 1997, these costs consisted of $128,803 in data entry
personnel, $68,345 in imaging fees and $9,017 in communication expenses. Costs
of repricing services were largely made up of $131,836 and $207,434 in third
party network fees for the quarters ended June 30, 1998 and 1997, respectively.
Costs of TPA services for the quarter ended June 30, 1998 were $19,045. No TPA
services were provided by the Company during the comparable period in fiscal
1997.
Gross Profit. Gross profit for the quarter ended June 30, 1998 was
$505,822 as compared to $473,572 for the quarter ended June 30, 1997. The gross
profit margin for the quarter ended June 30, 1998 was 62% versus 52% for 1997.
Other Expenses. Selling, general and administrative costs decreased to
$578,859 for the quarter ended June 30, 1998, compared to $1,097,429 for the
quarter ended June 30, 1997. Selling, general and administrative expenses
consisted primarily of personnel costs, rent, telephone and professional fees.
For the quarter ended June 30, 1998, total personnel costs were $393,027, total
rent costs were $108,025, total telephone costs were $29,253 and total
professional fees were $43,986. For the quarter ended June 30, 1997, total
personnel costs were $885,857, total rent costs were $43,383, total telephone
costs were $20,095 and total professional fees were $71,234. 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 was $9,564 for the quarter ended June 30, 1998
compared to $13,803 for the quarter ended June 30, 1997.
14
<PAGE>
Net Loss. The Company incurred a net loss of $675,481 and $169,954 for
the quarters ended June 30, 1997 and 1998, respectively. The Company expects to
incur losses in future periods until it generates sufficient revenues from an
expanded client base to offset ongoing operating costs and expansion expenses.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations, working
capital needs and capital expenditures principally through private placements of
equity securities. Cash and cash equivalents at June 30, 1998 were $271,432, and
the Company had a working capital deficit of $749,452. 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.
The Company signed a Securities Purchase Agreement (the "Purchase
Agreement") on December 17, 1997 with Special Situations Private Equity Fund,
L.P. and Special Situations Cayman Fund, L.P. (collectively, the "Investors") 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 Purchase Agreement called for
the sale and purchase of the available shares to occur in two tranches. 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.
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, 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 report, 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.
15
<PAGE>
The Company believes that by continuing to reduce the fixed costs associated
with its infrastructure, through capital raised from private debt or equity
financings and through implementation of its marketing strategy it may be able
to satisfy its cash requirements for the next 12 months. However, there can no
assurances given that any liquidity sources can be found or that working capital
will be provided from improved operations to satisfy the Company's cash
requirements for this period.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The lawsuit filed on April 20, 1998 by Ann C. McDearmon is still
pending and no disclosure has been required since the filing of the March 31,
1998 10-QSB.
ITEM 2. CHANGES IN SECURITIES
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 is obligated to issue 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 prior to the maturity date 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 is entitled to
receive 5,000 shares of Common Stock and David Stewart is entitled to receive
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 notes
are convertible at any time prior to the maturity date of the obligations by the
holders into shares of Common Stock at the rate of one share of Common Stock for
every $2.00 of principal converted.
In late June and early July 1998, the Company executed two promissory
notes payable to unaffiliated third parties in the aggregate principal amount of
$45,000. The notes are due and payable six months from the execution date. The
holders of the notes are entitled to receive an aggregate of 10,250 shares of
Common Stock in lieu of receipt of cash interest on the principal amount of the
respective obligations. The obligations to the note holders are secured by all
of the assets of the Company. The outstanding principal balances of the notes
are convertible at any time prior to the maturity thereof into shares of Common
Stock at the rate of one share of Common Stock for every $2.00 of principal
converted.
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Financial Statements and Exhibits Page
----
1. Financial Statements. The following financial statements are
submitted as a part of this report:
Balance Sheet - June 30, 1998.................................................... 1
Statements of Operations - Three Months Ended June 30, 1998 and 1997
and Six Months Ended June 30, 1998 and 1997...................................... 2
Statements of Cash Flows - Three Months Ended June 30, 1998 and 1997
and Six Months Ended June 30, 1998 and 1997...................................... 3
Notes to Financial Statements.................................................... 5
</TABLE>
2. Exhibits
Financial Data Schedule
17
<PAGE>
(b) Reports on Form 8-K.
On June 10, 1998, the Company filed a Corrective Report on Form 8-K for
the purpose of reporting that 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.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC TRANSMISSION CORPORATION
Signature Title Date
--------- ----- ----
/s/ Steve K. Arnold Chairman, Chief Executive August 18, 1998
- -------------------------
Steve K. Arnold Officer, and Director
(Principal Executive Officer)
/s/ Louann C. Smith Controller (Principal August 18, 1998
- ------------------------
Louann C. Smith Accounting Officer)
19
<TABLE> <S> <C>
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