Sanara MedTech Inc. — Annual Report 2002

Apr 15, 2002

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 ----------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ______ Commission File Number 0-11808 MB SOFTWARE CORPORATION (Exact name of Registrant as specified in its charter) COLORADO 59-2220004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2225 E. Randol Mill Road Suite 305 76011-6306 Arlington, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (817) 633-9400 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common NASDAQ - OTC BULLETIN BOARD Securities registered pursuant to Section 12(g) of the Act: Common Stock $ .001 par value ----------------------------- (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's 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. [X] Yes [ ] No Issuer's revenues for its most recent fiscal year: $20,959. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2001 was approximately $1,784,833. Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of Securities under a plan confirmed by a court. Yes [X] No [ ] As of December 31, 2001, 73,400,000 shares of the Issuer's $.001 par value common stock were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] 2 MB SOFTWARE CORPORATION Form 10-KSB For the Year Ended December 31, 2001 Page of Form 10 KSB ----------- ITEM 1. BUSINESS ...........................................................4 ITEM 2. PROPERTIES...........................................................5 ITEM 3. LEGAL PROCEEDINGS....................................................5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................5 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..................................................5 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..........................................6 ITEM 7. FINANCIAL STATEMENTS ................................................7 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................................7 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS........8 ITEM 10. EXECUTIVE COMPENSATION..............................................9 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................9 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................10 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................10 3 PART 1 Item 1. Business Until recently, MB Software Corporation (the "Company" or "MBSC") business was focused exclusively on the healthcare marketplace; owning and managing healthcare clinics and medical receivables. While the Company has overseen numerous changes in healthcare over the last 10 years, it has always remained focused on transactional revenue and residual income streams of revenue. During the 2001, the Company began evaluating how it could leverage its experiences within healthcare into the healthcare transaction market. This strategy would involve the divestiture of all healthcare facility-based lines of business, and a focus shifted entirely to the transaction market. In July of 2001, the Company acquired certain assets and assumed certain liabilities of Portalook, a California based company, which developed proprietary technology for use in enabling Internet transaction devices (ITDs) to be used as transaction processing devices in the field. The devices were identified as potential transaction devices for physician practices, and the technology developed for servers and the devices themselves, by Portalook, will serve as the starting point for a transaction services platform designed for healthcare. In an effort to pursue the strategy shift from owning and managing healthcare clinics and receivables, the Company moved to restructure its relationship with its preferred shareholders. In November 2001 the Company entered into a Restructure and Settlement Agreement with Imagine Investments, Inc. ("Imagine") and XHI(2), Inc., ("Imagine Sub"), which will alleviate the Company of Imagine and Imagine Sub's preferred stock positions in the Company, and eliminate a significant part of the Company's liabilities in return for the Company's Jacksonville clinic facility. The acquisition of the Portalook assets, along with the changes made to the Company's capitalization through the pending divestiture of the Jacksonville clinic were the significant events of 2001 for the Company. Transaction Services The Company acquired the Portalook assets with the intent to provide transaction services, ranging from credit card transactions to insurance eligibility transactions, to physicians' practices. The Internet Transaction Device (ITD) technology that was acquired will serve as the key technology for processing transactions. Additional capital will be required for further development of this product and service offering, but the acquisition of the technology from Portalook will provide the first prototype or "beta" offering of transaction services involving Internet connectivity via low-cost appliance. As of the writing of this document, the Company was pursuing several healthcare customers with the intent of leveraging this platform to connect a variety of healthcare-related businesses to the Internet to conduct transactions relevant to their respective businesses. The transactions seen as viable candidates for this platform include: insurance verification, pharmacy orders, email, and potentially credit card transactions. Healthcare / Practice Management Business The Company owned a total of three clinics in 2001, all of which were located in Florida. Florida law permits corporations to own medical clinics unlike several other states in which a corporation cannot own a clinic that employs medical doctors. 4 During 2001, the Company elected to consolidate its clinic operations into a single facility in Jacksonville Florida. In addition, the Company planned to divest of the Jacksonville Clinic as it transitioned to a transaction services company. The Restructure and Settlement Agreement (previously mentioned above) entered into among and between MBSC, Imagine, and Imagine Sub in November of 2001 established the timeframe and manner by which the Company would divest of the Jacksonville Clinic. Management believes that recent healthcare trends in reimbursement and managed care policies created significant challenges in maintaining profitability within healthcare clinics. For this reason, the Company has elected to exit from this healthcare sector. Management recognizes that historically approximately 90% of revenue has been derived from the clinic business, but foresees more significant profits and longevity in the business of transaction processing, where the majority of revenue is of a recurring nature on a monthly business. In addition, the transaction processing business will yield strong opportunities outside of the healthcare market, which MBSC has seen as volatile. Employees- The Company currently employs a total of approximately fifteen full time employees. The Company has no labor union contracts and believes its relationship with its employees is good. Healthcare Facilities JACKSONVILLE, FLORIDA: Formerly three separate clinics have been consolidated into a single facility which provides state of the art pain management, physical therapy, and related medical services. The clinic is also equipped with physical rehabilitation equipment. This clinic is to be divested under the terms of the Restructure and Settlement Agreement mentioned above. Item 2. Properties All premises occupied by the Company and subsidiaries are leased. The Company's principal executive office is located at Arlington, Texas at 2225 E. Randol Mill Road, Suite 305, Arlington, TX 76011. NFPM is located at 9143 Philips Highway, Suite 495, Jacksonville, Florida Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders For the year 2001, the Company did not conduct an annual shareholder's meeting. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded under the symbol "MBSC" on NASDAQ's OTC Electronic Bulletin Board. The following table sets forth the range of high and low bid prices of the Company's common stock: 5

The Company through the Restructure and Settlement Agreement (previously mentioned above) has divested its self of the Jacksonville Clinic. Therefore, the results of operation summarized below will reflect the audited discontinued operations results. The Company will focus all of its activity on the transaction processing business that the Company believes to be the market for future growth. The following summarizes the results of operations for the twelve months ended December 31, 2001 and December 31, 2000 of the discontinued operations of the clinic as outlined in the Restructure and Settlement Agreement. Medical Activities: 2001 2000 - -------------------------------------------------------------------------------- Income (Loss) Discontinued Operations Clinics $143,911 ($187,586) The following compares the results of operations for the twelve months ended December 31, 2001 and December 31, 2000 without the clinic operations. The selling, general and administrative expenses increased to $1,387,964 for the twelve months ended December 31, 2001 as compared to $815,336 for the twelve months ended December 31, 2000. 6 The net loss from continuing operations increased to ($1,643,782) for the twelve-month period ended December 31, 2001, as compared to ($914,033) for the twelve months ended December 31, 2000. The increase is due to costs associated with Portalook's transcactions. The Company decided after the third quarter of 2001 to move the Company into the transaction field and committed its self to that end. Liquidity and Capital Resources The Company's continuing operations used cash of $723,860 during the twelve months ended December 31, 2001 and $559,614 during the twelve months ended December 31, 2000. In 2001, the net cash amount provided by financing activities was $757,419. At December 31, 2001 and December 31, 2000, the Company had working capital deficits of $2,999,606. and $2,301,073, respectively. The Company has been working to raise capital in an attempt to decrease the working capital through financing activities. At December 31, 2001, the Company had checks in excess of bank balance of ($23,572.00). The net cash used in investing activities for 2001 was $71,011. The Independent Auditor's Report for the year ending December 31, 2001 ("Report"), states that the uncertainty of certain conditions raises substantial doubt about the ability of the Company to continue as a going concern. In raising the going concern issue, the Report cites past losses, the working capital deficit and whether the Company will be able to achieve profitable operations. The Company believes with the additional capital it plans on raising along with the settlement of preferred stock and restructure of debt will enable the Company to continue until its sales and transaction services operations are profitable. The Company does not anticipate any major equipment purchases for the twelve months of 2002. The Company did not have an annual stockholder' meeting for 2001. Item 7. Financial Statements Filed as exhibits hereto are the following statements of the Company and its subsidiaries: Page ---- Report of Independent Certified Public Accounts Weaver and Tidwell, L.L.P. F-1 Financial Statements Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2 Consolidated Statements of Operations for the years ended December 31, 2001 and 2000 F-4 Consolidated Statements of Changes in Shareholders' Deficit for theyears ended December 31, 2001 and 2000 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000 F-8 Notes to Consolidated Financial Statements F-10 Item 8. Changes in and disagreements with Accountants on Accounting and Financial Disclosure. None. 7 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. The following table sets forth certain information regarding the directors and executive officers of the Company: Year First Name Age Position Elected - ---- --- -------- ------- Scott A. Haire 37 President, Director 1993 Gilbert A. Valdez 58 Chief Operating Officer 1996 Araldo A. Cossutta 77 Director 1994 Steven W. Evans 51 Director 1994 Robert E. Gross 57 Director 1994 Thomas J. Kirchhofer 61 Director 1994 Lucy J. Singleton 64 Secretary 1995 Executive Officers of the Company are elected on an annual basis and serve at the discretion of the Board of Directors. Directors of the Company are elected on an annual basis. All directors agreed to remain until the 2002 annual meeting. Scott A. Haire Chairman, President and Director. Mr. Haire is Chief Executive Officer of MB Software Corporation and has been with the Company since 1992. Gilbert A. Valdez Chief Operating Officer and Director. Mr. Valdez is a former president and Chief Executive Officer of the National Electronic Information Corporation, Medaphis Corporation, Datix Corporation and Hospital Billing and Collection Services Corporation. Araldo A. Cossutta Director. Mr. Cossutta is president of Cossutta and Associates, an architectural firm based in New York City. He is also a director of Computer Integration Corporation of Boca Raton, Florida. 8

Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Options/SAR Values The following table provides information concerning option exercises in fiscal 2001 and the value of unexercised options held by each of the named Executive Officers at December 31, 2001. 9

Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information as of December 31, 2001, regarding the beneficial ownership of capital stock of the Company by: (i) Each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) the Company's Chief Executive Officer; and (iv) the directors and executive officers of the Company as a group. The persons named in the table have sole voting and investment power with respect to all shares of capital stock owned by them, unless otherwise noted. Amount and Nature Name of Beneficial of Beneficial Percent Owner of Group(1) Ownership of Class - ------------------ ----------------- -------- Scott A. Haire 30,021,297 (2) 61.0% Araldo A. Cossutta 3,082,025 6.0% Steven W. Evans 1,700,000 (3) 3.0% Gilbert Valdez 300,000 (4) * Robert E. Gross 200,000 (5) * Thomas J. Kirchhofer 150,000 (6) * R-M-S Investments, LTD. 11,000,000 22.0% All Directors and Executive Officers 49,453,322 98% as a group(six in number) - ---------- * Less than 1%. (1) The address for each person or entity listed above is 2225 E. Randol Mill Road, Suite 305, Arlington, Texas, 76011. (2) Includes 3,300,000 shares, respectively, that are presently exercisable by Mr. Haire. (3) Consists of 200,000 shares subject to options that are presently exercisable by Mr. Evans. (4) Consists of 300,000 shares subject to options that are presently exercisable by Mr. Valdez. (5) Consists of 200,000 shares subject to options that are presently exercisable by Mr. Gross. (6) Consists of 150,000 shares subject to options that are presently exercisable by Mr. Kirchhofer. . Item 12. Certain Relationships and Related Transactions 10 Item 13. Exhibits Reports on Form 8-K 1. Reports on Form 8-K - None. 2. Exhibits - None. All other exhibits incorporated by reference from prior filings with the Commission. SIGNATURE Pursuant to the requirements of Section 13 or 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. MB SOFTWARE CORPORATION By: /s/ Scott A. Haire ------------------- Scott A. Haire, Chairman of the Board, Chief Executive Officer and President (Principal Financial Officer) Date: April 15, 2002 11 MB SOFTWARE CORPORATION AND SUBSIDIARIES FINANCIAL REPORT DECEMBER 31, 2001 C O N T E N T S Page ---- INDEPENDENT AUDITOR'S REPORT.................................................F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets.............................................F-2 Consolidated Statements of Operations...................................F-4 Consolidated Statements of Changes in Shareholders' Deficit....................................F-6 Consolidated Statements of Cash Flows...................................F-8 Notes to Consolidated Financial Statements.............................F-10 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders MB Software Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of MB Software Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 MB Software Corporation and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has continuously incurred losses and has a working capital deficit, all of which raise substantial doubt about the company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas March 15, 2002 except as to the information presented in Note 14 for which the date is April 15, 2002 F-1

The Notes to Consolidated Financial Statements are an intergral part of these statements. F-3 MB SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 2001 2000 ----------- ----------- REVENUES Product sales $ 20,959 $ -- Other -- 4,589 ----------- ----------- Total revenues 20,959 4,589 COST OF REVENUES Cost of product sales 19,949 -- Other -- 13,736 ----------- ----------- Gross profit (loss) 1,010 (9,147) ----------- ----------- OPERATING EXPENSES Selling, general & administrative 1,387,964 815,336 Depreciation and amortization 61,120 2,212 ----------- ----------- Total operating expenses 1,449,084 817,548 ----------- ----------- Loss from operations (1,448,074) (826,695) OTHER INCOME (EXPENSE) Interest expense (328,330) (131,695) Interest income 28,486 44,357 ----------- ----------- Total other income (expense) (299,844) (87,338) Loss before benefit for income taxes (1,747,918) (914,033) BENEFIT FOR INCOME TAXES (74,136) -- ----------- ----------- Loss from continuing operations (1,673,782) (914,033) The Notes to Consolidated Financial Statements are an intergral part of these statements. F-4 MB SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 (continued) 2001 2000 ------------ ------------ DISCONTINUED OPERATIONS Income (loss) from operations, net of tax effect in 2001 of $74,136 and in 2000 of $0 143,911 (187,586) ------------ ------------ Net loss ($ 1,529,871) ($ 1,101,619) ============ ============ Loss from continuing operations ($ 1,673,782) ($ 914,033) Plus cumulative preferred stock dividends (340,000) (340,000) ------------ ------------ Loss available to common shareholders ($ 2,013,782) ($ 1,254,033) ============ ============ BASIC AND DILUTED LOSS PER SHARE Continuing operations ($ 0.03) ($ 0.01) Discontinued operations (0.00) (0.00) ------------ ------------ ($ 0.03) ($ 0.01) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 71,234,246 69,275,833 ============ ============ The Notes to Consolidated Financial Statements are an intergral part of these statements. F-4

The Notes to Consolidated Financial Statements are an intergral part of these statements. F-7

The Notes to Consolidated Financial Statements are an intergral part of these statements. F-9 MB SOFTWARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Healthcare Innovations, LLC (HI), North Florida Physical Medicine, LLC (NFPM), MB Practice Solutions, LLC. (MBPS) and eAppliance Innovations, LLC. All intercompany transactions and balances have been eliminated upon consolidation. Nature of Operations MB Software Corporation (the "Company") was incorporated in 1982. The focus of the Company has been to provide practice and cash management services to physicians, dentists and chiropractors. Effective September 1, 2000, the Company sold its South Florida Medical Center Clinic to a company wholly owned by two shareholders of the Company. The sale was accomplished by an assumption of net liabilities by the related company of approximately $79,000. The net gain on the transaction was recorded as a contribution to capital. In July of 2001, the Company acquired certain assets and assumed certain liabilities of Portalook, a California based company, which developed proprietary technology for use in enabling Internet Transaction Devices (ITD's) to be used as transaction processing devices in the field. On November 5, 2001, the Company entered into a restructure and settlement agreement with Imagine Investments, Inc. (Imagine). Pursuant to the agreement, which was approved by the shareholders on February 11, 2002, the Company will transfer its interest in NFPM and give common stock in exchange for settlement of debt and preferred stock. As a result of this agreement, certain assets, liabilities and operations of NFPM are presented as discontinued. The Company will now focus on the sale and development of the Company's internet transaction devices (ITD's) and transaction services which range from credit card transactions to insurance eligibility transactions for the medical and potentially other professions. Going Concern Basis The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The Company has continuously incurred losses from operations and has a working capital deficit. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. These conditions raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-10 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Going Concern Basis - continued Management plans to raise capital through debt private placement with attached equity instruments. Management believes that the additional capital coupled with the settlement of preferred stock and restructure of debt will enable the Company to continue until the ITD sales and transaction services operations become profitable. Use of Estimates and Assumptions Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Inventory Inventory consists of ITD's hardware recorded at cost, first-in, first-out basis. Revenue Recognition The Company's operating revenue currently consists of ITD sales which are recognized upon shipment to customers. Revenues from discontinued operations consist of sales of the Company's medical clinic fees which are recognized at the time the medical services are rendered (see Note 11 Discontinued Operations). Contractual Adjustments and Contractual Allowances Medical clinic fees are reported net of contractual adjustments. Contractual adjustments are adjustments made to gross medical clinic fees for the amounts contractually not billable to third party payors and/or adjustments for uncollectible charges. Management periodically analyzes these adjustments and adjusts the allowances for doubtful accounts and contractual allowances accordingly. Management's adjustments for allowance for doubtful accounts and contractual adjustments require significant estimates and it is at least reasonably possible that these estimates could "change in the near term" (see Note 11). Property and Equipment Property and equipment are stated at cost. Depreciation for financial statement purposes is computed principally on the straight-line method over the estimated useful lives of the related assets ranging from five to seven years. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. F-11 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Earnings (Loss) Per Common Share and Common Share Equivalents Basic earnings (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Potential common stock consists of convertible preferred stock and stock options. In 2001 and 2000, the potential common stock was considered anti-dilutive due to the loss from continuing operations. Cash and Cash Equivalents The Company considers all cash on hand and in banks, demand and time deposits, and all other highly liquid investments purchased with maturities of three months or less to be cash equivalents. Stock Based Compensation The Company has elected under the provisions of FASB No. 123, Accounting for Stock Compensation to account for its compensatory stock option plan using the intrinsic method as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Business and Credit Risk Concentrations The Company's ITD sales are to customers in the United States of America. The Company's medical clinics provide services to patients located in Florida. None of the patients receivables were individually significant. Management evaluates accounts receivable balances on an ongoing basis and provides allowances as necessary for amounts estimated to eventually become uncollectible. The allowance for uncollectible accounts receivable from continuing operations for December 31, 2001 and 2000 was $0. See Note 13 for discontinued operations. The Company maintains its cash in bank deposit accounts at high quality financial institutions. The balances at times, may exceed Federally insured limits. Income Taxes The Company accounts for income taxes in accordance with the asset and liability method. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. F-12 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Software Development The Company capitalizes software development costs after technological feasibility has been established in accordance with Financial Accounting Standards Board Statement Number 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Software costs are amortized over the greater of the ratio that current gross revenues bear to the current and future gross revenues or amortized using the straight line basis over the estimated economic life of the software. Included in other assets is a software license purchased from Portalook of $420,000, net of accumulated amortization of $51,220. Software development costs incurred by the Company for the development of the PatentMed 2000 internet appliance of $243,963 were expensed in 2001. No software development costs were incurred in 2000. Long-lived Assets Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets. Financial Instruments Financial instruments of the Company consist of cash, accounts receivable, notes receivable, accounts payable, notes payable, and other liabilities. Recorded values of cash, receivables and payables are carried at amounts that approximate fair values. Recently Issued Accounting Standards In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No.17, Intangible Assets. This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain indicators were encountered. The Company is currently in the process of finalizing the determination of the impact of the new FASB F-13 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Recently Issued Accounting Standards - continued pronouncement concerning goodwill and other intangible assets. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001. SFAS No. 143, Accounting for Asset Retirement Obligations was also issued in June 2001. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to have a material effect on the consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business. The Company as opted for early adoption of this statement effective January 1, 2001. Adoption of this statement did not have a material effect on the consolidated financial statements for the year ended December 31, 2001. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 2001 and 2000: 2001 2000 -------- -------- Office equipment $ 15,342 $ 13,618 Computer equipment 92,618 8,641 Furniture and fixtures 747 747 -------- -------- 108,707 23,006 Less accumulated depreciation and amortization 25,053 15,154 -------- -------- $ 83,654 $ 7,852 ======== ======== Depreciation expense was $9,900 and $3,181 for the years ended December 31, 2001 and 2000, respectively. See Note 13 for discontinued operations. F-14

See Note 13 for discontinued operations. NOTE 4. PREFERRED STOCK The Series A Senior Cumulative Convertible Participating Preferred Stock ("Series A Stock") is entitled to receive cash dividends of $1 per share per annum accruing from the date of issuance. Such dividends are cumulative and must be paid before any dividends can be paid on the common stock. The F-15 NOTE 4. PREFERRED STOCK - continued Series A Stock is convertible into common stock, at the option of the holders, into a maximum of 29,267,324 shares of common stock upon: (a) the sale of substantially all of the assets of the Company; (b) a change in control of the Company; (c) the dissolution of the Company; or (d) October 1, 2000. If the Series A Stock is not converted into common stock, it becomes redeemable at the option of the holder any time after October 1, 2000 at a redemption price of $10 per share. Should the Company fail to redeem any share of the Series A Stock after a redemption request, the Series A stockholders shall have the right to elect a majority of the Company's board of directors and the Company shall pay interest on the redemption price at the rate of prime plus 5% until actually redeemed. At December 31, 2001 and 2000, dividends in arrears on preferred stock was $1,065,644 and $725,644, respectively. See Note 13 Discontinued Operations for description of restructure and settlement agreement. NOTE 5. INCOME TAXES The components of tax expense (benefit) are as follows: 2001 2000 ---------- ---------- Current ($ 74,136) $ -- Deferred -- ( -- ) ---------- ---------- ($ 74,136) ($ -- ) ========== ========== A reconciliation of the expected federal income tax expense (benefit) based on the U.S. Corporate income tax rate of 34% to actual expense (benefit) for 2001 and 2000 is as follows: 2001 2000 ---------- ---------- Expected federal income tax benefit ($ 520,156) ($ 374,550) State income taxes -- -- Valuation allowance and other 446,020 374,550 Utilization of net operating loss ( -- ) ( -- ) ---------- ---------- ($ 74,136) ($ -- ) ========== ========== Deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows: 2001 2000 ---------- ---------- Current deferred tax asset $ 452,651 $ 380,334 Valuation allowance for current deferred tax asset (452,651) (380,334) ---------- ---------- Net current deferred tax asset $ -- $ -- ========== ========== Non-current deferred tax asset $2,521,426 $2,276,255 Valuation allowance for non-current deferred tax asset (2,521,426) (2,276,255) ---------- ---------- Net non-current deferred tax asset $ -- $ -- ========== ========== F-16 NOTE 5. INCOME TAXES - continued At December 31, 2001, the current deferred tax asset results from reserve for accounts receivable which is not deductible for tax purposes until actually written off. The non-current deferred tax asset results from the deferred tax benefit of net operating losses. The net current and non-current deferred tax assets have a 100% valuation allowance, as the ability of the Company to generate sufficient taxable income in the future is not certain. The net change in the valuation allowance for 2001 and 2000 was $317,488 and $867,558, respectively. MB generated net operating losses for financial reporting and Federal income tax reporting prior to its reorganization in 1993. As of December 31, 2001, subject to limitations under Internal Revenue Code ss.382, approximately $469,000 of these net operating losses are available for use after the reorganization. These net operating losses expire in 2008 if not previously utilized. The net operating loss carry forward at December 31, 2001 is approximately $7,416,000 and will begin to expire in 2008, if not previously utilized. NOTE 6. COMMITMENTS The Company has non-cancelable leases for office space and equipment. Future minimum payments under these leases and other equipment operating leases are payable as follows: Year Ended December 31, ------------ 2002 $ 228,119 2003 61,004 ----------- $ 289,123 =========== Lease and rent expense under non-cancelable operating leases for 2001 and 2000 were $299,818 and $394,449, respectively. NOTE 7. LEGAL PROCEEDINGS Effective April 2, 2000, the Company settled litigation pertaining to the Company, Scott A. Haire and MB Healthcare Management, Inc. ("MBHM"), a former Company subsidiary. MBHM merged with a corporation, and in connection with the transaction, MBHM filed suit against the corporation and related individuals. The corporation and related individuals filed a counterclaim against MBHM, the Company, and Scott A. Haire. As part of the settlement, all outstanding shares of MBHM were conveyed to one of the related individuals. In exchange, the Company received a cash payment and return of Company stock that was transferred in settlement of related liabilities. In addition, the Company is involved in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes adequate reserves have been provided for claims that have at least a reasonable possibility for loss and has not provided a reserve on those for which an adverse outcome is remote. F-17

There were no options granted during 2000. All of the 5,350,000 outstanding stock options are fully vested at December 31, 2001. The weighted average contractual life is 2.9 years. The fair value of options granted during the year is estimated on the date of grant using a Black-Sholes option pricing model and the following assumptions: a risk-free rate of return of 2.76%; a weighted average expected life of 2.25 years; expected volatility of 228%; and no dividends. The weighted average fair value of options granted during 2001 was $237,932. Options granted during 2001 were to employees and directors and, as a result, no compensation cost was recognized. Had compensation been determined based on the fair value at the grant date, the Company's net income would have been reduced as follows: Net loss As reported $ 1,529,871 ============= Pro forma $ 1,767,803 ============= Basic loss per share As reported ($ 0.03) ============= Pro forma ($ 0.03) ============= F-18

All of the 2,900,000 outstanding stock warrants are fully vested at December 31, 2001. The weighted average remaining contractual life is 2.4 years. The fair value of warrants granted during the year was estimated on the date of grant using a Black-Sholes option pricing model and the following assumptions: a risk-free rate of return of 3.28%; a weighted average expected life of 2.04 years; expected volatility of 227%; and no dividends. The weighted average fair value of options granted during 2001 was $306,568. Warrants granted during 2001 were to employees and directors. Compensation of $44,000 was recognized for the compensatory warrants. No compensation was recognized for the warrants attached to debt. Had compensation been determined based on the fair value at the grant date, there would be no material impact on net loss or loss per share. NOTE 10. BUSINESS SEGMENT INFORMATION As a result of the discontinued operations of NFPM, the Company's continuing operations are in one business segment. NOTE 11. RELATED PARTY TRANSACTIONS Notes receivable from related parties consist of two notes. The first note is due from Scott A. Haire dated November 1, 1999 for the original principal sum of $350,000. Interest accrues at an annual rate of 8%. Accrued interest at December 31, 2001 and 2000 was $33,455 and $19,513, and interest income for each of the years then ended was $28,000. The second note is due from a company owned by Scott A. Haire dated December 31, 2001 for the original principal sum of $11,789 with interest accruing at an F-19 NOTE 11. RELATED PARTY TRANSACTIONS - continued annual rate of 12%. Included in employee advance at December 31, 2000 is $90,000, due directly or indirectly from an employee of the Company. As of December 31, 2001, it became apparent the advance, including interest accrued during 2001 of $2,667, were impaired and, as a result, management has provided an impairment allowance of $92,667. The Company has various notes payable to shareholders and other related parties. The notes and various terms are identified in Note 3 - Notes Payable. Interest expense incurred under related party notes payable for the years ended December 31, 2001 and 2000 were $266,298 and $109,444, respectively. Accrued interest at December 31, 2001 and 2000 was $386,263 and $248,813, respectively. The Company provides limited administrative services to other companies affiliated through common ownership of Company shareholders. NOTE 12. ACQUISTIONS On July 31, 2001 the Company purchased certain assets including: inventory valued at $140,000, property and equipment valued at $84,000 and a software license valued at $420,000 from Portalook, Inc. The purchase price was allocated to the assets acquired based on their relative fair values on the purchase date. Purchase price for the assets was cash of $40,000, a payable of $184,000, assumed liability of $30,000 and 3,000,000 shares of common stock valued at $390,000, based on fair value of common stock on the purchase date. The purchase of the Portalook assets allows the Company to sell internet transaction devices and to develop supporting services. NOTE 13. DISCONTINUED OPERATIONS On November 5, 2001, the Company entered into a restructure and settlement agreement with Imagine Investments, Inc. (Imagine). Pursuant to the agreement, which was approved by the shareholders on February 11, 2002, the Company is transferring its interest in North Florida Physical Medicine, LLC (NFPM) to Imagine and Imagine is converting the convertible preferred stock and convertible debt to common stock and, accordingly, no gain or loss will be recorded on the transaction. The expected disposal date is April 1, 2002. Accordingly, the assets, liabilities and operating results of NFPM have been segregated from continuing operations and reported as separate line items on the balance sheets and statements of operations. Condensed balance sheets and operating results from discontinued operations are as follows: 2001 2000 -------- -------- Balance Sheets Assets: Accounts receivable, net and other current assets $405,119 $520,693 Property and equipment, net 69,455 108,275 -------- -------- Total assets $474,574 $628,968 ======== ======== F-20 NOTE 13. DISCONTINUED OPERATIONS - continued Liabilities Current maturities of long-term debt $ 250,000 $ -- Other current liabilities 135,472 154,683 ----------- ----------- Total Liabilities $ 385,472 $ 154,683 =========== =========== 2001 2000 ----------- ----------- Statements of Operations Revenues: Medical fees $ 1,914,952 $ 2,300,142 Expenses: Cost of medical (940,568) (1,499,250) Selling, general and administrative (711,018) (932,392) Depreciation (45,339) (55,783) ----------- ----------- Income (loss) from operations 218,027 (187,283) Other income (expenses) 20 (303) ----------- ----------- Income (loss) before taxes 218,047 (187,586) Income tax provision 74,136 -- ----------- ----------- Income (loss) from discontinued operations $ 143,911 ($ 187,586) =========== =========== The allowance for uncollectible accounts receivable associated with NFPM's trade accounts receivable at December 31, 2001 and 2000 was $1,296,284 and $1,338,059, respectively. Included in accounts receivable and other current assets is $9,000 due from a related party at December 31, 2001. The accumulated depreciation associated with NFPM's property and equipment at December 31, 2001 and 2000 was $242,042 and $196,702, respectively. The note payable at December 31, 2001 is due to a shareholder on May 5, 2002 with interest at 10%, and it is unsecured. NOTE 14. SUBSEQUENT EVENT On April 11, 2002, the Company agreed in principle to the Restructure and Settlement Agreement with Imagine Investments, Inc. (Imagine) effective April 1, 2002. In accordance with the agreement, the Company will convert 340,000 shares of Series A Convertible Preferred Stock, dividends in arrears, convertible debt and accrued interest on the debt, all held by Imagine, into 4,500,000 shares of common stock and the Company will convey to Imagine its ownership in NFPM. The difference between the par value of the common stock issued in the conversion plus the carrying value of NFPM and the preferred stock plus the debt will be added to paid-in capital. No gain or loss on the transaction with the preferred stockholder will be recognized. F-21