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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File No. 22135
ELECTRONIC TRANSMISSION CORPORATION
(Name of Small Business Issuer in Its Charter)
Delaware 75-2578619
(State or other jurisdiction incorporation) (IRS Employer Identification No.)
15301 Spectrum Drive, Suite 501, Addison Texas 75001
(ZIP Code)
(972) 980-0900
(Issuer's telephone number)
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Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value per share
(Title of Class)
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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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year ended on
December 31, 1999: $2,588,630
State the number of shares outstanding of the issuers common equity as of
March 27, 2000: 11,192,135
State the aggregate market value of the voting common and non-voting common
equity held by non-affiliates of the issuer, computed by reference to the
average bid and asked prices of such common stock on March 28, 2000, was
$0.40625 and $0.5625, respectively.
Documents Incorporated By Reference
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT - NO
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ITEM 1. DESCRIPTION OF BUSINESS.
Organization
Electronic Transmission Corporation, a Delaware corporation (the
"Company") is the surviving entity of the merger (the "Merger") of Electronic
Transmission Corporation, a Texas corporation ("ETC-Texas") into ETC Transaction
Corporation, a Canadian corporation ("ETC-Canada") as continued into the state
of Delaware, during the first quarter of 1997. ETC-Texas was organized in
December 1994. ETC-Canada was originally incorporated as Solo Petroleum Ltd.
("Solo") in September 1986. ETC-Canada was inactive from 1992 until late 1995
when it reorganized its affairs in preparation of the Merger. In March 1996,
Solo changed its name to ETC-Canada and effected a one-for-five consolidation of
capital of the outstanding shares of common stock to facilitate the
effectiveness of the Merger.
ETC-Texas and ETC-Canada jointly filed a registration statement with the
SEC to register the shares of stock issuable to the stockholders of ETC-Texas
under the terms of the Merger, subject to approval of the Merger by the
stockholders of the respective companies. The Merger was approved by
stockholders of ETC-Texas and ETC-Canada on January 31, 1997 and February 11,
1997, respectively. ETC-Canada, the surviving corporation, then continued into
Delaware and changed its name to Electronic Transmission Corporation, with the
stockholders of ETC-Texas receiving 1.25 shares of ETC-Canada common stock for
every one share of ETC-Texas common stock outstanding as of the time of the
Merger. The business operations of ETC-Texas were assumed by the survivor
following the Merger.
All references to the Company in this Annual Report on Form 10-KSB include
the Company's predecessors, ETC-Texas and ETC-Canada, unless otherwise
indicated.
General
The Company is in the business of providing process and systems solutions
to the non-provider sector of the health care industry. Process solutions are
automated through a broad range of application and data base information
systems. Information systems include software solutions developed by the Company
and are proprietary in nature. The Company believes that its software and
process solutions provide state-of-the-art methodology and technology to its
customers. In order to provide the process solutions, the Company contracts with
health care payors, self-insured companies and other payors, such as third party
administrators ("TPAs"), for automation and electronic data interchange ("EDI")
services. The Company also contracts with various managed care organizations and
PPO's to act as database manager and to perform repricing services.
During 1998, the Company also operated a TPA through ETC Administrative
Services, a Texas corporation ("ETC Services"), its wholly owned subsidiary and
terminated these activities effective January 1, 1999.
The Company's revenues are generated by different methods.. The Company is
paid a set price for scanning and automating each health care provider claim.
Additionally, the Company is paid a fee for its database management and
repricing services offered to PPO's.
Acquisition & Divestiture
In September, 1998, the Company entered into a letter of intent with Health
Plan Initiatives, Inc. ("HPI"), a Texas corporation, for the Company to acquire
HPI. The letter of intent was supplemented with an amendment dated October 5,
1998. The acquisition was closed effective January 31, 1999, by the Company
issuing 3,538,306 shares of unregistered common stock in exchange for all of the
outstanding shares of HPI. The acquisition was accomplished through the merger
of the Company's wholly owned subsidiary ETC Acquisition Corporation with and
into HPI. Upon consummation of the merger with ETC Acquisition Corporation, HPI
became a wholly-owned subsidiary of the Company.
HPI offered services similar to the Company. The primary business of HPI
was managed care access and health provider contracting with medical claims
repricing capabilities and other services related to the managed care sector of
health care delivery. Customers of HPI include health care payors, self-insured
companies, third party administrators, preferred provider organizations, and
health maintenance organizations.
HPI was wholly-owned by Robert Fortier, who served as President of HPI
until the acquisition. Since the signing of the October 5,
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1998, amendment to the letter of intent, Mr. Fortier has also served as
President and Chairman of the Board of the Company. As part of the transaction,
Mr. Fortier received 3,538,306 shares of unregistered Company common stock,
which was 42% of the outstanding common stock of the Company. The relative value
of HPI and number of shares as reflected in the October 5, 1998 amendment to the
letter of intent was determined by negotiations between the Company board of
directors and Robert Fortier.
Mr. Fortier received certain registration rights associated with the
Company shares and entered into a one year employment contract which
automatically renews for 2 one-year terms if not otherwise terminated pursuant
to the terms of the agreement. As part of his employment agreement, Mr. Fortier
also has the right to receive on the date of commencement of the second renewal
term, an option to purchase the equivalent of 3% of the outstanding shares of
Company common stock calculated on a fully diluted basis, if he remains employed
with the Company on the date of grant. The exercise price shall be the average
trading price on the date of grant.
In August of 1999 the Company sold HPI to A&G Financial Services which was
the largest client of HPI. The sale was for $394,000 in cash and the assumption
of $575,000 of debt. The Company believed at the time, that the cash and
assumption of debt by the purchaser was more important to the future success of
operations than the continuing management of HPI. The Company made the decision
to focus its resources on recovering and returning to the core business of the
Company which is automation processing. The sale price was a result of arms
length negotiations between the Company and A&G.
Company Business
The Company's principal business areas in 1999 included (i) claims automation,
(ii) managed care repricing, (iii) EDI services and (iv) automated reimbursement
index.
Claims Automation Services. The Company provides automation services of
healthcare claims for (i) self-insured companies that administer their own
healthcare plans and pay their own medical claims, and (ii) TPAs that administer
healthcare plans and pay medical claims for self-insured companies. The
automation process reduces or eliminates the need for front end data entry of
claims detail for those entities who must pay claims from paper bills. In
addition, this process paper is eliminated and the detail necessary to
adjudicate and pay the claim flows directly to the claim payment system without
human intervention. In 1998, several billion paper based medical claims were
processed in the United States. Prior to the payment of a claim, each paper
based claim passed through a minimum of two persons, resulting in more
transactions. The Company's proprietary systems and applications eliminate
duplication of some of the transactions. Through its scanning, optical character
recognition ("OCR") and data management technology, the Company eliminates the
multiple handling of paper and information associated with normal claims
processing. The Company's customers reduce data entry, data management and
warehousing costs by using the Company's products and thereby increasing
productivity.
Managed Care Repricing. The Company provides this service in two distinct
formats, In the first case, managed care repricing is a functionality contained
in the automation process for the payment of claims. While the claim detail is
passing through the ETC system during the conversion from paper to electronic
media electronic repricing to the appropriate managed care fee schedule occurs.
In the second instance, the Company provides a "back office" repricing function
for managed care organizations (PPO's & HMO's). this allows the managed care
organization to lower its administrative costs, reduce personnel and enhance the
savings it offers to its clients. There are over 1800 preferred provider
organization (PPO) and other managed care organizations in the United States.
Claims payors utilize multiple PPO's in the course of their daily activities.
The Company, through its Multiple Application Repricing Systems (MARS) allow for
application of multiple fee schedules in either the single user or multiple user
environment. The Company has, either resident in its system or via electronic
link, the fee schedules of over 25 managed care organizations. Customers access
the fee scheduled through various methods, including the Internet, modem,
scanner, or diskette. The Company's proprietary software identifies the patient,
payor and provider and then applies the appropriate fee schedule based upon
integrated data contained within MARS. The result of this application is a
seamless submission and transmittal of medical claim transactions. The
technology that allows the MARS system to deliver automated repricing to the
payor community is equally effective in providing automation to the managed care
organizations that use the fee schedules to provide and deliver the discounted
claims to the payors. These organizations, the majority of which are PPO's, have
found the same administrative difficulties in repricing claims as the payors
have had in paying claims. The use of the MARS system for PPO's has introduced a
whole new market to the Company. In 1998 there were no PPO customers. As of
March 1, 2000 the Company has six PPO customers.
EDI Services: the Company provides for the capture of electronic claim data
from clearinghouses and providers directly for claim payors and managed care
organizations. Currently, less than 30% of medical claims are transmitted or
delivered electronically and with the advent of the data security standards that
will be required by the Health Insurance Portability and Accountability Act
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(HIPAA), the Company sees a significant opportunity because of its experience in
the area of data encryption and movement. At this time the Company provides
services of this type for four of its customers and will be embarking on a
focused marketing campaign to grow this revenue source.
Automated Reimbursement Index. This fledgling yet potentially profitable
adaptation of Company data was in use only for two months in 1999. In that
period of time it provided for over $400,000 in savings for the initial test
customer and $60,000 in revenue for the Company. Taking advantage of the vast
data base of charges, reimbursements and utilized fee schedules the Company has
accumulated over the years, a procedure based and geographically sensitive index
of "reimbursements" has been developed. This index is electronically applied to
out of network physician claims for clients who use the Company automation
process. Charges are compared to the index and reduced to match the indicated
acceptable reimbursement level for that service in that geographical area based
upon actual billing and reimbursement data complied by the Company.
Business Strategies
General. The Company's current business strategy is to (i) continue to
increase cash flows by extensively marketing its products and services to the
non-provider sector of the health care industry, (ii) enhance existing client
relationships by offering a broader range of services, and (iii) become a
leading edge provider of EDI services and take advantage of the Internet
capabilities of the Company.
Enhanced Marketing Effort. Although the Company has utilized direct
marketing efforts to solicit customers in the past, new customers have been
generated through referrals from a small number of existing clients. Since the
Company's areas of service have grown and been enhanced, the Company will
supplement its direct sales force in the future. The sales force will be
comprised of employees of the Company and outside sales personnel with whom the
Company will have entered into specific marketing agreements. The Company
believes that to be successful in the future, it will have to expand the range
of existing services, its distribution channels and its sales force. The Company
also intends to pursue strategic alliances with other health care claims systems
vendors. As of March 1, 2000, the Company is in serious discussions with a
number of potential strategic alliance partners.
Professional Services. The Company currently provides system and process
review and design, installation and integration services to its customers. The
Company does not currently charge the customer for these services. As the
Company's services become more customized and are expanded, the Company believes
that it will be able to generate a revenue stream from this activity. Several
customers have availed themselves of the professional services of the Company on
a limited basis during 1999 and the ability to generate revenue in this area
should grow.
Vendors. The Company ceased furnishing customers with an imaging system
comprised of hardware, software and certain other peripheral devices free of
charge in 1999. The Company has become a value added reseller ("VAR") for the
components of the imaging system. As a VAR, the Company has been able to enhance
its profit margins on the provision of these systems without increasing its cost
of sales.
System and Work Flow Enhancements
The Company continually evaluates new imaging components including imaging
software capabilities. Additionally, the Company is continually enhancing its
proprietary software used in the provision of the services to its customers. The
Company seeks to make enhancements to existing service components in response to
recommendations made by its customers.
Sales and Marketing
The Company actively markets is services to PPO's, group health insurance
companies, worker's compensation insurance companies, TPA's and self-insured
employers through the Company's direct sales force. The Company creates interest
and demand for its products and services primarily through telemarketing
efforts, direct contact with potential customers and follow-up marketing
literature and information delivered through the Internet and designed to
specifically address customer needs. The Company also participates in managed
healthcare conventions and trade shows. The Company retained a public relations
consultant in January 2000 to initiate an advertising program to enhance name
recognition reputation and Web site development.
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Customers
The Company markets its processing services primarily to self-insured
companies, TPAs and other provider networks or other cost containment companies.
The Company's current customer base includes one self-insured and
self-administered customer, six health care provider networks, seven TPA's, two
practice management companies and one managed care facilitator.
Under the terms of its existing agreement with Wal-Mart, the Company is
obligated to provide electronic claims processing and repricing services for a
term ending on September 30, 2000 for which an "evergreen" provision exists.
Revenues generated from Wal-Mart represented approximately 74% and 62% of the
Company's revenues as of December 31, 1998 and 1999 respectively.
Competition
The non-provider sector of the health care industry is intensely competitive
and is characterized by companies that provide both electronic automation and
paper processing solutions. There are participants in the industry that provide
discount and repricing services in the market currently served by the Company.
The Company's competition in the market for electronic claims processing,
discount and repricing services is primarily concentrated in Internet enabled
business to business companies and certain software and hardware manufactures
through strategic alliances with sales and consulting groups which have greater
financial and technical resources and longer operating histories than the
Company.
The Company competes on the basis of its specialized knowledge and expertise
in the managed healthcare services industry and on its ability to deliver
effective services to the customer with a high level of customer satisfaction
through a seamless single source at an affordable price. The managed healthcare
industry has experienced significant changes in recent years, primarily as a
result of rising healthcare costs and consolidations and mergers. The Company
will be required to respond to various competitive factors affecting the
healthcare industry, including new technologies that may be introduced; general
trends relating to demand for healthcare services; and potential regulatory,
economic and political factors.
Management of the Company believes that the Company's competitors, while
each providing segments of the services offered by the Company, do not offer the
interconnected array of services provided by the Company. The Company believes
that it possesses a competitive advantage by offering its claims automation, and
repricing services in a format that connects payors, payees and service
providers. There can be no assurance that the Company will be able to compete
successfully in the future.
Intellectual Property, Proprietary Rights, and Licenses
The Company regards certain features of its products and services as
proprietary and relies on a combination of contract, copyright, trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and clients and limits access to and distribution
of its software, documentation, and other proprietary information. The Company
believes that trade secret and copyright protection are less significant than
factors such as the knowledge, ability, and experience of the Company's
employees and the timeliness and quality of the services they provide. The
Company has aggressively pursued suspected infringement of its proprietary
rights.
Regulatory Matters
The Company is not subject to any direct federal or state government
regulation because of the nature of its business. There can be no assurance that
federal or state authorities will not in the future impose restrictions on its
activities that might adversely effect the Company's business. The Company
believes that no impending regulations such as those that will be promulgated
under HIPAA will adversely effect operations or the ability to serve customers
in the future.
Employees
As of March 15, 2000, the Company had 28 full-time employees and 3 part-time
employees. None of the Company's employees is represented by a labor union or
subject to a collective bargaining agreement. The Company has never experienced
a work stoppage and believes that its employee relations are good.
Year 2000 Modifications
The computer systems of the Company functioned according to plan following
Y2K modifications. There were no customer
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complaints or slowdowns as a result of Y2K modifications.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns no real property. The Company's principal executive office
is located in a 5200 square foot office facility in Addison, Texas. The lease
for the Company's offices expires September 30, 2001 and provides for monthly
rental payments of $10,144. In addition, HPI leased 1800 square feet in Hurst
with a monthly rental payment of $2,100 which ended in December of 1999.
ITEM 3. LEGAL PROCEEDINGS.
On April 21, 1998, a former employee, Ann C. McDearmon initiated an action
against the Company in the 160th Judicial District Court of Dallas County,
Texas. The suit alleged a claim for involuntary termination and unpaid
compensation due the employee. The Company denied that it terminated the
employee or that it owed the employee any additional compensation. The suit was
settled in January of 2000.
HPI and Robert Fortier were parties to a suit filed in February of 1998 in
the 116th Judicial District Court of Dallas County, Texas. The suit was
originally brought by A&G Financial Services, Inc. against Medical Claims
Solutions, Inc. et al ("MCS") for misappropriation of assets and trade secrets
and interference with customers. MCS filed cross-actions against A&G, Robert
Fortier, HPI, and others alleging conspiracy to convert customers of MCS. HPI
was a vendor for MCS and had filed a counterclaim against MCS for approximately
$250,000 in past due compensation. HPI and Mr. Fortier denied all of the
allegations. The suit was dropped in February of 2000.
The Company is named as defendant in a suit filed in the 101st Judicial
District Court for Dallas County in July 1999 by W. Mack Goforth, a former
officer of the Company. Mr. Goforth alleges damages in the amount of $667,338
for a breach of his employment agreement. The Company answered the suit, denying
Mr. Goforth's claims and affirmatively defending that he was terminated for
cause.
Should the Company be required to pay damages as a result of any litigation,
the payment of such damage award may have a material adverse effect upon its
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock began trading on The OTC Bulletin Board on April
4, 1997 under the symbol "ETSM". The following table sets forth the high and low
bid information for the Common Stock as reported on The OTC Bulletin Board. The
table reflects inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
January 1 - March 31, 1998 $ 0.69 $ 0.38
April 1 - June 30, 1998 $ 0.31 $ 0.12
July 1 - September 30, 1998 $ 0.25 $ 0.12
October 1 - December 31, 1998 $ 0.50 $ 0.06
January 1 - March 31, 1999 $ 0.68 $ 0.18
April 1 - June 30, 1999 $ 0.63 $ 0.32
July 1 - September 30, 1999 $ 0.63 $ 0.31
October 1 - December 31, 1999 $ 0.56 $ 0.31
January 1 - March 28, 2000 $ 0.81 $ 0.34
</TABLE>
The Company effected a four to one reverse stock split on July 1, 1998. The
above prices have been adjusted for such action.
Holders: As of March 16, 2000, there were approximately 382 holders of record
for the Common Stock.
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Recent Financings
On December 17, 1997, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") pursuant to which Special Situations
Private Equity Fund, L.P. and Special Situations Cayman Fund, L.P.
(collectively, the "Investors") obtained the right to purchase up to an
aggregate of 3,000,000 shares of Common Stock, for total consideration of
$1,500,000. The Purchase Agreement called for the sale and purchase of the
available shares to occur in two tranches. On December 17, 1997, the Investors
purchased an aggregate of 2,447,719 shares of Common Stock, for total cash
consideration of $1,223,859.50. The Investors did not purchase the remaining
552,281 shares of Common Stock.
In March, 1999, Special Situations was issued an additional 651,751 shares
of common stock in exchange for a forbearance agreement and the termination of
purchase rights for additional shares owed under the Purchase Agreement.
In June 1998, the Company issued 440,000 shares of its common stock (adjusted to
110,000 post-split shares) for a consideration of $110,000 in cash.
Additionally, the Company sold convertible debentures totaling $170,000 with
maturates from December 31, 1998 to January 7, 1999. One share of pre-split
Common Stock was issued for each dollar of accrued interest. The debenture
holders converted this debt into 480,000 shares of Common Stock.
In December, 1998, the Company arranged a $500,000 line of credit through
Compass Bank. The line of credit was obtained through the use of letters of
credit and a guarantee provided by two individuals. The Company issued 250,000
shares of common stock to the two individuals as consideration for their
guarantees. The line of credit was paid off and closed in 1999.
In January of 1999 the Company issued 3,538,306 shares of Common Stock as
part of the merger with Health plan Initiatives, Inc.
In October of 1999 the Company offered and sold 1,620,000 shares of Common
Stock to six accredited individuals for $660,000.
In each instance described above the Company relied on exemption from the
Securities Act of 1933 as provided by Regulation D, Rule 506 and Section 4(2).
No public solicitation of investors was made and the Company believes that all
purchasers are either accredited investors or sophisticated investors.
Dividend Policy
The Company has not previously paid any cash dividends on its Common Stock
and does not anticipate or contemplate paying dividends on the Common Stock in
the foreseeable future. It is the present intention of management to utilize all
available funds for the development of the Company's business. In addition, the
Company may not pay any dividends on common equity unless and until all dividend
rights on outstanding preferred stock, if any, have been satisfied. The only
other restrictions that limit the ability to pay dividends on common equity or
that are likely to do so in the future, are those restrictions imposed by law or
by certain credit agreements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULT OF
OPERATIONS.
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto, included elsewhere herein. The
information below should not be construed to imply that the results discussed
herein will necessarily continue into the future or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of management of the
Company. Because of the Company's recent acquisitions the results of operations
from period to period are not necessarily comparative.
Overview
In January 1998, the Company, through ETC Services, initiated a TPA division
to provide TPA services to its existing clients. Through ETC Services, the
Company provided a continuum of services to a self-insured corporate customer
beginning with the scanning of the health care provider's claim and concluding
with the payment to the health care provider. As a result of significant losses
attributed to this division, the Company ceased its TPA division on December 31,
1998.
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Results of Operations of the Company
Year Ended December 31, 1999 Compared to 1998
Revenues. Revenues from automation services totaled $1,483,855 and
$1,048,762 for the fiscal years ended December 31, 1999 and 1998, respectively.
Revenues from repricing services totaled $1,104,775 for the fiscal year ended
December 31, 1999 compared to $1,418,248 for 1998. The difference in the gross
revenue is negligible however it should be noted that the Company in 1999
concentrated on delivering its core business product of automation rather than
continuing the costly process of accessing managed care networks for the purpose
of securing discounts on provider bills.
For the fiscal year ended December 31, 1999, fees paid by Wal-Mart for
automation services were approximately 62% of total revenues. In fiscal 1998,
Wal-Mart accounted for 74% of total revenues, which demonstrated the
diversification and growth of the Company's client base during the period.
Cost of Revenues. Cost of revenues totaled $911,379 and $1,300,658 for the
fiscal years ended December 31, 1999 and 1998, respectively. Not only is the
cost of producing automation revenue less than that of producing repricing
discount revenue but in 1998 a significant amount of personnel costs were
attributed to cost of revenue as a number of employees were provided for in a
lease arrangement.
Gross Profit. Gross profit for fiscal 1999 was $1,677,251 as compared to
$1,166,352 for fiscal 1998. The gross profit margin for fiscal 1999 was 64.8%
verses 47.3% for fiscal 1998. Gross profit increased significantly because of
efficiency in operations and that the cost for automation revenue is less than
that of repricing revenue because the Company controls the automation process
and its efficiencies. In the repricing environment the Company is forced to
share approximately 50% of its revenues with the managed care network accessed.
Other Expenses. Sales, general and administrative costs increased to
$2,801,344 for the fiscal year ended December 31, 1999, compared to $ 1,656,125
for the fiscal year ended December 31, 1998. The Company has issued stock
options to non-employees which are considered compensatory. Compensation costs
totaling $138,760 and $20,267 was recognized as expense during the fiscal years
ended December 31, 1999 and 1998, respectively. During the fiscal years ended
December 31, 1999 and 1998, the Company issued 377,500 shares of Common Stock
for services for a total expense of $99,663 and 879,100 shares of Common Stock
for services for a total expense of $164,105, respectively.
Sales, general and administrative expenses consisted primarily of personnel
costs, rent, telephone, and professional fees. For the fiscal year ended
December 31, 1999 total personnel costs were $1,633,364, rent cost was $157,546,
telephone costs were $105,469 and professional fees $217,110. For the fiscal
year ended December 31, 1998 total personnel costs were $1,314,442, rents were
$116,695, telephone costs were $113,467 and professional fees were $108,269.
Professional fees were incurred due to year-end audit, legal matters and
computer consulting. Personal costs increased because in 1998 a significant
number of employees were provided under lease arrangements that appeared as cost
of revenue. The increase in rent was due to escalators included in the original
rental agreement. Professional fees almost doubled due to the cost of audits and
legal matters.
Net interest expense decreased to $27,252 for the fiscal year ended December
31, 1999 compared to $131,301 for the fiscal year ended December 31, 1998. This
was because the Company expanded efforts to pay off or renegotiate in exchange
for equity as much debt as possible.
Net Loss. The Company reported a net loss of $1,111,517 for the fiscal year
ended December 31, 1999 as compared to a net loss of $1,043,108 for the fiscal
year ended December 31, 1998 or ($.11) and ($.27) basic earnings per share for
fiscal 1999 and fiscal 1998, respectively. For the fiscal years ended December
31, 1999 and 1998, the Company incurred non-cash employee stock compensation
expense and stock for consulting services expense totaling $238,423 and
$184,381, respectively, as discussed above. Such compensation expenses
materially increased the Company's net loss for the referenced periods. It is
not anticipated that the Company will incur similar expense items in future
periods.
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Liquidity and Capital Resources
Since 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 December 31, 1999 were $150,065.
At March 30, 2000, the Company had 16 clients including self-insured
companies and medical provider networks. The Company expended considerable
effort and resources 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.
In December, 1998, the Company arranged a $500,000 line of credit through
Compass Bank. The line of credit was obtained through the use of letters of
credit and guarantee provided by two individuals. The Company issued 250,000
shares of common stock to the two individuals as consideration for their
guarantees. In November of 1999, $300,000 of the proceeds raised from the stock
offering was used to pay off this line.
The Company is currently reviewing its cost structure and accessing a
possible reduction in the fixed cost portion of its infrastructure. The Company
intends to increase revenues by expanding its customer base and increasing
profitability. Additionally, the Company continues to enhance its productivity
through software improvements. The Company plans no material working capital
expenditures over the next 12-month period. The Company believes that the net
proceeds from, the existing liquidity sources and the anticipated working
capital provided from improved operations, will satisfy its cash requirements
for the next 12 months.
The Company, in the normal course of events, makes efforts to negotiate
extended payments where possible to assist in cash flow management. If these
efforts are not successful there may be and adverse impact on cash when the lump
sums are paid.
ITEM 7. FINANCIAL STATEMENTS.
The financial information required by this Item is found beginning at page
F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 22, 1999, the Board of Directors accepted the resignation of
Simonton, Kutac & Barnidge, LLP and appointed the firm of Jackson & Rhodes PC as
its independent accountants. During the prior two years, Simonton Kutac &
Barnidge did not have any dispute regarding any matter of accounting principles
or practices, financial statement disclosure or audit scope or procedures. This
change in accountants was reported on Form 8-K dated November 22, 1999
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16 OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table sets forth the names and ages of the directors and
executive officers of the Company on December 31, 1999
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Fortier 51 Chief Executive Officer and
Chairman of the Board
Timothy P. Powell 42 President - and Director
Richard Hershey 40 Director
Ken Andrew 48 Director
Scott Stewart 41 Director
Duncan McDonald 54 Director
</TABLE>
9
<PAGE> 10
Robert Fortier has served as Chairman and Chief Executive Officer of the
Company since October 1998. Mr. Fortier has 28 years of experience and service
in the healthcare and managed care industry. Mr. Fortier was the founder and
sole stockholder in Health Plan Initiatives, Inc., since its inception in 1994
which was acquired by the Company in January of 1999. Prior to the founding of
HPI, he founded two national managed care organizations (ProAmerica Managed Care
and Provider Networks of America). Mr. Fortier has served as Vice President of
Group Insurance Marketing for Michigan Life/National Casualty and Vice President
and Group Executive of American Life Insurance Company of the American
International Group. Mr. Fortier is a graduate of The College of the Holy Cross
in Worcester, Massachusetts with a degree in Economics and Political Science.
Timothy P. Powell was appointed President in August 1999 and had served as
Executive Vice President -- Data Services and as a director of the Company since
February 1995. From 1981 to February 1995, Mr. Powell served as a self-employed
computer consultant for individuals and corporations. Mr. Powell contracted
consulting projects with independent, governmental organizations and Fortune
1000 companies, and provided services in system design, implementation,
applications development and procurement specifications.
Richard Hershey has served as Director of the Company since December, 1998.
Mr. Hershey is also President and Chief Executive Officer of Hershey Financial,
Ventura California which he founded in 1997. Mr. Hershey is an individual
investor and financial consultant with interest in health care and publishing.
From 1990 until 1997 he served as Senior Vice President of Preferred Health
Network.
Duncan Macdonald has served as Director since March, 1998. Mr. Macdonald
has served as Vice President of CBA, Inc. since 1986 Mr. Macdonald has over 30
years in the field of health claim payments and operations. He serves as the
chief operating officer of CBA which is a wholly owned entity of the National
Rural Electric Cooperative Association. Mr. Macdonald has developed numerous
operating initiatives in health care administration and is viewed as an industry
leader in technology utilization.
Scott Stewart has served as Director since May of 1999. Mr. Stewart has
served as interim President of the Company from June through August of 1999 and
as the Company legal counsel. Mr. Stewart has been a partner in the law firm of
Horsley and Stewart for twenty years and is graduate of the Southern Methodist
University Law School.
Ken Andrew has served on the Board since August of 1999 and since 1998 has
provided investment banking counseling to the Company. Mr. Andrew has been an
independent stockbroker in Fort Worth, Texas since 1978.
Director Compensation Meetings and Committees of the Board of Directors
Mr. Hershey and Mr. Macdonald received options to purchase 10,000 shares of
the Company's common stock for $.19 per share in 1998 and no other compensation
for their service as directors. The Company does not presently compensate
employees who are also directors for serving in such a capacity. Other than
options granted to Mr. Hershey and Mr. Macdonald, directors are not compensated
for serving as directors or attending either Board or Committee meetings;
however out of pocket expenses are reimbursed by the Company.. Each director
currently holds office until the next annual meeting of stockholders and until a
successor has been elected and qualified or until his earlier resignation or
removal.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act, as amended (the "Exchange
Act"), requires directors, executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities ("10%
holders"), to file with the Securities and Exchange Commission (the SEC) initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors, officers and 10% holders are
required by SEC regulation to furnish the Company with copies of all of the
Section 16(a) reports they file.
Based solely on a review of reports furnished to the Company or written
representations from directors and executive officers during the fiscal year
ended December 31, 1999, all Section 16(a) filing requirements applicable to its
directors, officers and 10% holders for such year were complied with except in
the case of David Hannah, 10% holder and former Director, who filed Form 3 on
January 21, 2000 which was not on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued
10
<PAGE> 11
for services, including salary and bonus amounts, rendered in all capacities to
the listed current and former executive officers of the Company. No other
executive officer of the Company, or any predecessor entity, received salary and
bonus compensation in excess of $100,000 in the referenced fiscal years, nor did
any executive officer receive perquisites or other personal benefits exceeding
either $50,000 of 10% of their total annual salary for the referenced periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL RESTRICTED SECURITIES
NAME/TITLE YEAR COMPENSATION STOCK UNDERLYING OTHER
SALARY/BONUS AWARDS OPTIONS/SARs
<S> <C> <C> <C> <C> <C>
Robert Fortier,
Chairman of the 1999 $325,000 -0- -0- -0-
Board, and Chief 1998 -0-
Executive officer (1)
Timothy P. Powell- 1999 $120,000
President (2) 1998 $123,231 -0- 286,667 -0-
</TABLE>
(1) Mr. Fortier has deferred the $50,000 compensation due at the signing of the
employment agreement as well as $23,500 of salary in 1999. (2) Mr. Powell
has deferred $9,500 of salary in 1999
Employment Agreements and Related Matters
The Company and Mr. Fortier entered into an Employment Agreement effective
February 1, 1999 (the "Fortier Employment Agreement"). The Fortier Employment
Agreement is for a term of one year ending January 31, 2000, with automatic
renewals for two additional one year terms beginning February 1, 2000, and
February 1, 2001, respectively. As part of the Agreement, the Company paid Mr.
Fortier $50,000 upon signing as compensation for services rendered from October
5, 1998, to January 31, 1999. In addition, Mr. Fortier is to receive annual
compensation of $300,000, payable in monthly increments of $25,000. Mr. Fortier
is also eligible for bonuses and benefits payable under compensation and bonus
arrangements, as developed by the board of directors. The Fortier Employment
Agreement also provides that effective on date of the commencement of the second
renewal term, Mr. Fortier shall receive an option to purchase 3% of the shares
of Company common stock calculated on a fully diluted basis, if Mr. Fortier is
employed on the date of grant. The exercise price shall be the average trading
price of the common stock on the date of grant. Mr. Fortier is also entitled to
severance and certain fringe benefits as provided in the Fortier Employment
Agreement.
In May of 1999 Scott Stewart was appointed interim president of the Company
to assist in the streamlining of the administrative process. At that time he was
also elected a Board Member.
In August of 1999 Brian Schoonmaker resigned as Executive Vice President -
COO and Board Member. Scott Stewart, completing his administrative restructuring
duties, resigned as interim President and Timothy Powell was named President.
In August 1999 Ken Andrew was elected to the Board to replace Mr.
Schoonmaker.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/ OPTIONS/SARs GRANTED TO EXERCISE OF BASE EXPIRATION
NAME/TITLE SARs GRANTED EMPLOYEES IN FISCAL 1999 PRICE ($/SH) DATE
<S> <C> <C> <C> <C>
Ken Andrew - Director 300,000 75.0 $.4375 May 1, 2006
Michael Zipp 100,000 25.0 $ .50 (1)
</TABLE>
(1) Mr. Zipps options expire as follows: 25,000 on June 1, 2000; 25,000 on
December 31, 2000; 25,000 on June 1, 2001 and 25,000 on December 31, 2001
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS/SARs AT OPTIONS/SARs AT
NAME/TITLE EXERCISE (#) REALIZED FISCAL YEAR-END FISCAL YEAR-END
(#) ($)
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C>
Timothy Powell,
President -0- -0- 286,667/-0- -0-
</TABLE>
11
<PAGE> 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides certain information based on the outstanding
securities of the Company as of March 16, 2000 with respect to each director,
each beneficial owner of more than 5% of the Company Common Stock and all
corporate officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF PERCENT OUTSTANDING
OF BENEFICIAL OWNER (1)(2) BENEFICIAL OWNERSHIP COMMON STOCK
-------------------------- -------------------- -------------------
<S> <C> <C> <C>
Robert Fortier (3) 3,463,300 30.9
Timothy P. Powell (3)(4) 336,667 3.0
Richard Hershey (1)(3) 10,000 *
Duncan Macdonald (3) 20,000 *
Dave Hannah 1,862,579 16.6
All executive officers and 42.9
directors as a group 4,805,903
(6 persons as to the Company)
Ken Andrew (3)(5) 658,430 5.9
Scott Stewart(3) 317,500 2.8
</TABLE>
- -------------------
* Indicates less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of such options or
warrants. Each beneficial owner's percentage ownership is determined by assuming
that options or warrants that are held by such person (but not those held by any
other person) and which are exercisable within 60 days have been exercised.
Unless otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all common shares
beneficially owned by them. (2) Unless otherwise indicated, the address of each
beneficial owner identified is: c/o the Company 15301 Spectrum Drive, Suite 501
Addison, Texas 75001. (3) Director of the Company. (4) Represents options to
purchase 116,667 shares with an exercise price of $.04 per share, 125,000 shares
with an exercise price of $.50 per share, and 50,000 shares with an exercise
price of $1.00 per share. (5) Includes options to purchase 300,000 shares with
an exercise price of $.4375 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Conflicts of Interest. Certain officers, directors and related parties have
engaged in business transactions with the Company. The Company has entered into
consulting, marketing and leasing agreements, respectively, with certain of its
directors and stockholders. In September, 1998, the Company entered into a
letter of intent with HPI for the Company to acquire HPI. The letter of intent
was amended October 5, 1998. The acquisition was closed effective January 31,
1999. HPI was wholly-owned by Robert Fortier, who served as president of HPI
until the acquisition.
Management of the Company believes that the terms of transactions with
officers, directors and related parties were or are as favorable as those that
could have been obtained from unaffiliated parties under similar circumstances.
It is the Company's policy that transactions between it and its affiliates will
be on terms no less favorable than could be obtained from unaffiliated third
parties and be approved by a majority of the disinterested members of the Board
of Directors.
In early 1995, ETC-Texas purchased certain assets of Sterling National
Corporation ("Sterling"), a company wholly owned and operated by L. Cade Havard,
the former Chairman of the Board, Chief Executive Officer and President of the
Company, in exchange for a cash payment of $210,000 and the issuance of
3,965,100 shares of ETC-Texas common stock. As part of the resolution of
disputes between L. Cade Havard and the Company, in July, 1998, Havard returned
1,850,000 (462,500 post-split) shares of Common
12
<PAGE> 13
Stock of the Company to the Company. These shares were canceled. There are no
current arrangements between the parties and none are presently contemplated.
The Company is a party to an equipment lease and stock option agreement
(the "Lease Agreement"), dated October 1,1998, with Ironwood Leasing Ltd., a
Texas corporation ("Ironwood") Principals of Ironwood, including Dennis Barnes,
a former director of the Company (during 1996, 1997, & 1998), are also
stockholders of the Company. Under the terms of the Lease Agreement, the Company
leases certain scanning equipment necessary to scan paper claims and convert
them into electronically transmittable claims data information. Under the Lease
Agreement, the Company also granted to Ironwood the option to purchase 200,000
shares of Common Stock of the Company at an exercise price of $1.00 per share.
In a letter dated January 12, 2000, Ironwood Leasing Ltd. (Ironwood) made demand
for unpaid lease payments, which at the time amounted to $15,000 in connection
with the Lease. The lease calls for payments of $5,000 per month and terminates
on September 30, 2001. The Company believes the lease to be usurious and
presently negotiating with Ironwood to resolve the matter. If the negotiations
fail, the Company intends to defend any claims under the lease and pursue a
counterclaim for usury. No suit has been filed therefore management is not in a
position to quantify the Company's exposure beyond the lease terms.
In January of 1999 the Company entered into a fee arrangement ($48,000) with the
law firm of Horsley and Stewart for the purpose of providing legal services to
the Company for the 1999 calendar year. Mr. Scott Stewart, a partner in the firm
and former board member subsequently was named interim President and appointed
to the Board. Mr. Stewart received 120,000 shares of common stock from the
Company and 60,000 shares of stock from Mr. Fortier's account in consideration
of services rendered as President.
In October 1999 the Company entered into a Memorandum of Understanding with a
group made up of former and current Board members Dennis Barnes, Scott Stewart
and Ken Andrew which will pay the members a commission on certain enumerated
business for the period September 1, 1999 through August 31, 2002. As of March
30, 2000 no commission has been paid.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-K.
(a) Financial Statements and Exhibits Page
1. Financial Statements. The following financial statements are submitted
as part of this report:
<TABLE>
<S> <C>
Independent Auditor's Report ............................................. F-2
Consolidated Balance Sheets-December 31, 1999, and 1998 .................. F-3
Consolidated Statements of Operations-Years Ended
December 31, 1999 and 1998 ........................................... F-4
Consolidated Statements of Changes in Stockholders' Equity-Years Ended ... F-5
December 31, 1999 and 1998
Consolidated Statements of Cash Flows-Years Ended
December 31, 1999 and 1998 ........................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
</TABLE>
2. Exhibits
Exhibit Number Description of Exhibits
2.1* Agreement on Plan of reorganization, dated January 31, 1999
(incorporated by reference from Exhibit 2 to the Company's Form 8-K,
dated February 10, 1997).
2.2* Disposition of Asset - Purchase Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2 to the Company's Form 8-K,
dated August 27, 1999).
2.3* Disposition of Asset - Security Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2.1 to the Company's Form 8-K,
dated August 27, 1999).
2.4* Disposition of Asset - Guaranty Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2.2 to the Company's Form 8-K,
dated August 27, 1999).
3.1* Articles of Incorporation of the Company, dated September 5, 1986
(incorporated by reference from an Exhibit to the Company's
Registration Statement on Form S-4, dated January 7, 1997).
13
<PAGE> 14
3.2* Amendment to the Articles of Incorporation of the Company, dated March
26, 1996 (incorporated by reference from an exhibit to the Company's
Registration Statement on Form S-4, dated January 7, 1997).
3.3* Bylaws of the Company, dated September 5, 1986 (incorporated by
reference from an Exhibit to the Company's Registration Statement on
For S-4, dated January 7, 1997).
10. Employment Agreement, dated February 1, 1999 between Electronic
Transmission Corporation and Robert Fortier (incorporated by reference
from Exhibit 10 to the Company's Form 8-K, dated February 10, 1999).
21. Subsidiary of Registrant - ETC Administrative Services, Inc., a Texas
Corporation.
27.1 Financial Data Schedule.
* Previously Filed
(b) Reports on Form 8-K.
On November 24, 1999 the Company filed a Form 8K report under item number
304(a) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on March 30, 2000.
ELECTRONIC TRANSMISSION CORPORATION
By: /s/ Robert Fortier
--------------------------------------
Robert Fortier, Chairman of the Board,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert Fortier
- -------------------------------------------
Robert Fortier, Chairman of the Board,
and Chief Executive Officer
Date: March 30, 2000
/s/ Timothy P. Powell
- -------------------------------------------
Timothy P. Powell, President and Director
Date: March 30, 2000
/s/ Scott Stewart
- -------------------------------------------
Scott Stewart, Director
Date: March 30, 2000
/s/ Ken Andrew
- -------------------------------------------
Ken Andrew, Director
Date: March 30, 2000
/s/ Duncan Macdonald
- -------------------------------------------
Duncan Macdonald, Director
Date: March 30, 2000
/s/ Richard Hershey
- -------------------------------------------
Richard Hershey, Director
Date: March 30, 2000
/s/ Michael Lovell
- -------------------------------------------
Michael Lovell, Controller, Corporate
Secretary
Date: March 30, 2000
14
<PAGE> 15
ELECTRONIC TRANSMISSION CORPORATION
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report...............................................................................F-2
Consolidated Balance Sheets at December 31, 1999 and 1998..................................................F-3
Consolidated Statements of Operations For the Years Ended
December 31, 1999 and 1999........................................................................F-4
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999 and 1998....................................................F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1999 and 1998........................................................................F-6
Notes to Consolidated Financial Statements.................................................................F-7
</TABLE>
F-1
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Electronic Transmission Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Electronic
Transmission Corporation and Subsidiary, a Delaware corporation, as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Electronic Transmission Corporation and Subsidiary as of December 31, 1999 and
1998, and the results of operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
Jackson & Rhodes P.C.
Dallas, Texas
February 16, 2000 (except for Note 12, which
is as of March 7, 2000)
F-2
<PAGE> 17
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 150,065 $ 122,039
Accounts receivable 274,038 183,863
Prepaid expenses 106,439 55,797
Current portion, note receivable (Note 3) 45,376 -
----------- -----------
Total current assets 575,918 361,699
----------- -----------
Property and equipment, net 221,019 320,736
Other assets:
Deposits 6,749 6,749
Note receivable (Note 3) 77,081 -
----------- -----------
$ 880,767 $ 689,184
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities (Note 6) $ 468,181 $ 410,954
Notes payable and convertible debentures (Note 7) 55,718 280,318
Current portion, capital lease obligations 61,544 53,963
Net liabilities of discontinued operations (Note 4) 236,735 141,317
----------- -----------
Total current liabilities 822,178 886,552
Long-term capital lease obligations 65,671 126,520
----------- -----------
Total liabilities 887,849 1,013,072
----------- -----------
Commitments and contingencies (Note 12) - -
Stockholders' equity (deficit):
Preferred stock, $1 par value, 2,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value, 20,000000
shares authorized; 11,216,178 and 4,926,024 shares
issued and outstanding, respectively 11,337 4,927
Additional paid-in-capital 9,215,503 7,793,590
Accumulated deficit (9,233,922) (8,122,405)
Accumulated other comprehensive income - -
----------- -----------
Total stockholders' equity (deficit) (7,082) (323,888)
----------- -----------
$ 880,767 $ 689,184
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 18
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Service revenues $ 2,588,630 $ 2,467,010
Costs and expenses:
Costs of revenues 911,379 1,300,658
Selling, general and administrative 2,801,344 1,656,125
Depreciation and amortization 226,052 264,757
----------- -----------
Total costs and expenses 3,938,775 3,221,540
----------- -----------
Loss from operations (1,350,145) (754,530)
Other income (expense):
Interest expense, net (27,252) (131,301)
Other income 235,074 956
Gain on sale of subsidiary (Note 3) 17,097 -
----------- -----------
Total other income 224,919 (130,345)
----------- -----------
Loss from continuing operations (1,125,226) (884,875)
Gain (loss) from discontinued operations 13,709 (158,233)
----------- -----------
Net loss $(1,111,517) $(1,043,108)
=========== ===========
Basic loss per common share:
Loss from continuing operations $ (0.11) $ (0.23)
=========== ===========
Net loss $ (0.11) $ (0.27)
=========== ===========
Diluted loss per common share:
Loss from continuing operations $ (0.12) $ (0.44)
=========== ===========
Net loss $ (0.12) $ (0.52)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 19
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 3,506,506 $ 3,507 $ 7,362,697 $(7,079,297) $ 286,907
Issuance of shares for cash 247,918 248 109,934 - 110,182
Issuance of shares for interest 42,500 43 12,708 - 12,750
Conversion of debt 250,000 250 124,750 - 125,000
Issuance of shares for services 879,100 879 163,226 - 164,105
Issuance of options to nonemployees - - 20,276 - 20,276
Net loss - - - (1,043,108) (1,043,108)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 4,926,024 4,927 7,793,590 (8,122,405) (323,888)
Issuance of shares for cash 1,725,000 1,725 671,400 - 673,125
Conversion of debt 580,097 580 164,448 - 165,028
Issuance of shares for services 377,500 378 99,285 - 99,663
Issuance of shares for HPI 4,190,057 4,190 347,557 - 351,747
Cancellation of shares (462,500) (463) 463 - -
Issuance of options to nonemployees - - 138,760 - 138,760
Net loss - - - (1,111,517) (1,111,517)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 11,336,178 $ 11,337 $ 9,215,503 $(9,233,922) $ (7,082)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 20
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,111,517) $(1,043,108)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of common stock for services rendered 99,663 164,105
Issuance of common stock for interest - 12,750
Gain on sale of subsidiary (17,097)
Loss on refinancing of capital lease - 58,943
Change in net assets of discontinued operations 103,622 (63,021)
Write-off of software of discontinued operations - 350,946
Non-cash compensation from stock options 138,760 20,276
Depreciation and amortization 250,579 264,757
Changes in operating assets and liabilities:
Accounts receivable-trade (423,217) 401,130
Employee advances - -
Prepaid expenses 10,421 (26,537)
Deposits and other assets - (6,740)
Accounts payable and accrued expenses 313,914 (545,778)
----------- -----------
Net cash used in operating activities (634,872) (412,277)
----------- -----------
Cash flows from investing activities:
Payments on capital lease receivable 2,417 25,306
Purchases of furniture and equipment (62,243) (32,975)
Receipts on note receivable 123,592 -
----------- -----------
Net cash provided by (used in) investing activities 63,766 (7,669)
----------- -----------
Cash flows from financing activities:
Notes payable (20,725) (73,409)
Payments on capital leases (53,268) (43,353)
Issuance of common stock for cash 673,125 110,182
----------- -----------
Net cash provided by (used in) financing activities 599,132 (6,580)
----------- -----------
Net increase (decrease) in cash 28,026 (426,526)
Cash and equivalents, beginning of period 122,039 548,565
----------- -----------
Cash and equivalents, end of period $ 150,065 $ 122,039
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 21
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Electronic Transmission Corporation ("ETC" or "Company"), a Delaware
corporation, provides services to self-insured companies, third party
administrators that pay claims for self-insured companies and other
medical provider networks or cost containment companies providing
services to self-insured companies. The Company's automation
capabilities encompass the entire workflow process involved in
processing and paying healthcare claims. Revenues are derived primarily
from commerce within the United States.
Consolidation
The financial statements include the accounts of the Company and ETC
Administrative Services, Inc., a Texas corporation and wholly owned
subsidiary (see Note 4). All intercompany accounts and transactions
have been eliminated.
Revenue and Expense Recognition
The Company recognizes revenue when services are performed. Expenses
are recognized in the period in which incurred.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers any
short-term cash investments with an original maturity of three months
or less to be a cash equivalent.
Office Furniture, Equipment and Leasehold Improvements
Office furniture, equipment and leasehold improvements are stated at
cost. Maintenance and repairs are charged to operating expense. Costs
of significant improvements and renewals are capitalized. Depreciation
is provided on the straight-line basis over the following useful lives:
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
<S> <C>
Office furniture 5 years
Computer and office equipment 3 years
Computer software 3 years
Leasehold improvements 5 years
</TABLE>
F-7
<PAGE> 22
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Office Furniture, Equipment and Leasehold Improvements (Continued)
Certain claims processing and imaging equipment are furnished to
customers for off-site use at the customer's facility. This equipment
is recorded at adjusted cost basis as computer and office equipment on
the Company's financial statement. Maintenance, other repairs and
significant improvements are accounted for in accordance with the
aforementioned policies.
Whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company evaluates
whether changes have occurred that would require revision of the
remaining estimated useful lives of the equipment or render the value
of the equipment not recoverable. The recoverability is evaluated by
estimating the future cash flows expected to result from use of the
asset and its eventual disposition. Future cash flows are the future
cash inflows expected to be generated by an asset less the future cash
outflows expected to be necessary to obtain those inflows. If an
impairment loss is recognized, it is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
The fair value of an asset is the amount at which the asset could be
bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. See Note 4 regarding
the writeoff of certain software of the Company's discontinued
operations.
Income Taxes
ETC utilizes the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to
be realized. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
Loss Per Share
Loss per common share was calculated by dividing the Company's net loss
by the weighted average common shares outstanding. Certain common stock
equivalents were excluded from the calculation, as such inclusion would
have had an anti-dilutive effect. The Board of Directors authorized a
1-for-4 reverse stock split of the company's $0.001 par value common
stock to be effective on July 1, 1998. As a result of the split, the
Company' issued and outstanding shares decreased to 3,560,506 shares,
and additional paid-in capital increased by $10,519. All references in
the accompanying financial statements to the number of common shares
and per-share amounts for 1999 and 1998 have been restated to reflect
the stock split.
F-8
<PAGE> 23
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying value of cash, receivables and accounts payable
approximates fair value due to the short maturity of these instruments.
The carrying value of short and long-term debt approximates fair value
based on discounting the projected cash flows using market rates
available for similar maturities. None of the financial instruments are
held for trading purposes.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing its financial
statements. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual
results could vary from the estimates that were used.
Stock-Based Compensation
The Company has issued incentive stock options. Compensation costs
arising from such options will be recorded as an expense. The
measurement date for determining compensation costs is the date of the
grant. Compensation cost is the excess, if any, of the quoted market
price of the stock at date of grant over the amount the employee must
pay to acquire the stock. Compensation cost is recognized as an expense
over the vesting period of the option. The Company measures
compensation costs using the intrinsic value based method of accounting
for stock issued to employees.
2. GOING CONCERN AND CONTINUED OPERATIONS
The financial statements have been prepared on the assumption that the
Company will continue as a going concern. The financial statements do
not include any adjustments to reflect the possible effects on the
recoverability and classification of assets or classification of
liabilities which may result from the inability of the Company to
continue as a going concern. ETC sustained a net operating loss of
$1,111,517 and $1,043,108 during the years ended December 31, 1999 and
1998, respectively. Cash used by operating activities for the same
periods aggregated $634,872 and $412,277, respectively. Additionally,
at December 31, 1999, ETC's current liabilities exceeded its current
assets by $246,260. ETC's continued existence depends upon the success
of management's efforts to raise sufficient new capital and increase
its customer base.
F-9
<PAGE> 24
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN AND CONTINUED OPERATIONS (CONTINUED)
Management plans to mitigate the going concern issues by increasing and
enhancing its current marketing efforts, which include (i) claims
processors, TPAs, insurance companies, self-insured and
self-administered employers; (ii) PPO's; (iii) HMO's and practice
management groups with entry into Internet enabled repricing activities
and electronic claims transaction movement. To this end the Company has
form a subsidiary known as PPOREPRICER.com to address and take
advantage of Internet applications in its repricing endeavors. Internet
and EDI transactions are not resource intensive and provide margins
that will generate additional cash flows without accompanying expenses.
3. ACQUISITION AND SALE OF HPI
Effective January 31, 1999, the Company acquired 100% of the
outstanding common shares of Health Plan Initiative, Inc. ("HPI"), a
company which had been wholly owned by the Company's President, Robert
Fortier. HPI offers services similar to the Company.
As a result of the transaction, Mr. Fortier received 3,538,306 shares
of Company common stock, which was 42% of the outstanding stock of the
Company. Mr. Fortier received certain registration rights associated
with the Company shares and entered into a one-year employment contract
which automatically renews for two one-year terms if not otherwise
terminated pursuant to the terms of the agreement. An additional
651,751 shares valued at $54,747 were also issued related to the
acquisition. The transaction was accounted for as a purchase.
Accordingly, the Company's financial statements in 1999 include the
operations of HPI from the date of acquisition. Under purchase
accounting, the total purchase price was allocated to the tangible and
intangible assets and liabilities of HPI based upon their respective
estimated fair values as of the closing date based upon valuations and
other analyses. The estimated purchase price and preliminary
adjustments to the historical book value of HPI are as follows:
<TABLE>
<S> <C>
Purchase price, based on value of common stock issued $ 352,000
Fair value of net liabilities acquired 44,000
----------
Purchase price in excess of net liabilities acquired $ 396,000
==========
Goodwill $ 396,000
==========
</TABLE>
F-10
<PAGE> 25
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION AND SALE OF HPI (CONTINUED)
The following unaudited pro forma consolidated information for the year
ended December 31, 1998 give effect to the transaction as if it had
occurred at the beginning of 1998. The unaudited pro forma consolidated
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that would have
been achieved had the transaction been completed as of the beginning of
that year, nor are they indicative of the Company's future results of
operations.
<TABLE>
<S> <C>
Revenues $ 3,985,502
-----------
Loss from continuing operations $ (826,560)
-----------
Net loss $(1,121,811)
-----------
Net loss per common share:
Basic $ (0.29)
-----------
Diluted $ (0.61)
-----------
</TABLE>
The Company sold the stock of HPI, effective June 30, 1999,
for a note receivable of $323,582. The non-interest-bearing note has
been discounted at 10% and is receivable in monthly instalments of
$10,000. The unamortized discount at December 31, 1999 is $16,480.
4. DISCONTINUED OPERATIONS
Effective December 31, 1998, the Company discontinued the operations of
ETC Administrative Services, Inc. ("Administrative"). Administrative
was created in 1998 to offer third party administrative services. The
Company has accounted for the operations of Administrative as a
discontinued operation in the accompanying statement of operations.
Included in the loss from discontinued operations in 1998 is the
write-off of certain software purchased by Administrative amounting to
$350,946.
5. OFFICE FURNITURE AND EQUIPMENT
The following is a summary of office furniture and equipment:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Furniture $ 128,407 $ 106,111
Computer and office equipment 788,044 678,030
Computer software 163,678 160,581
Leasehold improvements 16,564 16,364
Less accumulated depreciation (875,674) (640,350)
----------- -----------
$ 221,019 $ 320,736
=========== ===========
</TABLE>
Depreciation expense was $187,104 and $271,865 for 1999 and 1998,
respectively.
F-11
<PAGE> 26
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following is a summary of accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accounts payable $ 297,782 $ 365,169
Accrued other 46,900 22,452
Accrued payroll and taxes 118,392 23,333
Accrued interest payable 5,107 -
----------- -----------
$ 468,181 $ 410,954
=========== ===========
</TABLE>
7. NOTES PAYABLE AND CONVERTIBLE DEBENTURES
The following is a summary of notes payable:
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Note payable to corporation, interest at 12.0%
$7,553 principal including interest due monthly,
remaining balance plus interest due upon maturity
at May 19, 1998; converted to 400,097 shares of
common stock in 1999 $ -- $ 114,327
Subordinated convertible denture payable to
corporation, interest at 12.0% payable semi-annually,
principal due upon maturity at May 21, 1998, convertible
at $5.00 per common share including principal and
accrued interest; delinquent 55,718 98,124
Note payable to corporation, interest at 8%; $5,379
principal including interest due monthly -- 20,726
Note payable to corporation, interest at 10%; $1,098
principal and interest due monthly -- 2,141
Note payable to individuals, interest at effective rate of 15%
paid by issuance of common stock; principal matures at
dates from December 31, 1998 to January 7, 1999,
converted to 180,000 shares of common stock in 1999 -- 45,000
---------- ----------
$ 55,718 $ 280,318
========== ==========
</TABLE>
F-12
<PAGE> 27
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASE OBLIGATIONS PAYABLE
The Company, as lessee, has entered into various non-cancelable leases
for service equipment, vehicles, and office facilities. Future minimum
lease payments under non-cancelable leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
For the Years Capital Operating
Ending December 31, Leases Leases
- ------------------- --------- ---------
<S> <C> <C>
2000 $ 68,415 $ 117,967
2001 68,415 88,475
2002 8,415 -
2003 189 -
--------- ---------
Total minimum lease payments 145,434 $ 206,442
Less amount representing interest (18,219) =========
---------
Present value of minimum lease payments 127,215
Less current portion (61,544)
---------
Long-term capital lease obligation $ 65,671
=========
</TABLE>
Rent expense during the years ended December 31, 1999 and 1998 for
operating leases was $157,546 and $116,695, respectively, and is
included in operating expenses.
The cost of assets subject to capital leases included in office
furniture and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Computer and office equipment $ 233,155 $ 233,155
Less accumulated depreciation (198,219) (156,507)
--------- ---------
$ 34,936 $ 76,648
========= =========
</TABLE>
F-13
<PAGE> 28
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASE OBLIGATIONS PAYABLE (CONTINUED)
Effective October 1, 1998, the Company executed a thirty-six (36) month
equipment lease ("Lease Agreement") that consolidated all existing
lease obligations with Ironwood Leasing, Ltd. ("Ironwood"). The stated
terms of the Lease Agreement call for payments of $5,000 per month. The
equipment lease relates to high speed scanning equipment used in the
Company's business. Also on October 1, 1998 the Company amended a stock
option agreement with Ironwood which, as amended, grants Ironwood the
right to purchase 200,000 shares of Common Stock at $1.00 per share for
5 years. Dennis Barnes, a principal of Ironwood, was a director of the
Company from 1996 until 1998. On January 12, 2000 Ironwood demanded
payment for unpaid lease payments, which at the time amounted to
$15,000. The Company believes the terms of the Lease Agreement to be
usurious and is presently negotiating to resolve the matter.
9. INCOME TAXES
ETC has net operating loss carryforwards of approximately $6,660,000
that are available to offset any future income tax liability. The net
operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31, Expiring
-------------------- --------
<S> <C>
2010 $ 880,000
2011 2,006,000
2012 1,633,000
2013 1,141,000
2014 1,000,000
-----------
Total $ 6,660,000
===========
</TABLE>
Deferred income taxes result from the book versus tax accounting
difference for net operating loss carryforwards, accrued payroll and
stock option-based compensation. The Company has deferred tax assets
amounting to approximately $2,200,000 and $1,627,000 at December 31,
1999 and 1998, respectively. The realization of the benefits from these
deferred tax assets appears uncertain due to going concern questions.
Accordingly, a valuation allowance has been recorded which offsets the
deferred tax assets at December 31, 1999 and 1998.
10. STOCK OPTIONS
The Company has issued various stock options to employees and
non-employees which are considered compensatory. Vesting varies by
agreement ranging from 2 to 7 years. The contractual life of
outstanding employee stock options at December 31, 1998 is the term of
employment of the holder.
F-14
<PAGE> 29
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS (CONTINUED)
A summary of the status of employee stock options is set forth below:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 982,500 $ 0.720 247,917 $ 3.576
Granted 400,000 $ 0.454 920,000 $ 0.680
Exercised - $ - (45,417) $ 0.001
Forfeited/expired - $ - (140,000) $ 1.116
----------- -----------
Outstanding, end of period 1,382,500 $ 0.640 982,500 $ 0.720
=========== ===========
Options excercisable, end of period 1,382,500 $ 0.640 982,500 $ 0.720
=========== ===========
</TABLE>
The following table summarizes information about stock options granted
during the years ended:
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted
Average Average Average Average
Fair Exercise Fair Exercise
Value Price Value Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Option price > fair market value $ 0.344 $ 0.500 $ - $ -
Option price < fair market value $ 0.531 $ 0.438 $ 0.250 $ 0.720
Total $ 0.398 $ 0.453 $ 0.250 $ 0.720
</TABLE>
F-15
<PAGE> 30
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Options Weighted Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------------- ----------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.438 300,000 May 1, 1006 $0.438 300,000 $0.438
$ 0.500 100,000 Various to 2001 $0.500 100,000 $0.500
$.0190 to $.52 595,000 Term of Employ $0.505 595,000 $0.505
$ 1.000 200,000 October 1, 2003 $1.000 200,000 $1.000
$ 1.000 125,000 Term of Employ $1.000 125,000 $1.000
$ 1.250 62,500 December 31, 2000 $1.250 62,500 $1.250
--------- ---------
1,382,500 1,382,500
========= =========
<CAPTION>
Options Weighted Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- --------------- ----------- ----------------- ----------------- ----------------- ----------------
<C> <C> <C> <C> <C> <C>
$.0190 to $ 52 595,000 Term of Employ $0.505 595,000 $0.505
$ 1.000 200,000 October 1, 2003 $1.000 200,000 $1.000
$ 1.000 125,000 Term of Employ $1.000 125,000 $1.000
$ 1.250 62,500 December 31, 2000 $1.250 62,500 $1.250
-------- -------
982,500 982,500
======== =======
</TABLE>
Fair values for the stock underlying stock options and stock warrants
subsequent to becoming publicly traded consisted of quoted market
prices as listed in stock-trading business journals. These fair values
were used to determine the compensatory components of the stock options
and stock warrants granted during the years ended December 31, 1999 and
1998. The Company's common stock became publicly traded in April 1997.
Compensation costs will be recognized as an expense over the vesting
period of the options at an amount equal to the excess of the fair
market value of the stock at the date of measurement over the amount
the employee must pay. The measurement date is generally the grant
date. There is no future compensation expense to be recorded in
subsequent periods as of December 31, 1999.
F-16
<PAGE> 31
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS (CONTINUED)
Using the fair value method, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1999: dividend yield of 0.0 percent; expected volatility of 382
percent; risk free interest rates of 4.5 percent; expected lives of two
years. Following are the weighted-average assumptions used for grants
in 1998: dividend yield of 0.0 percent; expected volatility of 40.0
percent; risk free interest rates of 4.5 percent; expected lives of
five years.. Had compensation cost for the Company's stock based
compensation been determined on the fair value at the grant dates for
awards with the method of FASB Statement 123, the Company's net loss in
1998 would have been $1,081,361. Basic and diluted loss per share would
have been $(.28) and $(.54), respectively, in 1998. There were no
options issued to employees during 1999.
The Company recognized $138,760 and $38,253 in expense for 1999 and
1998, respectively for the issuance of nonemployee stock options under
FASB Statement 123.
11. CUSTOMER CONCENTRATION
For the years ended December 31, 1999 and 1998, revenues from one
customer amounted to approximately 62% and 74% of total revenues.
Trade accounts receivable included $184,412 and $146,880 relating to
these customers at December 31, 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company invests its cash and certificates of deposit primarily in
deposits with major banks. Certain deposits, at times, are in excess of
federally insured limits. The Company has not incurred losses related
to its cash.
Litigation
The Company is in certain lawsuits arising in the ordinary course of
business. The Company is vigorously defending all allegations against
it. While the Company's legal counsel and management do not expect any
adverse judgments, should the Company be required to pay damages as a
result of any litigation, the payment of such damage award may have a
material adverse effect on its financial condition and results of
operations.
F-17
<PAGE> 32
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreement
As described in Note 3, in January 1999, the Company entered into a
three-year employment agreement with its CEO. The agreement has been
modified in March 2000 whereby the CEO voluntarily reduced his salary
through 2000 to $14,500 per month and agreed to receive seven per cent
of retained revenues, as defined, in excess of $100,000 per month,
unless such payment causes a loss in that month.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1999 and 1998, the Company paid
$29,127 and $27,663 for interest, respectively. During the years ended
December 31, 1999 and 1998, the Company made no payments for income
taxes.
Non-cash investing and financing activities include the following:
The Company acquired assets valued at $37,066 through capital lease
obligations during the year ended December 31, 1998.
During 1998, the Company issued 142,500 shares of common stock for
prepaid interest in connection with the execution of certain notes
payable (see Note 9). During 1998, $100,000 principal amount of a
subordinated convertible debenture was converted to 200,000 shares of
common stock.
During 1999, the Company acquired HPI through the issuance of 3,538,306
shares valued at $297,000. An additional 651,751 shares valued at
$54,747 were also issued related to the acquisition. The Company then
sold HPI for a note receivable of $323,582 less the discount of
$23,325.
F-18
<PAGE> 33
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
-------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss from continuing operations $(1,111,517) 9,847,812 $ (0.11)
EFFECT OF DILUTIVE SECURITIES: ===========
Warrants - (46,440)
Employee stock options - (536,904)
Non-employee options - (257,213)
----------- -----------
DILUTED EARNINGS PER SHARE:
Loss from continuing operations
and assumed conversions $(1,111,517) 9,007,255 $ (0.12)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss from continuing operations $ (884,875) 3,813,633 $ (0.23)
EFFECT OF DILUTIVE SECURITIES: =============
12% convertible debentures 12,211 (274,574)
Employee stock options - (770,679)
Non-employee stock options - (407,718)
Warrants - (363,771)
------------- -------------
DILUTED EARNINGS PER SHARE:
Loss from continuing operations
and assumed conversions $ (872,664) 1,996,891 $ (0.44)
============= ============= =============
</TABLE>
As of December 31, 1999 and 1998, options to purchase 20,000 and 8,550
shares, respectively, of common stock were outstanding but were not
included in the computation of diluted earnings per share because the
options had an antidilutive effect on earnings per share.
F-19
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
2.1* Agreement on Plan of reorganization, dated January 31, 1999
(incorporated by reference from Exhibit 2 to the Company's Form 8-K,
dated February 10, 1997).
2.2* Disposition of Asset - Purchase Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2 to the Company's Form 8-K,
dated August 27, 1999).
2.3* Disposition of Asset - Security Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2.1 to the Company's Form 8-K,
dated August 27, 1999).
2.4* Disposition of Asset - Guaranty Agreement, dated August 12, 1999
(incorporated by reference from Exhibit 2.2 to the Company's Form 8-K,
dated August 27, 1999).
3.1* Articles of Incorporation of the Company, dated September 5, 1986
(incorporated by reference from an Exhibit to the Company's
Registration Statement on Form S-4, dated January 7, 1997).
3.2* Amendment to the Articles of Incorporation of the Company, dated March
26, 1996 (incorporated by reference from an exhibit to the Company's
Registration Statement on Form S-4, dated January 7, 1997).
3.3* Bylaws of the Company, dated September 5, 1986 (incorporated by
reference from an Exhibit to the Company's Registration Statement on
For S-4, dated January 7, 1997).
10. Employment Agreement, dated February 1, 1999 between Electronic
Transmission Corporation and Robert Fortier (incorporated by reference
from Exhibit 10 to the Company's Form 8-K, dated February 10, 1999).
21. Subsidiary of Registrant - ETC Administrative Services, Inc., a Texas
Corporation.
27.1 Financial Data Schedule.
</TABLE>
* Previously Filed
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 150,065
<SECURITIES> 0
<RECEIVABLES> 274,038
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 575,918
<PP&E> 1,096,693
<DEPRECIATION> 875,674
<TOTAL-ASSETS> 880,767
<CURRENT-LIABILITIES> 822,178
<BONDS> 0
0
0
<COMMON> 11,337
<OTHER-SE> 9,215,503
<TOTAL-LIABILITY-AND-EQUITY> 880,767
<SALES> 0
<TOTAL-REVENUES> 2,588,630
<CGS> 0
<TOTAL-COSTS> 911,379
<OTHER-EXPENSES> 3,027,396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27,252)
<INCOME-PRETAX> (1,111,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,111,517)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.12)
</TABLE>
