ELECTRONIC TRANSMISSION CORP /DE/, 10KSB40, 1999-04-15

ELECTRONIC TRANSMISSION CORP /DE/
10KSB40, 1999-04-15
MISC HEALTH & ALLIED SERVICES, NEC

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10 - KSB
----------------

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

Commission File No. 22135

ELECTRONIC TRANSMISSION CORPORATION

(Name of Small Business Issuer in Its Charter)

Delaware 0-22135 75-2578619
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)

5025 Arapaho Road
Suite 501
Dallas, Texas 75248
(Address of principal executive offices) (ZIP Code)

(972) 980-0900
(Registrant's telephone number, including area code)

------------------------

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)

-------------------------

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 issuer'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]

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The issuer's revenues for its fiscal year ended on December 31, 1998 were
$2,467,010.

As of March 27, 1999, 8,464,330 of the issuer's common stock were
outstanding.

The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the issuer, computed by reference to the average bid
and asked prices of such common stock on March 27, 1998, was $0.47 and $0.63,
respectively.

Documents Incorporated By Reference

No documents, other than certain exhibits, have been incorporated by
reference in this report.

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
Petroleums 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

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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 health care provider
networks, through its Electra-Net division, to provide cost containment
services to its clients. During 1998, the Company performed TPA services
through ETC Administrative Services, a Texas corporation ("ETC Services"), its
wholly owned subsidiary.

The Company's revenues are generated by different methods for each
segment of its business. The Company is paid a set price for scanning and
automating each health care provider claim. Additionally, the Company is paid a
specific percentage of the "savings" generated by its re-pricing activities.
TPA services were charged on a set price for each customer employee that is
serviced by the Company.

The Company ceased its performance of TPA services effective December
31, 1998.

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, par value $.001 per share (the
"Common Stock"), for total consideration of $1,500,000 or $0.50 per share. 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 (the "Second Closing").

The Second Closing was contingent in part upon the Company's ability
to effect amendments to its Certificate of Incorporation for the purposes of
(i) increasing its authorized Common Stock from 15,000,000 to 20,000,000 shares
and (ii) undertaking a reverse stock split (the "Reverse Stock Split") whereby
every four shares of outstanding Common Stock was exchanged for one share of
Common Stock (the foregoing amendments to the Certificate of Incorporation
being collectively referred to herein as the "Amendments"). A special meeting
of stockholders was held on February 25, 1998, at which time the Amendments
were approved by the requisite vote of the Company's stockholders. The
Certificate of Amendment increasing the authorized Common Stock to 20,000,000
shares was filed with the State of Delaware on February 27, 1998. The Reverse
Stock Split was accomplished effective July 1, 1998.

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 procured loans

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in the amount of $170,000.00 in the form of a convertible debenture due on
dates from December 31, 1998, until January 7, 1999, with one share of
pre-split common stock being issued for each dollar loaned in lieu of interest.
The creditors converted all of the principal from these loans to equity by
converting the debt into 480,000 shares of common stock.

In December, 1998, the Company arranged a $500,000.00 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.

Acquisition

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 offers services similar to the Company. The primary business of
HPI is health network 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, 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 is 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.

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Service Areas

The Company's principal service areas in 1998 included (i) claims
automation, (ii) cost containment, and (iii) TPA, each of which is discussed
below:

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, (ii) TPAs that administer
healthcare plans and pay medical claims for self-insured companies, (iii) PPOs,
and (iv) other managed care organizations that offer discounts on medical
claims and who reprice those claims to reflect discounts offered by providers
to payors. The claims automation process electronically captures and stores
electronic images of scanned paper documents. Utilizing its existing work flow
process and available imaging technology, the Company processes standardized
claim forms by scanning these forms at the client's facility, with the scanned
data being transmitted to the Company's imaging center. The two primary sources
for the standardized claim forms are from the physicians (HCFA's) and from
health care facilities such as clinics and hospitals (UB's). Once received at
the Company's imaging center, the data is processed using an optical character
recognition process. The Company then stores all available data from the
scanned claim forms in proprietary data bases maintained by the Company,
manually reviews certain portions of each claim, and transmits the claim
information to a medical provider network (including Electra-Net) or to a payor
for repricing adjudication and/or payment.

Medical Provider Network Services. The Company, through its
Electra-Net division, provides medical provider network services to its
clients. Electra-Net is made up of regional and national networks, PPO's
(Physician Provider Organization), PHOs (Physician Hospital Organizations),
IPAs (Independent Physician Associations), and other provider groups that have
joined with the Company in providing true EDI claims processing in the managed
care area. Nationally, the number of provider networks with true EDI
capabilities is very small resulting in difficulties for payors looking to
reduce costs and streamline their operations. The Company's integrated solution
has reduced the time and effort required by payors to process repriced medical
claims. Currently Electra-Net has access to over 300,000 provider contracts
that can be repriced electronically, making it, what management believes to be,
one of the broadest coverage networks in the country.

Third Party Administration.

As a full service TPA, the Company, through ETC Services, offered
standard administration services in 1998, including, but not limited to,
marketing reinsurance, writing plan documents, processing medical, dental,
vision and disability claims and ensuring compliance with federal and state
mandates. As of December 31, 1998, the Company discontinued providing TPA
services through ETC Services. TPA services through ETC Services was not
profitable to the Company and management does not believe discontinuance will
have a material adverse effect on the Company's performance or operations going
forward. The Company accounted for the operations of ETC Services as a
discontinued operation for 1998. Included as part of the loss of discontinued
operations is a write-off of certain software purchased by ETC Services
amounting to $350,946.

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Business Strategy

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) concentrate
research and development activities within a limited number of core areas.

The following are key components of the Company's product: claims
automation; automated medical claims repricing; non-participatory claims
negotiation; and network access management and representation.

Claims automation - In 1997, 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.

Automated Medical Claims Repricing - 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 Company is in the process of implementing the MARS technology for
use by PPO's to replace their internal repricing engines.

Non-Participatory provider claims negotiation. The Company, through
its wholly owned subsidiary Electra-Net, negotiates a discount from medical
providers who do not participate in the PPO networks being accessed by the
customer, but who submitted a medical claim to a customer of the Company. Many
of these non-participating providers are willing to give a one time discount on
the submitted claim in exchange for timely payment of that claim. In exchange
for the discount, the client must pay the claim in a timely manner, usually
within two weeks. The Company receives a percentage of the savings as
compensation for securing the discount.

Network Access - The Company, through its wholly owned subsidiary HPI,
manages for its clients multiple PPO network utilization. HPI negotiates rates
on behalf of its clients, manages relationships and selects appropriate
networks for multiple location health plans. In providing these

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services, HPI utilizes the Company's technological resources as well as its
data management systems.

Rapid Installation and Enhanced Processing Capability. The Company
installs claims processing equipment, including computer, telecommunications
and scanning equipment, for use at the client's facility. Once the contractual
relationship is entered into, the Company generally initiates claims processing
services within 20 days of the date that an agreement is reached. The Company
believes its ability to rapidly install a processing system at a client's
location with minimal disruption gives it a significant advantage in the
marketplace.

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.

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.

Vendors. The Company currently furnishes the customer with an imaging
system that is comprised of hardware, software and certain other peripheral
devices free of charge. The Company is considering becoming a value added
reseller ("VAR") for the components of the imaging system. As a VAR, the
Company could be able to enhance its profit margins on the provision of these
systems without increasing its cost of sales.

Research and Development

The Company continually evaluates new imaging components including
imaging software (optical character recognition (OCR)) capabilities.
Additionally, the Company is continually enhancing its proprietary software
used in the provision of the services to its customers. The Company's research
and development activities are based in part upon its efforts to make
enhancements to existing service components in response to recommendations made
by its clients.

Sales and Marketing

The Company actively markets is services to PPO's, group health
insurance companies, worker's compensation insurance companies, third-party
administrators and self-insured employers through the Company's direct sales
force. The Company creates interest and demand for its products

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and services primarily through direct contact with potential customers and
follow-up marketing literature and information designed to specifically address
the client's needs. The Company also participates in managed healthcare
conventions and trade shows. The Company intends to initiate an advertising
program to enhance name recognition and its reputation in the managed care cost
containment industry.

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 2 self-insured and
self-administered customers, 2 health care provider networks and 4 TPA
customers.

Under the terms of its existing agreement with Wal-Mart, the Company
is obligated to provide electronic medical claims processing and repricing
services for a term ending on September 30, 1999. Revenues generated from
Wal-Mart represented approximately 54% and 74% of the Company's revenues as of
December 31, 1997 and 1998 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 and adjudication and payment
services is primarily concentrated in certain insurance companies, TPAs and
management services organizations 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 at a very affordable price. The managed healthcare industry has
experienced significant changes in recent years, primarily as a result of
rising healthcare costs. 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, discounting 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.

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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 a 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 failure
by the Company to obtain or retain any applicable licenses, certifications or
operational approvals could adversely effect its existing operations and
professional performance. There can be no assurance that in the future the
Company will be able to acquire all the necessary licenses, permits or
approvals, if any, necessary to conduct its business or that the costs
associated with complying with laws and regulations affecting its business will
not have a materially adverse effect on the Company.

Employees

As of March 27, 1999, the Company had 30 full-time employees and no
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.

Risk Factors

Accumulated Deficit and Independent Accountants' Report Referring to
Going Concern Uncertainties. Since inception, the Company has incurred losses
from operations, and as of December 31, 1998 the Company had an accumulated
deficit of $8,122,405. This history of recurring losses indicates that the
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis, to
obtain additional financing or capital and ultimately to attain profitable
operations. The Company's independent accountants, in their report regarding
the Company's financial statements for the fiscal year ended December 31, 1998,
stated that since the Company had a history of losses since inception and had a
significant working capital deficit, doubt existed as to the Company's ability
to continue as a going concern. See "Management's Discussion and Analysis or
Plan of Operation."

Working Capital Deficit; Lack of Liquidity and Capital Resources. As
of December 31, 1998, the Company had total current assets of $361,699 and
total current liabilities of $886,552

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resulting in a working capital deficit of $524,853. The ability of the Company
to sustain its working capital, and to obtain the necessary capital resources
to fund future costs associated with its operations and expansion plans is
dependent upon: (i) improving claims processing operations through cost
reductions and increased market penetration; (ii) entering into long-term
claims processing contracts with self-insured companies and management services
organizations; (iii) successful development and marketing of its claims
repricing and successful expansion of its existing service components; and (iv)
its ability to link the various medical claims processing activities of payees
and payors. Even if the Company achieves some success with its operational
strategy, there can be no assurance that it will be able to generate sufficient
revenues to sustain its working capital and have funds available for growth. To
achieve all of its objectives, the Company may be required to raise additional
working capital in the short term by issuing debt and/or equity securities. If
the Company is unable to raise additional capital as needed, it could be forced
to limit its expansion plans. See "Management's Discussion and Analysis or Plan
of Operation".

Possibility of Continued Losses. The Company incurred losses of
$2,101,820 for the fiscal year ended December 31, 1997 and $1,043,108 for the
fiscal year ended December 31, 1998. In addition to the historical losses, the
Company expects to have continued losses in the short term. See "Management's
Discussion and Analysis or Plan of Operation".

Dependence on Quality of Claims Processing. Substantially all of the
Company's revenues are currently derived from providing process and systems
solutions to the non-provider sector of the health care industry. There can be
no assurances that processing methodology will meet the demands of the
marketplace in the future. The Company's future success and financial
performance will depend in part upon its ability to provide an expanding
product line that will meet the functionality required by its customers through
the linkage of payees, health care cost containment companies and payors of
medical claims. There can be no assurance that the Company will successfully
implement electronic processing applications that will meet the requirements of
health care providers and payors and thereby achieve market acceptance.

Dependence on Major Clients; Material Contracts. For the 12 months
ended December 31, 1998, services provided to Wal-Mart, the Company's largest
client, accounted for approximately 74% of revenues. The loss of Wal-Mart as a
client would have a materially adverse effect on the Company and its business.

The Company is a party to a Processing Agreement (the "Processing
Agreement") with Imaged Data, Inc. ("IDI") pursuant to which IDI provides
electronic claims conversion functions for the Company. Under the terms of the
Processing Agreement, IDI can only perform medical claim conversions for the
Company or pay the Company 5% of gross revenues generated by IDI as a result of
medical claims conversions done for the benefit of third parties. The
Processing Agreement is subject to automatic one year renewals with the next
renewal to occur in August, 1999. Although the Company currently has a good
relationship with IDI and the Company has no reason to believe otherwise, no
assurances can be given that IDI will agree to an extension of the term of the
Processing Agreement. The loss of IDI's conversion services could have a
material adverse effect on the financial condition and results of operations of
the Company. The Company is, however,

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aware of other providers of services similar to those performed by IDI, but no
assurance can be given that such services could be contracted for on mutually
acceptable terms.

Consolidation and Uncertainty in the Health Care Industry.
Consolidation of the payor and provider segments of the health care industry
could erode the Company's customer base and reduce the size of its target
market. In addition, the resulting enterprises could have greater bargaining
power, which could lead to price erosion of the Company's services. The
reduction in the size of the Company's target market or the failure of the
Company to maintain adequate price levels could have a materially adverse
effect on the Company's business, financial condition and results of
operations. The health care industry also is subject to change by political,
economic and regulatory influences that may affect the procurement of contracts
and the operation of health care industry participants. During the past several
years, the United States health care industry has been subject to an increase
in governmental regulation and reform proposals. These reforms may increase
governmental involvement in health care, lower reimbursement rates, and
otherwise change the operating environment for the Company's customers. The
failure of the Company to retain adequate processing efficiency or price levels
as a result of legislative or market driven reforms could have a materially
adverse effect on the Company's business, financial conditions and results of
operations.

Effect of Government Regulation. The Company is not currently 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. The failure by the Company to obtain or retain any
applicable licenses, certifications or operational approvals could adversely
effect its existing operations and professional performance. There can be no
assurance that in the future the Company will be able to acquire all the
necessary licenses, permits or approvals, if any, necessary to conduct its
business or that the costs associated with complying with laws and regulations
affecting its business will not have a materially adverse effect on the
Company.

Proprietary Rights, Risk of Infringement. The Company will rely on
nondisclosure and other contractual provisions to protect its proprietary
rights and trade secrets. The Company has registered its service mark in the
States of Texas, Maryland and Arkansas. There can be no assurance that measures
taken by the Company to protect its intellectual property will be adequate or
that the Company's competitors will not independently develop services that are
substantially equivalent or superior to those of the Company. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that a license or similar agreement will be available
on reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any such claim may require the Company to incur substantial
litigation expenses or subject the Company to significant liabilities and could
have a materially adverse effect on the Company's business, financial condition
or results of operations.

Dependence on Key Personnel. The Company is dependent upon the efforts
and ability of Robert Fortier, Chairman of the Board and Chief Executive
Officer and Timothy P. Powell, Executive Vice President - Data Services. The
loss of the services of either of these individuals could have a materially
adverse effect on the Company. Each of the foregoing has entered into
employment and non-competition agreements with the Company. In addition, the
Company's future
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growth will be dependent to a significant degree upon its ability to attract
and retain additional skilled management personnel.

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.

Payment of Dividends. The Company has never declared or paid any cash
dividends on its capital stock. It is anticipated that future earnings of the
Company will be retained to finance the continuing development of its business.
The payment of any future dividends will be at the discretion of the Board of
Directors of the Company and will depend upon, among other things, future
earnings, the success of business activities, regulatory and capital
requirements, the general financial condition of the Company and general
business conditions.

Potential Anti-Takeover Effects of Delaware Law, Certificate of
Incorporation and Bylaws. Certain provisions of Delaware law applicable to the
Company could delay or make more difficult mergers, tender offers or proxy
contests involving the Company. In addition, the Board of Directors of the
Company may issue shares of preferred stock without stockholder approval on
such terms as the Board of Directors may determine. The rights of all the
holders of Common Stock will be subject to, and may be adversely effected by,
the rights of the holders of any preferred stock that may be issued in the
future. In addition, the Company's Bylaws eliminate the right of stockholders
to act by written consent without a meeting and eliminate cumulative voting in
the election of directors. All of the foregoing could have the effect of
delaying, deferring or preventing a change in control of the Company and could
limit the price that certain investors might be willing to pay in the future
for shares of the Common Stock.

Limitation of Liability and Indemnification of Officers and Directors.
Pursuant to the Company's Bylaws, directors and officers are not liable for
monetary damages for breach of fiduciary duty, except in connection with a
breach of the duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law. Furthermore,
the Bylaws provide that the Company may indemnify its directors, officers,
employees or agents to the full extent permitted by the Delaware General
Corporation Law (the "DGCL"), and the Company has the right to purchase and
maintain insurance on behalf of any such person whether or not the Company
would have the power to indemnify such person against the liability.

-12-
<PAGE> 13

Year 2000 Modifications. The Company is in the process of reviewing,
modifying, and testing its computer applications to ensure their functionality
with respect to Year 2000 changes. At present, the Company does not anticipate
that material incremental costs will be incurred in this process. The Company
is also dependent on its contracting medical providers and payor clients to
successfully address their respective Year 2000 technology issues in connection
with their respective claims processing functions. The Company has not
determined whether such providers or clients face Year 2000 problems that if
not resolved, may have a material adverse affect on the Company's business or
results of operations. Steps are now being taken to inquire with customers and
vendors about Year 2000 compliance. All mission critical components of the
Company's internal systems have been tested and are Year 2000 compliant.
However, if the Company's systems or a significant customer's or vendor's
system was not Year 2000 compliant, such consequences could have a material
adverse effect on the operations of the Company.

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 Dallas, Texas. The
lease for the Company's offices expires September 30, 2001 and provides for
monthly rental payments of $9,968.00. In addition, HPI has 1800 square feet in
Hurst, Texas with a lease expiration of May 1, 2000 and monthly rental payments
of $2,100.00.

ITEM 3. LEGAL PROCEEDINGS.

On April 21, 1998, a former employee initiated an action against the
Company pending in the 160th Judicial District Court of Dallas County, Texas.
The suit alleges a claim for involuntary termination and unpaid compensation
due the employee. The Company denies that it terminated the employee or that it
owes the employee any additional compensation.

HPI and Robert Fortier are parties to a suit pending 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 has filed a counterclaim against MCS for approximately $250,000.00 in
past due compensation. HPI and Mr.
Fortier deny all of the allegations that have been made against them.

On March 10, 1999, the Company filed suit in the 134th Judicial
District Court of Dallas County, Texas. The suit is against a former employee
for overstatement of negotiated savings while working through Electra-Net. The
overstatement resulted in overcompensation of the employee because he was
compensated on a percentage of the savings negotiated. The suit seeks recovery
of overpayments and other damages.

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.

-13-
<PAGE> 14

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>
April 4 - June 30, 1997 $3.50 $1.25
July 1 - September 30, 1997 $1.44 $0.75
October 1 - December 31, 1997 $1.13 $0.53
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 1998 $0.50 $0.06
January 1, 1999 - March 15, 1999 $0.68 $0.18
</TABLE>

Holders.

As of March 15, 1999, there were approximately 379 holders of the
Common Stock.

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 OR PLAN OF OPERATION.

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

-14-
<PAGE> 15

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 and the limited scale of the Company's operations prior to
1996, the results of operations from period to period are not necessarily
comparative.

Overview

The Company is the survivor of the Merger of ETC-Texas into ETC-Canada
in the first quarter of 1997. The Company and all of its predecessors received
going concern audit opinions for the fiscal years ended December 31, 1995,
1996, 1997, and 1998.

ETC-Canada was inactive from 1992 until it reorganized its affairs in
1995 in preparation of the Merger. In March 1996, ETC-Canada changed its name
from Solo 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. In June 1996, ETC-Canada consummated a private offering of common stock
for aggregate proceeds of $779,575 which it loaned to ETC-Texas to facilitate
the Merger. Since ETC-Canada had no significant assets and was relatively
inactive during the period prior to the Merger, management of the Company does
not believe that a discussion of ETC-Canada's financial condition and results
of operations would be relevant. Therefore, any references to activity prior to
the Merger are activities of ETC-Texas, unless otherwise specifically
referenced.

The Company is in the business of providing 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. In order to provide the process
solutions, the Company contracts with health care payors, self-insured
companies and other payors, such as TPAs, preferred provider organizations, and
health maintenance organizations for automation and EDI services. The Company
also contracts with various health care provider networks, through its
Electra-Net division, to provide cost containment services to its customers.

In January 1998, the Company, through ETC Services, initiated a TPA
component to service 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. The Company ceased its TPA component
effective December 31, 1998.

The Company's revenues are generated by different methods for each
segment of its business. The Company is paid a set price for scanning and
automating each health care provider claim. Additionally, the Company is paid a
specific percentage of the "savings" generated by its re-pricing activities.
The TPA services were charged on a set price for each customer employee that
was serviced by the Company.

The Company has not generated sufficient revenues during its limited
operating history to repay its outstanding indebtedness, pay its existing trade
accounts or fund its ongoing operating expenses or service development
activities. The Company plans to alleviate its current financial

-15-
<PAGE> 16

problems through debt reduction, borrowings and increased profits from
operations. At December 31, 1998, the Company had cash and cash equivalents of
approximately $122,039 and a working capital deficit of approximately $524,853.
Management believes that cash, working capital and available credit facilities
are sufficient to fund operations of the Company through the close of its
fiscal year ending December 31, 1999. Significant additional research and
development expenditures are not anticipated at this time.

At December 31, 1998, the Company had 8 clients including self-insured
companies and medical provider networks. The Company expended considerable
effort and resources, including hiring personnel with extensive experience in
paying medical claims, to develop its current work flow process. Additional
resources were devoted to (i) defining the exact services that were needed by
the market segment and (ii) developing, testing and ultimately implementing
these services. While expensive and time consuming, these activities serve as
the basis on which the business of the Company will operate. As the Company
expands its customer base, additional computer equipment and personnel will be
required and added. Such expansion will be funded by the revenues derived from
operations and other funding sources that the Company may find from time to
time.

Results of Operations of the Company

Year Ended December 31, 1997 Compared to 1996

Revenues. Revenues from automation services totaled $1,286,251 and
$797,154 for the fiscal years ended December 31, 1997 and 1996, respectively.
With the initiation of the Electra-Net division in April 1997, revenues for
network services totaled $1,788,997 for the fiscal year ended December 31,
1997. The addition of Electra-Net caused total revenues to increase 300% when
comparing revenues of $312,774 for the first quarter ended March 31, 1997 and
$912,026 for the second quarter ended June 30, 1997. The Company's workers'
compensation division had revenues totaling $174,243 in fiscal 1997, with
fiscal 1996 revenues of $34,169 based on four months of operations.

For the fiscal year ended December 31, 1996, fees paid by Wal-Mart for
automation services were approximately 64% of total revenues. In fiscal 1997,
Wal-Mart accounted for 54% of total revenues, which demonstrated the
diversification and growth of the Company's client base during the period.

Cost of Revenues. Cost of automation services totaled $763,700 and
$568,474 for the fiscal years ended December 31, 1997 and 1996, respectively.
These costs for fiscal 1997 were comprised of $457,471 in data entry personnel,
$247,767 in imaging fees and $36,386 for communication expenses. In fiscal
1996, these costs consisted of $324,466 in data entry personnel, $151,383 in
imaging fees and $28,469 in communication expenses. Cost of network services
were largely made up of $579,739 in third party network fees. Cost of workers'
compensation services were comprised primarily of personnel costs of $65,772
and $25,000 for the fiscal years ended December 31, 1997 and 1996,
respectively.

-16-
<PAGE> 17

Gross Profit. Gross profit for fiscal 1997 was $1,567,409 as compared
to $262,849 for fiscal 1996. The gross profit margin for fiscal 1997 was 48.3%
verses 31.6% for fiscal 1996.

Other Expenses. The Company, in the fourth quarter of 1996, emerged
from the development stage with the signing of the long-term contract with
Wal-Mart. Therefore, no start-up costs or research and development costs were
recorded for the fiscal year ended December 31, 1997. Sales, general and
administrative costs increased to $3,406,709 for the fiscal year ended December
31, 1997, compared to $826,285 for the fiscal year ended December 31, 1996. The
Company has issued stock options to employees which are considered
compensatory. Compensation costs were expensed over the periods of employment
attributable to the options at an amount equal to the excess of the fair market
value of the Common Stock underlying such options on the date of grant over the
exercise price thereof. In June 1997, the Company elected to vest all employee
stock options and recognize compensation expense for all outstanding options.
Compensation costs totaling $321,220 and $322,067 was recognized as expense
during the fiscal years ended December 31, 1997 and 1996, respectively. During
the fiscal years ended December 31, 1997 and 1996, the Company issued 320,000
shares of Common Stock for services for a total expense of $400,000 and 262,625
shares of Common Stock for a total expense of $262,625, respectively.

Sales, general and administrative expenses consisted primarily of
personnel costs, rent, telephone and professional fees. Total personnel costs
for fiscal 1997 were $1,744,771, rent of $178,212, telephone of $95,814 and
professional fees of $326,561. Professional fees were incurred due to the
preparation and filing of a registration statement, year-end audit, legal
matters and computer consulting.

Net interest expense increased to $87,328 for the fiscal year ended
December 31, 1997 compared to $34,230 for the fiscal year ended December 31,
1996. The increase is primarily related to the Company's issuance of
convertible debentures and the factoring of its accounts receivable during
fiscal 1997.

Net Loss. The Company reported a net loss of $1,999,404 for the fiscal
year ended December 31, 1997 as compared to a net loss of $2,470,684 for the
fiscal year ended December 31, 1996 or ($.23) and ($.36) basic earnings per
share for fiscal 1997 and fiscal 1996, respectively. For the fiscal years ended
December 31, 1997 and 1996, the Company incurred non-cash employee stock
compensation expense and stock for consulting services expense totaling
$721,220 and $584,692, 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.

Year Ended December 31, 1998 Compared to 1997

Revenues. Revenues from automation services totaled $2,467,010 and
$3,249,492 for the fiscal years ended December 31, 1998 and 1997, respectively.
Revenues for network services totaled $1,418,248 for the fiscal year ended
December 31, 1998, compared to $1,811,613 for 1997. The Company's workers'
compensation division had no revenues in fiscal 1998, with fiscal 1997 revenues
of $174,243.

-17-
<PAGE> 18

For the fiscal year ended December 31, 1997, fees paid by Wal-Mart for
automation services were approximately 56% of total revenues. In fiscal 1998,
Wal-Mart accounted for 74% of total revenues.

Cost of Revenues. Cost of revenues totaled $1,300,658 and $1,682,083
for the fiscal years ended December 31, 1998 and 1997, respectively.

Gross Profit. Gross profit for fiscal 1998 was $1,166,352 as compared
to $1,567,409 for fiscal 1997. The gross profit margin for fiscal 1998 was
47.3% verses 48.3% for fiscal 1997.

Other Expenses. Sales, general and administrative costs decreased to
$1,656,125 for the fiscal year ended December 31, 1998, compared to $3,509,125
for the fiscal year ended December 31, 1997. The Company has issued stock
options to employees which are considered compensatory. Compensation costs were
expensed over the periods of employment attributable to the options at an
amount equal to the excess of the fair market value of the Common Stock
underlying such options on the date of grant over the exercise price thereof.
Compensation costs totaling $20,276 and $423,626 was recognized as expense
during the fiscal years ended December 31, 1998 and 1997, respectively. During
the fiscal years ended December 31, 1998 and 1997, the Company issued 879,100
shares of Common Stock for services for a total expense of $164,105 and 80,000
shares of Common Stock for a total expense of $400,000 respectively.

Sales, general and administrative expenses consisted primarily of
personnel costs, rent, telephone and professional fees. Total personnel costs
for fiscal 1998 were $1,314,442, rent of $116,695, telephone of $113,467 and
professional fees of $108,269. Professional fees were incurred due to the
preparation and filing of a registration statement, year-end audit, legal
matters and computer consulting.

Net interest expense increased to $131,301 for the fiscal year ended
December 31, 1998 compared to $87,328 for the fiscal year ended December 31,
1997.

Net Loss. The Company reported a net loss of $1,043,108 for the fiscal
year ended December 31, 1998 as compared to a net loss of $2,101,820 for the
fiscal year ended December 31, 1997 or ($.27) and ($.96) basic loss per share
for fiscal 1998 and fiscal 1997, respectively. For the fiscal years ended
December 31, 1998 and 1997, the Company incurred non-cash employee stock
compensation expense and stock for consulting services expense totaling
$164,105 and $400,000, respectively, as discussed above. Such compensation
expenses materially increased the Company's net loss for the referenced
periods.

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, 1998 were
$122,039.

-18-
<PAGE> 19

The Company had previously entered into an agreement with Ironwood
Leasing, Ltd. which, among other things, provided for a $500,000 line of credit
and included certain options to purchase stock. During 1998, the Company
restructured this Agreement which resulted in the termination of the line of
credit and the liquidation of the options provision to a fixed number. Ironwood
Leasing now holds fully vested options to purchase up to 200,000 shares of
common stock at an exercise price of $1.00 per share.

In June, 1998 the Company received $110,000 in new capital
contributions in exchange for 440,000 pre-split shares of Common Stock.
Additionally, the Company received loans, with maturity dates between December
31, 1998 and January 7, 1998, in the amount of $170,000 for which it issued
42,500 post-split shares of Common Stock in lieu of interest with certain
rights of conversion. As of April 1, 1999, the entire amount of these loans had
been converted to equity in exchange for 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 guarantee provided by two individuals. The Company issued
250,000 shares of common stock to the two individuals as consideration for
their guarantees.

The Company's independent auditors have included a paragraph in their
report to the Company's Board of Directors and stockholders which states that
the Company's loss from operations and working capital deficiency raise
substantial doubt about its ability to continue as a going concern. The Company
is currently reviewing its cost structure and 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.

Year 2000 Modifications

The Company is in the process of reviewing, modifying, and testing its
computer applications to ensure their functionality with respect to the Year
2000 changes. At present, the Company does not anticipate that material
incremental costs will be incurred in this process. The Company is also
dependent on its contracting medical providers and payor clients to
successfully address their respective Year 2000 technology issues in connection
with their respective claims processing functions. The Company has not
determined whether such providers or clients face Year 2000 problems that if
not resolved, may have a material adverse affect on the Company's business or
results of operations. Steps are now being taken to inquire with customers and
vendors about Year 2000 compliance. All mission critical components of the
Company's internal systems have been tested and are Year 2000 compliant.
However, if the Company's systems or a significant customer's or vendor's
system was not Year 2000 compliant, such consequences could have a material
adverse effect on the operations of the Company.

-19-
<PAGE> 20

Other Matters

On February 16, 1998, the Board of Directors terminated the Employment
Agreement between the Company and L. Cade Havard, its Chief Executive Officer
at that time. After the termination, the Company and Mr. Havard entered a
period of negotiations to resolve various claims between them. As a result of
the negotiations, Mr. Havard returned 462,500 post-split shares of the
Company's common stock to the Company and the parties entered into mutual
releases.

Following the termination of Mr. Havard, Mack Goforth was made the
interim CEO while the Company undertook a reorganization and restructuring of
its operations. In June, 1998, Steven K. Arnold was hired as Chief Executive
Officer in place of Mack Goforth. Mr. Arnold had a background in the healthcare
industry and continued the restructuring and reorganization of the Company.

In September, 1998, through the efforts of Mr. Arnold and others,
Robert Fortier and HPI were identified as a potential acquisition candidate for
the Company. Upon the successful negotiation of that transaction, Mr. Arnold
agreed to step aside as CEO and Mr. Fortier was installed as the CEO of the
Company. As part of his severance, Mr. Arnold was awarded warrants for 450,000
shares of common stock at $.52 per share.

In December, 1998, the Board of Directors approved 487,500 shares of
common stock to be delivered to three former directors and a consultant to the
Company for substantial services rendered to the Company during the period from
December, 1997 through December, 1998.

On January 31, 1999, the Company completed the acquisition of HPI and
integrated the products and services of the two companies.

Health Plan Initiatives, Inc.

In September, 1998, the Company entered into a letter of intent with
HPI 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 was wholly-owned by Robert Fortier, who served as President of HPI
until the acquisition. Since the signing of the October 5, 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 is 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 Mr.
Fortier.

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<PAGE> 21

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.

There were no changes in or disagreements with accountants or
accounting and financial disclosure.

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, 1998.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <S>
Robert Fortier 50 Chief Executive Officer and
Chairman of the Board

Timothy P. Powell 41 Executive Vice President - Data
Services and Director

Richard Hershey 40 Director

Brian Schoonmaker 37 Executive Vice President -
Operations and Director

Duncan McDonald 54 Director
</TABLE>

-21-

<PAGE> 22

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. 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 has 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.

Brian Schoonmaker has served as Director and Executive Vice President
- -Chief Operations Officer of the Company since October 1998. Mr. Schoonmaker
has over 10 years of experience in the insurance and managed care industry.
Prior to his appointment with the Company he served as Executive Vice President
of HPI where he was responsible for all day to day non marketing functions.
Prior to HPI, Mr. Schoonmaker served as regional service manager for Preferred
Health Network and Director of Operations for HealthCorp International. Mr.
Schoonmaker commenced his career with Aetna Insurance Company. He has a
bachelors degree from Oklahoma State University.

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. Mr. Hershey is an individual investor and
financial consultant with interest in health care and publishing. He most
recently served as Senior Vice President of Preferred Health Network, a
Foundation Health Company. He serves on the Compensation Committee of the
Board.

Duncan Macdonald has served as Director since March, 1998. Mr.
Macdonald is also Vice President of CBA, Inc. 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. He serves on the Audit Committee of
the Board.

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 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

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<PAGE> 23

compensated for serving as directors or attending either Board or Committee
meetings. 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.

The Board of Directors has created an Audit Committee and a
Compensation Committee; however, at the present time, all Board related matters
are acted upon by the members as a whole. The Audit Committee is to be composed
of three members, one of which shall be an independent director, and is charged
with reviewing the annual audit and meeting with independent accountants to
review internal controls and financial management practices. The Compensation
Committee is to be composed of three members, the majority of which are to be
independent directors. The Compensation Committee is charged with recommending
to the Board of Directors the compensation for key employees.

The Board of Directors met on 16 during calendar 1998 and acted on
unanimous consent in lieu of meetings on 2 occasions during such period.

None of the directors is a party to any material pending legal
proceedings nor have there been any legal proceedings during the last five
years that are material to an evaluation of the ability or integrity of any of
the Directors or anyone nominated to become a director of the Company.

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 it's directors and executive officers during the
fiscal year ended December 31, 1998, all Section 16(a) filing requirements
applicable to its directors, officers and 10% holders for such year were
complied with.

ITEM 10. EXECUTIVE COMPENSATION.

The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued 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.

-23-

<PAGE> 24

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 1998 -0- -0- -0- -0-
Board, President (4)

Steven K. Arnold,
former (1) President, 1998 $58,890 -0- 450,000 -0-
Chief Executive
Officer

W. Mack Goforth,
former (2) President, 1998 $115,846 -0- -0- -0-
Chief Executive 1997 $ 25,000
Financial Officer

L. Cade Havard,
former (3) Chairman 1998 $ 15,000 -0- -0- -0-
of the Board, Chief 1997 $158,000
Executive Officer,
President

Timothy P. Powell, 1998 $123,231 -0- 286,667 -0-
Executive Vice 1997 $101,500
President-Data Services
</TABLE>

(1) Mr. Arnold's employment with the Company ceased on October 5, 1998. At the
time of his departure, Mr. Arnold was granted an option to purchase
450,000 shares at $.52 per share.
(2) Mr. Goforth's employment with Company ceased on October 19, 1998.
(3) Mr. Havard's employment with the Company ceased on February 16, 1998.
(4) Mr. Fortier became employed on February 1, 1999, and is entitled to base
compensation of $300,000 per year.

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

-24-
<PAGE> 25

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.

Mr. Powell and the Company entered into an Employment and Settlement
Agreement dated the first day of March, 1995, which agreement terminated under
its terms on December 31, 1998. The agreement may be extended by mutual
consent. Negotiations are continuing with Mr. Powell concerning a possible
extension or new agreement.

On February 16, 1998, the Board of Directors of the Company terminated
the Amended and Restated Employment Agreement, dated December 17, 1997, of L.
Cade Havard, the former Chairman of the Board, Chief Executive Officer and
President of the Company. The decision to terminate the agreement was based in
part upon the inability of the Board of Directors and Mr. Havard to resolve
differences regarding the Company's ongoing management and operational
philosophy. On February 16, 1998, Mr. Havard resigned from the Board of
Directors. Also on February 16, 1998, the Board of Directors elected W. Mack
Goforth, the Company's then Chief Financial Officer, as a member and Chairman
of the Board of Directors, as well as Chief Executive Officer of the Company.

On June, 1998, Mr. Goforth was replaced as Chief Executive Officer by
Mr. Steven K. Arnold. Mr. Goforth resigned from the Board of Directors and Mr.
Arnold became President and Chief Executive Officer and was elected Chairman of
the Board. On October 5, 1998, pursuant to the amended letter of intent between
the Company and HPI, Mr. Arnold resigned as President, Chief Executive Officer
and Chairman of the Board and was replaced by Mr. Robert Fortier as President,
Chief Executive Officer and Chairman of the Board.

On November 16, 1998, Mr. David Hannah resigned from the Board of
Directors and Brian Schoonmaker was appointed to replace Mr. Hannah on the
Board. On December 17, 1998 Mr. Scott Stewart resigned from the Board of
Directors and Richard Hershey was appointed to replace Mr. Stewart. On December
31, 1998, Mr. Dennis Barnes resigned from the Board of Directors.

On October 19, 1998, the Board of Directors terminated the Employment
Agreement between the Company and Mr. Goforth for cause. Mr. Brian Schoonmaker
became Executive Vice President and assumed the duties performed by Mr.
Goforth.

On March 20, 1998, Ann C. McDearmon, Executive Vice President -
Director of Marketing, submitted her resignation effective immediately, under
the terms of her Employment Agreement dated March 1, 1997. Ms. McDearmon cited
her disagreement to replace Mr. Havard, the engagement of consultants to review
the operations of ETC Services and other philosophical reasons as the basis for
her decision to resign as an officer of the Company. Ms. McDearmon's duties
with regard to marketing were assumed by Mr. Goforth and Mr. Powell until Mr.
Arnold was made Chief Executive Officer, at which time he undertook those
duties.

-25-

<PAGE> 26

Stock Options

During fiscal 1998, W. Mack Goforth and Timothy Powell each received
options to purchase 50,000 shares of Common Stock at $1.00 per share. The
options vested immediately but expire if not exercised within 30 days of any
termination of their employment. Mr. Goforth's options expired 30 days after
his termination.

As part of a renewal of his Employment Agreement, Timothy Powell
received options to purchase 125,000 shares of Common Stock at $0.50 per share.
The options vested immediately but expire if not exercised within 30 days of
any termination of his employment.

As part of the Fortier Employment Agreement, or the effective 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 remains employed on the date of grant. The
exercise price shall be the average trading price of the common stock on the
date of grant.

During fiscal 1997, the Company granted options to purchase 50,000
shares of Common Stock, at an exercise price of $1.50 per share, to Mack
Goforth. The option vested over the period commencing June 1998 and ending June
2000 and expires upon the termination of the holder's employment with the
Company. Mr. Goforth's options expired on the termination of his employment.

As part of his severance agreement with the Company, Steven K. Arnold
received warrants to purchase up to 450,000 shares of Common Stock of the
Company at an exercise price of $0.52 per share. The warrants must be exercised
within seven years.

On July 1, 1998, Bob Bonami was granted options to purchase 25,000
shares of Common Stock of the Company at an exercise price of $1.00 per share
as part of the consideration for software developed by Mr. Bonami.

In December, 1998, new Board members Duncan Macdonald and Richard
Hershey were granted options to purchase 10,000 shares each of Common Stock of
the Company at an exercise price of $0.19 per share.

As part of a renegotiation of terms of the Lease Agreement between the
Company and Ironwood Leasing, Ironwood was granted options to purchase 200,000
shares of the Company's Common Stock at an exercise price of $1.00 per share in
lieu of any other options they may have previously had under the Agreement.

-26-

<PAGE> 27

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 1997 Price ($/Sh) Date

<S> <C> <C> <C> <C>
Mack Goforth,
Former CEO and 50,000 7.4% $1.00 (1)
President

Timothy Powell,
Executive Vice-President- 50,000 7.4% $1.00 (2)
Data Services

Timothy Powell,
Executive Vice-President- 125,000 18.5% $ .50 (2)
Data Services

Steven K. Arnold,
Former Chief Executive 450,000 66.7% $ .52 (3)
Officer and President
</TABLE>

(1) Mr. Goforth's options expired following his termination of employment.
(2) Options expire 30 days after termination of employment.
(3) Warrants expire 7 years after grant.

-27-

<PAGE> 28

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>
Mack Goforth,
Former CEO and -0- -0- -0- -0-
President

Timothy Powell,
Executive Vice-President- -0- -0- 286,667/-0- -0-
Data Services

Steven K. Arnold,
Former Chief Executive -0- -0- 450,000/-0- -0-
Officer and President
</TABLE>

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 27, 1999, 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.

-28-

<PAGE> 29

<TABLE>
<CAPTION>
Name and Address Amount of Percent of Outstanding
of Beneficial Owner (1)(2) Beneficial Ownership Common Stock
-------------------------- -------------------- ------------

<S> <C> <C>
Robert Fortier (3) 3,538,306 42.0
Timothy P. Powell (3)(4) 286,667 3.4
Richard Hershey (1)(3) 10,000 *
Brian Schoonmaker (3) 50,000 *
Duncan Macdonald (3) 10,000 *
Dave Hannah 737,079 8.7
All executive officers and
directors as a group 3,894,793 46.2
(5 persons as to the Company)
Special Situations Private Equity
Fund, L.P. (5) 846,666 10.0
Special Situations Cayman
Fund, L.P. (5) 417,015 5.0
</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 following the date of this Prospectus
upon the exercise of 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 from the date of this Prospectus 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, 5025 Arapaho Road, Suite 501, Dallas, Texas 75248.
(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) Special Situations Private Equity Fund, L.P. and Special Situations Cayman
Fund, L.P. are affiliated entities managed through investment advisors
principally owned by Austin W. Marxe and David M. Greenhouse.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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 Stock of the Company to the
Company. 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 April 23,1996, with Ironwood Leasing
Ltd., a Texas corporation ("Ironwood").

-29-
<PAGE> 30

Principals of Ironwood, including Dennis Barnes, a former director of the
Company, 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 has granted to Ironwood the
option to either (i) sell to the Company all the equipment referenced in the
Lease Agreement in exchange for the number of shares of Common Stock equal to
the purchase price for said equipment divided by 1.25 per share or (ii)
purchase, at a per share price of $1.25, the number of shares of Common Stock
equal to the purchase price of the equipment divided by 1.25 whereby the
Company may in turn purchase the equipment referenced in the Lease Agreement at
the expiration of the lease term for $1.00. On June 20, 1996, Ironwood waived
the escrow requirements imposed pursuant to the Lease Agreement for the period
ending June 30, 1996. Ironwood further agreed that the Company would not have
to comply with the escrow provisions of the Lease Agreement until the Company
had received 30 days written notice from Ironwood. The Lease Agreement is for a
term of five years and automatically renews for consecutive one-year periods
unless a party thereto notifies the other of its intent to terminate the Lease
Agreement 90 days prior to the end of the renewal term. In October, 1998, the
parties modified the stock option portion of the agreement. Pursuant to the
modification, Ironwood was granted an option to purchase 200,000 shares of
Common Stock of the Company at an exercise price of $1.00 per share. All other
options were terminated.

Effective April 1, 1997, the Company completed a business combination
with Electra-Net, L.C. ("Electra-Net") by assuming its net liabilities.
Electra-Net is a limited liability company wholly owned and controlled by L.
Cade Havard. Mr. Havard received shares of Common Stock as additional
consideration in the transaction. In December 1997, Mr. Havard returned all
shares of Common Stock received in the transaction, pending a review by the
Board of Directors of the appropriateness of the consideration paid. After a
review of the nature of the business combination, it was determined by the
Board of Directors that Mr. Havard was not entitled to any additional
consideration.

On May 2, 1997, the Company and Elaine Boze, the Company's General
Counsel and a member of the Board of Directors, entered into a Severance
Agreement and General Release (the "Severance Agreement") whereby Ms. Boze
resigned as General Counsel and a director of the Company. Under the terms of
the Severance Agreement, Ms. Boze received a $25,000 separation payment and is
entitled to a continuation of her health care benefits until such time as Ms.
Boze becomes employed by an entity providing similar benefits. In consideration
for the foregoing, Ms. Boze agreed to non-competition, confidentiality and
non-solicitation covenants which expire on May 2, 1999. The Company has learned
that Ms. Boze has obtained employment that provides similar health care
benefits.

Effective January 1, 1998, HPI and the Company entered into three
agreements, including an Access Agreement, Commission Agreement, and Network
Development Agreement. Under the Access Agreement, HPI would provide repricing
services to ETC with HPI receiving a portion of the savings as compensation.
Under the Commission Agreement, HPI received a commission for business directed
to ETC and ETC received a commission for business directed to HPI. The Network
Development Agreement provided that HPI would attempt to develop a network of

-30-
<PAGE> 31

credentialed providers to deliver medical services to members or groups of
organizations who choose to use a developed network. No network was developed.
Pursuant to the merger, HPI is now the wholly-owned subsidiary of the Company
and the agreements are no longer in effect. No material compensation was paid
under any of the agreements.

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, 1997, and 1998 .................................F-3
Consolidated Statements of Operations-Years Ended
December 31, 1997 and 1998 ..........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity-Years Ended
December 31, 1997 and 1998 ..........................................................F-5
Consolidated Statements of Cash Flows-Years Ended
December 31, 1997 and 1998 ..........................................................F-6
Notes to Consolidated Financial Statements ..............................................F-7
</TABLE>

2. Exhibits

Exhibit Number Description of Exhibits
-------------- -----------------------
(2) Agreement and Plan of Reorganization,
heretofore filed as Exhibit (2) to the
Company's Form 8-K filed with the
Securities and Exchange Commission on
February 16, 1999, is incorporated herein
by reference.

(10) Employment Agreement, heretofore filed as
Exhibit (10) to the Company's Form 8-K
filed with the Securities and Exchange
Commission on February 16, 1999, is
incorporated herein by reference.

(10.1) Registration Rights Agreement, heretofore
filed as Exhibit (10) to the Company's
Form 8-K filed with the Securities and
Exchange Commission on February 16, 1999,
is incorporated herein by reference.

(27.1) Financial Data Schedule

(b) Reports on Form 8-K.

On February 16, 1999, the Company filed a Form 8-K for the purpose of
reporting consummation of the acquisition of HPI by the Company.

-31-
<PAGE> 32

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 April 14, 1998.

ELECTRONIC TRANSMISSION CORPORATION

By: /s/ Robert Fortier
--------------------------------------
Robert Fortier, Chairman of the Board,
President 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,
President And Chief Executive Officer
Date: April 14, 1999

/s/ Timothy P. Powell
-------------------------------------------
Timothy P. Powell, Executive Vice President-
Data Services and Director
Date: April 14, 1999

/s/ Brian Schoonmaker
-------------------------------------------
Brian Schoonmaker, Executive Vice President
- Chief Operations Officer and Director
Date: April 14, 1999

/s/ Michael Lovell
-------------------------------------------
Michael Lovell, Controller, Corporate
Secretary
Date: April 14, 1999

-32-

<PAGE> 33
ELECTRONIC TRANSMISSION CORPORATION
AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1998

<PAGE> 34

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, 1997 and 1998................F-3

Consolidated Statements of Operations For the Years Ended
December 31, 1997 and 1998......................................F-4

Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1998..................F-5

Consolidated Statements of Cash Flows For the Years Ended
December 31, 1997 and 1998......................................F-6

Notes to Consolidated Financial Statements...............................F-7
</TABLE>

<PAGE> 35

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, 1997 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, 1997 and
1998, and the results of operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.

As described in Note 3, the accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has experienced net losses of $2,101,820 and $1,043,108 for the years
ended December 31, 1997 and 1998, respectively. Additionally, the Company's
current liabilities exceeded its current assets by $524,853 and had a
stockholders' equity deficit of $323,888 at December 31, 1998. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
3. Unless the Company can raise sufficient new capital and increase its
customer base, it will not be able to meet its obligations as they come due and
it will be unable to execute its long-term business plan. These consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

Simonton, Kutac & Barnidge, L.L.P.

Houston, Texas
March 19,1999

F-2

<PAGE> 36

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998

<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 548,565 $ 122,039
Accounts receivable 582,575 181,446
Current portion, capital lease receivable 27,723 2,417
Prepaid assets 20,780 55,797
Net assets of discontinued operations 146,608 --
------------ ------------
Total current assets 1,326,251 361,699
------------ ------------

Property and equipment, net 515,452 320,736

Other assets 8,490 6,749
------------ ------------
$ 1,850,193 $ 689,184
============ ============

LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities $ 956,732 $ 410,954
Notes payable and convertible debentures 478,727 280,318
Current portion, capital lease obligations 102,240 53,963
Net liabilities of discontinued operations -- 141,317
------------ ------------
Total current liabilities 1,537,699 886,552

Long-term capital lease obligations 25,587 126,520
------------ ------------
Total liabilities 1,563,286 1,013,072
------------ ------------

Commitments and contingencies -- --

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; 3,506,506 and 4,926,024 shares
issued and outstanding, respectively 3,507 4,927
Additional paid-in-capital 7,362,697 7,793,590
Accumulated deficit (7,079,297) (8,122,405)
Accumulated other comprehensive income -- --
------------ ------------
Total stockholders' equity (deficit) 286,907 (323,888)
------------ ------------
$ 1,850,193 $ 689,184
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE> 37

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
1997 1998
------------ ------------

<S> <C> <C>
Service revenues $ 3,249,492 $ 2,467,010

Costs and expenses:
Costs of revenues 1,682,083 1,300,658
Selling, general and administrative 3,509,125 1,656,125
Depreciation and amortization 270,186 264,757
------------ ------------
Total costs and expenses 5,461,394 3,221,540
------------ ------------

Loss from operations (2,211,902) (754,530)

Other income (expense):
Interest expense, net (87,328) (131,301)
Other income 88,148 956
------------ ------------
Total other income 820 (130,345)
------------ ------------
Loss from continuing operations before income tax expense (2,211,082) (884,875)
Income tax benefit 36,000 --
------------ ------------
Loss from continuing operations (2,175,082) (884,875)
Loss from discontinued operations -- (158,233)
------------ ------------
Loss before extraordinary item (2,175,082) (1,043,108)
Extraordinary item - extinguishment of debt, net of
applicable income taxes of $36,000 73,262 --
------------ ------------

Net loss $ (2,101,820) $ (1,043,108)
============ ============

Basic loss per common share:
Loss from continuing operations $ (0.97) $ (0.23)
============ ============
Loss before extraordinary item $ (0.97) $ (0.27)
============ ============
Net loss $ (0.96) $ (0.27)
============ ============

Diluted loss per common share:
Loss from continuing operations $ (0.99) $ (0.44)
============ ============
Loss before extraordinary item $ (0.99) $ (0.52)
============ ============
Net loss $ (0.94) $ (0.52)
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE> 38

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998

Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------

<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,788,401 $ 2,475,637 $ 322,067 $(3,774,013) $ (976,309)

Merger with ETC
Transaction Corporation 501,786 1,704,569 (1,050,938) 653,631
Conversion of Electronic
Transmission Corporation
Stock on 1 for 1.25 Basis 447,100 -- -- -- --
Reclass for par value $0.001 -- (4,177,468) 4,177,468 -- --
Conversion of debentures 18,538 19 84,549 -- 84,568
Issuance of shares for cash 670,681 670 1,233,324 -- 1,233,994
Issuance of shares for services 80,000 80 399,920 -- 400,000
Capital contribution -- -- 721,733 -- 721,733
Compensation expense -- -- 423,636 -- 423,636
Deemed dividend -- -- -- (152,526) (152,526)
Net loss -- -- -- (2,101,820) (2,101,820)
----------- ----------- ----------- ----------- -----------

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)
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE> 39

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net loss $ (2,101,820) $ (1,043,108)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of common stock for services rendered 400,000 164,105
Issuance of common stock for interest -- 12,750
Loss on refinancing of capital lease -- 58,943
Change in net assets of discontinued operations (146,608) (63,021)
Write-off of software of discontinued operations -- 350,946
Non-cash compensation from stock options 423,636 20,276
Depreciation and amortization 270,186 264,757
Changes in operating assets and liabilities:
Accounts receivable-trade (320,308) 401,130
Employee advances 25,162 --
Prepaid expenses (5,493) (26,537)
Deposits and other assets 2,067 (6,740)
Accounts payable and accrued expenses 100,182 (545,778)
------------ ------------
Net cash used in operating activities (1,352,996) (412,277)
------------ ------------

Cash flows from investing activities:
Payments on capital lease receivable 25,095 25,306
Purchases of furniture and equipment (18,016) (32,975)
------------ ------------
Net cash provided (used) in investing activities 7,079 (7,669)
------------ ------------

Cash flows from financing activities:
Issuance of notes payable and convertible debentures 352,000 259,344
Payments on notes payable and convertible debentures (72,030) (332,753)
Net proceeds under factoring agreement 228,757 --
Payments on capital leases payable (98,231) (43,353)
Net payment of shareholder loans (521,866) --
Capital contribution 721,733 --
Issuance of common stock for cash 1,233,994 110,182
------------ ------------
Net cash provided (used) by financing activities 1,844,357 (6,580)
------------ ------------
Net increase (decrease) in cash 498,440 (426,526)
Cash and equivalents, beginning of period 50,125 548,565
------------ ------------
Cash and equivalents, end of period $ 548,565 $ 122,039
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 40

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1998

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BACKGROUND -- 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.

Effective February 11, 1997, ETC completed a merger with and into ETC
Transaction Corporation, formerly known as Solo Petroleums Ltd. The merger was,
in effect, a reverse acquisition and was accounted for as a recapitalization of
ETC, with ETC as the acquirer (see Note 2). Effective February 11, 1997, the
name of ETC Transaction Corporation was changed to Electronic Transmission
Corporation, with the Certificate of Incorporation being duly amended to
reflect the change of name.

CONSOLIDATION -- The financial statements include the accounts of the Company
and ETC Administrative Services, Inc., a Texas corporation and wholly owned
subsidiary (see Note 5). 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.

The Company is engaged in a marketing strategy of utilizing a 90-day review
period for new clients. These agreements allow for a 90-day review period for
processing claims with no long-term contracts and the Company has been
successful in providing the service at a per claim fee. Revenues earned and
expenses incurred are recognized for the 90-day review services in the period
services are provided.

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.

ACCOUNTS RECEIVABLE -- The Company's trade receivables arise from sales in the
normal course of business. ETC uses the allowance method to account for
uncollectible accounts; in management's opinion, all accounts are collectible
and no allowance is necessary at December 31, 1997 and 1998.

F-7

<PAGE> 41

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (CONTINUED)

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>

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 5 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

F-8
<PAGE> 42

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BACKGROUND (CONTINUED)

references in the accompanying financial statements to the number of common
shares and per-share amounts for 1997 and 1998 have been restated to reflect
the stock split.

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.

RECLASSIFICATIONS - Certain amounts for the year ended December 31, 1997, have
been reclassified to conform with the December 31, 1998 presentation. The
reclassifications have no effect on net income for the year ended December 31,
1998.

NOTE 2 - MERGER

Effective February 11, 1997, ETC completed a merger with ETC Transaction
Corporation, formerly known as Solo Petroleums Ltd. ("Solo"). ETC Transaction
Corporation was incorporated as Solo Petroleums Ltd. on September 5, 1986 for
the purpose of undertaking oil and gas exploration efforts. In 1987, Solo
completed a public offering of common stock as a Junior Capital Pool Company
under the policies of the Alberta Stock Exchange (the "ASE") and the Alberta
Securities Commission (the "ASC"). Solo common stock was subsequently listed
for trading on the ASE under the trading symbol "SOP". By 1990, revenues from
oil and gas exploration efforts had substantially declined and Solo began
experiencing financial difficulties. As a result, Solo liquidated substantially
all of its assets and underwent a significant change in management during 1990.
Since Solo had no significant assets or operations, its principal potential for
profits came solely from operations it may receive in merger. On March 21,
1996, Solo changed its name to ETC Transaction Corporation.

F-9
<PAGE> 43
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - MERGER (CONTINUED)

A special meeting of the shareholders of ETC was held on January 31, 1997, at
which time shareholders approved and ratified the terms and conditions of the
Merger Agreement and authorized the Board of Directors of ETC to effect the
merger. ETC Transaction Corporation held its annual meeting on February 11,
1997, at which time the shareholders ratified and approved both the Continuance
of ETC Transaction Corporation into the State of Delaware and the Merger
Agreement and authorized the Board of Directors to effect the merger. ETC and
ETC Transaction Corporation executed the merger transaction as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). ETC and ETC Transaction Corporation did not recognize any
gain or loss as a result of the merger. The merger is, in effect, a reverse
acquisition and is accounted for as a recapitalization of ETC in accordance
with SAB Topic 2:A., with ETC as the acquirer.

ETC Transaction Corporation is the surviving corporation of the merger. The
type and number of common shares outstanding at December 31, 1997 represent
those of ETC Transaction Corporation. Effective February 11, 1997, the name of
ETC Transaction Corporation was changed to Electronic Transmission Corporation,
with the Certificate of Incorporation being duly amended to reflect the change
of name. The Company's stockholders' equity as of December 31, 1996, represents
the stockholders' equity of Electronic Transmission Corporation prior to merger
with ETC Transaction Corporation and prior to the aforementioned name change by
ETC Transaction Corporation.

ETC Transaction Corporation was a non-operating entity with the following
summary balance sheet on the date of the merger:

<TABLE>
<S> <C>
Current Assets:
Cash $ 142
Accrued interest receivable 27,800
-----------------
Total Current Assets 27,942

Note receivable - ETC 779,575
-----------------
Total Assets $ 807,517
=================

Current Liabilities:
Accounts payable $ 26,991
Accrued expenses 50,970
Loan payable 23,425
Short-term debentures 52,500
----------------
Total Current Liabilities 153,886

Common Stock 1,704,569
Accumulated deficit (1,050,938)

Total Liabilities & Stockholders' Equity $ 807,517
================
</TABLE>

F-10
<PAGE> 44

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - MERGER (CONTINUED)

On May 15, 1996, prior to the merger, ETC Transaction Corporation sold 519,717
shares in a private placement offering of common stock. ETC Transaction
Corporation then loaned the $779,575 offering proceeds to ETC to fund its
marketing and product development efforts and costs associated with the Merger.
The note receivable recorded by ETC Transaction Corporation was eliminated
against the related note payable recorded by ETC at the date of merger. No cash
was involved in eliminating the note receivable from ETC. On the transaction
date, the ETC Transaction Corporation accumulated deficit of $1,050,938 was
recorded in the acquirer's financial statements as an increase in accumulated
deficit.

The merger was effected by ETC Transaction Corporation issuing 1.25 pre-reverse
stock split shares for each issued and outstanding common share in ETC. At the
date of merger, ETC had 7,153,601 pre-reverse stock split shares issued and
outstanding and accordingly, the merger resulted in the issuance of 8,942,002
pre-reverse stock split shares in ETC Transaction Corporation for all of the
issued and outstanding common shares of Electronic Transmission Corporation. At
the date of merger, ETC Transaction Corporation had 2,007,144 pre-reverse stock
split shares issued and outstanding. Accordingly, the effect of the merger
resulted in the surviving entity having 10,949,146 pre-reverse stock split
shares issued and outstanding at February 11, 1997.

Giving effect to the reverse stock split (see Note 1), the merger was effected
by ETC Transaction Corporation issuing 1.25 post-reverse stock split shares for
each issued and outstanding post-reverse stock split common share in ETC. At
the date of merger, ETC had 1,788,401 post-reverse stock split shares issued
and outstanding and accordingly, the merger resulted in the issuance of
2,235,501 post-reverse stock split shares in ETC Transaction Corporation for
all of the issued and outstanding common shares of Electronic Transmission
Corporation. At the date of merger, ETC Transaction Corporation had 501,786
post-reverse stock split shares issued and outstanding. Accordingly, the effect
of the merger resulted in the surviving entity having 2,737,287 post-reverse
stock split shares issued and outstanding at February 11, 1997.

NOTE 3 - 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 $2,101,820 and $1,043,108 during the years ended December
31, 1997 and 1998, respectively. Cash used by operating activities for the same
periods aggregated $1,352,996 and $412,277, respectively. Additionally, at
December 31, 1998, ETC's current liabilities exceeded its current assets by
$524,853. ETC's continued existence depends upon the success of management's
efforts to raise sufficient new capital and increase its customer base.

F-11
<PAGE> 45

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - GOING CONCERN AND CONTINUED OPERATIONS (CONTINUED)

Management plans to mitigate the going concern issues by marketing its services
to (i) PPOs; (ii) claims processors, TPAs and small to medium-size insurance
companies; and (iii) large self-insured and self-administered corporations to
expand its customer base and increase profitability. Management believes that
it will be successful in generating sufficient cash to support its operations.
There can be no degree of assurance that the Company will be successful in
raising additional working capital or executing its business plan to the extent
that it will be profitable.

NOTE 4 - SUBSEQUENT EVENTS, ACQUISITION

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 is 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. The transaction will be accounted for
as a purchase. Accordingly, the Company's financial statements in 1999 will
include the operations of HPI from the date of acquisition. Under purchase
accounting, the total purchase price will be 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:

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.

F-12
<PAGE> 46

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - SUBSEQUENT EVENTS, ACQUISITION (CONTINUED)

NOTE 5 - 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 for 1998 in
the accompanying statement of operations. Included in the loss from
discontinued operations is the writeoff of certain software purchased by
Administrative amounting to $350,946.

NOTE 6 - ACCOUNTS RECEIVABLE

The following is a summary of accounts receivable:

<TABLE>
<CAPTION>
December 31,
1997 1998

<S> <C> <C>
Accounts receivable - trade $ 578,870 $ 180,802
Employee receivables 3,041 -
Accounts receivable - other 664 664
----------------- ----------------

$ 582,575 $ 181,446
================= ================
</TABLE>

In September 1997, the Company entered into an agreement whereby the Company
has the right to factor certain receivables, with recourse, to a financial
institution from time to time until September 1998. The Company discontinued
the use of the factoring arrangement in 1998. The maximum amount of receivables
that could be factored to the financial institution at any time was $500,000.
The receivables were discounted at 2.75% of the face value of the receivables.
The financial institution retained 20% of the face amount of outstanding
receivables in a cash reserve account in the name of the Company. The Company
was required to repurchase any receivables sold, which were in arrears more
than ninety days, at the receivables amount net of unearned interest. The terms
of the factoring agreement allowed the Company to maintain effective control
over the receivables

F-13
<PAGE> 47

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - ACCOUNTS RECEIVABLE (CONTINUED)

and therefore the agreement is recorded as a secured borrowing in accordance
with Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". During the year ended December 31, 1997, the Company received
$1,080,806 from the factoring of receivables. The factoring obligation
outstanding under the agreement at December 31, 1997 amounted to $228,757.
Required cash reserves included in cash and cash equivalents amounted to
$45,751 at December 31, 1997. Discounts on the factoring of receivables
recorded as interest expense in 1997 amounted to $38,500.

NOTE 7 - OFFICE FURNITURE AND EQUIPMENT

The following is a summary of office furniture and equipment:

Depreciation expense was $266,133 and $271,865 for 1997 and 1998, respectively.

NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The following is a summary of accounts payable and accrued liabilities:

F-14
<PAGE> 48

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES

The following is a summary of notes payable:

F-15

<PAGE> 49

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)

In December, 1998, the Company acquired a $500,000.00 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.

During 1991 and 1992, ETC Transaction Corporation (formerly Solo Petroleums,
Ltd.) issued $52,500 in short-term convertible debentures which were due 180
days from issuance bearing an interest rate of 20%. The debentures provided for
the holder to receive 2.5 common shares of ETC Transaction Corporation stock
for each one U.S. dollar of debenture. In December 1997, the Company issued
8,125 shares of common stock on a $4-for-1 post-reverse stock split share basis
in full settlement of the agreements. The remaining $20,000 in debentures were
paid in cash to the holders in full settlement.

On May 14, 1997, the Company issued $50,000 in short-term subordinated
convertible debentures which were due in one year. The debentures were
convertible at $5.00 per common share including principal and accrued interest.
On September 22, 1997, the holder converted $52,067 of principal and interest
into 10,413 shares of common stock.

NOTE 10 - 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, 1998 are as follows:

F-16
<PAGE> 50

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - LEASE OBLIGATIONS PAYABLE (CONTINUED)

Rent expense during the years ended December 31, 1997 and 1998 for operating
leases was $173,494 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:

In April 1996, the Company entered into an equipment lease agreement and stock
option agreement with Ironwood Leasing Ltd. (a related party) which is recorded
as a capital lease by the Company. Principals of Ironwood Leasing, Ltd. are
also stockholders of ETC, including a director of ETC. The master lease
agreement is for a term of five years beginning April 23, 1996 through April
23, 2001 and allows the Company to lease certain equipment for amounts
specified in the agreement with rental payments due on the first of each month.
As of December 31, 1998, monthly payments required under the master lease
agreement amounted to $5,000 expiring in October 2001.

At any time during the term of the agreement, the leasing company has the right
to i) sell to ETC any or all of the equipment in exchange for the number of
shares of ETC common stock, or stock of any company with which ETC merges, that
is equal to the purchase price of the equipment divided by $5.00 per share or,
ii) purchase, at $5.00 per share, the number of shares of ETC stock, or stock
of the merged company, equal to the purchase price of the equipment divided by
5.00, and give ETC the option to purchase the equipment at the end of the lease
for $1.00; provided, that if ETC issues, agrees to issue or grants an option to
purchase ETC stock to any other person for a price less than $5.00 per share,
the price payable to the leasing company will be reduced to such lower price.
The Company has subsequently agreed to grant the leasing company the right to
exercise the options at $1.00 per share.

Because this transaction was with other than employees, it was accounted for
using the fair value method under SFAS 123, "Accounting for Stock-based
Compensation." Using the fair market method, the fair value of the options
granted in this transaction was based on the fair value of the services
received. Compensation expense recognized in conjunction with these options for
the year ended December 31, 1997 was not material.

F-17
<PAGE> 51
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - LEASE OBLIGATIONS PAYABLE (CONTINUED)

The leasing company agreement contained certain restrictive covenants which (i)
required ETC to escrow all accounts received which were derived from the use of
this equipment, less third party costs, through March 31, 1996 or until any
class of stock became registered with the Securities and Exchange Commission or
otherwise became publicly traded, or the funds in escrow equaled the total
purchase price of the equipment, and (ii) restricted ETC from issuing
additional securities before ETC merged with a public company. ETC was in
violation of each of these covenants and has obtained a waiver from the leasing
company releasing ETC from any claims under the escrow requirement and
violations relating to the issuance of securities. On June 20, 1996, Ironwood
waived the escrow requirements imposed pursuant to the Lease Agreement for the
period ending June 30, 1996. Ironwood agreed that the Company would not have to
comply with the escrow provisions of the Lease Agreement until the Company had
received 30 days written notice from Ironwood. A credit facility portion of the
agreement has been terminated.

NOTE 11 - INCOME TAXES

ETC has net operating loss carryforwards of approximately $5,660,000 that are
available to offset any future income tax liability. The net operating loss
carryforwards expire as follows:

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
$1,627,000 and $2,100,000 at December 31, 1997 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, 1997 and 1998.

The components of the provision for federal income taxes are as follows as of
December 31:

<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Currently payable $ -- $ --
Deferred (36,000) --
-------------- --------------

Federal income tax expense (benefit) $ (36,000) $ --
============== ==============
</TABLE>

F-18
<PAGE> 52
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - INCOME TAXES (CONTINUED)

Deferred tax benefit in 1997 results from the difference in extraordinary gain
on extinguishment of debt which reduced the benefit of the net operating loss
carryforwards and decreased the valuation allowance recorded against the
deferred tax assets.

NOTE 12 - BUSINESS COMBINATION

Effective April 1, 1997, the Company completed a business combination with
Electra-Net, L.C. ("Electra-Net") by assuming their net liabilities.
Electra-Net, L.C. is a company that was wholly owned and controlled by ETC's
former Chairman of the Board, Chief Executive Officer and President at the time
of the combination. The individual no longer holds those titles and is
currently only a shareholder.

The transaction was accounted for using the purchase method at predecessor cost
as follows:

<TABLE>
<S> <C>
Assets Acquired:
Cash $ 2,065
Accounts receivable 76,061
Computer hardware 20,908
-----------------
Total assets $ 99,034
-----------------

Liabilities Assumed:
Accounts payable $ 15,711
Loans payable 235,849
-----------------
Total liabilities $ 251,560
-----------------

Net Liabilities Assumed $ 152,526

Consideration Paid:
Cash $ --
-----------------
Total consideration --
-----------------

Dividend paid to shareholder $ 152,526
=================
</TABLE>

The excess of the consideration over the related party predecessor cost (net
liabilities assumed) is treated as a reduction of equity (i.e., a deemed
dividend). Goodwill resulting from market value adjustments to assets and
liabilities of the entity was not recorded since this transaction was
consummated with a related party, and that treatment would have constituted a
step-up in basis.

F-19
<PAGE> 53
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - STOCK OPTIONS

The Company has issued various stock options to employees of the Company which
are considered compensatory. Vesting varies by employee agreement ranging from
2 to 5 years. The contractual life of outstanding stock options at December 31,
1998 is the term of employment of the holder.

F-20

<PAGE> 54
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - STOCK OPTIONS (CONTINUED)

A summary of the status of employee stock options is set forth below:

The following table summarizes information about stock options granted during
the years ended:

The following table summarizes information about stock options outstanding at
December 31, 1997 and 1998:

F-21
<PAGE> 55
ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - STOCK OPTIONS (CONTINUED)

Fair value for the stock underlying stock options and stock warrants was
determined, prior to the Company trading on the over-the-counter market, using
information available from other stock sale transactions at or near the grant
date. In management's opinion, these transactions between willing parties
included the best information available at the time of grant to estimate the
market value of the common stock of the Company. No quoted market prices
existed due to the non-public status of the Company. 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, 1997 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, 1998. During
1997, the Company elected to rescind specific compensatory stock options of an
officer of the Company. Accordingly, compensation costs associated with these
options were not expensed due to the officer retroactively forfeiting any
rights under the original option agreement. Effective June 30, 1997, the
Company elected to vest all employee stock options and recognize compensation
expense for all outstanding options. Compensation cost totalling $321,220 was
recognized as expense during the year ended December 31, 1997.

F-22
<PAGE> 56

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 1997: dividend yield
of 0.0 percent; expected volatility of 40.0 percent; risk free interest rates
of 5.0 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 1997 would
have been $2,392,318. Basic and diluted loss per share would have been $(1.09)
and $(1.13) in 1997, respectively. 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

NOTE 13 - STOCK OPTIONS (CONTINUED)

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.

As discussed in Note 10, the Company issued 28,333 options to purchase common
stock at $6.00 per share to a corporation as collateral to secure a note
payable. The Company accounted for this transaction using the "intrinsic value
based method" of accounting for stock options. The exercise price of the stock
options on the date of grant is equal to fair market value of the underlying
common stock. The fair value was determined based upon available market quotes
on the date of grant. No compensation expense was recognized in conjunction
with these options for the year ended December 31, 1997. The options expired on
May 19, 1998.

Of 100,000 stock options granted in 1995 to a shareholder, and officer of the
Company, 50,000 were rescinded and forfeited in 1997. The Company and
shareholder, by mutual agreement, elected to rescind the stock options and
return all rights under the agreement. The financial statements of the Company
only include compensation expense for shares vested prior to the rescission.
The compensation expense adjustment due to the rescission was recorded as a
1997 adjustment, and, net of the adjustment, no compensation expense was
recognized in 1997 from these stock options.

Total compensation expense of $339,600 was measured at the date of grant of the
100,000 options. The Company used the straight-line method to recognize
stock-based compensation expense for these options over their three year
vesting period, even though the options vested on various dates during that
period. This method was not materially different than the method prescribed by
APB 25: Accounting for Stock Issued to Employees. Stock-based compensation
expense of $199,800 was recognized in 1996 under these options. The remaining
$199,800 of compensation expense will not be recognized by the Company due to
the rescission. Because the Company recognized stock-based compensation expense
using the straight-line method, and 50,000 of the 100,000 stock options granted
in 1995 were rescinded in 1997, no adjustment is necessary in the period of
forfeiture to reverse stock-based compensation recognized in previous periods.

F-23
<PAGE> 57

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized $38,253 in expense for 1998 for the issuance of
nonemployee stock options under FASB Statement 123.

NOTE 14 - STOCK WARRANTS

Effective February 28, 1997, the Company issued 130,000 stock warrants to
shareholders which expire on February 28, 2004, and allow the holder of each
warrant to purchase one share of common stock at a price of $5.00 per share.
Fair value of the stock underlying the warrants issued was determined based
upon the selling price to a willing buyer at or near the date of grant. In
management's opinion, these transactions included the best information
available at the time of grant to estimate the fair value of the common stock
of the Company. The warrants issued to the shareholder were for services
rendered for consulting in obtaining equity capital and marketing the Company's
common stock and were accounted for under SFAS 123, "Accounting for Stock Based
Compensation." The fair value of the warrants was estimated using the Binomial
Method with the following assumptions: dividend yield 0.0%; risk free interest
rate of 8%; expected lives of two years. Compensation expense of $96,200 was
recognized in 1997. As of December 31, 1998, no warrants have been exercised.

Effective June 1, 1997, the Company issued 5,750 stock warrants to shareholders
which expired on June 1, 1998, and allow the holder of each warrant to purchase
one share of common stock at a price of $6.00 per share. Fair value was
determined based on quoted market prices. The warrants issued to shareholders
were for services rendered for consulting in obtaining equity capital and
marketing the Company's common stock and were accounted for under SFAS 123,
"Accounting for Stock Based Compensation." The fair value of the warrants was
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions: dividend yield 0.0%; expected
volatility 40.0%; risk-free interest rate 5.0%; expected lives of one year.
Compensation expense of $6,212 was recognized in 1997. None of these warrants
were exercised prior to their expiration.

NOTE 15 - CUSTOMER CONCENTRATION

For the years ended December 31, 1997 and 1998, revenues from one customer
amounted to approximately 56% and 74% of total revenues. For the year ended
December 31, 1997, revenues from a separate customer amounted to approximately
13% of revenues.

Trade accounts receivable included $86,717 and $146,880 relating to these
customers at December 31, 1997 and 1998, respectively.

F-24
<PAGE> 58

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - RELATED PARTY TRANSACTIONS

In December 1995, the Company entered into an agreement with a marketing firm
to assist in obtaining and servicing customers. A member of the marketing firm
is a former member of the Board of Directors. Compensation for services
rendered to the Company will be paid through November 1997. At December 31,
1997, the Company was indebted to the former director in the amount of $32,857.
During the year ended December 31, 1997, the Company incurred expenses under
this agreement amounting to $19,872.

The Company had an agreement to purchase equipment from SNC. The relationship
exists through SNC's purchase contract with an equipment wholesaler which
allowed SNC to purchase equipment at a significant discount. The Company
recorded the equipment purchases at SNC's cost. As of December 31, 1997, the
agreement had been cancelled. During the year ended December 31, 1997, the
Company purchased equipment totaling $20,291.

On May 2, 1997, the Company and Elaine Boze, the Company's General Counsel and
a member of the Board of Directors, entered into a Severance Agreement and
General Release (the "Severance Agreement") whereby Ms. Boze resigned as
General Counsel and a director of the Company. Under the terms of the Severance
Agreement, Ms. Boze received a $25,000 separation payment and is entitled to a
continuation of her health care benefits until such time as Ms. Boze becomes
employed by an entity providing similar benefits. In consideration for the
foregoing, Ms. Boze agreed to non-competition, confidentiality and
non-solicitation covenants which expire on May 2, 1999. The Company has learned
that Ms. Boze obtained employment that provides similar health care benefits.

On January 18, 1996, ETC entered into a consulting agreement with Michael
Eckstein, a director of the Company, pursuant to which Mr. Eckstein agreed to
assist ETC in identifying and placing under contract TPAs, preferred provider
organizations and other managed care companies which may be able to utilize the
Company's claims processing services. This agreement has been terminated and
there are no outstanding claims with respect to the agreement.

NOTE 17 - 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-25
<PAGE> 59

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the years ended December 31, 1997 and 1998, the Company paid $79,202 and
$27,663 for interest, respectively. During the years ended December 31, 1997
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 $16,747 and $37,066 through capital lease
obligations during the year ended December 31, 1997 and 1998, respectively.

During the year ended December 31, 1997, the Company issued an aggregate of
80,000 shares of common stock for services rendered at $5.00 per share in the
total amount of $400,000. These shares were comprised of 12,500 shares issued
to two separate third parties (total of 25,000 shares) for services rendered
for public relations. Additionally, the Company issued the remaining 55,000
shares to a separate third party for services rendered in connection with
assisting the Company in raising equity capital.

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.

Fair value of the common stock issued for services were determined based upon
recent sales to willing parties at or near the date of issuance. In
management's opinion, fair value on the date of issuance of common stock and
the cost recognized in the financial statements is commensurate with the value
of the services provided to the Company in 1997 and 1998.

NOTE 19 - EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:

F-26
<PAGE> 60

ELECTRONIC TRANSMISSION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - EARNINGS PER SHARE (CONTINUED)

As of December 31, 1997 and 1998, options to purchase 185,417 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-27

<PAGE> 61

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------
<S> <C>
(2) Agreement and Plan of Reorganization,
heretofore filed as Exhibit (2) to the
Company's Form 8-K filed with the
Securities and Exchange Commission on
February 16, 1999, is incorporated herein
by reference.

(10) Employment Agreement, heretofore filed as
Exhibit (10) to the Company's Form 8-K
filed with the Securities and Exchange
Commission on February 16, 1999, is
incorporated herein by reference.

(27.1) Financial Data Schedule
</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 122,039
<SECURITIES> 0
<RECEIVABLES> 181,446
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 361,699
<PP&E> 961,086
<DEPRECIATION> (640,350)
<TOTAL-ASSETS> 689,184
<CURRENT-LIABILITIES> 886,552
<BONDS> 280,318
0
0
<COMMON> 4,927
<OTHER-SE> (328,815)
<TOTAL-LIABILITY-AND-EQUITY> 689,184
<SALES> 2,467,010
<TOTAL-REVENUES> 2,467,010
<CGS> 1,300,658
<TOTAL-COSTS> 3,221,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,301
<INCOME-PRETAX> (884,875)
<INCOME-TAX> 0
<INCOME-CONTINUING> (884,875)
<DISCONTINUED> (158,233)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,043,108)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.52)

</TABLE>