-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VttooL4z2tPkP+syBCk6XWpcu/RQ1+ePAhTGzpuINhukhd/BvUihoT7K/JC8TEiw u/VsGM1+s9kMZ0ozpJPtJw== /in/edgar/work/20000608/0000950148-00-001236/0000950148-00-001236.txt : 20000919 0000950148-00-001236.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950148-00-001236 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MPR HEALTH SYSTEMS INC CENTRAL INDEX KEY: 0001029312 STANDARD INDUSTRIAL CLASSIFICATION: [3841 ] IRS NUMBER: 954089525 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 333-19285 FILM NUMBER: 651327 BUSINESS ADDRESS: STREET 1: 3710 S ROBERTSON BLVD CITY: CULVER CITY STATE: CA ZIP: 90232 BUSINESS PHONE: 3105595500 MAIL ADDRESS: STREET 1: 3710 S ROBERTSON CITY: CULVER CITY STATE: CA ZIP: 90232 FORMER COMPANY: FORMER CONFORMED NAME: MYO DIAGNOSTICS INC DATE OF NAME CHANGE: 19961218 10KSB40 1 0001.txt FORM 10-KSB (DATED DECEMBER 31, 1999) 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 333-19285 MPR HEALTH SYSTEMS, INC. (Name of Small Business Issuer In Its Charter) California 95-4089525 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 3710 South Robertson Boulevard Culver City, California 90232 (Address of Principal Executive Offices and Zip Code) (310) 559-5500 (Issuer's telephone Number, Including Area Code) Securities registered under to Section 12(b) of the Exchange Act: Name of Each Exchange Title of Each Class on which Registered None Securities registered under to Section 12(g) of the Exchange Act: None Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [x] No [ ] Check if there is no 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] Revenues for the fiscal year ended December 31, 1999: $55,965 At March 31, 2000 the aggregate market value of the voting stock held by non-affiliates of the issuer was $14,285,506. At December 31, 1999 the issuer had 9,723,370 shares of Common Stock, no par value, issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] DOCUMENTS INCORPORATED BY REFERENCE None ITEMS OMITTED PURSUANT TO RULE 12b-25 None 2 Table of Contents
Part I Item 1. Description of Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Common Equity and Related Stockholder Matter Item 6. Management's Discussion and Analysis or Plan of Operation Item 7. Financial Statements Item 8. Changes in and Disagreements with Accountants and Financial Disclosure Part III Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10. Executive Compensation Item 11. Security Ownership of Certain Beneficial Owners and Management Item 12. Certain Relationships and Related Transactions Item 13. Exhibits and reports on Form 8-K
SIGNATURES FINANCIAL STATEMENTS AND SCHEDULE 3 PART I Item 1. Description of Business. History and Prior Activities MPR Health Systems, Inc. (the "Company") is a development stage company which was formed in 1988 to develop and bring to market a new patented medical information system called Muscle Pattern Recognition ("MPR"). The Company, headquartered in Culver City, California, was incorporated in California in January 1987 as AREX, Inc. The name was changed to Devion Group, then to Myo Diagnostics, Inc. in September 1989, then to MPR Health Systems Inc. in March 2000. The Company held a 97.2% general partnership interest in Myo Diagnostics, Ltd. (the "Partnership"), a California partnership, that began operations in April 1991. The Partnership researched and developed the hardware and related software to perform Muscle Pattern Recognition pursuant to a license agreement with Toomim Research Group ("TRG"), a partnership of three of the Company's shareholders, which holds a United States patent on the MPR technology. In December 1994, the Partnership's assets (including the license agreement) and liabilities were transferred to the Company at their book value and neither the Partnership nor the Company recognized any gain or loss. The 2.8% partners exchanged their interests in the partnership, totaling $547,885, for 755,330 shares of Common Stock of the Company and notes in the aggregate principal amount of $175,000. The business combination was recorded in a manner similar to a "pooling-of-interest" method of accounting. Under this method, assets and liabilities of the Partnership were recorded at historical cost. General The Company was formed to develop and bring to market a new patented medical information system called Muscle Pattern Recognition ("MPR"). MPR analyzes patterns of muscle recruitment--the engagement of muscles in order to perform a specific body movement--to provide objective evidence of muscle dysfunction which assists in the diagnosis of muscle injury. It can identify affected muscle sites, determine the existence of muscle dysfunction, and measure its severity. The results of an MPR evaluation are presented in a comprehensive report that is generated at the Company's central processing facility. The Company believes that the capabilities of its MPR System are unique and the MPR System addresses an unmet market need that has become even more pressing in view of the cost-consciousness of the present health care environment. The MPR System supports the cost-containment and risk management goals of insurers and managed care providers by giving them means to measure treatment outcomes, to eliminate unnecessary care, and to detect outright fraud. It can serve as a forensic medical tool in medical/legal cases and reduce the exposure of insurers of disability and workers compensation risks. 4 MPR's scientific foundation originates from the research of Dr. Hershel Toomim, one of the founders of the Company. Over the ten-year period that preceded the formation of the Company, Dr. Toomim did extensive research on the patterns of interactions occurring between the various muscles that participate in the execution of a movement. Central to the MPR concept is the discovery of movement-specific patterns that can be captured by simultaneously recording the electromyographic ("EMG") signals of all participating muscles. The comparison of a patient's patterns with those of "normal" subjects, using an expert system (described in greater detail below), is the basis of the evaluation. Up until now, the Company has focused its development efforts on the back and neck muscle application; it plans to address other muscle groups in the future. The first MPR system prototype capable of measuring simultaneously up to 14 muscle sites was Alpha and Beta tested in early 1990. A limited market test was initiated in September 1990 in Southern California, through a non-exclusive mobile diagnostic distributor. The Company certified four technologists and approximately 300 patients were tested through June 1991. The Company appointed in-house and independent sales representatives to expand the market test. These market tests served to establish the prerequisites necessary to commence marketing the product. These prerequisites included: an independent scientific validation of the system, conclusive clinical studies, a demonstration of the successful use of MPR information as medical/legal evidence, and the publication of papers in peer reviewed journals. In the opinion of management, these prerequisites have been met. See "Product--Scientific Validation of the System" and "--Legal Validation of the System." Market Market Environment. The United States health care delivery and payment systems have been undergoing profound changes over the past few years. These changes have been driven by the determination of employers to halt the alarming escalation of health care spending, by the concerns of the health care industry over the threat of regulatory controls, and by a general awareness that major flaws plague the system. "Liability System Incentives to Consume Excess Medical Care," a study by the RAND Corporation Institute for Civil Justice, found an estimated 59% of the costs submitted in support of soft injury claims for auto accidents was excess. This study further indicated "the implications of this analysis reached far beyond auto insurance premiums. Our data clearly suggests that large amounts of medical resources are being unnecessarily consumed." Lead by managed care providers, the re-engineering of the industry has brought a new focus on the cost- effectiveness of services and procedures. Capitated payment plans have reversed the financial incentives of managed care providers, and insurers of traditional indemnity plans have had to adopt similar cost-containment techniques to compete. Management believes these trends will benefit the Company as MPR can facilitate cost-containment: by providing a means to objectively diagnose a condition to aid in the selection of the most appropriate treatment course, a means to measure outcomes which can prevent overuse, and a means to detect fraud in workers compensation, personal injury, and disability cases involving back injury. 5 Back Muscle Diagnostic Market. Back pain and back muscle injuries from automobile, sports and work related accidents affect a large number of individuals. In 1997, back injuries represented the largest cause of workdays lost (25% of all non-fatal occupational injuries and illnesses involving days away from work) according to the United States Department of Commerce, Bureau of Labor Statistics (April 1999). According to Physical Therapy, April 1999 Vol. 79. No. 4, pp 385-395, it is estimated that the prevalence of lower back pain of greater than two weeks' duration is 5.6% of the adult population of North America (roughly 10 million people) at any given point in time. According to the American Academy of Orthopedic Surgeons, 1998, back pain is the second leading cause of absenteeism from work, after the common cold. In an April 1999 article, the peer-reviewed journal SPINE (Vol. 24, No. 7, pp 691 - 697) estimated that, based on statistics taken from the Bureau of Labor, $8.8 billion was spent on low back pain claims in 1995. The Company believes that the United States offers as many annual examination opportunities for MPR as it does for MRI. According to Market Intelligence Research Company Annual Report (1993), there are in excess of seven million MRI examinations per year. Business Strategy The Company's goal is to establish MPR as a widely recognized and accepted medical procedure, and to capitalize upon the full potential of this technology by developing protocols for other applications. Market Awareness. The Company's success will depend in substantial part upon its ability to establish MPR as a standard medical practice for diagnosis of muscle dysfunction. In addition to its sales and marketing plans, the Company intends to sponsor additional clinical studies in the United States and in select foreign markets, with the expectation that the results will be submitted for publication in peer-reviewed scientific journals. The Company will be assisted in these efforts, in part through the activities of the members of its Medical and Scientific Advisory Board. The Company will encourage these members to write articles about the MPR technology and present the technology at various professional conferences. The Company also intends to increase awareness through trade shows, seminars, professional conferences, scientific presentations and through its corporate web site: www.mprhealth.com or www.myodx.com. The extent to which the Company can create this market awareness may depend in part upon obtaining additional funding or generating sufficient revenues from the MPR System. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statements and Risk Factors--Need for Additional Funding." Product The MPR System is a computer-assisted evaluation procedure that is based on the simultaneous measurement of electromyographic ("EMG") signals produced by 14 muscles during the execution of a movement. A patient's EMG readings, which are collected during the examination procedure, digitized, and then processed by an expert system, can then be converted into graphic "images" of recognizable muscle patterns. A computer-assisted comparison of a patient's patterns with those produced by normal subjects reveals differences that are the basis of the diagnosis. 6 The MPR System consists of three components: * The Data Acquisition Device; * the MPR Diagnostics Expert System, and * the MPR Diagnostics Muscle Pattern Recognition Report. The data acquisition device consists of a set of 33 cutaneous electrodes connected to the data acquisition device. The electrodes, which are commercially available, pick up the EMG signals produced by muscles and feed them into the device whose design provides for the simultaneous reception of up to 16 EMG signals. The data acquisition device is commercially available, and the Company presently purchases the device from an unaffiliated manufacturer. In the event that the data acquisition device is not available from a third party, the Company could manufacture the module itself using commercially available components (and, in past years, did manufacture such device). Proprietary software is installed in the data acquisition device that provides features to analyze the quality of the signal received from each electrode and recognizes and warns the technologist/operator of any malfunction, thereby ensuring that data reflects accurate EMG measurements. The data acquisition device also assists the operator by signaling the beginning and end of each movement through visual prompts and audio tones, and by providing a real-time feedback on the patient's performance through a graphic display. The software also accepts the data and prepares it for electronic transmittal to the company's headquarters. After affixing the electrodes on the skin of the patient's back at carefully selected muscle sites, the patient is directed to execute four repetitions of each of nine specific movements. Fourteen muscle sites are associated to each movement and report to the data acquisition device during the execution of such movement. Their repetitions are important for the protocol. To convert these parallel inflows of signals into digital patterns ("images"), the data acquisition device processes some 75,000 data points and calculates these points' relationships to each other. Technologists who perform the tests on the patient are presently required to receive two weeks training from the Company. No special governmental or regulatory license or approval is required for the technologists to perform the service. The Expert System. The data collected during the examination is submitted to the Company for processing. A report is generated which includes graphic, statistical and narrative representations of each muscle group's pattern compared to the pattern of a normative database of non- injured and pain-free subjects. The normative data has been collected utilizing the same protocols performed by the patient. The normative database is periodically updated as more data is collected. The report that is produced is reviewed to ascertain that the data was properly collected and processed. 7 The system of statistical analysis used in the MPR evaluations is based on well-established principles of statistics which indicate that data which falls two standard deviations or more from the mean value of the data base to which it is compared has a statistical certainly of 95%-99% depending upon how far beyond two standard deviations the data falls. The MPR System requires that this phenomenon occur in multiple instances before it is considered to be significant for further analysis. This assures that there is a very high probability that the data is significant and a very low probability of falsely identifying an artifact as being significant. The Muscle Pattern Recognition Report. The MPR Report provides the physician with findings to classify the patient as normal or with a graded level of muscle dysfunction. It provides four critical statements about the muscle groups examined, along with detailed information supportive of these conclusions: Evidence of dysfunction: Reports if muscle recruitment is normal or abnormal and, if abnormal, the location of the abnormality. Frequency and severity of the dysfunction: The severity of the dysfunction as compared to normal and the frequency it occurs during the nine movements. The patterns of abnormal Muscle recruitment: Graphic presentation of the abnormal muscle patterns including the patterns of muscle compensation. The bio-mechanical explanation of the abnormal muscle compensation: Describes the reason for the functional adjustments made during movement. Patients may be retested to measure progress and treatment and to assist the physician in making a decision for discharge. Such retests are not normal, but are done at the discretion of the physician. When a patient is retested to ascertain if additional treatment is advisable and the second MPR evaluation is compared to the baseline test, several other critical questions are addressed: * Is the patient's muscle recruitment pattern now within the range of normal? * If still dysfunctional, has the patient progressed through treatment? * Should the insurance Company continue to fund further (or different) treatment? 8 These questions address the issues of rehabilitation and short and long term disability that affect insurance reserves. Scientific Validation of the System. In May 1992, Dr. Norman Carabet completed an independent study of the Company's evaluation methodology. The study determined that the overall classification accuracy of normal subjects was 90%. In a further cross validation study involving 196 subjects, the results confirmed the stability of the database. In June 1992, Dr. Carabet completed a second clinical study. This study showed a high correlation between the Company's evaluation of doctor- diagnosed injured accident and Workers Compensation patients and the doctors' diagnoses. The results were particularly impressive because the test was able to detect injuries after a one to four week time lapse between the doctor's diagnosis and the Company's examination. A test/retest study of 40 of these patients indicated that 82% of the patients improved over a four- week period. The retest also validated the accuracy of the Company's classification. Dr. Carabet received an option to purchase 15,000 shares of Common Stock for $750 for the provision of facilities and services in connection with these studies. The Company does not believe this affected his independence for purposes of the studies. The Company's MPR technology was submitted to leading academicians and clinicians. Dr. V. Reggie Edgerton of UCLA and Dr. Steven Wolf of Emory University reviewed the technical aspects of the MPR System in detail and confirmed the validity of the science behind the MPR technology. They have authored three published articles relating to the Company's MPR technology, entitled "Evaluating Patterns of EMG Amplitudes for Back and Trunk Muscles of Patients and Controls," International Journal of Rehabilitation and Health, Vol. 2, No. 1 (1996), "Theoretical Basis for Patterning EMG Amplitudes to Assess Muscle Dysfunction," Medicine and Science in Sports Exercise, Vol. 28, No. 6 (1996), and AEMG activity in neck and back muscles during selected static postures in adult males and females, physiotherapy Theory and Practice, (1997) 13, 179-195. Dr. Edgerton and Dr. Wolf are members of the Company's Scientific Advisory Board and receive fees for attendance at meetings of that Board. See "Management -- Scientific Advisory Board." They have also received consulting fees on specific projects for the Company. Legal Validation of the System. In 1993, the California Workers Compensation Appeals Board ("WCAB") issued a decision that the Company had ". . . persuaded the Court as to the validity of the lien-claimant's [Myo Diagnostics] methodology and mechanism" and that "it found that the procedure (muscle pattern recognition) is a valid and useful diagnostic medical tool when used in the proper case. . . ." This determination was in connection with an action pursuant to which an insurance carrier had sought refund of payments made to a provider who had submitted claims for use of the MPR System (and the WCAB denied the insurance company such refund). The Company believes that this opinion helps to validate MPR as a valid medical/legal procedure. 9 No court or administrative body other than the California Workers' Compensation Appeals Board has examined the validity or invalidity of the MPR System. Competition The Company believes it has no direct competition and that no other system in use today is capable of delivering information similar in content, comprehensiveness and reliability to the Company's MPR system. EMG signals have been used by others to evaluate muscles at rest and muscles that do not have kinesiological relationships; but the Company believes that these methodologies are not supported by scientific studies and are not reliable. The Company believes that Magnetic Resonance Imaging ("MRI") does not compete with MPR because it cannot measure interactive muscle relationships when the muscles are under constant tension. MRI's use in relation to back problems is primarily to diagnose disk injuries. However, there are many companies, both public and private, which are active in the field of medical diagnostic imaging. Most of these companies have substantially greater financial, technical and human resources, have a well-established name, and enjoy a strong market presence. There is no assurance that one or several such companies are not currently developing, or will not start developing, technology that will prove more effective or desirable than the Company's technology. Such occurrence could severely affect the Company's ability to establish and develop a market presence and to maintain its competitive position. Marketing and Distribution Market Awareness. The Company's success will depend in substantial part upon its ability to establish MPR as a standard medical practice for diagnosis of muscle dysfunction. The Company hopes to achieve this awareness, in part, through an active public relations campaign. Company personnel and approximately 20 Independent Sales Representatives ("ISRs") have initiated contacts with healthcare providers and payors in the application of MPR and the benefits of its utilization. The Company has also created a web page on the Internet ( www.mprhealth.com or www.myodx.com ) that will encourage easy access to information about the Company and the procedure. The Company intends to sponsor additional clinical studies in the United States and in select foreign markets, with the expectation that the results will be submitted for publication in peer-reviewed scientific journals. The Company will be assisted in these efforts through the activities of the members of its Medical and Scientific Advisory Boards. The Company will encourage these members to write articles about the MPR technology and present the technology at various professional conferences. The Company also intends to increase awareness through trade shows, seminars, professional conferences and scientific presentations. 10 The extent to which the Company can create this market awareness will depend in part upon obtaining additional funding or generating sufficient revenues from the MPR System. See "Risk Factors--Need for Additional Funding." Market Targets. The Company's overall market is comprised principally of two major segments: the medical/legal market, which deals primarily with workers compensation and personal injury claims, and the physical medicine market. Initially, the Company will focus primarily on the medical/legal segment. To this end the Company will target the medical providers that service these markets such as hospitals, rehabilitation clinics, industrial clinics, diagnostic centers, physicians, physical therapists and MRI imaging centers. This group is an important component of the Company's strategy because, in addition to its capacity to prescribe MPR, it may serve as a delivery vehicle. The Company will also continue to target firms servicing insurance companies, HMOs and PPOs, self-insured employers and their third-party plan administrators, and risk and case management companies. Hospitals, independent clinics, diagnostic centers, rehabilitation professionals and physicians will be recruited as evaluation centers for MPR evaluations. These providers may become the delivery system for corporate clients and insurance companies. They may service the medical/legal market and may later become the sites for entry into the medical back pain and physical medicine market. Insurance Companies are primary targets because their reimbursement policies and practices have a profound impact on the medical diagnostic industry; they largely dictate pricing policies, methods of distribution and growth strategies. Insurance companies are also playing an increasingly important role as prescribers. For example, recent workers compensation reforms in California have given insurers more control over treatment regimen. An insurer can now dictate the treatment of a patient for up to four months. Because MPR can serve to control direct medical costs and indirect costs such as lost time, disability claims, and litigation costs, the Company believes that its procedure will be well received by insurers who may become a major source of referrals, particularly in the workers compensation market. HMOs and PPOs are expected to be of vital importance to the Company due to their leadership role in the cost containment drive and the considerable market share they enjoy. Self-insured employers paid claims representing 34% of the claims paid in California for worker's compensation in 1995, according to Table No. 1, 1995 State Wide Totals, Department of Industrial Relations, Office of Self-Insurance Plans (1996). This could be a significant market for the MPR System. Health Care Plan Administrators are large organizations which provide services to public and private self-insured employers. In their role to manage private plans, they can influence care strategies and/or treatment selection criteria, and they may have authority to commit funds for evaluation and treatment. Most of them have financial incentives to contain costs and limit payors' exposure related to ongoing treatment and disability. 11 Marketing Plan: The Company's objective is to achieve significant and profitable sales growth through the successful introduction of the MPR evaluation procedure through three strategic channels: * Selling directly through independent sales representatives in the United States; * Through strategic technology partnerships in foreign markets; and * Through targeted strategic partnerships in the United States that can leverage the domestic distribution of MPR. Independent Sales Representatives: The U.S. market is an untapped market for the MPR evaluation procedure across all insurance payer lines of health, disability, personal injury and workers' compensation. Based on 1997 incidence rates taken from the United States Department of Commerce, Bureau of Labor, the market for the MPR procedure is estimated at approximately $2.1 billion per year. This forecast reflects the total amount of insurance reimbursement projected for the MPR procedure. The Company believes it has no direct competition into this market and that no other system in use today is capable of delivering information similar in content, comprehensiveness and reliability to the Company's MPR system. The Company intends on distributing the MPR procedure domestically through a national network of independent sales representatives ("ISRs"). The Company believes that by distributing through a network of ISRs, it will be able to achieve national exposure without assuming the costly overhead of hiring a large, direct sales force. The Company's agreements with the ISRs will provide them with exclusive sales territories and a highly competitive commission structure. As of April 30, 2000, the Company had 16 ISRs. The Company may maintain a small, direct sales force to supplement the ISR network to assist the ISRs with accounts that require corporate involvement. The Company will direct its sales efforts during the first year toward a limited, highly targeted group of accounts that have the ability to become MPR centers capable of distributing the technical component of the MPR procedure. The Company believes this enhanced distribution network will become a secondary sales force that will have the ability to influence payers and corporate users. These centers will be established on the premises of providers of diagnostic and rehabilitation services and the general physician community that treats injured patients. ISRs will be selected based on their experience and influence into these key domestic markets. Foreign Distribution: The foreign health care markets targeted by the Company differ in many ways from the U.S market in terms of structure and accessibility. In most developed countries, particularly those in North and South American and the European Union, the various health care markets revolve around different forms of government national health care, augmented by a second tier of private insurance. The Company believes access to these markets will be less complex and therefore introduction of MPR more easily achieved. The Company intends to distribute the MPR System into selected foreign markets through strategic technology partners. These partners will be selected based on their experience and/or ability to market and sell MPR in their respective markets, their current product mix (and how MPR fits within that product portfolio), and their financial strength. The Company will enter into distribution agreements with these partners which typically will have a minimum term, provide exclusivity in the territory to the partner for the term, and will require the partner to make minimum purchases of data acquisition modules and MPR evaluations and maintain specified levels of quality control. 12 The Company believes that it may be required to conduct additional clinical trials in some of these foreign markets. The Company presently intends to have these studies funded by its strategic technology partners. In December 1999, the Company entered its first agreement with a strategic technology partner for a foreign market (the United Kingdom). Strategic Partnerships in the U.S.: The Company also intends to pursue strategic partnerships with companies in the United States that offer opportunities for accelerating the distribution of the MPR System into selected niche markets. Potential U.S. partners include multi-site diagnostic firms, medical device companies, imaging companies and insurance companies, as well as pharmaceutical companies that are currently pursuing strategies to access their customers by providing products and services that support their existing product lines. As of April 30, 2000, the Company has no such partners. Regulatory Requirements The data acquisition device used in the MPR System is subject to regulation by the U.S. Food and Drug Administration ("FDA"). Under the FDA Act, manufacturers of medical devices must comply with certain regulations governing the testing, manufacturing, packaging and marketing of medical devices. FDA clearance to allow commercial sales and use may be acquired by means of a new pre-market approval ("PMA") application to the FDA or by notification under Section 510(k) of the FDA Act that the medical device used demonstrates "substantial equivalence" to devices on the market prior to 1976 or already approved under PMA applications. A substantially equivalent device requires no clinical trials such as those needed to establish the efficacy of a drug or invasive diagnostic system. The Company purchases the data acquisition device from Thought Technologies, Ltd., an unaffiliated manufacturer. The manufacturer has advised the Company that the data acquisition device used in the MPR system may be used as a result of notification under Section 510(k) of the FDA Act that it is deemed to be a substantially equivalent medical device. The Company believes that its use of the device is in compliance with the intended use of the device as contemplated by the Thought Technologies, Inc. Section 510(k) notification. The Company makes no marketing or use claims for the device inconsistent with such intended use. Any person who distributes a medical device in violation of the FDA Act is subject to having such distribution enjoined and to civil monetary penalties. If the Company distributes the device, the Company must notify the FDA by filing two short data entry forms, which forms are not subject to review or approval by the FDA. The Company has filed these forms. In the event that the data acquisition module is not available from a third party, the Company could manufacture the module itself (and, in past years, did manufacture such device). The Company's authority to manufacture and market the data acquisition module would be based upon its notification under Section 510(k) of the FDA Act that its device was a substantially equivalent medical device, which notification was accepted by the FDA in 1990. 13 The Company believes that no other aspect of the MPR System is subject to regulation by the FDA. Intellectual Property The Company licenses the right to manufacture, market, sell, distribute and further develop the MPR System and MPR technology and any related or derivative technology throughout the world pursuant to an exclusive license with TRG, a partnership among Gerald D. Appel, Daniel J. Levendowski and Hershel Toomim. Mr. Appel and Mr. Toomim are directors of the Company, and Mr. Appel is the principal shareholder and Chief Executive Officer of the Company. The MPR System and related technology and all additions or modifications thereto remain the property of TRG, provided, however, that any derivative technology developed by the Company for purposes other than the evaluation and treatment of muscle dysfunction in the back, arms and legs ("Derivative Technology") will be the property of the Company. The Company pays royalties to TRG for the use of the MPR technology and any Derivative Technology as follows: (i) the lesser of $30.00 per use or 10% of total revenues received by the Company for each of the first 10,000 times the MPR procedure is ever used, (ii) the greater of $12.50 per use or 5% of total revenues received by the Company for each use thereafter, (iii) 5% of total revenues received by the Company for each sale, lease, license or other transfer of the MPR procedure or related equipment or technology and (iv) 3% of total revenues received by the Company for each sale, lease, license or other transfer of the Derivative Technology. The Company is not required to make any payments on revenues pursuant to (iii) or (iv) to the extent royalties were previously paid on such revenues pursuant to (i) or (ii). The license expires in 2013. The license is terminable by TRG upon 14 days notice (subject to cure during such period) (i) if the Company fails to observe the terms of the Agreement, (ii) if the Company becomes insolvent or generally fails to pay its debts when due, (iii) the assignment by the Company of its property for the benefit of the Company's creditors or the appointment of a receiver for any part of the Company's property, (iv) the commencement of any proceedings under bankruptcy or insolvency law by or against the Company and (v) the sale or other transfer of the license by the Company without TRG's consent. 14 If the license is terminated for any reason, the Company becomes subject to a three-year agreement not to engage in the manufacture, sale or distribution of the MPR system or any similar product in any area in which the MPR system or procedure has been sold. The Company and TRG rely upon the law of trade secrets, patent protection and unpatented proprietary know-how to protect the MPR technology. Due to the rapid technological change that characterizes the medical device industry, the Company believes that reliance upon trade secrets and unpatented know-how, and on the continued introduction of improvements and new products, are generally as important as patent protection in establishing and maintaining a competitive advantage. TRG was granted a United States patent covering the MPR system, which expires in 2013. The Company presently has no patent protection of the MPR technology outside the United States. The Company has the right to file patent applications and attempt to obtain patents in other jurisdictions. To date, the Company has not done so, in part because of lack of funds. TRG is under no obligation to patent the MPR technology in any jurisdiction and the Company's determination as to whether or not to seek patent protection will depend upon a number of factors, including the likelihood of the issuance of the patent, the Company's financial resources and marketing plans that include foreign markets. The Company plans to investigate patent protection of the MPR System in the foreign markets covered by its strategic technology partnership agreement(s). Employees As of December 31, 1999, the Company had six full time employees including two involved in research and development and four involved in administration, operations and marketing. Item 2. Description of Properties. The Company operates from leased facilities in Culver City, California consisting of approximately 3,550 square feet. Research and development, equipment assembly, and report processing activities are centralized to allow closer control over service and response time, and to better protect the technology. The current annual base rental for the facilities is $64,644 and the current term of the lease expires in October 2001. 15 Item 3. Legal Proceedings. The Company is not involved in any litigation. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted for approval to the holders of the Company's outstanding Common Stock. PART II Item 5. Market for Common Equity and Related Stockholder Matters. Common Stock and Dividends There is no public market for the Company's Common Stock. As of March 31, 2000, there were one hundred and nine holders of record of the Common Stock. Recent Sales of Unregistered Securities On January 1, 1999, the Company entered into a three-year employment agreement with Gerald D. Appel to serve as its President and Chief Executive Officer. Pursuant to the employment agreement, Mr. Appel was granted three hundred thousand (300,000) Common Shares of the Company. The shares were issued in cancellation of $30,000 of deferred salary. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. Dividends The Company has never paid any dividends on its Common Stock. The Company presently intends to retain any earnings for use in its business and does not intend paying any cash dividends on its Common Stock in the foreseeable future. 16 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company is a development stage company that has yet to realize any material revenues. The Company is ready to bring its product to market, but may need additional funding to implement its marketing plan. Forward Looking Statements The Company may from time to time make "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this discussion, the words "estimate", "project", "anticipate" and similar expressions are subject to certain risks and uncertainties, such as changes in general economic conditions, competition, changes in federal regulations, as well as uncertainties relating to raising additional financing and acceptance of the Company's product and services in the marketplace, including those discussed below that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations Year Ended December 31, 1999 as Compared to Year Ended December 31, 1998. The Company incurred net losses of $1,091,866 for 1999 and $793,195 for 1998. Revenues increased from $9,339 for 1998 to $55,965 for 1999. Revenues in both periods consisted primarily of fees for performance of MPR evaluations. The Company performed more MPR evaluations in 1999 due to the completion of the development of the MPR System and an increase in marketing. During 1998, the Company adopted a change in the method of accounting for the costs associated with certain research and development costs related its product. Certain of these research and development costs are now being capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Previously, the Company had expensed all research and development costs. As a result of this change in accounting for research and development costs, the Company now capitalizes costs previously expensed. The Company's operating expenses increased to $794,849 during 1999 from $761,063 during 1998. Technical expenses and research and development costs were $103,591 and $44,796, respectively, greater in 1999 than 1998 primarily as a result of the change in method of accounting for research and development costs. Sales and marketing expenses for 1999 increased by $42,000 compared to 1998 as the Company focused much of its efforts on sales and marketing. During the year ended December 31, 1999 compared to the year ended December 31, 1998, general and administrative expenses decreased to $482,278 from $638,879 respectively. This decrease was principally as a result of reallocating certain expenses based on the change in method of accounting for research and development costs. 17 During 1999 the Company recorded an extraordinary loss of $258,271 relating to the issuance of 200,000 shares of Common Stock and options to purchase an additional 280,000 shares of Common Stock to satisfy obligations relating to notes payable in the aggregate principal amount of $400,000 and accrued and unpaid interest by the Company to a commercial bank. Financial Condition The Company has funded its operating expenses principally through equity and debt financings, as the Company has had no material cash flows from operations. During the year ended December 31, 1999, the Company funded its operations principally from net proceeds of $698,874 obtained from the sales of Common Stock. The Company presently has funds to continue operations at its present level only through July of 2000. The Company expects modest revenues during this period, and is exploring the possibility of raising additional capital. If the Company does not generate sufficient revenues or obtain additional capital by the end of August 2000, it will be forced to severely curtail operations. Cautionary Statements and Risk Factors Several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward looking statements which could cause actual results to differ materially from those projected or forecast in the statements that appear below. In addition to other information contained in this document, readers should carefully consider the following cautionary statements and risks factors: Reliance on a Single Product: The Company has only one product, the MPR System. There is no established market for this product. Accordingly, if for any reason the MPR System cannot be marketed successfully, the Company would not survive. Reliance on License: The Company's entire business is based on an exclusive license of the MPR process and related technology from TRG. See "Business -- Intellectual Property." The license terminates in 2013, but may be terminated earlier upon the occurrence of certain events including (i) the failure by Licensee to observe or perform any of its covenants, conditions or agreements contained within the license. Any termination of the license would have a material adverse effect on the Company and would likely result in the Company not surviving. Development Stage Company with Limited Operating History: The Company is in the development stage and its operations are subject to all the risks inherent in launching a new business enterprise, in developing and marketing a new product or service, and in establishing a name and a business reputation. The likelihood of success of the Company must be considered in light of problems, expenses, difficulties and delays frequently encountered in converting prototype designs into viable production designs, and in achieving market acceptance with a new type of product or service. The Company has had limited revenues to date, has operated at a loss since inception, and, because it is only now entering its commercial stage, it will likely sustain operating losses for an indeterminate time period. There can be no assurance that the Company will ever generate material revenues or that the Company will ever be profitable. 18 New and Uncertain Market: Until now, muscle injuries have always been diagnosed and evaluated subjectively by physicians through physical examination. Accordingly, there is no established demand for a computer assisted procedure to assist in the diagnosis of such injuries, and it is difficult to predict if, and when, the procedure will gain wide acceptance by prescribers. A prerequisite to success will be the ability of the Company to establish MPR as a standard medical practice for use in the diagnosis of muscle dysfunction. The Company believes it will take a minimum of three to five years for such awareness to be achieved, if it can be achieved at all. Factors that may affect market acceptance could include resistance to change, concerns over the lack of track record of the procedure, and the risk for insurance companies to use the results of the procedure to challenge or overrule the diagnostic or treatment decisions of a physician. Need for Additional Funding: To create market awareness of its MPR System, the Company will need to devote significant resources to marketing and sales. The Company's plan is to develop market awareness partially through a public relations campaign, including attendance at trade shows and professional conferences, scientific presentations and clinical studies. The Company believes its success may depend, in part, on the Company's ability to conduct additional clinical studies. In addition, and very critical to this process, will be direct contact with payors (primarily insurance companies, HMOs and PPOs) and providers (including physicians, rehabilitation professionals, hospitals and diagnostic clinics) to create awareness of the MPR System and to educate them as to its benefits and clinical applicability. To fully implement its marketing plan in 2000, the Company estimates it will need an additional $1.0 million to $1.5 million of funding. The amount of funding, if any, the Company receives in 2000 will partially determine the degree to which it can implement its marketing plan. The Company may obtain additional funding primarily through private placements of debt and/or equity securities with strategic partners or others. In addition, the Company could obtain funds through development funding from and/or advance sales to strategic partners. To date, the Company has no commitments for these additional funds. The issuance of additional debt or equity securities by the Company could have the effect of impairing the rights of existing shareholders. For example, the Company could issue securities senior to the Common Stock in liquidation (such as debt securities or preferred stock), with preferential voting rights, or which limit or restrict the payment of dividends. In addition, the Company could issue securities at prices that are dilutive to the existing shareholders. 19 Intellectual Property: TRG holds a United States patent on the MPR technology, and the Company is the exclusive licensee of the rights under the patent. The Company believes that its ability to be successful will be contingent on its ability to protect the MPR technology, its future developments and its know how. There can be no assurance, however, that this patent will provide substantial protection of the MPR technology or that its validity will not be challenged. Pursuant to its license agreement with TRG, the Company has the right to protect the MPR technology. The Company presently has no patent protection of the MPR technology outside the United States. The Company has the right to file patent applications and attempt to obtain patents in other jurisdictions. To date, the Company has not done so, in part because of lack of funds. TRG is under no obligation to patent the MPR technology in any jurisdiction and the Company's determination as to whether or not to seek patent protection will depend upon a number of factors, including the likelihood of the issuance of the patent, the Company's financial resources and marketing plans. Competition: The Company believes that there is no competitive diagnostic technology in use today capable of detecting, locating and evaluating soft tissue muscle injuries in a manner similar to the MPR System. However, there are many companies, both public and private, which are active in the field of medical diagnostic imaging. Some of these companies have substantially greater financial, technical and human resources, have a well-established name and enjoy a strong market presence. There is no assurance that one or several such companies are not currently developing, or will not start developing, technology that will prove more effective or desirable than the Company's technology. Such occurrence could severely affect the Company's ability to establish and develop a market presence and to maintain its competitive position. Dependence on Third Parties: The success of the Company will depend, in part, on insurance companies and managed care organizations paying for or reimbursing for MPR evaluations. To date, over 60 insurance companies have reimbursed patients who have been diagnosed using the MPR System. However, this has been a limited sample in that the Company's experience is based solely on clinical tests and test marketing. No assurance can be given as to what extent, if at all, insurance companies will continue to reimburse for MPR evaluations. Dependence on Key Management Personnel: The Company is substantially dependent upon the experience of Gerald D. Appel, President, Chief Executive Officer and founder of the Company. The loss of the services of Mr. Appel could have a material adverse impact on the Company and its business unless a suitable replacement for the individual is found promptly, but there is no assurance that such replacement can be found. 20 Product Liability: The Company may be subject to substantial product liability costs if claims arise out of problems associated with the use of the Company's MPR System. While the Company maintains insurance against such potential liabilities, there can be no assurance that such product liability insurance will adequately insure against such risk. Control by Management: Gerald D. Appel owns beneficially 3,410,019 shares of the Common Stock (which includes voting rights with respect to 111,900 shares), representing 35.8% of the outstanding voting power of the Company as of December 31, 1999. As of December 31, 1999, all directors and officers of the Company (including Mr. Appel) currently had voting power with respect to 41.1% of the outstanding Common Stock. Accordingly, Mr. Appel, individually, and all directors and officers as a group, have the power to control the election of directors, and therefore the business and affairs of the Company. See "Principal Shareholders." This concentration of stock ownership may have the effect of delaying or preventing a change in the management or control of the Company. Preferred Stock: The Company is authorized to issue up to 10,000,000 shares of Preferred Stock, issuable in one or more series, the rights, preferences, privileges and restrictions of which may be established by the Company's Board of Directors without stockholder approval. As a result, in the future, the Company could issue Preferred Stock with voting and conversion rights that could adversely affect the voting power and other rights of the holders of the Common Stock. No shares of Preferred Stock are presently outstanding and the Company has no present plans to issue shares of Preferred Stock. Absence of a Public Market: Presently, there is no public market for any securities of the Company. No assurance can be given that any public market will ever develop for any of the Company's securities. The Company does not presently meet the requirements for listing securities on any national securities exchange or the NASDAQ Stock Market. The absence of a public market for the Company's securities makes an investment in such securities highly illiquid. In addition, the absence of a public market results in there being no true "market price" for the Company's securities which would enable investors to determine the value of their investment. Forward Looking Statements: The Company may from time to time make "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this discussion, the words "estimate", "project", "anticipate" and similar expressions are subject to certain risks and uncertainties, such as changes in general economic conditions, competition, changes in federal regulations, as well as uncertainties relating to raising additional financing and acceptance of the Company's product and services in the marketplace, including those discussed below that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 21 Item 7. Financial Statements. The response to this item is submitted in a separate section of this report. See Financial Statements and Schedules on Page [26]. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors and Executive Officers of Registrant. The following table sets forth information with respect to each director, executive officer and key personnel of the Company.
Name Age Position ---- --- -------- Gerald D. Appel 63 President, Chief Executive Officer and Chairman of the Board of Directors Dr. Hershel Toomim 82 Director Wayne D. Cockburn 43 Director
Mr. Appel has served as President and Chief Executive Officer of the Company since 1991, and as a director of the Company since inception. Mr. Appel is also Chairman of the Board of Directors. Dr. Toomim has served as a Director of the Company since he co-founded it with Mr. Appel in 1988. Dr. Toomim also served as Vice President of Research and Development of the Company from 1988 to 1996. Mr. Cockburn has served as a Director of the Company since July 1995. Mr. Cockburn has been employed by Lorus Therapeutics Inc., a Canadian biopharmaceutical company, since January 1995, and is currently Vice President, Business Development. From 1994 to 1995 Mr. Cockburn was an investment banker with McDermid St. Lawrence Chisholm, Ontario, Canada, and for more than the three years prior to that, he was a securities broker with Midland Walwyn, Ontario, Canada. Medical and Scientific Advisory Board The Company has a Medical and Scientific Advisory Board ("MSAB") whose members are physicians who were contacted by the Company based upon their prominence and expertise in medical fields which the Company believed relevant to the Company's business, and who accepted invitations to serve upon the MSAB. The role of the MSAB is to advise on the medical considerations involved in designing the product, to provide a user/prescriber perspective, and to assist with the design of clinical trials. The MSAB meets on an ad hoc basis. Members of the MSAB presently receive $750 for each meeting attended. Certain members of the MSAB are, and others may become, shareholders of the Company. The MSAB includes: 22 Steven L. Wolf, PhD, Chair Professor and Director of Research, Department of Rehabilitation Medicine, Emory University School of Medicine, former Chair of the Advisory Council of the American Physical Therapy Association. Gunnar B.J. Andersson, MD, PhD Chairman of Orthopedic Surgery at Rush-Presbyterian-St. Luke's Medical Center in Chicago, managing partner of Midwest Orthopaedics, past President of the International Society for the Study of the Lumbar Spine. Jonathon Fielding, M.D., PhD Professor of Medicine at UCLA, President of the International Society of Preventative Medicine, Chief Health Officer for the County of Los Angeles and consultant to Fortune 100 health care companies. William Finkle, PhD Epidemiologist and President of Consolidated Research Inc., providing consulting services to the major health care companies in matters pertaining to the epidemiology of disease, data analysis and predictive modeling. Reggie Edgerton, PhD Professor and Vice Chairman of the Physiological Sciences Department at UCLA, Project Program Director evaluating neurophysiological changes in microgravity for NASA. 23 Item 10. Executive Compensation Summary Compensation Table The following table sets for certain information regarding the compensation of the Company's Chief Executive Officer for the fiscal years ended December 31, 1999, 1998 and 1997 (no other officer had annual compensation in excess of $100,000 during any of those years): SUMMARY COMPENSATION TABLE
Long Term Compensation -------------- Annual Number of Name and Fiscal Year Compensation Securities Principal Position Ended --------------------- Underlying Compensation December 31, Salary Bonus Options - ------------------ ------------ -------- ---------- -------------- Gerald Appel, President and 1999 $150,000 $30,000(1) 375,000 Chief Executive 1998 $116,000 $ 0 0 Officer 1997 $116,000 $ 0 0
(1) In addition to salary during the year, the Company issued 300,000 shares of Common Stock in cancellation of $30,000 of deferred salary. Employment Agreement The Company entered into a three-year employment agreement with Gerald D. Appel to serve as its President and Chief Executive Officer dated January 1, 1999. Pursuant to the employment agreement, Mr. Appel will be paid an annual salary (exclusive of benefits, bonuses or incentive payments) of $150,000 per year. Under the agreement, the Company issued to Mr. Appel 300,000 shares of Common Stock in consideration of cancellation of deferred salary of $30,000. Mr. Appel also was granted nonqualified stock options, pursuant to the Company's 1997 Stock Option Plan, to purchase (i) 125,000 Common Shares at an exercise price of $1.00 per share, expiring January 1, 2006, (ii) 125,000 Common Shares at an exercise price of $1.50 per share, expiring January 1, 2006, and (iii) 125,000 Common Shares at an exercise price of $2.00 per share, expiring January 1, 2006. 24 The employment agreement is terminable by Mr. Appel for any reason, upon ninety (90) days written notice. In the event Mr. Appel terminates the employment agreement, he would be entitled to receive salary, benefits and all bonus and stock options earned up to the date of termination, but unpaid. Mr. Appel may also be terminated by the Company upon ninety (90) days written notice. In the event Mr. Appel is terminated by the Company without cause, he would be entitled to receive the full value of his contract and his employee benefits would continue for a period of one year after termination. The employment agreement also contains certain confidentiality and non-competition obligations. Stock Option Plan The Company adopted a Stock Option Plan (the "1997 Plan") in December 1997. The purpose of the 1997 Plan is to attract, retain and motivate certain key employees of the Company by giving them incentives that are linked directly to increases in the value of the Common Stock of the Company. Each director, officer, employee or consultant of the Company is eligible to be considered for the grant of awards under the 1997 Plan. The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the 1997 Plan is 1,000,000. Any shares of Common Stock subject to an award that for any reason expires or terminates unexercised are again available for issuance under the 1997 Plan. The 1997 Plan authorizes the Board of Directors or a committee of the Board whose members shall serve at the pleasure of the Board (the "Administrator") to grant stock options to eligible directors, officers, employees and consultants of the Company. Stock Options granted under the 1997 Plan may, at the discretion of the Administrator, either be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not qualify as "incentive stock options." The 1997 Plan currently is administered by the Board of Directors of the Company. Subject to the provisions of the 1997 Plan, the Board will have full and final authority to select the executives and other employees to whom options will be granted thereunder, to grant the options and to determine the terms and conditions of the options and the number of shares to be issued pursuant thereto. As of April 30, 2000, options to purchase an aggregate of 425,000 shares of Common Stock under the 1997 Plan were outstanding. 25 OPTION/SAR GRANTS IN LAST FISCAL YEAR (Individual Grants)
Number of Percent of Total Securities Options/SARs Underlying Granted to Exercise of Name and Options/SARs Employees in Base Price Expiration Principal Position Granted Fiscal Year ($/share) Date - ------------------ ------------ ---------------- ----------- ---------- Gerald Appel, President and 125,000 $1.00 Jan. 1/06 Chief Executive 125,000 $1.50 Jan. 1/06 Officer 125,000 100% $2.00 Jan. 1/06
(1) There has not been any public market for the Company's Common Stock. The Board of Directors believes that the fair market value of the Common Stock on the grant date did not exceed $1.00 per share. No options were exercised during the fiscal year ended December 31, 1999. Director Compensation Members of the Board of Directors receive no cash compensation for such service. However, each year since 1997, the Company has granted to each of the Company's outside directors an option to purchase 20,000 shares at an exercise price of $1.50 per share. Furthermore, the Company has established for future outside board members an option-based compensation policy for the compensation of such members of its Board of Directors providing that each newly appointed or elected outside director will be granted a five-year option, for 20,000 shares of the Company's common stock, exercisable at the fair market value of such stock on the date of grant of the option. In January 2000, stock options to purchase 40,000 Common Shares at a price of $1.50 per share expiring January 13, 2005, were granted, in aggregate, to outside directors of the Company in this regard. Item 11. Security Ownership of Certain Beneficial Owners and Management. PRINCIPAL SHAREHOLDERS The following table sets forth as of April 30, 2000, certain information relating to the ownership of the Company's Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of the Company's Common Stock, (ii) each of the Company's directors, (iii) each officer named in the Executive Compensation table and (iv) all of the Company's executive officers and directors as a group. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each of such persons has the sole voting and investment power with respect to the shares owned. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under this Rule, certain shares may be deemed to be beneficially owned by more than one person (such as where persons share voting power or investment power). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an 26 option) within 60 days of the date as of which the information is provided; in computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person's actual voting power at any particular date. The address of each individual listed is in care of the Company, 3710 South Robertson Boulevard, Culver City, California 90232, unless otherwise set forth below such person's name.
Number of Percent Name and Address Shares of Class - ---------------- --------- -------- Gerald D. Appel (1) 3,621,019 37.2% Ontario Municipal Employees Retirement Board 1,179,339 12.1% One University Avenue, Ste. 1000, Toronto, Ontario Wayne D. Cockburn (2) 190,000 2.0% Dr. Hershel Toomim, Sc. D. (3) 252,000 2.6% All of the directors and executive offers as a group (3 persons) (4) 4,063,019 41.8%
- ----------------------- (1) Includes 111,900 shares with respect to which Mr. Appel believes he has voting power as a result of a proxy granted by Daniel J. Levendowski. (2) Includes 60,000 shares of Common Stock which may be acquired currently upon exercise of stock options. (3) Includes 60,000 shares of Common Stock which may be acquired currently upon exercise of stock options. (4) Includes shares described in footnotes (1) and (2). Item 12. Certain Relationships and Related Transactions The Company licenses the right to manufacture, market, sell, distribute and further develop the MPR System and technology and any related or derivative technology throughout the world pursuant to an exclusive twenty-year license with TRG, a partnership among Gerald D. Appel, Daniel J. Levendowski and Hershel Toomim. Mr. Appel is the Chairman of the Board, Chief Executive Officer, President and a principal shareholder of the Company, and Dr. Toomim is a director and a principal shareholder of the Company. During 1999, no royalties were paid to TRG pursuant to the license. See "Description of Business--Intellectual Property." From time to time Gerald D. Appel has loaned funds to the Company. These loans were payable on demand with interest at the rate of 10% per annum. The largest amount outstanding to Mr. Appel for these loans at any time since January 1, 1995 was $90,000. At December 31, 1999, there were no loans outstanding. During the year ended December 31, 1999, the largest amount outstanding to Mr. Appel was $39,000. Item 13. Exhibits, List and Reports on Form 8-K. (a) Exhibits: See Exhibit List. (b) Reports on Form 8-K. None. Supplemental Information to be Furnished with reports filed pursuant to Section 15(d) of the Exchange Act by Non-Reporting Issuers 27 As of the date this Form 10-KSB is filed with the Securities and Exchange Commission, the Company has not provided to its security holders any annual report with respect to the fiscal year ended December 31, 1998, nor has the Company sent to more than 10 of its security holders any proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders for the fiscal year ended December 31, 1999. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MPR HEALTH SYSTEMS, INC. By: /s/ GERALD D. APPEL -------------------------------------- Gerald D. Appel Its: President, Chief Executive Officer and Chairman of the Board (Principal Financial and Accounting Officer) POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Gerald D. Appel as his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURES In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ GERALD D. APPEL President, Chief Executive Officer May 31, 2000 - ---------------------- and Chairman of the Board of Gerald D. Appel Directors (Principal Financial and Accounting Officer) /s/ DR. HERSHEL TOOMIM Director May 31, 2000 - ---------------------- Dr. Hershel Toomim /s/ WAYNE D. COCKBURN Director May 31, 2000 - ---------------------- Wayne D. Cockburn
29 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders MPR Health Systems, Inc. We have audited the accompanying balance sheet of MPR Health Systems, Inc. (a development stage company) (the "Company"), as of December 31, 1999 and the related statements of operations, shareholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 financial statements referred to above present fairly in all material respects, the financial position of MPR Health Systems, Inc. as of December 31, 1999, and the results of its operations, stockholders' equity, and its cash flows for the year then ended in conformity with generally accepted accounting principles. As more fully discussed in Note 1 to the financial statements, the accompanying financial statement disclosures related to the cumulative amounts for the period from January 5, 1987 (date of inception) to December 31, 1999 are unaudited because it is impractical to audit the financial statement information for the first seven years of the Company's existence due to the lack of sufficient accounting records. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended December 31, 1999, the Company incurred a net loss of $1,091,866 and is in the development stage at December 31, 1999. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition, ultimately, to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Dickey, Rush, Duncan, Scott & Co., P.C. Houston, Texas May 18, 2000 30 MPR Health Systems, Inc. (A Development Stage Company) BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ---------- ---------- Current Assets Cash $ 281,867 $ 240,861 Accounts Receivable, less allowance for Doubtful accounts of $758 and $0 5,985 2,295 Prepaid Expenses & Other Current Assets 42,864 7,097 ---------- ---------- Total Current Assets 330,716 250,253 Furniture & Equipment, net 71,828 138,486 Capitalized Product Development Costs Muscle Pattern Recognition Software 1,496,895 1,470,875 Other Assets 24,608 31,780 ---------- ---------- Total Non Current Assets $1,593,331 $1,641,141 ---------- ---------- Total Assets $1,924,047 $1,891,394 ---------- ----------
See accompanying notes and accountant's report. MPR Health Systems, Inc. (A Development Stage Company) BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ----------- ----------- Current Liabilities Accounts Payable & Accrued Expenses $ 297,417 $ 363,206 Deferred Revenue 275,000 Notes Payable to Bank 270,000 Notes Payable 25,000 Loans from Shareholders 14,000 -- Convertible Debenture Loans 167,000 -- Current Portion of Capital Leases Payable 15,188 22,018 ----------- ----------- Total Current Liabilities 793,605 655,224 Non Current Liabilities Convertible Debenture Loans 167,000 Loans from Shareholders 39,000 Capital Leases Payable 14,750 44,886 Notes Payable 25,000 ----------- ----------- Total Non Current Liabilities 14,750 275,886 ----------- ----------- Total Current Liabilities 808,355 931,110 Shareholders' Equity (Deficit) Preferred Stock, no par value 10,000,000 shares authorized No shares issued and outstanding -- -- Common Stock, no par value 50,000,000 shares authorized 9,723,370 and 8,916,370 issued and outstanding 7,305,309 6,229,435 Paid In Capital - Options 316,400 -- Additional Paid In Capital 145,000 Deficit Accumulated during Development Stage (6,506,017) (4,414,151) ----------- ----------- Total Shareholders' Equity 1,115,692 960,284 ----------- ----------- Total Liabilities & Shareholders' Equity $ 1,924,047 $ 1,891,394 ----------- -----------
See accompanying notes and accountant's report. 31 MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
For the Year Ended Period From December 31, Inception ----------------------- Dec. 31, 1999 1998 1999 ----------- --------- ------------ Revenues $ 55,965 $ 9,339 $ 164,861 Operating Expenses Research & Development 53,897 9,101 1,128,343 Technical Services 119,039 15,448 681,791 Sales & Marketing 139,635 97,635 651,443 General & Administrative 482,278 638,879 3,707,320 ----------- --------- ----------- Total Operating Expenses 794,849 761,063 6,168,897 ----------- --------- ----------- Loss from Operations (738,884) (751,724) (6,004,036) Other Income (Expenses) Interest Expense (59,373) (32,917) (298,581) Miscellaneous (35,338) (6,475) (41,813) Interest Income 223 103,786 ----------- --------- ----------- Total Other Income (Expenses) (94,711) (39,169) (236,608) Provision for Income Taxes 2,302 7,102 ----------- --------- ----------- Loss Before Extraordinary Item $ (833,595) $(793,195) $(6,247,746) Extraordinary Item - Loss on Debt Restructuring (258,271) (258,271) ----------- --------- ----------- Net Loss $(1,091,866) $(793,195) $(6,506,017) ----------- --------- ----------- Basic Loss Per Share ($0.11) ($0.09) ($0.97) ----------- --------- ----------- Diluted Loss Per Share ($0.11) ($0.09) ($0.97) ----------- --------- ----------- Weighted Average Common Shares 9,644,785 8,519,173 6,471,431 ----------- --------- -----------
See accompanying notes and accountant's report 32 MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
For the Year Ended December 31, Period From -------------------------- Inception to 1999 1998 Dec 31, 1999 ----------- --------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(1,091,866) $(793,195) $(6,506,017) Adjustments to Net Income (Loss): Depreciation & Amortization 55,515 62,573 423,841 Extraordinary Loss on Debt Restructuring 258,271 258,271 Bad Debt Expense 26,394 Loss on Disposition of Fixed Assets 2,891 2,891 Stock Options Issued for Services Rendered 24,000 Common Stock Issued in Consideration For extension of Repayment Terms for Notes Payable to Related Parties 75,600 Common Stock Issued for Services Rendered 12,527 (Increase)/Decrease in: Accounts Receivables (3,690) (2,295) (12,929) Other Receivables 1,643 66,040 67,683 Prepaid Expenses and Deposits (32,828) 7,314 (106,790) Employee Receivables 1,275 825 (30,995) Increase/(Decrease) in: Accounts Payable (9,823) 7,930 284,243 Deferred Revenue 275,000 275,000 Other Current Liabilities (41,837) 169,140 127,303 ----------- --------- ----------- Net Cash Provided (Used) by Operating Activities (585,449) (497,528) (5,078,978) ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Fixed Assets (9,289) (32,763) (413,982) Proceeds from Disposition of Fixed assets 18,856 18,856 Software Product Development Costs (26,020) (399,075) (1,496,895) ----------- --------- ----------- Net Cash Provided (Used) by Investing Activities (16,453) (431,838) (1,892,021)
See accompanying notes and accountant's report. 33 MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
For the Year Ended December 31, Period From ------------------------ Inception to 1999 1998 Dec 31, 1999 --------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Convertible Debentures 167,000 167,000 Net Increase (Decrease) in Notes Payables 25,000 295,000 Net Increase (Decrease) in Notes Payables to Related Parties (25,000) 39,000 238,000 Repayment (Borrowings) on Obligations Under Capital Lease (36,966) (8,747) (90,316) Net Proceeds from Issuance of Common Stock 849,874 645,296 6,643,092 Increase (Decrease) in Paid-In Capital (145,000) 145,000 0 --------- ----------- ---------- Net Cash Provided (Used) from Financing Activities 642,908 1,012,5494 7,252,866 --------- ----------- ---------- Net Increase (Decrease) in Cash 41,006 83,183 281,867 Beginning Cash 240,861 157,678 0 --------- ----------- ---------- Ending Cash $ 281,867 $ 240,861 $ 281,867 --------- ----------- ---------- Other Disclosure: Income Tax - Paid $ 800 $ 2,302 $ 5,600 Interest Expense 48,099 32,917 298,530
34
Supplemental Disclosure: Non-Cash Investing & Financing Activities: Furniture and equipment acquired under capital leases 112,262 145,000 shares of common stock issued for conversion of paid-in capital 200,000 shares of common stock issued as part of debt restructuring.
See accompanying notes and accountant's report. MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
Deficit Accumulated During The Common Shares Paid In Development Shares Amount Capital Stage Total --------- ---------- ------- ------------ ------------ Issued upon incorporation for services 910,000 $ 7,685 $ $ $ 7,685 Issued for services 952,250 9,523 9,523 Net Loss from inception through 12/31/90 20,367) (20,367) Balance - Dec 31/90 1,862,250 17,208 0 (20,367) (3,159) Issued for services 305,950 2,404 2,404 Issued for cash 11,230 25,000 25,000 Net Loss (243,621) (243,621) Balance - Dec 31/91 2,179,430 44,612 0 (263,988) (219,376) Net Loss (258,180) (258,180) Balance - Dec 31/92 2,179,430 44,612 0 (522,168) (477,556) Issued for cash 11,230 1,123 1,123 Net Loss (421,341) (421,341) Balance - Dec 31/93 2,190,660 45,735 0 (943,509) (897,774) Stock split 2,190,660 0 0 Issued for exchange of $174,090 debt 144,619 174,090 174,090 Issued for services 60,000 600 600 Issued for net assets of limited partnership, net of related expenses of $1,350 755,330 372,885 372,885 Issued for cash in a Private placement net of related expenses of $6,600 245,400 300,150 300,150 Issued for cash in a Private placement net of related expenses of $164,036 680,741 835,964 835,964 Net loss (821,898) (821,898) Balance - Dec 31/94 6,267,410 1,729,424 0 (1,765,407) (35,983) Issued for cash 15,000 750 750 Issued for cash in a Private placement net of related expenses of $67,609 125,000 157,391 157,391 Issued for cash in a Private placement net of related expenses of $64,243 111,111 135,757 135,757 Issued for cash 2,738 5,000 5,000 Net loss (1,067,280) (1,067,280) Balance - Dec 31/95 6,521,259 2,028,322 0 (2,832,687) (804,365)
See accompanying notes and accountant's report. 35 MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
Deficit Accumulated During The Common Shares Paid In Development Shares Amount Capital Stage Total ---------- ---------- ------- ------------ ---------- Issued for cash in a private placement net of related expenses of $14,243 $ 500,000 $ 985,757 $ $ $ 985,757 Issued for cash 27,778 50,000 50,000 Forgiveness of accrued expenses 100,000 100,000 100,000 Issued for defaulted Notes payable 42,000 75,600 75,600 Stock options exercised 50,000 5,000 5,000 Conversion of debt 25,000 50,000 50,000 Issued for cash in a private placement net of related expenses of $169,000 480,000 982,000 982,000 Issuance of stock options 0 24,000 24,000 Net loss (796,054) (796,054) Balance - Dec 31/96 7,746,037 4,300,679 0 (3,628,741) 671,938 Voided shares (3,000) 0 0 Issued for cash in a Private placement net of related expenses of $66,540 480,000 1,133,460 1,133,460 Issued for cash 100,000 150,000 150,000 Net Loss (999,385) (999,385) Balance - Dec 31/97 8,323,037 5,584,139 0 (4,620,956) 963,183 Stock warrants exercised 83,333 145,833 145,833 Issued for services 10,000 0 0 Issued for cash in a Private placement net of Related expenses of $537 500,000 499,463 499,463 Additional Paid-In Capital 145,000 145,000 Net Loss (793,195) (793,195) Balance - Dec 31/98 8,323,037 5,584,139 0 (4,620,956) 963,183
See accompanying notes and accountant's report. 36 MPR Health Systems, Inc. (A Development Stage Company) STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1999 and 1998 and from January 5, 1987 (Inception) to December 31, 1999 (Unaudited)
Deficit Accumulated During The Common Shares Paid In Development Shares Amount Capital Stage Total ----------- ----------- ----------- ----------- ----------- Stock options exercised 12,000 6,000 6,000 Stock issued in conjunction with reclassification of capital 145,000 145,000 (145,000) 0 Stock issued for cash in a private placement net of related expenses of $52,626 450,000 698,874 698,874 Stock issued as part of Debt restructuring 200,000 226,000 226,000 Stock options issued as part Of debt restructuring 316,400 316,400 Net Loss (1,091,866) (1,091,866) Balance - Dec 31/99 9,723,370 $ 7,305,309 $ 0 $(4,620,956) $(1,115,692)
See accompanying notes and accountant's report 37 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Line of Business MPR Health Systems, Inc. (a development stage company) (the "Company"), a California corporation, was incorporated and commenced operations on January 5, 1987 as AREX, Inc. On June 15, 1988, the name was changed to Devion Group and then to MPR Health Systems, Inc. on September 15, 1989. The principal activity of the Company has been the research and development of Muscle Pattern Recognition technology. Muscle Pattern Recognition technology provides an objective evaluation of soft tissue muscle injuries. Basis of Presentation The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, during the year ended December 31, 1999, the Company incurred a net loss of $1,091,866 and is completing the development stage at December 31, 1999. These factors raise substantial doubt about the Company's ability to continue as a going concern. Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition to the attainment of profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. In view of these matters, realization of a major portion of the assets in the accompanying balance sheets is dependent upon the Company's ability to meet its financing requirements and the success of its plans to sell its products. In addition to the capital raised in 1999 and 1998 through private equity offerings, the Company is negotiating with several investors about raising additional capital through private placement offerings. Management of the Company believes that its current cash on hand plus the additional capital that is expected to be raised in the future will be sufficient to cover its working capital needs until the Company's sales volume reaches a sufficient level to cover operating expenses. Business Combination The Company held a 97.2% sole general partner interest in Myo Diagnostics, Ltd. (the "Partnership"), a California limited partnership, that began operations on April 18, 1991. The Partnership researched and developed the hardware and related software to perform Muscle Pattern Recognition. Effective on December 19, 1994, the Partnership's assets and liabilities were transferred to the Company at its book value, and neither the Partnership nor Corporation recognized a gain or loss. The 2.8% limited partners exchanged their interests in the Partnership, totaling $547,885, for 755,330 shares of common stock and $175,000 in notes payable. The business combination was recorded in a manner similar to a "pooling-of-interest" method of accounting. Under this method, assets and liabilities of the Partnership were recorded at historical cost. Development Stage Company The Company is a development stage company as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company is devoting substantially all of its present efforts to establish a new business, and its planned principal operations have not yet commenced. All losses accumulated since inception have been considered as part of the Company's development stage activities. The cumulative amounts presented for the statements of operations and cash flows from the Company's inception are unaudited because it is impractical to audit the financial statement information for the first seven years of the Company's existence due to the lack of sufficient accounting records. 38 Net revenues to date have primarily been from the sale of in-house evaluations of patients. Revenue Revenue is reported at the estimated net realizable amounts from insurance companies, third parties, and others for services rendered. Furniture and Equipment Furniture and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets as follows: Furniture and equipment 5 to 7 years Computer hardware and software 5 years
Leasehold improvements are amortized over three years, which is the remaining term of the lease. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. When furniture and equipment are retired or disposed of, the related costs and accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is reflected in operations. Patents Patents, which are included in other assets in the accompanying balance sheets, consist of legal fees incurred in securing a patent for the Company's product. These costs are amortized over a period of seventeen years using the straight-line method. Compensated Absences Employees of the Company are entitled to paid vacations, paid sick days and holidays off, depending on job classification, length of service and other factors. An estimate of the liability of the amount of future compensated absences has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when earned by its employees. The Company does not maintain any unfunded retirement or health plans. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be "cash equivalents". 39 Research and Development Costs The Company accounts for research and development costs incurred in the development of its software product in conformance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The accounting standard requires the capitalization of certain NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) research and development costs related to the initial program development and significant program enhancements. All research and development costs incurred in developing a product prior to reaching technological feasibility are charged to expense in the period incurred. Upon reaching technological feasibility all costs are then capitalized as Capitalized Product Development Costs. The Company incurred such costs during 1999, 1998, 1997 and 1996 after technological feasibility had been established. During 1999, 1998, 1997 and 1996, the Company capitalized software development costs in the amount of $26,020, $399,075, $632,800 and $439,000, respectively. Capitalized software development costs will be amortized over a period of time estimated to be the useful life of the product, not to exceed sixty months. Research and development costs prior to reaching technological feasibility, routine maintenance, debugging and custom programming costs are charged to expense in the period in which they are incurred. Capital Leases The Company is the lessee of certain equipment under capital leases expiring in various years through 2001. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over the lower of their related lease terms or their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense. Income Taxes Prior to January 1, 1993, the Company had elected to be treated as an "S" corporation for both federal and California State income tax purposes. The shareholders of the "S" corporation were taxed on their proportionate share of taxable income (loss). Effective January 1, 1993, the Company terminated such election and became taxable as a "C" corporation. The Company will not realize any future tax benefits of net operating losses incurred prior to January 1, 1993. The Company accounts for income taxes under the liability method required by SFAS No. 109 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax 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. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. 40 Net Loss Per Common Share For the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." Basic and diluted net loss per share are computed using weighted average common shares outstanding. At December 31, 1999 and 1998, stock options for 801,998 and NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 650,000 common shares were outstanding. At December 31, 1998, warrants were outstanding for 83,333 common shares. All of these instruments were not included in the computation of diluted net loss per common share because the effect in years with a net loss would be antidilutive. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments, including cash, accounts receivable, and accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for notes payable also approximate fair value because current interest rates offered to the Company for notes payable of similar maturities are substantially the same. NOTE 2-CONCENTRATION OF CREDIT RISK The Company maintained cash accounts at a bank located in southern California. Accounts at the bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 each. As of December 31, 1999 and 1998, the balances held at the bank aggregated to $281,867 and $240,892, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk regarding cash. 41 NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31 consisted of the following:
1999 1998 ------- ------- Miscellaneous receivables $ $ 1,643 Deposits 800 Prepaid expenses 42,064 4,179 Employee advances 1,275 Total $42,864 $ 7,097
NOTE 4 - FURNITURE AND EQUIPMENT Furniture and equipment at December 31 consisted of the following:
1999 1998 -------- -------- Furniture and equipment $117,295 $117,295 Computer hardware and software 179,176 169,887 Equipment held under capital leases 91,889 120,254 Leasehold improvements 5,249 5,249 393,609 412,685 Less accumulated depreciation and Amortization 321,781 274,199 Total $ 71,828 $138,486
Depreciation expense charged to operations during the years ended December 31, 1999 and 1998 was $54,200 and $61,258, respectively. NOTE 5 - OTHER ASSETS Other assets at December 31 consisted of the following:
1999 1998 ------- ------- Patents, net of accumulated amortization of $7,362 and $6,047 $14,993 $16,308 Security deposits 9,615 15,472 Total $24,608 $31,780
Amortization expense on patent costs charged to operations during the years ended December 31, 1999 and 1998 was $1,315 and $1,315, respectively. 42 NOTE 6 - NOTES PAYABLE AND DEBT RESTRUCTURING In August 1998, the Company issued unsecured debentures with an aggregate principal of $167,000. Interest on these notes is payable semiannually at 10% per annum. These notes mature in August 2000. In 1998, the Company issued demand notes to two of its shareholders and an individual investor in the amounts of $25,000, $7,500 and $25,000, respectively. Interest on each of these notes accrues at 10% per annum. As of December 31, 1999, the outstanding principal balances on these loans were $6,500, $7,500 and $25,000. As of December 31, 1998, the Company had four revolving lines of credit with Wells Fargo Bank that provided for borrowings totaling $270,000. These revolving lines of credit matured beginning May 10, 1998 through July 10, 1998 and were collateralized by standby letters of credit issued by certain third parties. The Company had $270,000 outstanding on these revolving lines of credit as of December 31,1998. NOTE 6 - NOTES PAYABLE AND DEBT RESTRUCTURING (Continued) As collateral for the bank revolving lines of credit, certain third parties (the "Guarantors") guaranteed the notes payable to the bank by obtaining standby letters of credit. The Company granted stock options to the Guarantors for the Company's common stock as consideration for the guarantees. These options entitled the Guarantors to purchase an aggregate of 300,000 shares of common stock for $1.13 per share if certain conditions were met. The options became exercisable at various dates during 1995. None of these options were exercised as of December 31, 1998, the date of their expiration. During 1999, the Company restructured the aforementioned debts owed to Wells Fargo Bank totaling $270,000 and related accrued interest in the amount of $14,129. The following transactions have been reported in the financial statements as of December 31, 1999, and result in an aggregated Loss on Debt Restructuring of $258,271: On March 5, 1999, the Bank called notes totaling $140,000 which were in default and exercised Letters of Credit pledged as collateral by certain Guarantors to satisfy $140,000 of outstanding principal. On January 13, 2000, the Company issued 200,000 shares of its common stock and granted 150,000 options with an exercise price of $1.50 per share, expiring July 1, 2001, to these Guarantors in consideration for the Bank's exercise of these Letters of Credit. On August 24, 1999, the Company granted 130,000 options of its common stock with an exercise price of $1.13 per share, expiring July 1, 2001, to the Bank in satisfaction of the remaining $130,000 of outstanding principal plus all accrued interest outstanding. 43 NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES Minimum future lease payments under capital leases as of December 31, 1999 for each of the next five years are:
Years Ending December 31, 2000 17,889 2001 14,886 Total minimum lease payments 32,775 Less amount representing interest 2,837 Present value of minimum lease payment 29,938 Less current portion of obligations under capital leases 15,188 Total $14,750
Interest rates on capitalized leases vary from 9% to 14.89% and are imputed based on the lower of the Company's incremental borrowing rate at the inception of each lease or the lessor's implicit rate of return. NOTE 8 - RELATED PARTY TRANSACTIONS The Company is obligated under a licensing agreement to a partnership whose partners are officers, directors and shareholders of the Company. (See Note 10) The Company repaid a $25,000 short-term promissory note to a shareholder during 1999. NOTE 9 - INCOME TAXES The Company has not recorded a current or deferred provision for federal income taxes for the years ended December 31, 1999 or 1998 due to losses incurred during those periods. The provision for income taxes represents the minimum required for state franchise taxes. To reconcile from the federal statutory tax rate of 34% to the Company's effective tax rate of approximately 1%, the deferred tax asset valuation reserve is deducted. The net operating loss carryforwards will be utilized to offset taxable income generated in future years, subject to the applicable limitations and their expiration in varying amounts through the year 2019. The Company also had a research tax credit of approximately $24,970 at December 31, 1998 that expires in 2012. The ability of the Company to utilize the federal and state net operating loss carryforwards may be subject to annual limitations under certain provisions of the Internal Revenue Code. Management has determined that a valuation allowance should be provided for the net operating losses and the credits to be used to offset future tax liability. 44 Deferred tax assets (liabilities) for the years ended December 31, 1999 and 1998 consist of the following:
1999 1998 ----------- ----------- Deferred tax assets: Net federal operating loss carryforwards $ 1,958,444 $ 1,694,219 Net state operating loss carryforwards 316,678 223,219 Research tax credit 24,970 24,970 Total deferred tax assets 2,300,092 1,942,408 Valuation allowance for deferred tax assets (2,300,092) (1,942,408)
NOTE 10 - COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its facility and certain equipment under non-cancelable operating leases expiring at various dates through 2001. Certain leases contain renewal provisions. Future minimum lease payments under these leases are as follows:
Years Ending December 31, 2000 73,113 2001 51,870 Total $124,983
Rent expense under operating leases was $46,374 and $131,835 for the years ended December 31, 1999 and 1998, respectively. License Agreement The Company has a licensing agreement with Toomim Research Group ("TRG"), a partnership, whose partners are officers and shareholders of the Company (see Note 8). Under the terms of the licensing agreement, the Company is entitled to exclusive rights to the product under development by the Company, beginning on August 1, 1993 and ending on August 1, 2013, unless terminated earlier. As consideration for the exclusive rights to the product, the Company pays TRG a royalty. 45 The royalty is payable quarterly under the following terms: * The Company shall pay a royalty on the lesser of 10%, of total revenue or $30 per patient examined and reported upon up to the first 10,000 examinations. After the first 10,000 examinations, the Company shall pay a royalty of 5% of total revenue but not less than $12.50 per patient examined and reported upon. * The Company shall pay a royalty of 5% of total revenue for each sale, lease, rental, license, transfer, or assignment of the product under license to the extent that no royalty was paid on such total revenue. * The Company shall pay a royalty of 3% of total revenue for any derivative technology developed by the Company to the extent that no royalty was paid on such total revenue. NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 consisted of the following:
1999 1998 -------- -------- Accounts payable $117,475 $127,297 Accrued salaries 127,178 35,045 Payroll taxes payable 166,396 Customer deposits 11,274 Accrued vacation payable 41,490 34,468 Total $297,417 $363,206
NOTE 12 - SHAREHOLDERS' EQUITY On May 4, 1994, the Board of Directors authorized a two-for-one stock split of the Company's common stock for shareholders as of that date. As a result of the split, 2,190,660 shares were issued. All references in the accompanying financial statements to the per share amount have been restated to reflect the stock split. In 1996, the Company settled its obligation to pay $100,000 in connection with services rendered in 1995 for 100,000 shares of common stock and issued 25,000 shares of its common stock for debt totaling $50,000. In 1996, the Company also issued to note holders 42,000 shares of common stock valued at $75,600 as consideration for the note holders extending the repayment terms pursuant to the terms of the note agreement. 46 In 1997, the Company sold 480,000 shares of common stock for gross proceeds of $1,200,000. In connection with this issuance of common stock, investors also received 120,000 warrants to purchase common stock at $3.00 per share through April 16, 1998. In 1999, the Company sold 462,000 shares of common stock for net proceeds of $704,874. The Company issued 145,000 shares of common stock in conjunction with the reclassification of $145,000 received and recorded in 1998 as Paid in Capital. Additionally, the Company issued 200,000 shares of common stock, valued at $1.13 per share in conjunction with the Company's debt restructuring. (See Note 6) NOTE 13 - STOCK OPTIONS AND WARRANTS Warrants As of December 31, 1999 and 1998, the Company had no outstanding warrants. Stock Option Plan The Company adopted the 1997 Stock Option Plan (the "1997 Plan") in December 1997. The purpose of the 1997 Plan is to attract, retain, and motivate certain key employees of the Company by giving them incentives which are linked directly to increases in the value of the common stock of the Company. Each director, officer, employee, or consultant of the Company is eligible to be considered for the grant of awards under the 1997 Plan. The maximum number of shares of common stock that may be issued pursuant to awards granted under the 1997 Plan is 1,000,000, subject to certain adjustments to prevent dilution. Any shares of common stock subject to an award, which for any reason expires or terminates unexercised, are again available for issuance under the 1997 Plan. (See Note 15) Stock Option Agreements Options and warrants were granted, which under certain agreements, allows employees, consultants, and Guarantors to purchase shares of common stock, which were issued outside the 1997 Plan. These options expire upon certain events. 47 NOTE 13 - STOCK OPTIONS AND WARRANTS (Continued) The following summarizes the Company's stock option transactions under the stock option agreements:
1997 Weighted- Other Weighted- Stock Average Stock Average Option Exercise Options & Exercise Plan Price Warrants Price -------- -------- -------- -------- Options outstanding, December 31, 1997 280,000 $ 1.98 742,000 $ 1.23 Expired (280,000) $ -- (472,000) $ -- Granted 305,000 $ 1.13 75,000 $ 0.10 Options outstanding, December 31, 1998 305,000 $ 1.13 345,000 $ 1.07 Reclassifications 40,000 $ 1.50 (40,000) Cancelled (270,000) Granted 40,000 $ 1.50 381,998 $ 1.24 Options outstanding, December 31, 1999 385,000 $ 1.21 416,998 $ 1.15 Options exercisable, December 31, 1998 -- $ 1.13 175,000 $ 1.07 Options exercisable, December 31, 1999 360,000 $ 1.19 266,998 $ 0.95
The remaining weighted-average contractual life of options outstanding at December 31, 1999 and 1998, was 4.94 years and 1.25 years, respectively. 48 NOTE 13 - STOCK OPTIONS AND WARRANTS (Continued) The Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock- based compensation plans. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for, awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be increased to the pro forma amounts indicated below:
For the Years Ended December 31, --------------------------------------- 1999 1998 ------------- ------------- Net Loss As reported $ (1,091,866) $ (793,195) Pro forma $ (1,091,866) $ (803,195) Loss per share As reported $ (0.11) $ (0.09) Pro forma $ (0.11) $ (0.09)
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. NOTE 14-PRIOR PERIOD ADJUSTMENTS AND RESTATEMENTS Certain adjustments defined as corrections of accounting errors and change in accounting methods, the nature and amount of which has been detailed in the following schedule, resulted in an understatement of assets, net income and stockholders equity in prior years. Prior Period Adjustment During 1998, outdated and outstanding checks in the amount of $7,170 were voided, resulting in the understatement of assets and overstatement of the accumulated deficit. The change as of December 31, 1998 is summarized as follows:
Accumulated Assets Deficit ----------- ----------- As previously reported $ 1,503,660 $(4,628,126) Void outdated/outstanding checks 7,170 7,170 As adjusted $ 1,510,830 $(4,620,956)
NOTE 15-SUBSEQUENT EVENTS Subsequent to the balance sheet date, the Company had the following significant financial transactions: In January 2000, the Company's name was changed to MPR Health Systems, Inc. 49 On January 13, 2000, the Company issued 300,000 shares of common stock at a price of $0.10 per share to the Company's CEO in conjunction with his employment agreement. On January 13, 2000, the Company issued 200,000 shares of common stock and 150,000 stock options exercisable at $1.50 per share to individuals known as "The Paterson Group" in consideration of The Paterson Group's repayment of debt owed by the Company. (See Note 6) Effective January 21, 2000, the Company approved American Securities Transfer and Trust as transfer agent and registrar of the Company. Effective January 21, 2000, the Company approved Northern Bank Note share certificate No. 438, color Special Green, as the Company's new share certificate. In January 2000, the Company's "1997 Stock Option Plan" was amended to increase the number of common shares which may be issued under the plan to 2,250,000. In January 2000, the Company's Board of Directors resolved that 200,000 stock options be allocated to settle any potential legal claims resulting from an aborted merger with Charrington Business Consultants. 50 EXHIBIT INDEX
Exhibit Number Exhibit Description - ------- ------------------- 3.1 Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 3.2 Bylaws of Registrant.+ 10.1 Form of Registrant's Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 10.2 Licensing Agreement, dated October 31, 1993, by and between Registrant and Toomim Research Group, as amended. Incorporated by reference to Exhibit 10.2 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 10.3 Securities Purchase Agreement, dated December 23, 1994, by and among Registrant, OMERB, Gerald Appel and Hershel Toomim. Incorporated by reference to Exhibit 10.3 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 10.4 Securities Purchase Agreement, dated August 18, 1995, by and among Registrant, OMERB and Gerald Appel. Incorporated by reference to Exhibit 10.4 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 10.5 Lease Agreement, dated August 1, 1996, by and between Registrant and The Urcis Family Trust. Incorporated by reference to Exhibit 10.11 to Form SB-2 filed on January 6, 1997, and the amendments thereto. 10.6 Master Equipment Lease Agreement, dated March 1, 1996 by and between Registrant and Medical Consulting Imaging Co., and Distribution Agreement, dated March 1, 1996, by and among Registrant, Medical Consulting Imaging Co. and MCIC/HNI. Incorporated by reference to Exhibit 10.16 to Form SB-2 filed on January 6, 1997, and the amendments thereto. Termination of Distribution Agreement, dated February 23, 1998. 10.7 1997 Stock Option Plan.+ 10.8 Amendment Number Three, Waiver and Consent between Toomim Research Group and Myo Diagnostics, Inc. Incorporated by reference to Exhibit 10.20 to Form 10-KSB filed on July 9, 1998. 10.9 Certificate of Amendment of Articles of Incorporation. 10.10 Employment Agreement, dated January 1, 1999, by and between Registrant and Gerald D. Appel. 24.1 Power of Attorney (included on signature page). 27.1 Financial Data Schedule.
- -------------------- + Previously Filed EX-10.9 2 0002.txt EXHIBIT 10.9 1 EXHIBIT 10.9 CERTIFICATE OF AMENDMENT ENDORSED - FILED OF IN THE OFFICE OF THE SECRETARY OF STATE ARTICLES OF INCORPORATION OF THE STATE OF CALIFORNIA JANUARY 28 2000 The undersigned certify that: 1. They are the President and the secretary, respectively, of Myo Diagnostics, Inc., a California corporation. 2. Article 1 of the Articles of Incorporation of this corporation is amended to read as follows: 1. The name of this corporation is MPR HEALTH SYSTEMS INC. 3. The foregoing amendment of Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, California Corporations Code. The total number of outstanding shares of the Corporation is 9,973,370.* The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: January 10, 2000 /s/ GERALD APPEL ---------------------------------------- (Signature of President) GERALD APPEL ---------------------------------------- (Name of President) /s/ WAYNE COCKBURN ---------------------------------------- (Signature of Secretary) WAYNE COCKBURN ---------------------------------------- (Name of Secretary) 2 A0540379 STATE OF CALIFORNIA [SEAL OF THE OFFICE SECRETARY OF STATE OF THE SECRETARY OF STATE] I, BILL JONES, Secretary of State of the State of California, hereby certify: That the attached transcript of 2 page(s) has been compared with the record on file in this office, of which it purports to be a copy, and that it is full, true and correct. IN WITNESS WHEREOF, I execute this [SEAL OF THE STATE certificate and affix the Great Seal OF CALIFORNIA] of the State of California this day of MAR -3, 2000 ------------ /s/ Bill Jones Secretary of State EX-10.10 3 0003.txt EXHIBIT 10.10 1 Exhibit 10.10 EXECUTIVE EMPLOYMENT AGREEMENT Gerald D. Appel This Employment Agreement is made and entered into this 1st day of January, 1999, by and between Myo Diagnostics, Inc., a California corporation (hereinafter "Myo"), and Gerald D. Appel (hereinafter "Appel"). RECITALS A. Myo is engaged in developing and marketing a medical diagnostic technique known as Muscle Pattern Recognition (referred to herein as "MPR") pursuant to an exclusive license with respect to the MPR technology from Toomim Research Group. It is anticipated that Myo will design, develop and create derivatives of the MPR technology and new applications of the MPR technology, and may develop, design, create, license or otherwise acquire other technology, which may or may not be related to MPR. B. Appel is an executive employee of Myo and, in connection with his employment, has been and/or will be exposed to Confidential Information (as defined below) and will participate in the design, development, creation, production, management, exploitation and/or sales and marketing activities of Myo, in addition to many other confidential aspects of Myo's business. C. Myo desires assurance of the continued association and services of Appel in order to retain his experience, abilities, and knowledge, and is therefore willing to engage his services on the terms and conditions set forth below. D. Appel desires to continue in the employ of Myo and is willing to do so on the terms and conditions set forth below. DEFINITIONS "Board" shall mean the Board of Directors of Myo. "Myo Group" shall mean Myo and each Person which Myo directly or indirectly Controls. "Confidential Information" is defined as confidential records, including, but not limited to, scientific, engineering, development, marketing, organizational, financial, managerial, administrative, manufacturing, production, distribution and sales information, data, specifications, secret inventions and processes, computer software and hardware, presently owned or at any time hereafter developed by Myo, or used presently or at any time hereafter in the course of its business. This includes, without limitation, all of Myo's price lists, pricing information, customer lists, customer information, financial information, trade secrets, formulas, patterns, compilations, devices, methods, techniques, processes, procedures, confidential trade knowledge, scripts and computer programs and like information that is essential to the goodwill of the business of Myo. Confidential Information shall also include any information which, if disclosed, would be detrimental to Myo or its customers, whether or not such information is identified as Confidential Information. 2 "Control" shall mean, with respect to any Person or entity, 0 the beneficial ownership of more than 50% of the outstanding voting securities of such Person, or (ii) the power, directly or indirectly, by proxy, voting trust or otherwise, to elect a majority of the outstanding directors, trustees or other managing persons of such Person. "Employee Handbook" shall mean Myo's Employee Handbook, as from time to time in effect. "Employment Commencement Date" shall mean January 1, 1998. "For Cause" shall mean, in the context of a basis for termination of Appel's employment with Myo, that: (a) Appel materially breaches any obligation, duty or agreement under this Agreement, which breach is not reasonably cured or corrected within 30 days of written notice thereof from Myo (except for breaches of Sections 8 and 9 of this Agreement, which cannot be cured and for which Myo need not give any opportunity to cure); or (b) Appel is guilty of gross misconduct in the performance of services to Myo, or commits any act of personal dishonesty, fraud, breach of fiduciary duty or trust that, in the reasonable judgment of the Board, renders Appel unsuitable for his position; or (c) Appel is convicted of, or pleads guilty or nolo contenders with respect to, theft, fraud, crime involving moral turpitude, or felony under federal or applicable state law; or (d) Appel commits any act of personal conduct that is proven in a, court of law that results in liability under federal or applicable state law for discrimination or sexual or other forms of harassment or other similar liabilities to subordinate employees; or (e) Appel commits continued and repeated substantive violations of specific written directions of the Board and/or Chief Executive Officer of Myo, which directions are consistent with this Agreement and Appel's position as an executive officer, or continued and repeated substantive failure to perform duties assigned by or pursuant to this Agreement including; i. failure to reduce the debt existing at the time of this contract; ii. failure to provide at least $1,000,000 financing from September l, 1998 to September 1, 1999; iii. failure to initiate marketing efforts that result in revenue that is equal to a minimum of 50% of operating expenses in the fourth quarter of 1999; iv. failure to fully develop an operational support system to automatically electronically process MPR reports, provided that no discharge shall be deemed for Cause under this subsection (e) unless Appel first receives written notice from Myo advising Appel of the specific acts or omissions alleged to constitute violations of written directions or a material failure to perform his duties, and such violations or material failure continue after Appel shall have had a reasonable opportunity to correct the acts or omissions so complained of; or (f) Appel made any material misrepresentation or omission regarding his 3 employment history, education or experience in connection with his negotiations to become an employee of Myo; or (g) Appel acts in a repeated manner that, as adjudicated in a court of law, has a direct and measurably substantial adverse effect on Myo's reputation. "Person" shall mean an individual or a partnership, corporation, trust, association, limited liability company, governmental authority or other entity. AGREEMENT NOW, THEREFORE, in consideration of the foregoing facts and the mutual covenants, agreements and representations, and in exchange for good and valuable consideration of Appel's employment, the wages, training and other benefits of such employment, Myo and Appel agree as follows: 1. Engagement and Responsibilities (a) Upon the terms and subject to the conditions set forth in this Agreement, Myo hereby engages and employs Appel as an officer of Myo, with the title and designation "Chief Executive Officer and President." Appel hereby accepts such engagement and employment. Unless the parties agree otherwise in writing, during the employment term Appel shall perform the services he is required to perform under this Agreement at Myo's offices, located at 3710 S. Robertson Blvd., Culver City, California 90232; provided, however, that Myo may from time to time require Appel to travel temporarily to other locations on Myo's business. (b) Appel's duties and responsibilities shall be those incident to the position(s) set forth in Section 1 (a) as set forth in the Bylaws of Myo and those which are normally and customarily vested in such offices of a corporation. In addition, Appel's duties shall include those duties and services for Myo and its affiliates as the Board of Myo, shall, in their sole and absolute discretion, from time to time reasonably direct which are not inconsistent with Appel's positions described in Section 1 (a). (c) Appel agrees to devote his best efforts and abilities to Myo and such time, interest and effort to the performance of this Agreement as may be fairly and reasonably necessary for Appel to faithfully and diligently promote Myo's business interests. For so long as Appel is employed by Myo, or for so long as Appel is receiving severance under Section 6 of this Agreement, Appel shall not, directly or indirectly, either as an employee, employer, consultant, agent, investor, principal, partner, stockholder (except as the holder of less than 3% of the issued and outstanding stock of a publicly held corporation), corporate officer or director, or in any other individual or representative capacity, engage or participate in any business that is in direct competition with the business of Myo, as such businesses are now or hereafter conducted. Subject to the foregoing prohibition and provided such services or investments do not violate any applicable law, regulation or order, or interfere in any way with the faithful and diligent performance by Appel of the services to Myo otherwise required or contemplated by this Agreement, Myo expressly acknowledges that Appel may: (i) make and manage personal business investments of Appel's choice without consulting the Board; and 4 (ii) serve in any capacity with any civic, educational, charitable or trade organization without consulting with the Board, (d) Appel represents to Myo that he has no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered under it. 2. Compensation and Benefits Myo shall compensate Appel pursuant to the terms of Attachment "l", attached hereto and incorporated herein by this reference. 3. Term of Employment and Termination Appel's employment pursuant to this Agreement shall commence on the Employment Commencement Date and shall terminate on the earliest to occur of the following: (a) upon the death of Appel; (b) upon delivery to Appel of written notice of termination by Myo if Appel shall suffer a physical or mental disability which renders Appel, in the reasonable judgement of the Board and/or Chief Executive Officer, unable to perform his duties and obligations under this Agreement for 90 consecutive days or 140 days in any 12-month period; (c) upon 90 days' prior written notice of resignation from Appel to Myo; (d) upon delivery to Appel of written notice of termination by Myo For Cause; (e) upon delivery to Appel of written notice of termination by Myo Without Cause such notice to be issued 90 days prior written notice. (f) upon delivery by Appel to Myo of Appel's voluntary retirement, which retirement shall be effective on the last day of any fiscal year, provided that day occurs after Appel's 64th birthday, and provided three (3) months' prior written notice of the retirement shall have been given by Appel to Myo. 4. Rights to Terminate or Assign Agreement This Agreement shall not be terminated by Myo's voluntary or involuntary dissolution or by any merger in which Myo is or is not the surviving or resulting corporation, or on any transfer of all or substantially all of Myo's assets. In the event of any such merger or transfer of assets, the provisions of this Agreement shall be binding on and inure to the benefit of the surviving business entity or the business entity to which such assets shall be transferred. 5. Severance Compensation (a) If Appel's employment is terminated pursuant to Section 3(a) (death) or Section 3(b) (disability), Appel shall be entitled to compensation equal to the base compensation received in the immediate past year including bonuses. Stock options for the year in which death or disability occurs shall be vested on the 5 date earned to the date of the death or disability; (b) If Appel's employment is terminated pursuant to Section 3(c) (by Appel), Appel shall be entitled to: salary, all other benefits and all bonus and stock options (pro-rata or otherwise up to the date of termination) as earned up to that date as provided with respect to the Employment Year period during which his employment is terminated; C. If Appel's employment is terminated pursuant to Section 3(d) (by Myo For Cause), Appel shall be entitled to compensation only to the date of such termination. All benefits will terminate as of that date and all stock options not vested shall be cancelled. Any loan to Appel from Myo for the purchase of stock shall be due in full within thirty (30) days of the date of termination. Payment of this loan will be in cash or surrender of the number of shares of equivalent market value of the loan, up to the total shares purchased with the proceeds of the loan. Myo shall be entitled to offset against any payments due Appel the loss and damage, if any, which shall have been suffered by Myo as a result of the acts or omissions of Appel giving rise to termination under Section 3(d)(i). The foregoing shall not be construed to limit any cause of action, claim or other rights which Myo may have against Appel in connection with such acts or omissions. d. In the event of termination of Appel's employment pursuant to Section 3(e) by Myo without Cause), Appel shall be entitled to: i. compensation for the balance of the term of the Agreement or an amount equal to the immediate past two years compensation including bonuses and stock options, whichever is greater; ii. forgiveness of all notes held by the Company for purchase of stock and shall pay any state and federal income taxes resultant of that forgiveness the balance of the notes shares of Myo and payment of all state and federal taxes on the amounts forgiven. iii. all other benefits specifically provided in this Agreement for a period ending one year after the third anniversary of the Employment Commencement date; iv. severance pay equal to the base compensation and bonus earned in the year previous to the period in which termination occurred. (e) In the event of termination of Appel's employment pursuant to Section 3(f) (voluntary retirement) pursuant to the terms of this Agreement or earlier by mutual agreement of Myo and Appel, Appel shall be entitled to compensation according to this Section5(d) unless otherwise mutually agreed by the parties. (f) Appel acknowledges that in the event of termination of his employment for any reason, Appel shall not be entitled to any severance or other compensation from Myo except as specifically provided in this Section 5. Without limitation on the generality of the foregoing, this Section supersedes any plan or policy of Myo which provides for severance to its officers or employees, and Appel shall not be entitled to any benefits under any such plan or policy. (g) Appel shall have no obligation to offset any payments he receives from Myo following the termination of his employment by any payments he receives from his subsequent employer, except that any payments Appel receives under the employee benefit plans or programs of a subsequent employer shall offset any 6 payments he receives from comparable employment benefit plan or program of Myo. 6. Stock Options Myo shall provide stock options to Appel pursuant to the terms of Attachment "2", attached hereto and incorporated herein by this reference. 7. Covenant Not To Compete/Solicit (a) During the term of Appel's employment with Myo, Appel shall not directly or indirectly, promote, participate, or engage in any activity or other business competitive with Myo's business. (b) Because of his employment by Myo, Appel will have access to trade secrets and Confidential Information about Myo, its products, its customers, and its methods of doing business. In consideration of his access to this information, Appel agrees that for a period of three years after termination of his employment, he will not, directly or indirectly, compete with Myo in the field of diagnosis or treatment of soft tissue muscle injuries of the back, neck, arms or legs in the following locations: the state of California and any other location where Myo has distributed its products. Appel understands that direct competition means design, development, production, promotion, or sale of products or services competitive with those of Myo. Indirect competition means employment by any competitor or third party providing products competing with Myo's products, for whom Appel will perform the same or similar function as he performs for Myo. C. During the period from the date Appel's employment with Myo terminates through the first anniversary of such date, Appel will not directly or indirectly, either alone or by action in concert with others: i. induce or attempt to influence any employee of any member of Myo Group to engage in any activity in which Appel is prohibited from engaging by Section 1(c) of this Agreement or to terminate his employment with any member of Myo Group; ii. employ or offer employment to any person who was employed by any member of Myo Group at the time of termination of Appel's employment with Myo; iii. induce or attempt to induce any customer, supplier, licensee or other business relationship of any member of Myo Group to cease or reduce its business with any member of Myo Group, or in any way interfere with the relationship between any such customer, supplier, licensee or business relationship and any member of Myo Group; or iv. solicit business from any of Myo's customers. 8. Confidentiality, Ownership and Assignment of Rights (a) Appel shall not, at any time from and after the date hereof, directly or indirectly disclose, reveal or permit access to all or any portion of the Confidential Information, or any tangible expressions or embodiments thereof (including any facilities, apparatus or equipment which embody or employ all or any portion of the Confidential Information), to any Person without the written consent of Myo, except to Persons designated or employed by Myo, or in the course of Appel's ordinary and reasonable business activities, or as required 7 by law. (b) Without the prior written consent of Myo, Appel shall not directly or indirectly use or exploit the Confidential Information at any time from and after the date hereof for any purpose other than in connection with his employment duties and obligations to Myo. (c) Appel agrees to assign and does hereby irrevocably assign to Myo all of his right, title and interest in and to any Confidential Information devised, developed, designed or discovered by [him or her] or in which he may otherwise obtain, or has otherwise obtained, any rights, while in the employ of Myo. (d) Appel agrees to take any actions, including the execution of documents or instruments, which Myo may reasonably require to effect the Appel's assignment of rights pursuant to this Agreement, and Appel hereby constitutes and appoints, with full power of substitution and resubstitution, the President of Myo as his attorney-in-fact to execute and deliver any documents or instruments which Appel is obligated to execute and deliver pursuant to this Agreement. (e) At the request of Myo, Appel shall assist Myo in applying for and obtaining both domestic and foreign patents, or copyrights, as the case may be, on all Confidential Information that Myo deems to be patentable or copyrightable, devised, developed, designed or discovered by Appel or in which he may otherwise obtain, or has otherwise obtained, any rights, while in the employ of Myo, and Appel shall execute at any time or times any and all documents and perform all acts reasonably requested by Myo which Myo deems to be necessary or desirable in order to obtain such patents or copyrights or otherwise to vest in Myo full and exclusive title and interest in and to all such Confidential Information, to protect the same against infringement by others and otherwise to aid Myo in connection with any continuations, renewals or reissues of any patents or copyrights, or in the conduct of any proceedings or litigation in regard thereto. All expenses of procuring any patent or copyright shall be paid by Myo. Appel specifically acknowledges and agrees that all tangible expressions of the Confidential Information, including, without limitation, all documents, instruments, sketches, drawings, notes, records, plans, specifications, manuals and tapes, and all reproductions, copies or facsimiles thereof, have been developed, made or invented exclusively for the benefit of and are the sole and exclusive property of Myo, its successors and assigns and constitute "Work For Hire" under Section 201 of Title 17 of the United States Code. (g) Appel shall not remove any tangible expressions of the Confidential Information from the premises of Myo, except as is reasonably necessary for Appel to conduct business on behalf of Myo. (h) Upon either the written request of Myo, or upon termination of Appel's employment with Myo (as herein defined), Appel shall deliver to Myo all tangible expressions of the Confidential Information which are in the possession or under the control of Appel. 9. Indemnification (a) Myo shall, to the maximum extent permitted by law and its Bylaws, indemnify and hold Appel harmless for any acts or decisions made in good faith while performing services for Myo. To the same extent, Myo will pay, and subject to any legal limitations, advance all expenses, including reasonable 8 attorney fees and costs, actually and necessarily incurred by Appel in connection with the defense of any action, suit or proceeding and in connection with any appeal, which has been brought against Appel by reason of his service as an officer or agent of Myo. (b) Myo shall use its best efforts to obtain coverage for Appel (provided it may be obtained at a reasonable cost) under any liability insurance policy or policies now in force or hereafter obtained during the term of this Agreement that cover other officers of Myo having comparable or lesser status and responsibility. 10. Resolution of Disputes/Arbitration (a) Except as provided in subsection (b) below, any controversy or claim between Myo and Appel relating to Appel's employment with Myo, including but not limited to those arising out of or relating to this Agreement, shall at the request of any party be determined by arbitration. The arbitration shall be conducted with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAN"). The parties shall have the right to review and approve a panel of prospective arbitrators supplied by AAA, but the arbitration shall be conducted by a single arbitrator selected from the approved panel by AAA or by stipulation of the parties. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). The arbitrator(s) shall be entitled to order specific performance of the obligations imposed by this Agreement. Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) Subsection (a) above does not prohibit a party from seeking and obtaining injunctive relief pending the outcome of arbitration . Moreover, Appel acknowledges that the injury that would be suffered by Myo as a result of a breach or threatened breach of Section 1 (c), 7 or 8 -would be irreparable and that an award of monetary damages to Myo for such breach would be an inadequate remedy. Consequently, Myo, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 11. Miscellaneous (a) Notices. All notices, requests, demands and other communications (collectively, "Notices") given pursuant to this Agreement shall be in writing, and shall be delivered by personal service, courier, facsimile transmission or by United States first class, registered or certified mail, addressed to the following addresses: (i) If to Myo, to: Myo Diagnostics, Inc. 3710 South Robertson Boulevard Culver City, CA 90232 Attn: Chairman of the Board/Chief Executive Officer 9 (ii) If to Appel, to: The last known address as set forth on the books and records of Myo Any Notice, other than a Notice sent by registered or certified mail, shall be effective when received; a Notice sent by registered or certified mail, postage prepaid return receipt requested, shall be effective on the earlier of when received or the third day following deposit in the United States mails (or on the seventh day if sent to or from an address outside the United States). Any party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section. (b) Entire Agreement This Agreement contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter of this Agreement, and any and all prior discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein. No representations, oral or otherwise, express or implied, other than those contained in this Agreement have been relied upon by any party to this Agreement. Notwithstanding the foregoing, Appel acknowledges that Myo has relied on his resume and other documents which may have been provided by Appel, and oral statements regarding Appel's employment history, education and experience, in determining to enter into the Agreement, and material misrepresentations (or omissions) in connection with such documents may constitute the basis of termination For Cause, as contemplated by the definition of For Cause herein. (c) Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. (d) Governing Law. This Agreement has been made and entered into in the State of California and shall be construed in accordance with the laws of the State of California. (e) Captions. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (g) Business Day. If the last day permissible for delivery of any notice under any provision of this Agreement, or for the performance of any obligation under this Agreement, shall be other than a business day, such last day for such notice or performance shall be extended to the next following business day (provided, however, under no circumstances shall this provision be construed to extend the date of termination of this Agreement). (h) Attorneys' Fees. If any action or proceeding is brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover as an element of its costs, and not its damages, its reasonable attorneys' fees, costs and expenses. The prevailing party is the party who is entitled to recover its costs in the action or proceeding. A 10 party not entitled to recover its costs may not recover attorneys' fees. No sum for attorneys' fees shall be counted in calculating the amount of a judgment for purposes of determining whether a party is entitled to recover its costs or attorneys' fees. (i) Advice from Independent Counsel The parties hereto understand that this Agreement is legally binding and may affect such party's rights. Each party represents to the other that it has had the opportunity to seek and obtain legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement to which it is a party. (j) Judicial Interpretation. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that all Parties have participated in the preparation of this Agreement. (k) Waiver of Jury Trial. If notwithstanding the agreement that all disputes be submitted to binding arbitration, a dispute is submitted to a court, each party hereto waives the right to a trial by jury in any dispute in connection with or relating to this Agreement, any related agreement or any matters described or contemplated herein or therein, and agree to take any and all action necessary or appropriate to effect such waiver. In the event of litigation, this Agreement may be filed as written consent to a trial by the court. IN WITNESS WHEREOF, this Agreement is made and entered into as of the dates indicated hereinbelow. Dated: "MYO" MYO DIAGNOSTICS, INC. By: Its: Dated: "Appel" Signature: Print Name: 11 EXECUTIVE EMPLOYMENT AGREEMENT ATTACHMENT "1" 1. TERM OF EMPLOYMENT Appel shall be employed for a period of three years commencing January 1,1999, this term being defined as employment for a minimum of two years and a consulting term of one year thereafter. 2. POSITION During the first year, Chairman, CEO and President. After the first year, position will be subject to change upon mutual agreement of Appel and the Board. A change in position shall have no impact on base compensation defined within this agreement and bonus except as outlined in this Attachment 1 2(D)(3). 3. COMPENSATION AND BENEFITS a. Base Salary. Myo shall pay to Appel a base salary at an annual rate of not less than $150,000 during the term of his employment pursuant to this Agreement. The base salary and additional benefits shall be reviewed for increase by the Board no less frequently than every twelve months, commencing January 1, 2000 provided, however, that Myo shall be under no obligation to increase such base salary and additional benefits. The base salary shall be payable as current salary in installments in the same manner and at the same times Myo pays base salaries to other senior officers of Myo, but in no event less frequently than equal bi-monthly installments. i. In the event that Appel is a consultant in the third year of this agreement he shall be paid at the base salary and is not eligible for participation in the employee's Bonus pool for that year. ii.In the event that Appel agrees to defer a portion of that salary, the deferred amounts shall be paid no later than one year from the date deferred unless mutually agreed by the parties. b. Incentive Compensation. In addition to the Base Salary provided for above, Myo shall pay Appel as incentive compensation, the following sums: i. Appel shall receive incentive compensation for Appel's signing this contract in the amount of $25,000 to be paid by the end of the first year of employment and shall receive previous salaries deferred in 1998 and 1997 unless the parties mutually agree upon a program for further deferral. ii.Appel shall participate in the Myo bonus pool established for its employees. The annual bonus for 1999 shall be a minimum sum of $50,000 subject to reasonable performance and progress toward accomplishing the Company's objectives as defined in Appel's annual Management Objectives. In the event that Myo is unable to pay incentive bonus earned, Appel at his sole option may accept deferral or stock option in lieu of such bonus. 12 iii. Appel shall receive incentive compensation a minimum of $100,000 for Appel's second and third year of employment with Myo subject to the same terms as (2) above. The bonus shall be determined by the Board and paid semi-annually. In the event that Appel's role and responsibilities in the company in the second year are reduced, the minimum shall be reduced but in no instance shall it be reduced by more than 50% except if he is acting as a consultant per the 3(B) above. c. Stock Purchase. Upon execution of this Agreement, Myo shall sell to Appel 300,000 shares of its stock at a price of $1.00 per share or the current market value whichever is lower, according to following terms; i. Shares shall be paid by an interest bearing loan provided by the Company, the shares to serve as collateral for the loan. If the shares are sold during the term of the agreement, the outstanding balance of the loan shall be repaid by Appel in full; ii.If the shares are retained beyond the term of the Agreement or if, at any time after they are purchased, the shares are sold due to a merger or acquisition in which more than 50% of Myo's shares are acquired, the loan shall be repaid by forgiveness by Myo over a period of five years including the payment of all state and federal taxes arising from this transaction; iii. If the shares are sold at any time during the five year period, Appel shall pay 50% of the outstanding balance of the loan with 30 days of the completion of the sale and the balance shall be forgiven per the terms of 3(C)(c) above. d. Stock Options. Non-qualified options to purchase Three Hundred and Seventy Five Thousand (375,000) shares of Myo's stock shall be granted as follows; i. Options to purchase 125,000 shares at $1.00 per share shall be granted and shall be vested at the date of execution of this Agreement; ii.Options to purchase 125,000 shares at $1.50 per share shall be granted on the date of execution of this Agreement and shall be vested one year from that date; iii. Options to purchase 125,000 shares at $2.00 per share shall be granted on the date of execution of this Agreement and shall be vested two from that date; iv. All options shall expire seven years from the date of their vesting. e. Insurance Benefits. During Appel's employment with Myo, Appel shall be entitled to all other benefits of employment generally available to Myo's other executive and managerial employees when and as he becomes eligible for them, including medical and dental insurance benefits. Upon termination of this Agreement for any reason except by Myo for Cause, Appel shall receive insurance benefits for an additional twenty four (24) months. f. Expense Reimbursement. Appel shall be entitled to prompt reimbursement from Myo for all reasonable costs and expenses that Appel incurs in connection with the performance of his duties and obligations under this Agreement. Reimbursement shall be in a manner consistent with Myo's practices and policies. Reasonable costs and expenses include 13 expenses related to travel, entertainment, business meetings and professional dues, made and substantiated in accordance with the policies and procedures established from time to time by Myo with respect to Appel's other executive and managerial employees. g. Automobile Allowance. Appel shall be entitled to an automobile allowance of no more than $1,000 per month . The automobile allowance shall include all costs associated with the operation Appel's auto including fuel, repairs, insurance, depreciation, parking and maintenance so long as those costs are not covered by warranties or other insurance. Reimbursement shall be paid in a manner consistent with Myo's practices and policies therefor. h. Additional Benefit Plans. Appel shall be entitled to participate in any pension, savings and group term life, medical, dental, disability and other group benefit plans which Myo makes available to its employees generally. i. Vacation. Appel shall be entitled to eight weeks vacation each twelve-month period, which shall accrue on a prorata basis from the date employment commences under this Agreement. Vacation time will continue to accrue so long as Appel's total accrued vacation does not exceed Myo's policies as defined in its Employee Handbook. j. Disability. In the event of any disability or illness of Appel, if Appel shall receive payments as a result of such disability or illness under any disability plan maintained by Myo, Myo shall be entitled to deduct the amount of such payments received from Base Salary payable to Appel during the period of such illness and/or disability. k. Withholding. Myo may deduct from any compensation payable to Appel (including payments made pursuant to Section 3 of this Agreement in connection with or following termination of employment), amounts sufficient to cover Appel's share of applicable federal, state and/or local income tax withholding, old-age and survivors' and other social security payments, state disability and other insurance premiums and payments. BALANCE OF THIS PAGE LEFT INTENTIONALLY BLANK EX-27.1 4 0004.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS OF MPR HEALTH SYSTEMS, INC. DATED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 281,867 0 5,985 0 0 330,716 71,828 55,515 1,924,047 793,605 0 0 0 7,305,309 (6,506,017) (1,924,947) 55,965 55,965 0 794,849 94,711 0 59,373 (833,595) 0 0 0 258,271 0 (1,091,866) (0.11) (0.11)
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