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 SEPTEMBER 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 November 13, 1998, 3,694,423 shares of the issuer's Common Stock
were outstanding.
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
September 30,
1998
-------------
Current Assets:
Cash and cash equivalents $ 126,470
Accounts receivable, Trade 428,875
Note receivable 16,415
Capital lease receivable 7,192
Prepaid assets 118,597
-----------
Total Current Assets 697,549
-----------
Property and Equipment, net 705,745
-----------
Other Assets 6,750
-----------
Total Assets $ 1,410,044
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,091,308
Notes payable and convertible debentures 478,491
Current portion, capital lease obligations 76,414
-----------
Total Current Liabilities 1,646,213
Long-term capital lease obligations 30,630
-----------
Total Liabilities 1,676,843
-----------
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;
3,694,423 shares issued and outstanding 3,694
Additional paid-in-capital 7,515,151
Accumulated deficit (7,785,644)
-----------
Total Stockholders' Equity (266,799)
-----------
Total Liabilities & Stockholders' Equity $ 1,410,044
===========
1
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<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service revenues $ 1,002,169 $ 722,962 $ 2,226,969 $ 2,510,907
----------- ----------- ----------- -----------
Costs and Expenses:
Costs of revenues $ 304,012 $ 321,731 $ 927,204 $ 1,076,416
Selling, general and administrative 712,187 576,982 2,550,092 1,908,149
Depreciation and amortization 64,737 99,315 169,550 265,897
----------- ----------- ----------- -----------
Total Costs and Expenses 1,080,936 998,028 3,646,846 3,250,462
----------- ----------- ----------- -----------
Loss from operations (78,767) (275,066) (1,419,877) (739,555)
Other Income (Expense):
Interest expense, net (31,954) (28,794) (55,206) (50,219)
Other income 1,161 612 3,550 83,426
----------- ----------- ----------- -----------
Total Other Income (30,793) (28,182) (51,656) 33,207
----------- ----------- ----------- -----------
Net loss $ (109,560) $ (303,248) $(1,471,533) $ (706,348)
=========== =========== =========== ===========
Loss per common share:
Basic $ (0.04) $ (0.11) $ (0.49) $ (0.28)
=========== =========== =========== ===========
Diluted $ (0.04) $ (0.20) $ (0.49) $ (0.47)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 2,971,172 2,556,054 2,971,172 2,556,054
=========== =========== =========== ===========
Diluted 2,971,172 1,490,410 2,971,172 1,490,410
=========== =========== =========== ===========
</TABLE>
2
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<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Sept.30, Nine Months Ended Sept. 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operations:
Net loss $ (109,560) $ (303,248) $(1,471,533) $ (706,348)
Adjustments to Reconcile Net Loss
to Net Cash Provided (Used)
by Operations:
Non-cash issuance of common
stock for services rendered -- -- 400,000 --
Non-cash compensation from
stock options -- -- 321,220 --
Depreciation and amortization 64,737 99,315 169,550 265,897
(Increase) decrease in
accounts receivable 227,279 (50,209) (31,143) 153,700
(Increase) decrease in employee
advances (1,249) 3,966 18,690 1,686
Increase in advances
to stockholders -- -- (323,312) --
(Increase) decrease in prepaid expenses (23,751) 32,170 (24,911) (96,460)
(Increase) decrease in deposits
and other assets -- (315) 2,067 (12,200)
Increase in accounts payable 471,682 92,989 557,032 212,852
Increase (decrease) in accrued
expenses (174,937) (25,551) 81,619 (502,609)
Increase in client deposit -- -- 75,531 --
Increase (decrease) in accrued
payroll and taxes -- 11,500 (119,924) (52,107)
----------- ----------- ----------- -----------
Net Cash Provided by (Used in)
Operations 454,201 (139,383) (345,114) (735,589)
----------- ----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of furniture and equipment (489,937) (7,978) (575,410) (104,232)
Proceeds on capital lease receivable 6,350 7,015 18,585 20,531
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities (483,587) (963) (556,825) (83,701)
----------- ----------- ----------- -----------
</TABLE>
3
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<TABLE>
<CAPTION>
ELECTRONIC TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
1997 1998 1997 1998
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of common 52,113 15,000 52,171 152,642
Stock
Capital Contribution -- -- 721,537 --
Proceeds from capital lease -- -- -- 37,495
Proceeds from note payable 32,000 38,507 202,000 348,340
Proceeds from issuance of debentures -- -- 150,000 --
Conversion of debenture to equity (50,000) -- (50,000) --
Principal payments on note payable (20,511) (55,820) (27,213) (119,821)
Payments on capital leases payable (25,583) (2,303) (55,255) (21,461)
--------- --------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities (11,981) (4,616) 993,240 397,195
--------- --------- --------- ---------
Net increase (decrease) in cash (41,367) (144,962) 91,301 (422,095)
Cash, beginning of period 182,793 271,432 50,125 548,565
--------- --------- --------- ---------
Cash, end of period $ 141,426 $ 126,470 $ 141,426 $ 126,470
========= ========= ========= =========
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4
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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 Form 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.
5
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<CAPTION>
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
- ---------------------------------------
The following is a summary of office furniture and equipment:
Sept. 30,
1998
-------------
<S> <C>
Furniture $ 106,111
Computer & Office Equipment 678,105
Computer Software 578,561
Leasehold Improvements 16,562
-------------
1,379,339
Less: accumulated depreciation (673,594)
-------------
$ 705,745
=============
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- -------------------------------------------------
The following is a summary of accounts payable and accrued liabilities:
Sept. 30,
1998
-------------
Accounts payable $ 650,299
Accrued expenses:
Computer software acquisition costs 51,838
Legal and professional 5,000
Other 120,838
Accrued payroll and taxes 263,333
-------------
$ 1,091,308
=============
</TABLE>
NOTE 5 - FINANCING ACTIVITIES
- -----------------------------
The Company obtained a $125,000 line of credit in April 1997. On July 17, 1997,
the $125,000 line of credit was renewed and increased to $200,000. The principal
balance of $190,000 and interest were paid-off 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 are due
in May 1998 with interest payable semi-annually. The holder or holders of this
Debenture may, at any time prior to maturity, convert the principal amount and
the accrued interest on this Debenture into Common stock of the Company at
varying conversion rates of Debenture principal and/or accrued interest for one
share of Common Stock.
6
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - FINANCING ACTIVITIES CONTINUED
- ---------------------------------------
The offering terminated on June 1, 1997 raising $150,000. In September 1997,
$50,000 in Debentures plus accrued interest were converted to 41,653 shares of
common stock at a conversion rate of $1.25 per share.
Under a business financing agreement with a bank in Dallas, Texas, the Company
has available at September 30, 1997 a revolving credit line of $500,000 that
expires September 2, 1998. Under the credit line terms, the Company sells
qualified accounts receivable invoices to the bank. The credit line is secured
by accounts receivable and a personal guarantee by the Chairman. A 20% (twenty
percent) reserve and a service charge are deducted from each invoice with the
balance going to the Company for operations. Any receivable which remains unpaid
ninety (90) days after its due date, will be repaid by the Company to the bank
through the reserve account. As of September 30, 1997, the balance outstanding
on the loan was $299,619.
In early July 1998, the Company executed a promissory note payable to an
unaffiliated third party in the principal amount of $20,000. The note is due and
payable six months from the execution date. The holder of the note is entitled
to receive an aggregate of 5,000 shares of Common Stock in lieu of receipt of
cash interest on the principal amount of the respective obligation. The
obligation to the note holder is secured by all of the assets of the Company.
The outstanding principal balance of the note is 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.
The Company has successfully renegotiated a note payable in the amount of
$99,881 bearing interest as 12% per annum. Effective September 1, 1998 the note
payable balance plus accrued interest totaling $114,281 were rolled into the new
note. The note bears interest at 12% per annum with repayment of one half of the
amount (including interest on the other half) over one year at $5,648.31 per
month. The remaining half will be repaid with a balloon payment of $57,141 on
September 1, 1999. The stock option plan was also replaced with a new plan of
50,000 share of common stock at a price of $1.00 per share with an expiration
date of September 1, 1999.
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 interest. The
Company was in default, however, it successfully renegotiated the terms of the
debenture and effective September 30, 1998 the debenture amount plus accrued
interest totaled $111,435. The debenture bears an interest rate of 12% per annum
with repayment of one half of the amount (including interest on the other half)
over one year at $5,507.64 per month. The remaining half will be repaid with a
balloon payment of $55,717 on October 1, 1999. The debenture holder may convert
the debt to equity at any time at varying rates of $1.00 per share to $2.00 per
share.
7
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ELECTRONIC TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - SUBSEQUENT EVENTS
- --------------------------
On October 5, 1998, Steven K. Arnold resigned as Chairman of the Board and Chief
Executive Officer of the Company. He will remain on the Board of Directors and
serve as a consultant. Effective October 5, 1998, Robert Fortier was elected
Chief Executive Officer and President of the Company.
The Company was in default of its leasing agreement with Ironwood Leasing, Ltd.
The leasing agreement was successfully renegotiated in October 1998.
W. Mack Goforth, the Company's Chief Financial Officer, was terminated for cause
in accordance with his employment agreement with the Company effective October
19, 1998.
A long-term claims processing and repricing contract was executed with Wal-Mart
Stores, Inc. It is effective October 1, 1998 and will expire in two years. In
addition, the third party administrator, reSource Partners, for Bordens, Inc.,
signed a long-term claims processing and repricing contract with the Company. It
is effective October 28, 1998 and will expire in two years.
It was determined by the Board of Directors that effective December 31, 1998,
ETC Administrative Services, a wholly owned subsidiary of the Company, will
cease its operations.
An Amended Letter of Intent was signed with Health Plan Initiatives, Inc.
("HPI") on October 5, 1998. The terms are being negotiated for a
merger/acquisition to take place within the next few months. Robert Fortier is
the President of HPI.
8
<PAGE>
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 Form 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.
9
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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 September 30, 1998, the Company had cash and cash equivalents of
approximately $126,470 and a working capital deficit of approximately $948,664.
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 expired in
September 1998. The Company successfully negotiated a renewal of this agreement.
Effective October 1, 1998, a two year contract was signed for the Company's
claims processing and repricing services. In addition to the Wal-Mart long-term
contract, the Company entered into a long-term claims processing and repricing
contract with the third party administrator, reSource Partners for Bordens,
Inc., effective October 28, 1998.
10
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At September 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. 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Revenues. Revenues from automation services totaled $776,181 and
$1,079,320 for the nine months ended September 30, 1998 and 1997, respectively.
Revenues from repricing totaled $1,225,723 and $1,114,545 for the nine months
ended September 30, 1998 and 1997, respectively. The TPA division generated
revenues of $509,004 for the nine months ended September 30, 1998.
Cost of Revenues. Costs of automation services totaled $504,798 and
$613,889 for the nine months ended September 30, 1998 and 1997, respectively.
The costs for the nine months of 1998 were comprised of $311,297 in data entry
personnel, $132,833 in imaging fees and $33,233 for communication expenses. In
the nine months of 1997, these costs consisted of $331,898 in data entry
personnel, $189,621 in imaging fees and $32,968 in communication expenses. Costs
of repricing services were largely made up of $514,486 and $313,315 in third
party network fees for the nine months ended September 30, 1998 and 1997,
respectively. Costs of TPA services for the nine months ended September 30, 1998
were $57,133. No TPA services were provided by the Company during the comparable
period in fiscal 1997.
Gross Profit. Gross profit for the nine months ended September 30, 1998
was $1,434,491 as compared to $1,299,765 for the nine months ended September 30,
1997. The gross profit margin for the nine months ended September 30, 1998 was
57% versus 58% for 1997.
Other Expenses. Selling, general and administrative costs decreased to
$1,908,149 for the nine months ended September 30, 1998, compared to $2,550,092
for the nine months ended September 30, 1997. Selling, general and
administrative expenses consisted primarily of personnel costs, rent, telephone
and professional fees. For the nine months ended September 30, 1998, total
personnel costs were $1,091,170, total rent costs were $149,854, total telephone
costs were $95,216 and total professional fees were $138,035. For the nine
months ended September 30, 1997, total personnel costs were $1,083,661, total
rent costs were $129,646, total telephone costs were $59,280 and total
11
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professional fees were $303,850. 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 $50,219 for the nine months ended September
30, 1998 compared to $55,206 for the nine months ended September 30, 1997.
Net Loss. The Company incurred a net loss of $1,471,533 and $706,348
for the nine months ended September 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 September 30, 1998 Compared to Quarter Ended September 30, 1997
Revenues. Revenues from automation services totaled $235,954 and
$385,786 for the quarters ended September 30, 1998 and 1997, respectively.
Revenues from repricing totaled $305,735 and $583,280 for the three months ended
September 30, 1998 and 1997, respectively. The TPA division generated revenues
of $181,272 for the third quarter of 1998.
Cost of Revenues. Costs of automation services totaled $142,014 and
$198,130 for the quarters ended September 30, 1998 and 1997, respectively. The
costs for the third quarter of 1998 were comprised of $89,602 in data entry
personnel, $38,161 in imaging fees and $9,855 for communication expenses. In the
third quarter of 1997, these costs consisted of $103,280 in data entry
personnel, $60,502 in imaging fees and $13,764 in communication expenses. Costs
of repricing services were largely made up of $160,672 and $105,881 in third
party network fees for the quarters ended September 30, 1998 and 1997,
respectively. Costs of TPA services for the quarter ended September 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 September 30, 1998 was
$401,231 as compared to $698,157 for the quarter ended September 30, 1997. The
gross profit margin for the quarter ended September 30, 1998 was 56% versus 70%
for 1997.
Other Expenses. Selling, general and administrative costs decreased to
$576,982 for the quarter ended September 30, 1998, compared to $712,187 for the
quarter ended September 30, 1997. Selling, general and administrative expenses
consisted primarily of personnel costs, rent, telephone and professional fees.
For the quarter ended September 30, 1998, total personnel costs were $325,325,
total rent costs were $29,511, total telephone costs were $25,057 and total
professional fees were $86,062. For the quarter ended September 30, 1997, total
personnel costs were $450,520, total rent costs were $42,899, total telephone
costs were $27,179 and total professional fees were $33,563. Professional fees
were incurred primarily due to the preparation and filing of a registration
statement, year-end audit and general corporate matters.
12
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Net interest expense was $28,794 for the quarter ended September 30,
1998 compared to $31,954 for the quarter ended September 30, 1997.
Net Loss. The Company incurred a net loss of $109,560 and $303,248 for
the quarters ended September 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 September 30, 1998 were
$126,470, and the Company had a working capital deficit of $948,664. 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 successfully renegotiated new terms for this
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 successfully renegotiated this
obligation.
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
13
<PAGE>
material working capital expenditures over the next 12-month period. 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 be 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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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> <C>
(a) Financial Statements and Exhibits Page
--------------------------------- ----
1. Financial Statements. The following financial statements are submitted
as a part of this report:
Balance Sheet - September 30, 1998............................................. 1
Statements of Operations - Three Months Ended September 30, 1998 and 1997
and Nine Months Ended September 30, 1998 and 1997.............................. 2
Statements of Cash Flows - Three Months Ended September 30, 1998 and 1997
and Nine Months Ended September 30, 1998 and 1997.............................. 3
Notes to Financial Statements.................................................. 5
</TABLE>
14
<PAGE>
2. Exhibits
--------
Financial Data Schedule
(b) Reports on Form 8-K.
None.
15
<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/ Robert Fortier Chief Executive Officer, November 16, 1998
- ------------------------ President and Director
Robert Fortier (Principal Executive Officer)
/s/ Louann C. Smith Controller (Principal November 16, 1998
- ------------------------ Accounting Officer)
Louann C. Smith
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001017586
<NAME> Electronic Transmission Corporation
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
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