UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
Commission file number 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
Dallas, Texas
(Address of Principal Executive Offices) 75248
(Zip Code)
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 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,694,423 shares as of
August 7, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
March 31,
1998
--------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 113,662
Accounts receivable, Trade 464,914
Note receivable 25,000
Capital lease receivable 21,049
Prepaid assets 54,144
--------------
Total Current Assets 678,769
--------------
Property and Equipment, net 883,705
--------------
Other Assets 5,450
--------------
Total Assets $ 1,567,924
==============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 1,188,694
Notes payable and convertible debentures 224,448
Current portion, capital lease obligations 87,036
--------------
Total Current Liabilities 1,500,178
Long-term capital lease obligations 13,902
--------------
Total Liabilities 1,514,080
--------------
Stockholders' Equity:
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued and outstanding --
Common stock, $0.001 par value, 20,000,000
shares authorized; 3,506,506 and 3,527,340
shares issued and outstanding, respectively 3,527
Additional paid-in-capital 7,362,760
Accumulated deficit (7,312,443)
--------------
Total Stockholders' Equity 53,844
Total Liabilities & Stockholders' Equity $ 1,567,924
==============
1
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------------
1997 1998
----------------------------------
Service revenues $ 312,774 $ 971,011
--------------- -------------
Costs and Expenses:
Costs of revenues $ 184,738 $ 443,574
Selling, general and administrative 755,706 701,729
Depreciation and amortization 51,664 67,157
--------------- -------------
Total Costs and Expenses 992,108 1,212,460
--------------- -------------
Loss from operations (679,334) (241,449)
Other Income (Expense):
Interest expense, net (7,157) (8,670)
Other income -- 16,973
Total Other Income (7,157) 8,303
--------------- -------------
Net loss $ (686,491) $ (233,146)
=============== =============
Loss per common share:
Basic $ (0.23) $ (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
=============== =============
2
<PAGE>
<TABLE>
ELECTRONIC TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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 179,175 --
(Increase) decrease in prepaid expenses 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>
3
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 and 1997
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.
NOTE 3 - OFFICE FURNITURE AND EQUIPMENT
- ---------------------------------------
The following is a summary of office furniture and equipment:
March 31,
1998
---------------
Furniture $ 106,111
Computer & Office Equipment 678,494
Computer Software 565,220
Leasehold Improvements 9,747
---------------
1,359,572
Less: Accumulated Depreciation (475,867)
---------------
$ 883,705
===============
4
<PAGE>
ELECTRONIC TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 and 1997
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- -------------------------------------------------
The following is a summary of accounts payable and accrued liabilities:
March 31,
1998
------------
Accounts payable $ 445,317
Accrued expenses:
Deferred rent 64,841
Computer software acquisition costs 223,236
Legal and professional 202,214
Other 8,053
Accrued payroll and taxes 240,000
Accrued interest payable 5,033
$ 1,188,694
============
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.
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.
6
<PAGE>
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.
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 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.
7
<PAGE>
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 repricing
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. Costs of TPA services for the quarter ended March 31,
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 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.
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.
8
<PAGE>
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. 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.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 also alleged that as a result
of the termination of the employment agreement she is entitled to certain
liquidated damages identified in the agreement. Ms. McDearmon's employment
agreement provides that should she be terminated for any reason other than for
cause she would be entitled to receive (i) 25% of all base salary ($60,000 per
year) that would have been earned from the date of termination through the
expiration of the term of the agreement (December 31, 2000); (ii) commission
payments for a period of one year from the date of termination; and (iii) free
medical insurance coverage for life. 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. Other
than the foregoing, the Company is not currently a party to any litigation.
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
A special meeting of stockholders of the Company was held on February
25, 1998 approving an increase in authorized shares of the Company's common
stock, par value $.001 per share from 15,000,000 shares to 20,000,000 shares.
The stockholders of the Company also authorized at this special meeting a
one-for-four (1:4) reverse stock split of its outstanding common stock, whereby
every four shares of outstanding common stock will be exchanged for one share of
common stock upon the effective date of such reverse split. The number of votes
cast by the Company's stockholders for and against (i) the increase in
authorized shares of the Company was 2,729,890 and 38,044, respectively, and
(ii) the reverse stock split was 2,726,269 and 49,664, respectively. There were
not any votes withheld or broker non-votes with respect to such stockholder
action. The number of stockholders abstaining in the vote to increase the
authorized shares of the Company was 38,511 and the number of stockholder
abstaining in the vote of the reverse stock split was 30,511.
ITEM 5. OTHER INFORMATION
Not applicable.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
---------------------------------
<TABLE>
Page
----
<S> <C> <C>
1. Financial Statements. The following financial statements are
submitted as a part of this report:
Balance Sheet - December 31, 1997 and March 31, 1998............................ 1
Statements of Operations - Quarters Ended March 31, 1998 and 1997............... 2
Statements of Cash Flows - quarters Ended March 31, 1998 and 1997............... 3
Notes to Consolidated Financial Statements - Quarters Ended
March 31, 1998 and 1997......................................................... 4
</TABLE>
2. Exhibits
Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-KSB was filed by the Company on March 16, 1998,
disclosing the termination of L. Cade Havard as Chief Executive Officer,
President and Chairman of the Board of the Company and the appointment of W.
Mack Goforth, the Company's Chief Financial Officer, as the Chairman of the
Board and Chief Executive Officer. Also disclosed in this report were the
results of the special meeting of stockholders of the Company held on February
25, 1998 whereby an increase in the number of authorized shares of the Company's
common stock, par value $.001 per share, from 15,000,000 shares to 20,000,000
shares and a one-for-four (1:4) reverse stock split of the Company's Common
Stock were approved.
11
<PAGE>
S I G N A T U R E S
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.
<TABLE>
<S> <C>
Signature Title Date
--------- ----- ----
/s/ Steven K. Arnold
- ----------------------------------- Chairman of the Board and Chief Executive August 18, 1998
Steven K. Arnold Officer (Principal Executive Officer)
/s/ Louann C. Smith Controller (Principal Accounting Officer) August 18, 1998
- -----------------------------------
Louann C. Smith
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001017586
<NAME> Electronic Transmission Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 113662
<SECURITIES> 0
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