UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ____________
Commission File Number 0-11808
MB SOFTWARE CORPORATION
(Exact name of Registrant as specified in its charter)
COLORADO 59-2219994
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
2225 E. Randol Mill Road Suite 305
Arlington, Texas 76011
(817) 633-9400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------------
Common NASDAQ - OTC BULLETIN BOARD
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $ .001 par value
-----------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
[X] Yes [ ] No
Issuer's revenues for its most recent fiscal year: $3,415,925
<PAGE>
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked price of such stock, as of a specified date within the past 60 days. The
aggregate market value of the voting stock held by non-affiliates computed by
reference to the average bid and asked price of such stock, as of April 9, 1999,
is $2,551,702 based upon a per share price of $0.19.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of Securities under a plan confirmed by a court.
Yes [X] No [ ]
As of December 31, 1998, 68,691,971 shares of the Issuer's $.001 par value
common stock were outstanding.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
2
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION
Form 10-KSB
For the Year Ended December 31, 1998
Page of
Form 10 KSB
-----------
<S> <C> <C>
ITEM 1. BUSINESS.............................................................................4
ITEM 2. PROPERTIES...........................................................................7
ITEM 3. LEGAL PROCEEDINGS....................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND REALATED SHAREHOLDER MATTERS...........9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................9
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................13
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS........................13
ITEM 10. EXECUTIVE COMPENSATION..............................................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................................15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TANSACTIONS.......................................16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................................16
</TABLE>
3
<PAGE>
PART 1
Item 1. Business
MB Software Corporation (the "Company") was incorporated in 1982.
During the last five years, the focus of the Company has been twofold: First, to
provide practice and cash management services to physicians, dentists,
chiropractors and medical billing centers; and second, to develop and sell
medical software. In 1997, the Company began expanding its' scope of operations
by acquiring and managing additional healthcare facilities and utilizing in
those facilities the software products developed by the Company. In 1998, the
Company continued to acquire medical clinics, expand the revenue base of
existing clinics, advance its' medical software to comply with all regulations
and industry standards and integrate the software with new products and
services.
Healthcare/Practice Management Business
The Company acquired a primary care facility in Austin, Texas and a
sports medicine and rehabilitation facility in Fort Worth, Texas. The
acquisitions were made by the Company directly through its' subsidiaries.
On April 1, 1998, a Company subsidiary acquired the assets of and
assumed certain liabilities from Med-Sport Physical Therapy & Rehabilitation
Center, Inc. The Company planned to expand its Austin presence into the Fort
Worth area and therefore renamed the rehabilitation center Victory Medical &
Family Care of Fort Worth. However, primarily as a result of litigation with
Victory (as defined below), the Company closed the Fort Worth clinic and wrote
off the investment as set forth in the December 31, 1998 financial statements.
Also in April 1998, the Company sold Sandy Home Health, Inc., a home
healthcare facility located in Utah. The Company determined that recent
significant changes in governmental reimbursement programs could adversely
affect the revenue of the Utah facility. As a result, the December 31, 1998
financial statements reflect a $200,000 loss pertaining to the Utah sale. The
Company is unaware of any residual Medicare liability pertaining to Sandy Home
Health, Inc.
Effective June 3, 1998, MB Healthcare Management, Inc. ("MB
Healthcare"), a wholly-owned Company subsidiary, acquired by merger all of the
assets of Toth Enterprises, Inc. d/b/a Victory Medical & Family Care ("Toth I").
At the time of the merger, the common stock of Toth I was converted into 400,000
shares of the Company's common stock. As part of the transaction, MB Healthcare
and Toth Enterprises II, P.A. d/b/a Victory Medical & Family Care ("Victory")
entered into a Management Services Agreement providing for the management of
Victory by MB Healthcare.
As of September 1998, the Company was involved in litigation with
Victory and its' principals. Pending the outcome of the litigation, the
investment in Victory and unpaid fees earned by the Company pursuant to the
Management Services Agreement have been written off as reflected in the December
31, 1998 financial statements.
Healthcare Innovations, LLC ("HI"), a Company subsidiary, executed a
promissory note ("Note") in the amount of $1.4 million in favor of Imagine
Investments, L.L.C. ("Imagine"). Prior to the time of the transaction, Imagine
owned 49% of the stock of HI. As part of the transaction, Imagine, in November
1998, converted its ownership interest in HI and the debt evidenced by the Note
to 340,000 shares of preferred stock of the Company.
Effective January 30, 1999, the Company sold Color Country Health
Express, Inc. ("Color Country"), a subsidiary in Utah and a sole
4
<PAGE>
nurse-practitioner arrangement. The Company determined that the corporate
expense associated with Color Country was not justified given the amount of
revenue generated and seasonal fluctuations in revenue.
Nevada Multicare, a Company subsidiary consisting of a chiropractic
facility, is continuing to expand as a result of its current marketing program.
Nevada Multicare has secured a license agreement with the Culinary Union, one of
the largest insurers in Nevada.
The Company's Florida operations are expanding. The revenue derived
from those operations has doubled from 1997 to 1998. A third location was opened
in Jacksonville, Florida in 1998. The Company continues to focus on the Florida
market where it is has been successful and believes that continued growth and
expansion will likely continue in 1999. The Company intends to increase revenue,
reduce cost where applicable and maximize collections by utilizing the Company's
employee base in Florida.
The Company's healthcare acquisition strategy is to target for purchase
those clinics that specialize in physical medicine, pain management, physical
therapy and rehabilitation through the use of MD's, DO's, physical therapists
and chiropractors. Typically, acquisition targets are distressed businesses
having a strong medical practice but also having concurrent difficulties
associated with cash management (particularly collections) or practice
management problems. The Company believes that it's experience in cash
management, particularly collecting receivables from providers, together with
utilization of the Company's software, will enable the Company to operate target
acquisitions more efficiently and therefore more profitably.
The Software Division
The Company's software strategy is to refine OneClaim(R) Plus, the
Company's primary software product, and integrate the software with new products
and services.
OneClaim(R) Plus 32 bit Windows 95/98/NT Medical Practice Management
Software Package was developed for the healthcare industry and is fully Y2K
compliant. The software offers billing and accounting features and customized
reporting capability and information management functions to accelerate and
monitor the growth of a practice. While maintaining and streamlining billing and
accounting functions, OneClaim(R) Plus utilizes an integrated approach to
electronic claims filing and electronic statement processing. The Company plans
to heavily promote these features in the wake of recent mandates by the Health
Care Financing Administration ("HCFA") for the standardization of electronic
claims processing for all insurance companies.
Prior to January 1998, the Company maintained a business
opportunity-marketing program with a distribution base of resellers that
marketed and sold the Company's OneClaim(R) Plus product. The business
opportunity-marketing program was sold in January 1998. The Company now engages
in direct sales of the OneClaim(R) Plus practice management software via a
network of strategic alliances with professional organizations.
In July 1998, the Company's technology division was relocated to
corporate headquarters in Arlington, Texas. The technology division is comprised
of both the development and customer support departments. This move enabled the
Company to further strengthen its relationship with and control of the
day-to-day operations of these two crucial areas.
Perhaps the most important aspect of the Company's software division is
the Company's plan to promote two new products that the Company intends to
integrate with OneClaim(R) Plus. The Company believes that integrating the
existing software with those products will afford new alternatives to the
healthcare industry (see below for New Product Development).
5
<PAGE>
Relationship between the Software Division and the Healthcare/Practice
Management Business
The Company utilizes its own practice management software in its own
practice management businesses. This means that the Company's development and
support departments have direct access to their own user base for immediate
feedback on enhancements and for beta testing. Implementing OneClaim(R) Plus
software in each of the clinic locations has provided valuable information that
has contributed greatly to the foundation for new products.
Industry Overview
The Health Care Financing Administration (HCFA) has estimated that the
nation's total spending for health care is projected to increase from $1.0
trillion in 1996 to $2.1 trillion in 2007, averaging annual increases of 6.8
percent. Over this period, health spending as a share of gross domestic product
(GDP) is estimated to increase from 13.6 percent to 16.6 percent.
To reduce health care expenditures, governmental and other payors have
adopted certain cost containment initiatives. The initiatives have resulted in a
shift from traditional fee-for-service provider reimbursement to a variety of
managed care arrangements, including prospective payment systems, discounted
fees-for-services and fully capitated plans whereby providers assume the
financial risks related to service utilization for a defined group of covered
members and services.
Patterns of growth and reduction differ substantially depending upon
the type of services. Hospital growth is projected to lag increasingly behind
growth in physician and other professional services. The trend away from the
in-patient hospital setting towards ambulatory care settings is reinforced by
the movement of Medicare beneficiaries into managed care. Other cost-effective
settings include outpatient surgery centers, in-office laboratory services and
similar outpatient services.
As a result of the reimbursement reductions, individual physicians and
small group practices are increasingly consolidating, either by affiliating with
physician practice managements or by forming physician networks or independent
practice associations. However, numerous physician practice management companies
have recently experienced significant financial difficulties.
The cost-containment initiatives have resulted in decreased physician
practice profitability while demands for clinical documentation, including cost,
quality and utilization data, have increased physicians' administrative duties.
Over seven hundred thousand physicians are responsible for filing approximately
five billion insurance claims annually to more than two hundred different
insurance companies. These insurance companies require utilization of more than
forty different claim-forms and communication with more than ten thousand
different locations. Many physician practices currently lack the software
necessary to compete in this evolving health care industry.
However, because of demands under the healthcare reimbursement system,
physicians are becoming increasingly aware of the benefits of computerization
and electronic data submission. This has contributed to the creation of a
medical claim processing market with an estimated value of $1.32 billion.
The advent of computerization in the healthcare industry has opened the
door to additional technological advances. The Internet may prove to be a viable
industry vehicle. Internet connections are typically more rapid than traditional
alternatives thereby giving users a competitive edge. It is therefore likely
that there will be a significant demand for Internet related products and
services in the healthcare industry.
6
<PAGE>
Products
OneClaim(R) Plus Practice Management Software - Practice management software
product to be used in the healthcare industry and developed for both MS-DOS and
Windows 95/98 NT operating systems.
o Electronic Claims - The electronic processing of medical claims
is a feature available to the software users. Electronic
processing reduces the insurance payment cycle from four to six
weeks to as little as seven days.
o E-Statements - The Electronic Statement processing feature of
OneClaim(R) Plus significantly reduces the cost of processing and
producing monthly patient invoices. In approximately the same
amount of time it takes to produce and mail a single paper
statement, users can gather and transmit hundreds of electronic
statements.
Software Support and Training services - Ongoing product support and training is
available to all OneClaim(R) Plus users.
o Support services - A user may purchase blocks of support time
that are sold in a variety of increments.
o Training services - At an additional charge, training is
available at MB's training center, the user's office or via
electronic classroom which is an online training media using PC's
connected over telephone lines.
New Product Development - The Company anticipates integrating OneClaim(R) Plus
with these new software products:
o Internet Based Connectivity - OneClaim(R) Plus would afford users
direct access to the World Wide Web. Integrating Internet access
through practice management software has to this point been
extremely limited.
o Patient Verification and Eligibility Service - By utilizing the
Internet Based Connectivity, the OneClaim(R) Plus user would then
be able to access this unique service. The service is a
verification procedure for patient insurance and billing
information. Use of the verification procedure would increase
practice revenue by affording immediate access to accurate
insurance eligibility and billing information. Employees
The Company currently employs a total of approximately 45 full and part
time employees. The Company has no labor union contracts and believes its
relationship with its employees is good.
Healthcare Facilities
Following is a description of each of the Company's healthcare
facilities:
JACKSONVILLE, FLORIDA: The three clinics located in Jacksonville
provide state of the art pain management, physical therapy, and related medical
services. The clinics are equipped with physical rehabilitation equipment with
one clinic having a swimming pool allowing for hydrotherapy. Combined, the
Florida clinics have a MD, DO, physical therapist and a staff of 30.
LAS VEGAS, NEVADA: This clinic offers chiropractic manipulations,
diagnostic and physical therapy services. The staff consists of a chiropractor
and three other employees.
Item 2. Properties
All premises occupied by the Company and subsidiaries are leased. The
Company's principal executive office is located at Arlington, Texas at 2225 E.
Randol Mill Road, Suite 305, Arlington, TX 76011. MB Software Solutions, Inc.'s
principal office is also at the corporate office. NFPM, LLC is located at 9143
Philips Highway, Suite 495, Jacksonville, Florida, with a second location at
1950 Miller Street, Orange Park, Florida and the third location at 233 N. 10th
Street, Jacksonville Beach, Florida. Nevada Multicare is located at 500 S.
Rancho Drive, Suite A-1, Las Vegas, Nevada.
7
<PAGE>
Item 3. Legal Proceedings
On October 15, 1997, the Company filed a lawsuit in the District Court
of Tarrant County, Texas against a former Company stockholder and employee. The
lawsuit asserted a breach of a Severance Agreement entered into between the
Company and the employee in connection with the termination of the employee by a
Company subsidiary. On January 6, 1998, the employee filed a lawsuit in the
United States District Court for the Central District of California against the
Company and Scott A. Haire, the Company's Chairman of the Board, Chief Executive
Officer and President. The lawsuit alleged a violation of Federal securities
laws and other causes of action concerning the employee's termination and
acquisition of common stock of the Company at the time of termination. The
Company believes that the damages sought in this case exceed $1 million. The
Company further believes that the allegations in the former employee's lawsuit
are without merit. In fact, the former employee's lawsuit has been abated until
such time as the Company's lawsuit is resolved. The Company is of the opinion
that both lawsuits will be resolved within the next twelve months.
On July 20, 1998, a subsidiary of the Company filed a lawsuit in the
District Court of Tarrant County, Texas against certain individuals. Pursuant to
an Acquisition Agreement, the subsidiary had merged with a corporation, which
the individuals were associated with and thereafter the subsidiary entered into
a Management Agreement with an entity involving the same individuals. The
lawsuit, which was amended to include the entity, asserted a breach of the
Acquisition Agreement and Management Agreement and other various causes of
action. On July 28, 1998, the individuals filed a lawsuit in the District Court
of Travis County, Texas against the Company and Scott A. Haire. The individuals
and entity also filed a counterclaim against the subsidiary. The Travis County
lawsuit alleged a breach of the Acquisition Agreement, fraud in connection with
the Acquisition Agreement, and violation of Texas securities laws. Upon request
filed by the subsidiary, the Travis County lawsuit was consolidated with the
Company's Tarrant County lawsuit. The Company believes that the allegations of
the entity and individuals are of limited merit. The Company anticipates the
litigation to be resolved within the next eighteen months.
On November 6, 1998, the Company and its subsidiary filed a lawsuit in
the District Court of Tarrant County, Texas against a former employee of one of
the subsidiaries. The lawsuit asserted a right to damages based upon the
employee's breach of a Confidentiality Agreement entered into between the former
employee and one of the subsidiaries. The Company and subsidiaries anticipate
entry of a judgment in their favor and against the former employee. The lawsuit
should be resolved within the next twelve to eighteen months. In January, 1999,
the former employee filed an action against the Company asserting a right to
unpaid wages. The action was filed with the Department of Industrial Relations,
Division of Labor Standards Enforcement in Santa Ana, California.
Item 4. Submission of Matters to a Vote of Security Holders
On November 12, 1998, at the annual meeting of shareholders, the
Company shareholders approved the following:
o Election of directors, including: Robert E. Gross, Araldo A.
Cossutta, Steven W. Evans, Thomas J. Kirchhofer, Gilbert A.
Valdez and Scott A. Haire;
o an amendment to the Company's Articles of Incorporation
authorizing preferred stock and additional shares of common stock
(see Healthcare/ Practice Management Business for a description
of the amendment as it pertains to Imagine Investments, L.L.C.);
and
o ratification of the selection of the Company's independent
auditors.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
8
<PAGE>
The Company's common stock is traded under the symbol "MBSC" on
NASDAQ's OTC Electronic Bulletin Board. The following table sets forth the range
of high and low bid prices of the Company's common stock:
BID PRICE
BY QUARTER ENDED: HIGH LOW
- ---------------- ---- ---
Year Ended 12/31/98
March, 1998 $.39 $.34
June, 1998 .24 .15
September, 1998 .17 .12
December, 1998 .09 .07
Year Ended 12/31/97
March, 1997 $.19 $.19
June, 1997 .36 .33
September, 1997 .49 .49
December, 1997 .34 .34
The Company had approximately 7,722 holders of record of its common stock as of
December 31, 1998. No dividends have been paid on common stock and none are
anticipated in the foreseeable future. The Company has determined that it will
utilize any earnings in the expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
The following is a listing of the Company and its operating and
discontinued subsidiaries as of December 31, 1998:
Operating at Discontinued
Name of Company/Subsidiary Location December 31, 1998 in 1998
- -------------------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
MB Software Corporation (Parent) Arlington, TX Yes -
MB Software Solutions, Inc. Arlington, TX Yes -
(formerly Santiago SDS, Inc.)
Multicare Plus, Inc. Ft. Worth, TX No Yes
MB Healthcare Management, Inc. Austin, TX No Yes
(Management company for
Victory Medical)
MB Healthcare Corp Arlington, TX No Yes
Healthcare Innovations, LLC
(100% ownership) Arlington, TX Yes -
N.F.P.M., LLC Jacksonville, FL Yes -
CFHC, LLC Arlington, TX No -
Oak Tree Receivables, LLC Arlington, TX No Yes
Color Country Health Express St. George, UT No Yes
Nevada Multicare, Inc. Las Vegas, NV Yes
Sandy Home Health Care, LLC St. George, UT No Yes
</TABLE>
9
<PAGE>
In the fourth quarter of 1998, the Company focused primarily on
operations of its existing healthcare businesses and further reorganization and
development of its medical practice management and software business. As stated
in the third quarter of 1998, the Company continued to expand existing
healthcare clinics, which had a positive effect on the annual results of the
operations of the Company.
The Company has concluded that it is not profitable to operate healthcare
businesses pursuant to practice management agreements. Rather, the Company must
own the practice and thus the profits, and directly employ the physicians and
other necessary staff. However, many state corporate practice of medicine laws,
other than those in Florida, prohibit corporations such as the Company from
owning physician practices and employing physicians. As a result, the Company
will in the future focus on healthcare businesses such as rehabilitation
clinics, chiropractic practices and healthcare businesses in the state of
Florida. This will enable the Company to operate its businesses directly, retain
its profits and employee physicians and staff directly.
In August 1998, the Company moved its medical software business from
California to its Corporate office in Arlington. The Company expects to realize
some cost savings resulting from this relocation.
The Company did not have any material changes in its Year 2000 compliance
status from that disclosed in the Form 10Q for the quarter ended June 30, 1998.
However, the Company's OneClaim(R) Plus software has met the compliance
standards for Medicare and as a result, will meet compliance standards for the
industry as a whole.
The Company discontinued the operations of three clinics located in
Texas, including Austin, Arlington and Fort Worth. The Company recognized from
discontinued operations a loss of $81,025 for the 12 months ended December 31,
1998.
The Company sold Color Country Health Express, Inc. and Sandy Home Health
Care, LLC and reported an attendant loss of $81,025 for the year ended December
31, 1998. As of December 31, 1998, the records reflect a reserve and charge to
operations of $210,863 that relates to the Company's sale of its wholly-owned
subsidiary Santiago SDS, Inc. including the subsidiary's name and certain sales
and marketing rights. An additional reserve and charge to operations of $272,538
is applicable to the receivable related to the sale of the dental software in
the same subsidiary. The reserve and charge to operations is the final amount to
be so charged.
The Company's financial records reflect a reversal of $119,289 for fees
and a reserve of $199,289 of investment related to the previously disclosed
litigation concerning Victory in Austin, Texas. As of the date of this filing,
that litigation is still pending.
The Company's remaining healthcare businesses consist of three clinics in
and around Jacksonville, Florida, and a chiropractic clinic in Las Vegas,
Nevada. The Florida clinics account for approximately 88% of gross medical
revenues.
10
<PAGE>
The following summarizes the results of operations for the twelve months ended
December 31, 1998 and December 31, 1997:
Twelve Months Ended
December 31
--------------------------------------------
Medical Activities: 1998 % 1997 %
--------------------------------------------
Gross Revenue $ 4,272,597 100.0 $ 2,710,909 100.00
Contractual Allowance 1,638,844 38.4 564,914 20.8
------------ ------------
Net Revenues 2,633,753 61.6 2,145,995 79.2
Cost of Revenue 2,298,747 87.3 1,570,545 73.1
------------ ------------
Gross Profit (Loss) $ 335,006 12.7 $ 575,450 26.9
------------ ------------
Service Fees and Broker Income 455,661 174,622
Other - 14,923
------------ ------------
Gross Profit 455,661 $ 189,545
------------ ------------
Software Activities:
Gross Revenue 326,511 1,502,445
Cost of Revenue 24,775 465,758
------------ ------------
Gross Profit 301,736 1,036,687
------------ ------------
Gross Profit 1,092,403 1,801,682
Operating Expenses:
Selling, General and
Administrative- 3,551,095 2,226,810
Bad Debt Expense
Other General and
Administrative
Depreciation and Amoritization 1,502,083 358,502
Interest Expense and Other (221,267) (166,750)
Income and Expenses
Gain (loss) on sale of Assets (43,994) 269,724
Loss from Continuing Operations
before Minority Interest $ (4,226,036) $ (680,656)
------------ ------------
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997
Gross medical revenues increased 57.61% to $4,272,549 for the twelve
months ended December 31, 1998 as compared to $2,710,909 for the twelve months
ended December 31, 1997. This increase is primarily attributable to the
additional Florida clinic (3 in 1998, 2 in 1997).
The Contractual allowance as a percentage of gross medical revenue was
38.4% and 20.8% of gross revenue for the twelve months ending December 31, 1998
and 1997, respectively. The Company has implemented in the Florida clinics a
comprehensive receivables plan with the objective collecting older receivables
and writing off the balances where necessary. The 1998 increase in contractual
allowance is the result of the twofold plan objectives, i.e. collecting
receivables and writing off balances where necessary.
The Company experienced a decrease in gross profit from medical
activities of 41.8% to $335,006 for the twelve months ended December 31, 1998
as compared to a gross profit of $575,450 for the twelve months ended December
31, 1997. The decrease is primarily attributable to the cost of additional staff
in the Florida clinics, including the costs for the experienced collections team
and that of the third Florida clinic.
11
<PAGE>
On July 31, 1997, the Company organized Healthcare Innovations, LLC
("HI") which was intended to be the acquisition entity for future medical
clinics. HI was funded by a $2,000,000 capital contribution for a 49% ownership
interest.
In January 1998, the Company sold its business-opportunity-marketing
program. This change in operations resulted in a 78.3% decline in software
sales revenue in 1998 as compared to 1997. Due to the Company's reduction in
this aspect of its software sales effort, the Company assessed the carrying
value of its goodwill and software development costs related to the software
subsidiary and an additional one time $200,000 amortization of goodwill was
recognized in 1998.
The selling, general and administrative expenses increased 39.4% to
$3,551,005 for the twelve months ended December 31, 1998 as compared to
$2,226,810 for the twelve months ended December 31, 1997. The increase is
primarily due to the acquisition of the additional Florida clinic and the
attendant costs associated therewith and bad debt expenses.
The net loss from continuing operations increased to $4,226,036 for the
twelve month period ended December 31, 1998, as compared to $783,630 loss for
the twelve months ended December 31, 1997. The increase in the loss is a result
of increased bad debt expense, increased amortization of goodwill, legal and
accounting fees and increased general operating expenses including a onetime
special charge of $916,921 applicable to the expensing of goodwill associated
with the acquisitionof the minority interest.
The 49% minority interest in the net loss of HI for the twelve-month
periods ended December 31, 1998 and 1997 was $548,623 and $258,908,
respectively.
Liquidity and Capital Resources
The Company's operations used cash of $1,514,289 during the twelve months
ended December 31, 1998 and $656,617 during the twelve months ended December 31,
1997. The 1998 operating activities use of cash was financed by borrowing
approximately $1,700,000 from a related party.
At December 31, 1998 and December 31, 1997, the Company had working
capital deficits of $52,001 and $416,311, respectively. With continued efforts
from the Company the working capital deficit should continue to decrease. At
December 31, 1998, the Company had cash deposits of $188,797. The Company plans
on increasing its cash position by opening a clinic in south Florida that would
generate sufficient cash by the end of the second quarter. The Company has
arranged to lease the premises for the South Florida location with the first
lease payment being deferred until August, 1999.
In the twelve months ended December 31, 1998, the Company spent $111,945
cash to purchase equipment. The Company does not anticipate any major equipment
purchases for the for the twelve (12) months of 1999.
At the Company's annual stockholders' meeting on November 12, 1998, the
stockholders approved the following actions.
o Amendment of the Company's Articles of Incorporation to add
1,000,000 shares of preferred stock with a par value of $10 per
share.
o Authorization of the issuance of 340,000 shares of Series A
Preferred Stock with a cumulative dividend rate of 10% payable
quarterly. The terms of the preferred stock transaction provide
that Series A Preferred Stock will be:
o Senior to all other shares of capital stock of the Company
with respect to payment of dividends, redemption and
liquidation preference;
12
<PAGE>
o redeemable at the option of the holders at any time after
October 1, 2000; if the Company is unable to redeem shares
at a price of $10 per share, the holder may exercise certain
rights concerning management control of the Company; and
o convertible into common stock in an amount equal to 30% of
the total outstanding common stock on a fully diluted basis
if certain triggering events occur.
o Amendment of the Articles of Incorporation to increase the
authorized shares of common stock of the Company from 100,000,000
to 150,000,000 shares.
Item 7. Financial Statements
<TABLE>
<CAPTION>
Filed as exhibits hereto are the following statements of the Company
and its subsidiaries:
Page
----
<S> <C>
Report of Independent Certified Public Accounts
Killman, Murrell & Company, P.C. F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997 F- 4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F- 6
Consolidated Statements of Shareholder's Deficit for the
years ended December 31, 1998 and 1997 F- 8
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F- 9
Notes to Consolidated Financial Statements F- 11
</TABLE>
Item 8. None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The following table sets forth certain information regarding the
directors and executive officers of the Company:
Year First
Name Age Position Elected
- ---- --- -------- ----------
Scott A. Haire 34 President, Director 1993
Gilbert A. Valdez 55 Chief Operating Officer 1996
Araldo A. Cossutta 74 Director 1994
Steven W. Evans 48 Director 1994
Robert E. Gross 54 Director 1994
13
<PAGE>
Thomas J. Kirchhofer 58 Director 1994
Lucy J. Singleton 61 Secretary 1995
Executive Officers of the Company are elected on an annual basis and
serve at the discretion of the Board of Directors. Directors of the Company are
elected on an annual basis.
Scott A. Haire Chairman, President and Director. Mr. Haire is Chief Executive
Officer of MB Software Corporation and has been with the Company since 1992.
Gilbert A. Valdez Chief Operating Officer and Director. Mr. Valdez is a former
president and Chief Executive Officer of the National Electronic Information
Corporation, Medaphis Corporation, Datix Corporation and Hospital Billing and
Collection Services Corporation.
Araldo A. Cossutta Director. Mr. Cossutta is president of Cossutta and
Associates, an architectural firm based in New York City. He is also a director
of Computer Integration Corporation of Boca Raton, Florida.
Steven W. Evans Director. Mr. Evans is a certified public account and president
of Evans Phillips & Co., PSC, an accounting firm. He is a founder and active in
PTRL, which operates contract research laboratories in Kentucky, North Carolina,
California and Germany. He is active in environmental management and financial
and hotel corporations in Kentucky and Tennessee.
Robert E. Gross Director. Mr. Gross is president of R. E. Gross & Associates,
which provides consulting and system projects for clients in the multi-location
service, banking and healthcare industries.
Thomas J. Kirchhofer Director. Mr. Kirchhofer is president of Synergy Wellness
Centers of Georgia, Inc., and a past president of the Georgia Chiropractic
Association.
Lucy Singleton Secretary. Ms. Singleton has been secretary since 1995.
Item 10. Executive Compensation
The Company provides health benefits to its employees and may provide
additional benefits in the future, as may be authorized by the Board of
Directors. The Company has adopted no retirement, pension, profit sharing or
other similar program.
The Company may offer stock bonuses, stock options, profit sharing or
pension plans to key employees or executive officers of the Company in such
amounts and upon such conditions as the Board of Directors may, in its sole
discretion, determine.
14
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
The following sets forth information concerning the compensation of the
Company's Chief Executive Officer for the fiscal years shown. No other Executive
Officer was paid a salary in excess of $100,00 during such period.
- -------------------------------------------------------------------------------------------------------------
Long Term Compensation
Name and ----------------------
Principal Annual Compensation Restricted Options All
Position ------------------- Stock /SARS Other
Year Salary($) Bonus Other Awards # shares (2) Comp.($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Scott A. Haire 1998 141,000 -0- -0- -0- -0- -0-
President 1997 120,000 -0- -0- -0- -0- -0-
1996 120,000 -0- -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Options/SAR Values
The following table provides information concerning option exercises in
fiscal 1998 and the value of unexercised options held by each of the named
Executive Officers at December 31, 1998.
- -------------------------------------------------------------------------------------------------------------
Name Shares Acquired Value No. of unexercised Value of
on Exercise (#) Realized ($) options/SARs at in-the-money
at FY-End (#) SARs at FY-end($)
exercisable/unexercisable exercisable/unexercisable
- -------------------------------------------------------------------------------------------------------------
Scott A. Haire -0- N/A 2,400,000 $240,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1998,
regarding the beneficial ownership of capital stock of the Company by: (i) Each
person known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock; (ii) each director of the Company; (iii) the Company's
Chief Executive Officer; and (iv) the directors and executive officers of the
Company as a group. The persons named in the table have sole voting and
investment power with respect to all shares of capital stock owned by them,
unless otherwise noted.
Amount and Nature
Name of Beneficial of Beneficial Percent
Owner of Group(1) Ownership of Class
Scott A. Haire 29,321,297 (2) 42.0%
Araldo A. Cossutta 2,982,025 4.0%
Steven W. Evans 1,700,000 (3) 2.0%
Gilbert Valdez 900,000 (4) *
Robert E. Gross 200,000 (5) *
Thomas J. Kirchhofer 150,000 (6) *
15
<PAGE>
R-M-S Investments, LTD. 11,000,000 16.0%
Cazenove 7,500,000 10.0%
All Directors and Executive Officers as a group 41,303,332 60.8%
(six in number)
- ----------
* Less than 1%.
(1) The address for each person or entity listed above is 2225 E. Randol Mill
Road, Suite 305, Arlington, Texas, 76011.
(2) Includes 2,400,000 shares and 600,000 shares subject to options and a
warrant, respectively, that are presently exercisable.
(3) Consists of 200,000 shares subject to options that are presently
exercisable by Mr. Evans.
(4) Consists of 900,000 shares subject to options that are presently
exercisable by Mr. Valdez.
(5) Consists of 200,000 shares subject to options that are presently
exercisable by Mr. Gross.
(6) Consists of 150,000 shares subject to options that are presently
exercisable by Mr. Kirchhofer.
Item 12. Certain Relationships and Related Transactions - None
Item 13. Exhibits Reports on Form 8-K
1. Reports on Form 8-K - None.
2. Exhibits - None.
All other exhibits incorporated by reference from prior filings with the
Commission.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MB SOFTWARE CORPORATION
By: /s/ Scott A. Haire
--------------------------------------
Scott A. Haire, Chairman of the Board,
Chief Executive Officer and President
(Principal Financial Officer)
Date: April 12, 1999
16
<PAGE>
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Deficit for the
years ended December 31, 1998 and 1997 F-7
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
MB Software Corporation and Subsidiaries
2225 E. Randol Mill Road, Suite 305
Arlington, Texas 76011
We have audited the accompanying consolidated balance sheets of MB Software
Corporation (a Colorado corporation) and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MB
Software Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/Killman, Murrell & Company, P.C.
- -----------------------------------
KILLMAN, MURRELL & COMPANY, P.C.
Dallas, Texas
April 9, 1999
F-2
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
---------- ----------
CURRENT ASSETS
Cash $ 188,797 $ 716,735
Medical receivables, net of allowance
for doubtful accounts and contractual
allowances of $1,810,887 and
$343,662 in 1998 and 1997, respectively 1,003,126 1,604,233
Notes receivable - current portion 51,288 108,178
Prepaid expenses and other 4,200 8,548
---------- ----------
TOTAL CURRENT ASSETS 1,247,411 2,437,694
---------- ----------
PROPERTY AND EQUIPMENT, NET - Note 2 396,022 418,934
---------- ----------
OTHER ASSETS
Goodwill, net of accumulated amortization of
$1,407,055 and $287,326 in 1998 and 1997,
respectively 316,806 791,681
Software development costs, net of accumulated
amortization of $389,812 and $282,808 in
1998 and 1997, respectively 169,376 405,966
Note receivable, net of current portion -- 203,569
Deposits and other assets 73,036 83,470
---------- ----------
TOTAL OTHER ASSETS 559,218 1,484,686
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS -- 319,059
---------- ----------
$2,202,651 $4,660,373
========== ==========
(Continued)
F-3
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' DEFICIT
1998 1997
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable - Note 3
Related parties $ -- $ 300,000
Other 303,946 291,410
Current maturities of long-term debt - Note 4
Related parties -- 1,298,808
Other 54,965 81,836
Accounts payable 483,074 445,760
Accrued liabilities 400,004 327,535
Deferred revenues 57,423 108,656
----------- -----------
TOTAL CURRENT LIABILITIES 1,299,412 2,854,005
LONG-TERM DEBT,-
Net of current maturities - Note 4
Related parties 933,808 500,000
Other 826,392 23,266
----------- -----------
TOTAL LIABILITIES 3,059,612 3,377,271
----------- -----------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES -- 1,754,841
----------- -----------
COMMITMENTS AND CONTINGENCIES
(NOTES 4, 8, 9 and 10) -- --
SHAREHOLDERS' DEFICIT
Series A senior cumulative convertible
participating preferred stock; $10 par value;
340,000 shares issued and outstanding in 1998 - Note 5 3,400,000 --
Undesignated preferred stock; $10 par value;
660,000 shares authorized; none issued -- --
Common stock; $.001 par value; 150,000,000 shares
authorized; 69,100,000 and 68,580,000 shares issued,
in 1998 and 1997, respectively 69,100 68,580
Additional paid-in capital 1,101,105 1,035,625
Accumulated deficit (5,415,127) (1,563,905)
Treasury stock, at cost; 408,029 shares (12,039) (12,039)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT (856,961) (471,739)
----------- -----------
$ 2,202,651 $ 4,660,373
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Medical clinic fees - net of contractual
adjustments of $1,638,844 and
$564,914 in 1998 and 1987, respectively $ 2,633,753 $ 2,145,995
Software and maintenance sales 326,511 1,502,445
Service fees and broker income 455,661 174,622
Other -- 14,923
----------- -----------
TOTAL REVENUES 3,415,925 3,837,985
----------- -----------
COST OF REVENUES
Cost of medical clinic fees 2,298,747 1,570,545
Cost of software and maintenance sales 24,775 465,758
----------- -----------
TOTAL COST OF REVENUES 2,323,522 2,036,303
----------- -----------
GROSS PROFIT 1,092,403 1,801,682
----------- -----------
OPERATING EXPENSES
Selling, general & administrative 3,551,095 2,226,810
Depreciation and amortization 1,502,083 358,502
----------- -----------
TOTAL OPERATING EXPENSES 5,053,178 2,585,312
----------- -----------
LOSS FROM OPERATIONS (3,960,775) (783,630)
----------- -----------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of assets (43,994) 269,724
Interest expense
Related parties (280,301) (219,287)
Other (28,165) (20,645)
Interest income and other, net 87,199 73,182
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (265,261) 102,974
----------- -----------
INCOME TAX EXPENSE -- --
----------- -----------
NET (LOSS) FROM CONTINUING
OPERATIONS BEFORE MINORITY INTEREST (4,226,036) (680,656)
MINORITY INTEREST IN LOSS 548,623 258,908
----------- -----------
(LOSS) BEFORE PREFERRED STOCK
DIVIDENDS AND DISCONTINUED
OPERATIONS (3,677,413) (421,748)
PREFERRED STOCK DIVIDENDS (45,644) --
----------- -----------
(LOSS) BEFORE DISCONTINUED
OPERATIONS $(3,723,057) $ (421,748)
----------- -----------
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements
F-5
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------- -------------
DISCONTINUED OPERATIONS
Income (Loss) from discontinued operations $ (47,140) $ 14,310
Loss on sale of subsidiaries (81,025) --
------------ ------------
NET LOSS $ (3,851,222) $ (407,438)
============ ============
LOSS PER WEIGHTED AVERAGE COMMON SHARE
Continuing operations $ (.05) $ (.01)
Income (loss) from discontinued operations -- --
Loss on sale of subsidiaries (.01) --
------------ ------------
TOTAL $ (.06) $ (.01)
============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 68,470,433 67,797,740
============ ============
The accompanying notes are an
integral part of these consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
Series A Additional
Preferred Stock Common Stock Paid In (Accumulated
Shares Amount Shares Amount Capital Deficit)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 -- $ -- 67,885,000 $ 67,885 $ 810,322 $(1,156,467)
Stock options exercised -- -- 70,000 70 3,428 --
Stockholder contributions -- -- -- -- 5,000 --
Issuance of shares related to
acquisition of
Nevada Multicare -- -- 525,000 525 209,475 --
Issuance of shares for services -- -- 100,000 100 7,400 --
Net loss -- -- -- -- -- (407,438)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 -- -- 68,580,000 68,580 1,035,625 (1,563,905)
Stock options exercised -- -- 120,000 120 5,880 --
Common stock issued for services -- -- 400,000 400 59,600 --
Conversion of $1,400,000 promissory
note to preferred stock 140,000 1,400,000 -- -- -- --
Issuance of preferred stock in
connection with acquisition
of minority interest in
Healthcare Innovations 200,000 2,000,000 -- -- -- --
Net loss -- -- -- -- -- (3,851,222)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 340,000 $ 3,400,000 69,100,000 $ 69,100 $ 1,101,105 $(5,415,127)
=========== =========== =========== =========== =========== ===========
Treasury
Stock Total
----------- -----------
Balances at December 31, 1996 $(12,039)$ (290,299
Stock options exercised -- 3,498
Stockholder contributions -- 5,000
Issuance of shares related to
acquisition of
Nevada Multicare -- 210,000
Issuance of shares for services -- 7,500
Net loss -- (407,438)
----------- -----------
Balances at December 31, 1997 (12,039) (471,739)
Stock options exercised -- 6,000
Common stock issued for services -- 60,000
Conversion of $1,400,000 promissor
note to preferred stock -- 1,400,000
Issuance of preferred stock in
connection with acquisition
of minority interest in
Healthcare Innovations -- 2,000,000
Net loss -- (3,851,222)
----------- -----------
Balances at December 31, 1998 $ (12,039) $ (856,961)
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements
F-7
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before discontinued operations $(3,723,057) $ (421,748)
Adjustments to reconcile net (loss) to net
cash used by operating activities
Depreciation and amortization 1,502,083 358,502
Loss (Gain) on sale of assets 43,994 (269,724)
Common stock issued for services 60,000 7,500
Minority interest in loss (548,623) (258,908)
Change in allowance for doubtful accounts 1,950,626 433,576
Changes in assets and liabilities
Accounts receivable (866,118) (605,255)
Notes receivable 8,040 35,065
Prepaid expenses and other 4,348 11,335
Deposits (4,132) (189)
Accounts payable and accrued liabilities 109,783 103,598
Deferred revenues (51,233) (50,369)
----------- -----------
NET CASH USED BY
CONTINUING OPERATIONS (1,514,289) (656,617)
----------- -----------
NET CASH (USED) PROVIDED BY
DISCONTINUED OPERATIONS 67,755 (291,000)
----------- -----------
NET CASH USED BY OPERATING
ACTIVITIES (1,446,534) (947,617)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (111,945) (309,470)
Software development costs capitalized -- (193,160)
Organizational costs -- (72,832)
Proceeds from sale of equipment 750 --
----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (111,195) (575,462)
----------- -----------
(Continued)
The accompanying notes are an
integral part of these consolidated financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable
Related parties $ (895,000) $ (650,744)
Other (220,035) (533,707)
Proceeds from notes payable
Related parties 1,900,000 1,000,000
Other 238,826 219,114
Minority investment in subsidiaries -- 2,000,000
Proceeds from common stock issuance 6,000 8,498
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,029,791 2,043,161
----------- -----------
(DECREASE) INCREASE IN CASH (527,938) 520,082
CASH AT BEGINNING OF PERIOD 716,735 196,653
----------- -----------
CASH AT END OF PERIOD $ 188,797 $ 716,735
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 260,516 $ 256,306
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Purchase of medical clinics
Medical assets acquired $ -- $(2,128,812)
Goodwill acquired -- (125,582)
Common stock issued -- 210,000
Accounts payable and accrued liabilities assumed -- 199,574
Note payable -- 1,834,820
Note receivable reduction -- 10,000
Reduction in note payable - Related party -- (900,000)
Reduction in accounts receivable -- 900,000
Note receivable -- (346,811)
Proceeds from sale of assets -- 346,811
Preferred stock issued for minority interest 2,000,000 --
Minority interest acquired (1,083,079) --
Preferred stock issued to satisfy note payable 1,400,000 --
Conversion of note payable to preferred stock - Related party (1,400,000) --
Goodwill on acquisition of minority interest (916,921) --
Sale of software for note receivable 230,982 --
Note receivable from software sale (230,982) --
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
F-9
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
- -----------
MB Software Corporation (the "Company") was incorporated in 1982. The focus of
the Company is to provide practice and cash management services to physicians,
dentists, chiropractors and medical billing centers and to develop and sell
medical software. In 1997, the Company began expanding its scope of operations
by acquiring and managing healthcare facilities and utilizing software products
developed by the Company.
During 1997, the Company acquired a nurse-practitioner business that operates
three (3) clinic sites in Utah and two (2) physical medicine and rehabilitation
facilities located in Jacksonville, Florida. In August 1997, the Company and
Imagine Investments, Inc. announced formation of Healthcare Innovations, LLC, a
limited liability company formed for the purposes of acquiring and operating
healthcare businesses. Imagine Investments, Inc. is a subsidiary of Stone
Investments, which is a subsidiary of Stone Capital, a company with over $3
billion in assets. At that time, the Company owned 51% of the outstanding equity
of Healthcare Innovations and contributed its interests in the Jacksonville and
Utah facilities to the new venture. Healthcare Innovations acquired a home
nursing operation located in Utah in August 1997 and two (2) chiropractic
clinics located in Arlington, Texas, and Las Vegas, Nevada, in October 1997.
In April 1998 and February 1999, the Company sold both of its Utah facilities.
Net assets from discontinued operations, income (loss) from discontinued
operations, and loss on sale of subsidiaries report the results of these two
sales. The Company closed its chiropractic clinic in Arlington, Texas, as well
as the physical medicine and rehabilitation facility located in Ft. Worth. These
closures were immaterial to the financial statements taken as a whole and the
net assets and results of operations were absorbed by its parent company,
Healthcare Innovations.
On November 12, 1998, the Company issued 200,000 shares of its Series A Senior
Cumulative Convertible Participating Preferred Stock in exchange for the
minority ownership interest in Healthcare Innovations consisting of 49,000 Class
A units and 151,000 Class B units. The Company also issued 140,000 shares of the
Series A Preferred Stock to the minority interest owners as payment of the
principal of a $1,400,000 note payable.
In 1997, the Company took significant steps to focus on its core competency in
its practice management business. The Company divested itself of all other
products other than its OneClaim Plus family of products. Additionally, the
Company sold its business opportunity marketing program in January 1998, which
used third parties to sell the OneClaim Plus program. The Company now focuses
instead on direct sales of the OneClaim Plus program.
The OneClaim Plus program is a comprehensive practice management software that
can operate on either a DOS-based or Windows 95/98/NT system. The software is
designed to cover nearly every aspect of practice management, including
marketing, patient management, billing, transaction management, basic and
customized reporting, and information management. The Company not only markets
OneClaim Plus to third parties, but also uses the software in the conduct of its
own healthcare businesses, thus providing the Company with a common program that
offers stability, dependability and ease of use in the acquisition and operation
of the acquired healthcare businesses.
(Continued)
F-10
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Consolidation Policy
- --------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries which are managed by the Company. All material
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
- --------------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
Revenue Recognition
- --------------------
Revenue consists primarily of sales of the Company's healthcare services,
software products, maintenance and customer support and related consulting
services.
Medical Clinic Fees - Fees are recognized at the time medical services
are rendered.
Software Sales - Sales of software are recognized at shipment of the
product and fulfillment of acceptance terms, if any.
Consulting Fees - Consulting fees are recognized as the service is
delivered.
Services Revenue - Maintenance revenue is deferred and recognized ratably
over the term of the maintenance agreement, which is typically twelve
months.
Contractual Adjustments and Contractual Allowances
- --------------------------------------------------
Medical clinic fees are reported net of contractual adjustments. Contractual
adjustments are adjustments made to gross medical clinic fees for the amounts
contractually not billable to third party payors and/or adjustments for
uncollectible charges. The company periodically analyzes these adjustments and
adjusts the allowances for doubtful accounts and contractual allowances
accordingly.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation for financial statement
purposes is computed principally on the straight-line method over the estimated
useful lives of the related assets ranging from three to ten years. Maintenance
and repairs are expensed as incurred. Replacements and betterments are
capitalized.
(Continued)
F-11
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Goodwill
- --------
Goodwill is the difference between the purchase price paid and liabilities
assumed over the estimated fair market value of assets acquired in connection
with the acquisition of subsidiaries. Goodwill amounted to $1,723,861 and
$1,079,007 in 1998 and 1997, respectively, and is being amortized using the
straight-line method over 10 years. Amortization of goodwill for 1998 and 1997
amounted to $1,204,315 and $106,932, respectively. On an on-going basis,
management reviews recoverability, the valuation and amortization of goodwill.
As a part of this review, the Company considers the undiscounted projected
future net earnings in evaluating the value of goodwill. If the undiscounted
future net earnings is less than the stated value, the goodwill would be written
down to fair value. The 1998 amortization includes a special charge of $916,921
applicable to the expensing of goodwill associalted with the acquisition of the
minority interest.
Earnings Per Common Share and Common Share Equivalents
- ------------------------------------------------------
Earnings per share is based on the weighted average number of shares of common
stock outstanding during the period. Common equivalent shares are comprised of
dilutive stock options. In 1998 and 1997, the common stock equivalent shares
were considered anti-dilutive due to the loss from operations.
Cash and Cash Equivalents
- -------------------------
The Company considers all cash on hand and in banks, demand and time deposits,
certificates of deposit, and all other highly liquid debt investments with
maturities of three months or less when purchased, to be cash and cash
equivalents.
Business and Credit Risk Concentrations
- ---------------------------------------
The Company's medical clinics provide services to patients located in Florida,
Texas, Nevada and Utah. These patients are billed at the time services are
performed. None of the patients are individually significant.
The Company extends unsecured credit to some of its customers in the normal
course of the software sales and consulting business. A significant portion of
the customers pay for the software in cash. Service maintenance contracts are
paid for in advance and amortized over the period of the contract. Consulting
fees are billed as the services are provided. Customers are located throughout
the United States and none of these customers are individually significant.
The majority of service fee and broker income with respect to medical
receivables are received in cash at time of completion of each transaction.
Clients are located throughout the United States.
Management evaluates accounts receivable balances on an ongoing basis and
provides allowances as necessary for amounts estimated to eventually become
uncollectible or amounts that are not subject to payment by third party payors
such as insurance companies. The allowance for uncollectible accounts receivable
at December 31, 1998 and 1997 was $1,810,887 and $343,662, respectively. In the
event of complete non-performance of accounts receivable, the maximum exposure
to the Company is the recorded amount on the financial statements at the date of
non-performance. Approximately 95% of accounts receivable is subject to payment
by third party payors, predominately insurance companies.
(Continued)
F-12
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Goodwill (Continued)
- --------------------
The Company maintains its cash in bank deposit accounts at high quality
financial institutions. The balances at times, may exceed Federally insured
limits. At December 31, 1998, the Company exceeded the insured limit by
approximately $212,891.
Accounts Receivable
- -------------------
Accounts receivable consist of the amount due on open customer and patient
accounts. The Company uses the allowance method to account for contractual
adjustment and uncollectible accounts receivable. Bad debt expense is recorded
in cost of medical and general and administrative expense in the amount of
$1,506,302 and $119,133 for the years ended December 31, 1998 and 1997,
respectively.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with the asset and liability
method. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Software Development
- --------------------
The Company was previously involved in developing frequency software and
hardware to be sold as an integrated system. After the acquisition of Santiago
assets and liabilities in 1995, the Company became involved in developing
software related to the medical profession as described previously. The Company
capitalizes software development costs after technological feasibility has been
established in accordance with Financial Accounting Standards Board Statement
Number 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Software costs are amortized over the estimated economic
life of the software from the time that a particular product is completed.
Software development costs incurred in development of medical billing software
of $193,160 were capitalized in 1997. Amortization of these costs amounted to
$174,504 and $181,434 during 1998 and 1997, respectively. There were no
capitalized costs related to software development in 1998.
Reclassification
- ----------------
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
(Continued)
F-13
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
New Accounting Standards
- ------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (Statement No. 130). Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Statement No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Statement No. 130 had no impact on the financial condition or results of
operations of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (Statement No. 131), "Disclosures About Segments of an Enterprise and
Related Information". Statement No. 131 establishes standards for disclosures
related to business operating segments. The Company anticipates that Statement
No. 131 will have no significant effect on the disclosures set forth in its
consolidated financial statements.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 (Statement No. 132), "Employers' Disclosures about Pensions and
Postretirement Benefits." Statement No. 132 revises employers' disclosures about
pensions and other postretirement benefit plans. The adoption of Statement No.
132 did not have a material impact on the Company's consolidated financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (Statement No. 133), "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 133 establishes accounting and reporting standards
for derivative instruments embedded in other contracts, and for hedging
activities. The adoption of Statement No. 133 did not have a material impact on
the Company's consolidated financial statements.
In 1998, the FASB issued Emerging Issues Task Force Abstract No. 97-2 (EITF
97-2). EITF 97-2 addresses the application of FASB Statement No. 94,
"Consolidation of All Majority-Owned Subsidiaries" and APB Opinion No. 16
"Business Conventions to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangements."
At December 31, 1998 and 1997, the Company did not have any contractual
management arrangements as defined by EITF 97-2; therefore, EITF 97-2 is not
applicable to the Company.
F-14
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and 1997:
1998 1997
--------- ---------
<S> <C> <C>
Clinic and office equipment $505,557 $421,608
Computer equipment 60,835 28,916
Furniture and fixtures 16,518 20,442
Vehicles and other - 35,000
--------- ---------
582,910 505,966
Less accumulated depreciation and amortization (186,888) (87,032)
-------- --------
$396,022 $418,934
======== ========
Depreciation expense was $108,698 and $76,364 for the years ended December 31,
1998 and 1997, respectively.
NOTE 3: NOTES PAYABLE
Notes payable consist of the following as of December 31, 1998 and 1997:
1998 1997
---------- ---------
8% Note payable to a shareholder, due on
December 31, 1997, unsecured - related party $ - $300,000
Non-interest bearing notes payable to third parties
assumed in connection with the Santiago purchase,
due on demand 92,611 105,205
Prime plus 1% note payable to a bank, due June 30, 1999,
secured by accounts receivable 120,070 117,885
Non-interest bearing note payable to a corporation,
due on demand, unsecured - 24,000
10% note payable to an individual, due April 1, 1998,
unsecured 15,320 44,320
7.6%note payable to a bank, due in monthly installments
of $11,000, including principal and interest through
June 25, 1999 75,945 -
----------- ---------
$ 303,946 $591,410
=========== ========
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 4 - LONG-TERM DEBT
Long term debt consisted of the following at December 31, 1998 and 1997:
1998 1997
--------- ---------
<S> <C> <C>
8% note payable to a shareholder due
August 1, 2000, unsecured - related party $455,000 $755,000
8% note payable to an employee, shareholder,
and officer, due August 1, 2000, unsecured 434,808 434,808
8% note payable to a shareholder, due on demand,
unsecured 2,000 2,000
8% note payable to a shareholder, due August 1, 2000,
unsecured - related party 300,000 -
8% note payable to a shareholder, due on demand,
unsecured - 25,000
8% note payable to a shareholder, due in 1998, unsecured - 45,000
10.25% note payable to a bank, monthly payments of
$236 including interest, due June 2000, secured by
vehicle 5,647 -
8% note payable to a shareholder due July 16, 1998,
unsecured - 25,000
8% note payable to a shareholder, due August 1, 2000,
unsecured 12,000 12,000
10% note payable to an investor, due August 1, 2000 -
related party 500,000 500,000
13.5% notes payable to a financing company, monthly
payments of $654 including interest, due
June 20, 2000, secured by equipment 4,924 9,042
8.6%note payable to a financing company, monthly
payments of $426 including
interest, due
September 15, 1999, secured by equipment 12,173 17,039
Non-interest bearing note (imputed at 10%); note
payable to a company, monthly payments of
$2,481, due March 22, 1999, unsecured - 33,477
(Continued)
F-16
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 4 - LONG-TERM DEBT (CONTINUED)
1998 1997
--------- ----------
12% note payable to a financing company, monthly
payments of $767 including
interest, due
July 31, 2000, secured by equipment 13,211 -
11.5% note payable to a financing company, monthly
payments of $921 including interest, due June 16, 2000,
secured by equipment 19,128 -
14% note payable to a financing company, monthly
payments of $1,355, due April 9, 2001, secured
by equipment 35,034 45,544
12% note payable to a financing company, monthly
payments of $615 including interest, due
September 19, 2002, secured by equipment 21,240 -
---------- -----------
1,815,165 1,903,910
Less current portion 54,965 (1,380,644)
---------- -----------
$1,760,200 $ 523,266
========== ===========
The following is a schedule of maturities of notes payable at December 31,1998:
1999 $ 54,965
2000 1,739,656
2001 15,369
2002 5,175
-----------
$1,815,165
===========
</TABLE>
F-17
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 5 - PREFERRED STOCK
The Series A Senior Cumulative Convertible Participating Preferred Stock
("Series A Stock")is entitled to receive cash dividends of $1 per share per
annum accruing from the date of issuance. Such dividends are cumulative and must
be paid before any dividends can be paid on the common stock. The Series A Stock
is convertible into common stock, at the option of the holders, into a maximum
of 29,439,000 shares of common stock upon: (a) the sale of substantially all of
the assets of the Company; (b) a change in control of the Company; (c) the
dissolution of the Company; or (d) October 1, 2000. If the Series A Stock is not
converted into common stock, it becomes redeemable at the option of the holder
any time after October 1, 2000 at a redemption price of $10 per share. Should
the Company fail to redeem any share of the Series A Stock after a redemption
request, the Series A stockholders shall have the right to elect a majority of
the Company's board of directors and the Company shall pay interest on the
redemption price at the rate of prime plus 5% until actually redeemed. No
beneficial conversion feature was recognized upon the issuance of the
convertible participating preferred stock since, the conversion price and the
fair value of the Company's Common stock were approximately the same on November
12, 1998.
NOTE 6 - INCOME TAXES
A reconciliation of the expected federal income tax expense (benefit) based on
the U.S. Corporate income tax rate of 34% to actual expense (benefit) for 1998
and 1997 is as follows:
<TABLE>
1998 1997
------------ -----------
<S> <C> <C>
Expected federal income tax provision (benefit) $ 1,208,545 $ (148,069)
State income taxes -
Valuation allowance and other (1,208,545) 148,069
----------- --------
$ - $ -
============ ==========
Deferred tax assets and liabilities as of December 31, 1998 and 1997 are as
follows:
1998 1997
------------ -----------
Current deferred tax asset $ 635,225 $ 155,779
Current deferred tax liability - -
Valuation allowance for current deferred tax asset (635,225) (155,779)
------------ -----------
Net current deferred tax asset $ - $ -
============ ===========
Non-current deferred tax asset $ 1,831,339 $1,180,948
Non-current deferred tax liability (93,079) (148,506)
Valuation allowance for non-current deferred tax asset (1,738,260) (1,032,442)
----------- ----------
Net non-current deferred tax asset $ - $ -
============ ===========
</TABLE>
(Continued)
F-18
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 6 - INCOME TAXES (CONTINUED)
The current deferred tax asset results from reserve for accounts receivable
which is not deductible for tax purposes until actually written off, and
deferred revenues an service contracts which are recognized for tax purposes
upon receipt. The non-current deferred tax liability results from software
development charges capitalized for financial reporting purposes and deducted
for federal income tax purposes. The non-current deferred tax asset results from
differences in amortization of goodwill for financial and federal income tax
reporting purposes and the deferred tax benefit of net operating losses. The net
current and non-current deferred tax assets have a 100% valuation allowance, as
the ability of the Company to generate sufficient taxable income in the future
is not certain.
MB generated net operating losses for financial reporting and Federal income tax
reporting prior to its reorganization in 1993. As of December 31, 1998, subject
to limitations under Internal Revenue Code ss.382, approximately $469,000 of
these net operating losses are available for use after the reorganization. These
net operating losses expire in 2008 if not utilized. The net operating loss
carry forward at December 31, 1998 amounts to $4,051,000 and will begin to
expire in 2008 if not utilized.
NOTE 7 - LEASE COMMITMENTS
The Company has non-cancelable leases for office space and equipment. Future
minimum payments under these leases and other equipment operating leases are
payable as follows:
Year Ended
December 31, Amount
1999 $223,637
2000 221,490
2001 228,237
2002 235,416
2003 29,554
--------
$938,334
========
Lease and rent expense under non-cancelable operating leases for 1998 and 1997
are $349,550 and $222,579, respectively.
NOTE 8 - LEGAL PROCEEDINGS
On October 15, 1997, the Company filed a lawsuit in the 342nd Judicial District
Court of Tarrant County, Texas against a former stockholder and employee of the
Company for breach of a Severance Agreement entered into by the Company of the
stockholder in connection with the termination of that person's employment by a
subsidiary of the Company. On January 6, 1998, that stockholder filed a lawsuit
in the United States District Court for the Central District of California
against the Company and Scott A. Haire, Chairman of the Board and President of
the Company alleging violation of the Federal securities laws and other causes
of action in connection with the purchase of stockholder's shares of Company
common stock in connection with the termination of his employment. The Company
believes that the damages sought in this case exceed $1 million. The Company
believes that the allegations of the former stockholder in his lawsuit are
without merit and intends to vigorously defend itself in this lawsuit.
F-19
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 8 - LEGAL PROCEEDINGS (CONTINUED)
On April 1, 1998, the Company entered into a physician coverage and service
agreement with Toth Enterprises II, P.A., a Texas professional association doing
business as Victory Medical and Family Care and Dr. William G. Franklin. The
Company through a subsidiary was to provide administrative and management
services for the clinic. The assets of Victory Medical and Family Care were
purchased by the Company with the issuance of 400,000 shares of the Company's
common stock. Subsequent to the acquisition, the previous management services to
Victory Medical and Family Care and, as of the date of this report, is in the
process of trying to settle the dispute.
On July 20, 1998, a subsidiary of the Company filed a lawsuit in the District
Court of Tarrant County, Texas, against Toth Enterprises, II, P.A. Pursuant to
an Acquisition Agreement, the subsidiary had merged with a corporation which the
individuals were associated with and thereafter the subsidiary entered into a
Management Agreement with a new entity involving the same individuals. The
lawsuit, which amended to include the entity, asserted a breach of the
Acquisition Agreement and Management Agreement and other various causes of
action. On July 28, 1998, the individuals filed a lawsuit in the District Court
of Travis County, Texas, against the Company and a stockholder and employee. The
individuals and entity also filed a counterclaim against the subsidiary. The
Travis County lawsuit alleged a breach of the Acquisition Agreement, and
violation of Texas securities laws. Upon request filed by the subsidiary, the
Travis County lawsuit was consolidated with the Company's Tarrant County
lawsuit. The Company believes that the allegations of the entity and individuals
are meritless.
On November 6, 1998, the Company and its subsidiary filed a lawsuit in the
District Court of Tarrant County, Texas, against a former employee of one of the
subsidiaries. The lawsuit asserted a right to damages based upon the employee's
breach of a Confidentiality Agreement entered into between the former employee
and one of the subsidiaries. The Company and subsidiaries anticipate entry of a
judgment in their favor and against the former employee.
F-20
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 9 - STOCK OPTIONS
Stock Options
- -------------
Effective May 5, 1994, the Board of Directors approved an Incentive Stock Option
Plan ("Plan") for key executives and employees. The Plan provides for 1,045,000
shares.
A summary of changes in the Company's incentive stock options issued under the
Plan and other compensatory options follows:
Other
Plan Options Compensatory Options Combined
Total ----------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price Options
-------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at 12/31/96 865,000 $.05 2,400,000 $.03 3,265,000
Granted - - 2,100,000 .48 2,100,000
Exercised (70,000) .05 - - (70,000)
Forfeited - - - - -
--------- ----- ---------- ----- -----------
Outstanding at 12/31/97 795,000 .05 4,500,000 .24 5,295,000
Granted 1,075,000 .13 - - - 1,075,000
Exercised (120,000) .05 - - (120,000)
Forfeited (200,000) .05 (1,050,000) .16 (1,250,000)
-------- ---- ---------- ---- ----------
Outstanding at 12/31/98 1,550,000 $.09 3,450,000 $.22 5,000,000
========= ==== ========== ==== ==========
The fair value of plan options issued during 1998 was approximately $137,750. There were no plan options
issued during 1997.
The following table summarizes information about options outstanding at December
31, 1998 under the Plan:
Options Outstanding Options Exercisable
------------------- ----------------------------------
Weighted Average
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
- --------------- ----------- ------------------- -------------- ----------- -----------------
$.02-$.19 1,550,000 1.2 $.09 1,550,000 $.09
</TABLE>
The following table summarized information about the other compensatory stock
options outstanding at December 31, 1998:
(Continued)
F-21
<PAGE>
<TABLE>
<CAPTION>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 9 - STOCK OPTIONS (CONTINUED)
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
- --------------- ----------- ------------------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$.03-$.65 3,450,000 1.6 $.22 3,450,000 $.22
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB25"), in accounting for its compensatory stock options plans.
The options granted during 1998 and 1997 have exercise prices which approximate
fair value, and accordingly, no compensation cost has been recognized for its
incentive or other compensatory stock options in the consolidated financial
statements. Had compensation cost for the Company's stock options been
determined consistent with FASB statement No. 123, "Accounting for Stock Based
Compensation", the Company's net income (loss) and net income (loss) per share
would have been changed to the pro forma amounts indicated below:
Years ended December 31,
-------------------------------------
1998 1997
------------ ----------
Net Income (Loss) As reported $(3,851,222) $(407,438)
Pro forma $(3,851,222) $(407,438)
Net Income (Loss) per share As reported $(.06) $(.01)
Pro forma $(.06) $(.01)
</TABLE>
Of the 5,000,000 outstanding incentive stock options at December 31, 1998,
1,075,000 options are fully vested at December 31, 1998 and 3,925,000 options
vested in 1997.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in both 1998 and 1997: dividend yield of 0%, expected volatility of
29.55%, risk free interest rates ranging from 5.77% to 6.41% over a 5 year
period, and an expected life of 1.5 years.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. Cash,
accounts receivable, notes receivable, accounts payable, notes payable, and
other liabilities are carried at amounts that reasonably approximate their fair
values.
(Continued)
F-22
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 11: BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into two principal business
segments: medical receivables and software and maintenance sales. Summarized
financial information by significant business segments as of and for the years
ended December 31, 1998 and 1997 is as follows:
1998 1997
----------- -----------
Revenues:
Medical fees $ 2,633,753 $ 2,145,995
Software and maintenance sales 326,511 1,502,445
Other 455,661 189,545
----------- -----------
$ 3,415,925 $ 3,837,985
=========== ===========
Operating income (loss):
Medical fees $(2,496,079) $ 141,349
Software and maintenance sales (1,144,715) (578,787)
Corporate (319,981) (346,192)
----------- -----------
$(3,960,775) $ (783,630)
=========== ===========
Total assets:
Medical fees $ 872,630 $ 2,558,312
Software and maintenance sales 462,873 1,604,693
Corporate 867,148 497,368
----------- -----------
$ 2,202,651 $ 4,660,373
=========== ===========
Depreciation and amortization:
Medical fees $ 1,034,674 $ 54,205
Software and maintenance sales 457,723 295,089
Corporate 9,686 9,208
----------- -----------
$ 1,502,083 $ 358,502
=========== ===========
Capital expenditures:
Medical fees $ 110,706 $ 382,302
Software and maintenance sales -- 193,160
Corporate 1,239 --
----------- -----------
$ 111,945 $ 575,462
=========== ===========
(Continued)
F-23
<PAGE>
MB SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 12: DISCONTINUED OPERATIONS
On April 30, 1998 and February 1, 1999, the Company entered into agreements to
sell its ownerships in Sandy Home Health, Inc. ("SHH") (a Utah corporation) and
Color Country Health Express ("CCHE") (a Utah corporation), respectively.
Accordingly, the operating results of SHH and CCHE have been segregated from
continuing operations and reported as a separate line item on the statement of
operations.
The Company has restated its prior financial statements to present the operating
results of SHH and CCHE as discontinued operations. The assets and liabilities
of such operations at December 31, 1997, have been reflected as a net
non-current asset based substantially on the original classification of such
assets and liabilities.
Operating results from discontinued operations are as follows:
<TABLE>
1998 1997
-------------- --------------
<S> <C> <C>
Medical income $ 1,055,975 $ 1,451,870
Cost of medical (1,122,809) (1,370,251)
Depreciation and amortization (33,871) (39,581)
------------ ------------
Income (loss) from operations (100,705) 42,038
Other expense 8,274 (13,979)
Minority interest 45,291 13,749
------------- -------------
Income (loss) from discontinued operations $ (47,140) $ 14,310
============ ============
</TABLE>
NOTE 13: IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will not be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company believes that the Year 2000 Issue will not pose
significant operational problems for its computer systems.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for the products it has sold.
The total cost of the Year 2000 project is not expected to be significant.
(Continued)
F-24
