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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-19285
MYO DIAGNOSTICS, 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.)
3760 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
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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]
The issuer's revenues for the fiscal year ended December 31, 1997 were
$10,266.
At March 27, 1998 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $7,805,732.
At March 27, 1998 the issuer had 8,323,037 shares of Common Stock, $0.001
par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY AND PRIOR ACTIVITIES
Myo Diagnostics, 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 and then to Myo
Diagnostics, Inc. in September 1989.
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 which 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 which 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.
MPR's scientific foundation originates from the research of Dr.
Toomim, one of the principals 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 which
participate in the execution of a movement. Central to the MPR concept is the
discovery of movement-specific patterns which 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. Four technologists were certified
by the Company 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."
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In February 1996, the Company entered into a distribution agreement
with Medical Consulting Images, Co. ("MCIC"), a well established,
Cleveland-based diagnostic imaging service company. Under the distribution
agreement, MCIC committed to present the product to potential users to create
awareness of the MPR procedure ("introduce" the product) in 20 markets in the
five states in which it operates. As of December 31, 1997, MCIC has not
successfully introduced the product. As of December 31, 1997, no MPR
evaluations had been conducted through MCIC other than limited evaluations
for clinical purposes. On February 27, 1998 the Company terminated its
distribution agreement with MCIC.
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 the
system is plagued by major flaws. "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 that
"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
provides important means required for cost-containment: means to objectively
diagnose a condition to aid in the selection of the most appropriate treatment
course, means to measure outcomes which can prevent overuse, and means to
detect fraud in workers compensation, personal injury, and disability cases
involving back injury.
BACK MUSCLE DIAGNOSTIC MARKET. Back pain and back muscle injuries from
automobile, sports and work related accidents affect a large number of
individuals. In 1994, back injuries represented the largest cause of workdays
lost (27% of all non-fatal occupational injuries and illnesses involving days
away from work) according to the 75 Resource Tables, United States Department
of Commerce, Bureau of Labor Statistics (May 1996). According to Work Injury
Management, Vol. 2, No. 4 (July/August 1993), lower back injuries were the most
prevalent cause of compensable injuries in the United States with an estimated
cost of $16 billion per year. The United States Department of Health and Human
Services, Public Health Service, Agency for Health Care Policy and Research,
stated in Publication No. 95-0643, Acute Low Back Problems in Adults:
Assessment and Treatment (December 1994) that low back problems affect more
than 80% of the population sometime during their life. It also indicated that
50% of working aged adults experience symptoms of back pain each year. An
article in California Worker's Compensation Enquirer, Vol. 13, No. 4 (October
1995) under the signature of Dr. Richard Hyman, estimates that, in 1994, soft
tissue back injuries may have accounted for up to 70% or $2.1 billion of
California's $3 billion annual worker's compensation medical costs. 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 procedure, to capitalize upon the full potential of this technology by
developing protocols for other applications, and to achieve and maintain a
leadership position in muscle-related diagnostic techniques. The Company's
strategy to achieve these goals consists of the following principal elements:
- ESTABLISH THE PRODUCT IN THE HMO AND CORPORATE MARKETS through
strategic partnerships with major health care firms, insurance
companies and through direct sales to targeted self-insured
corporations. The Company hopes that these strategic partners
will introduce MPR to users with whom they have existing
relationships, which will provide accelerated entry into a large
number of HMOs and major corporations. One such partnership is
presently being negotiated.
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- EXPAND GEOGRAPHICALLY through establishing regional and local
distribution arrangements with diagnostic imaging services,
rehabilitation centers and diagnostic clinics. The existing
physician referral base of these distributors will provide
access to the personal injury, workers compensation, and general
back pain markets more rapidly. While the Company does not
currently have any distributor relationships, the Company
believes that distributors will have interest as the low capital
investment and high margin of MPR provides an attractive
opportunity for incremental profits.
- INCREASE EXPOSURE AND PEER RECOGNITION THROUGH PUBLICATIONS IN
MEDICAL AND SCIENTIFIC JOURNALS. Peer-reviewed publications play
an important role in overcoming physician resistance to new
procedures. Accordingly, the Company has an on-going program of
studies and trials aimed at providing statistical and clinical
evidence for publication. As of December 31, 1997, the Company
had no clinical study in process, and its ability to conduct
additional clinical studies (each of which costs at minimum
approximately $250,000) is dependent upon obtaining additional
funding. See "Risk Factors--Need For Additional Funding".
- DEVELOP NEW APPLICATIONS OF ITS CORE TECHNOLOGY. The Company
intends to use its know-how and core technology to address other
applications related to arm and leg muscles. For example, the
development of appropriate protocols may allow the Company to
introduce evaluation systems for carpal tunnel syndrome, rotator
cuff injuries and pre- and post-operative arthroscopic surgery
evaluation. In addition, the Company plans to develop a
disability management information system designed to provide the
elements necessary to predict potential high risk of injury,
avoid injuries through appropriate preventative intervention,
assess injury through MPR and other data, establish protocols
for treatment of injuries, manage chronic back injury cases and
establish outcome measures. This system of "disease management"
provides significant elements of cost containment which are
currently being sought by payors. The Company does not
anticipate completing development of new applications for at
least the next two years; in addition, its ability to complete
development of new applications will be contingent in part upon
obtaining additional funding or generating sufficient revenues
from the MPR System.
PRODUCT
The MPR System is a computer-assisted evaluation procedure which is
based on the simultaneous measurement of electromyographic signals produced by
14 muscles during the execution of a movement. A patient's EMG readings, which
are collected during the examination procedure, digitized, 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 which are the basis of
the diagnosis.
All the proprietary components of the MPR System have been designed
and built based on published and accepted scientific data and proven medical,
electronic, and statistical technology. The two proprietary components of the
system include:
- the Myo Diagnostics Expert System, and
- the Myo Diagnostics Muscle Pattern Recognition Report.
The third component of the system is a data acquisition device which
is commercially available, and which the Company purchases from third parties.
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 has built-in features which analyze the
quality of the signal received from each electrode and recognize and warn 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.
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
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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 three 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 which is produced is reviewed to
ascertain that the data was properly collected and processed.
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 The severity of the dysfunction as
OF THE DYSFUNCTION: compared to normal and the frequency it
occurs during the nine movements;
- - THE PATTERNS OF ABNORMAL Graphic presentation of the abnormal
MUSCLE RECRUITMENT: muscle patterns including the patterns
of muscle compensation;
- - THE BIO-MECHANICAL Describes the reason for the functional
EXPLANATION OF THE adjustments made during movement.
ABNORMAL MUSCLE
COMPENSATION:
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?
These questions address the issues of rehabilitation and short and
long term disability which affect insurance reserves.
SCIENTIFIC VALIDATION OF THE SYSTEM. In May 1992, an independent study
of the Company's evaluation methodology was completed by Dr. Norman Carabet.
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 data base.
In June 1992, a second clinical study was completed by Dr. Carabet.
This study showed a high correlation between the Company's evaluation of
doctor-diagnosed injured accident and Workers Compensation patients and the
doctors'
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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 Trunk and Neck 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 and Exercise, Vol.
28, No. 6 pp. 744-751 (1996), and most recently, EMG 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.
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. 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.
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
through an active public relations campaign. Company personnel will contact
providers in the application of MPR and advise payors of the benefits of its
utilization. The Company will create a web page on the Internet which will
encourage easy access to information about the Company and the procedure. The
Company intends to sponsor additional clinical studies, with the
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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. The Company may utilize direct mail
to initiate contacts with key decision makers in target markets.
The extent to which the Company can create this market awareness will
depend in part upon obtaining additional funding. See "Risk Factors--Need for
Additional Funding."
MARKET TARGETS. The Company's 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 continue to target strategic alliances with firms
servicing insurance companies, HMOs and PPOs, self-insured employers and their
third-party plan administrators, and risk and case management companies. The
Company will also target the medical providers which service these markets such
as hospitals, rehabilitation clinics, industrial clinics, diagnostic centers,
physicians, physical therapists and MRI imaging centers. This second group is
also an important component of the Company's strategy because, in addition to
its capacity to prescribe MPR, it may serve as a delivery vehicle.
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.
HOSPITALS, INDEPENDENT CLINICS, DIAGNOSTIC CENTERS 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.
SERVICE DELIVERY STRATEGIES. The Company intends to market its
services on a per-use basis, directly ("Direct Services Operations") and
through distributors. As of the date of this 10-KSB, the Company has not
performed any MPR evaluations except as part of research and development,
clinical studies and test marketing.
Patient data will be processed by, and reports will be prepared at,
the Company's evaluation center at its executive offices in Los Angeles,
California. The Company may establish other evaluation centers either as stand
alone co-ventures with existing diagnostic, physical therapy and rehabilitation
facilities, or based on lease arrangements with hospitals. The Company believes
an evaluation center can be operated at very low fixed overhead by subleasing
space and services at existing clinics.
DIRECT SERVICES OPERATIONS. In this mode of operation, services will
be provided either at a Company-owned and operated facility (evaluation
center), or at the facility of a provider (mobile testing services). Mobile
testing services will allow patient examinations to take place on the premises
of medical providers, using the Company's equipment and
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personnel. The Company believes that this approach will overcome providers'
resistance to invest in equipment and incur additional personnel costs. As of
the date of this 10-KSB, the Company had no contracts for mobile testing
services.
DISTRIBUTORS. The Company intends to establish distributor operations
with firms which presently provide mobile and fixed-site MRI, CT and ultrasound
services to hospital clinics and managed care locations. These firms, which
market to the same referral base of doctors, payors and HMO's which will refer
MPR, are attracted by the low capital investment and high margin of MPR.
REGULATORY REQUIREMENTS
The data acquisition device used in the MPR System is subject to
regulation by the 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 Company has been advised
by the manufacturer 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.
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 procedure has
been used in clinical tests approximately 350 times to date.
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The license expires in 2013. As amended, 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) the sale or other
transfer of the license by the Company without TRG's consent.
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.
EMPLOYEES
As of December 31, 1997, the Company had 13 full time and two part
time employees, including six involved in research and development and nine
involved in administration, operations and marketing.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company operates from leased facilities in Culver City, California
consisting of approximately 9,749 square feet. Research and development,
manufacturing, 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 $123,600 and the current
term of the lease expires in September 1999. The Company will also conduct
research and development activities and clinical studies at universities and
research hospital sites where the independent primary investigators reside. To
the extent that these studies are conducted, they will be funded by the Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS.
On December 30, 1997, a majority of the Company's shareholders
approved by written consent an amendment to the Company's bylaws increasing the
authorized number of directors from three to a number not less than four nor
more than seven, and fixing the exact number of directors at five. The
amendment to the bylaws was approved by shareholders holding 4,183,185 shares,
or 50.3%, of the Company's outstanding Common Stock, the only securities of the
Company entitled to vote on the matter. The matter was not submitted for
approval to the remaining holders of the Company's outstanding Common Stock.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED MATTERS.
COMMON STOCK AND DIVIDENDS
There is no public market for the Company's Common Stock. As of March 30,
1998, there were ninety-three holders of record of the Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1994, the Company entered into a Securities Purchase
Agreement (the "December Purchase Agreement") with Ontario Municipal
Employees Retirement Board ("OMERB"). Pursuant to the terms of the December
Purchase Agreement, the Company sold to OMERB 680,741 shares of Common Stock
for an aggregate purchase price of $1,000,000, and granted to OMERB currently
exercisable warrants to purchase 100,000 shares (the "Series A Warrant") and
83,333 shares (the "Series B Warrant") of Common Stock with a current
exercise price of $1.50 and $1.75 per share, respectively. On December 15,
1997, OMERB elected to exercise the "Series A Warrants" to purchase 100,000
shares of the Company's Common Stock for $1.50 per share, for a total
purchase price of $150,000. On May 7, 1998, OMERB elected to exercise the
"Series B Warrants" to purchase 83,333 shares of the Company's Common Stock
for $1.75 per share, for a total purchase price of $145,833.
DIVIDENDS
Myo has never paid any dividends on its Common Stock. Myo 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read together with the
Financial Statements of the Company and notes thereto incorporated elsewhere
in this Form 10-KSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY/CASH FLOWS
OF THE COMPANY FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT
ARE BEYOND THE COMPANY'S CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER
FACTORS, THE FACTORS SET FORTH UNDER THE CAPTION "CAUTIONARY STATEMENTS AND
RISK FACTORS" BELOW.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997 AS COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996. The Company incurred net losses of $1,632,185 for the
twelve months ended December 31, 1997 and $1,235,054 for the twelve months
ended December 31, 1996.
Revenues decreased from $13,650 for the twelve months ended December 31,
1996 to $10,266 for the twelve months ended December 31, 1997. Revenues
consisted primarily of fees for performance of MPR evaluations. Revenues
were less for the twelve months ended December 31, 1997 as fewer MPR
evaluations were conducted during those periods.
The Company's operating expenses increased to $1,634,668 during the
twelve months ended December 31, 1997 from $1,239,938 during the twelve
months ended December 31, 1996. During the twelve months ended December 31,
1997 compared to the twelve months ended December 31, 1996, technical
services expenses increased by $35,601, primarily as a
<PAGE>
result of further product development and refinement. During the twelve
months ended December 31, 1997 compared to the twelve months ended December
31, 1996, research and development expenses increased to $419,295 from
$256,211. This increase was principally as a result of an increase of
$53,782 in salary expenses and a $94,252 increase in consulting fees due to
the development of clinical studies and treatment guidelines and the
refinement of the MPR System, including software advancements to convert the
MPR System from DOS to a Windows format. Sales and marketing expenses for
the twelve months ended December 31, 1997 increased only slightly, by
$19,186, compared to the twelve months ended December 31, 1996 due to a
slight increase in marketing efforts during the latter part of fiscal 1997.
Sales and marketing expenses for this period increased only slightly as the
Company focused the majority of its efforts on raising capital and further
product development. During the twelve months ended December 31, 1997
compared to the twelve months ended December 31, 1996, general and
administrative expenses increased to $880,141 from $703,274 respectively.
This increase was principally as a result of an increase of $67,226 in rental
and utility expenses due to an expansion of the Company's leased facilities,
a $21,644 increase in consulting fees due to the addition of members to the
Company's Scientific Advisory Board, a $35,114 increase in insurance costs as
a result of the Company's acquisition of a directors liability policy and the
increase in coverage under the Company's errors and omissions policy, a
$65,174 increase in compensation expenses and payroll taxes due to the hiring
of additional personnel involved, in part, in administration, and a $30,552
increase in recruiting expenses due principally to the Company's search for a
Vice President of Sales and Marketing and a CFO.
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 twelve months ended December 31, 1997, the
Company funded its operations principally from proceeds obtained from the
sales of Common Stock and Warrants to purchase Common Stock. During the
twelve months ended December 31, 1997, the Company raised net proceeds of
approximately $1,350,000 from the sale of Common Stock and Warrants to
purchase Common Stock.
The Company paid off two revolving lines of credit from a commercial
bank in the total amount of approximately $130,500, in July 1997. The
Company currently has four revolving lines of credit from a commercial bank
pursuant to which the Company may from time to time borrow up to an aggregate
of $270,000 at interest rates equal to the bank's prime rate of interest plus
.75% to 1.50%. These lines, which were fully utilized at December 31, 1997,
mature at various times through June 10, 1998, and may be extended
thereafter. The Company was able to obtain these lines of credit because four
unaffiliated individuals delivered to the bank irrevocable letters of credit
in support of such lines, for which these individuals received options to
purchase an aggregate of 270,000 shares of Common Stock for $1.13 per share.
The Company presently has funds to continue operations at its present
level only through July of 1998. The Company expects very little or no
revenues during this period, and is attempting to raise additional capital.
If the Company does not obtain additional capital by the end of July 1998, it
will be forced to severely curtail operations and, if additional capital is
not obtained shortly thereafter, the Company may be forced to cease
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 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 (including the
many reasons described elsewhere under "Factors That May Affect Future
Results"), 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
<PAGE>
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.
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 through a public
relations campaign, including attendance at trade shows and professional
conferences, scientific presentations and clinical studies. The Company
believes its success will 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 1998, the Company estimates it will
need an additional $2.0 million to $2.5 million of funding. The amount of
funding, if any, the Company receives in 1998 will 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 which are dilutive to the existing
shareholders.
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
<PAGE>
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 and efforts 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.
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 3,715,019
shares of the Common Stock (which includes voting rights with respect to
111,900 shares), representing 44.6% of the outstanding voting power of the
Company as of December 31, 1997. As of December 31, 1997, all directors and
officers of the Company (including Mr. Appel) currently had voting power with
respect to 50.9% 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 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.
PENNY STOCK. Broker-dealer practices in connection with transactions in
"penny stocks" are regulated by certain penny stock rules adopted by the
Securities and Exchange Commission. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered
on certain national securities exchanges or the NASDAQ Stock Market provided
that current price and volume information with respect to transactions in
such securities is provided by the exchange or NASDAQ). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the
customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock the broker-dealer must make a
special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the
transaction.
<PAGE>
The Common Stock would be considered a penny stock when its price is
less than $5.00 unless at such time the Common Stock is registered on a
national securities exchange or the NASDAQ Stock Market. For so long as the
Common Stock is a penny stock, the penny stock rules may affect adversely the
ability of purchasers to sell securities in the secondary market.
FORWARD LOOKING STATEMENTS. The Company may from time to time make
"forward-looking statements" within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended. When used in this discussion, the words, "estimate", and "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.
<PAGE>
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 62 President, Chief Executive Officer and
Chairman of the Board of Directors
Gary D. Weinhouse, Esq. 29 Director of Operations
Kathleen Day 41 Director of Research and Development
Dr. Theodore Goldstein 60 Medical Director
Dr. Hershel Toomim, Sc.D. 81 Director
Wayne C. Cockburn 40 Director
Harvey Wineberg 65 Director
Donald Christie 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.
MR. WEINHOUSE, JD, PFP, Director of Operations, is responsible for
training, technical services, and support operations. Previous experience
includes the practice of law and consulting for Arthur Andersen. He received
his BA and PFP from UCLA and JD from Loyola Law School. Mr. Weinhouse has
experience in Financial consulting, strategic planning, corporate, taxation,
negotiation, litigation and securities matters.
MS. DAY has served as Director of Research and Development of the
Company since March 1997. Ms. Day has been a member of the UCLA
Neurophysiology laboratory, headed by V. Reggie Edgerton. As such, she has
participated in projects funded by the National Institute of Health and NASA.
Ms. Day has been associated with the development of the MPR technology for the
past four years.
DR. GOLDSTEIN became Medical Director of the Company in March 1997.
He has been a practicing orthopedist for more than 30 years. He is currently
the Director of the West Coast Spine Institute in Los Angeles, California. Dr.
Goldstein lectures extensively on back injury and has co-authored the book,
"Win The Battle Against Back Pain," (1996). He graduated from the University of
Illinois Medical School with honors in 1964.
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 Imutec Corporation, a Canadian
biopharmaceutical company, since January 1995, and is currently Vice President
of Corporate Development. From 1994 to 1995 Mr. Cockburn was an investment
banker with McDermid St. Laurence Chisholm, Ontario, Canada, and for more than
the three years prior to that, he was a securities broker with Midland Walwyn,
Ontario, Canada.
HARVEY WINEBERG has served as a director of the Company since January
1998. Mr. Wineberg received his C.P.A. in 1956. Since 1963, he has been the
President and Managing Partner of the C.P.A. firm of Wineberg & Lewis of
Chicago,
<PAGE>
Illinois. Prior to that he was a founder of Ticketron, Inc. Wineberg is a
Director of the Columbus Hospital Foundation and has served on the Board of
Directors of the Mid-Town Bank of Chicago, Illinois for 20 years. In 1978, Mr.
Wineberg completed study at the Kent College of Law and was admitted to the
Illinois Bar in 1979.
DONALD CHRISTIE has served as a director of the Company since January
1998. Mr. Christie is a Director of Newcourt Capital's head office investment
banking group in Toronto, Canada. He is responsible for the syndication of
structured debt financings underwritten by Newcourt Capital. Prior to joining
Newcourt, Mr. Christie was a Vice President with First City Capital Markets
Inc., a merchant bank. Mr. Christie began his career in 1977 at Coopers &
Lybrand. In 1982 he joined Continental Bank of Canada and gained further
corporate finance experience with Toronto Dominion Securities Inc.
MEDICAL ADVISORY BOARD
The Company has a Medical Advisory Board ("MAB") 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 MAB. The
role of the MAB 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 MAB meets on an ad hoc basis. Members
of the MAB presently receive $750 for each meeting attended. Certain members of
the MAB are, and others may become, shareholders of the Company.
THEODORE GOLDSTEIN, M.D., F.A.C.S., MEDICAL DIRECTOR: Dr. Goldstein
graduated from the University of Illinois Medical School with honors in 1964.
He is a practicing orthopedist for more than 30 years. He is currently the
Director of the West Coast Spine Institute in Los Angeles, California. Dr.
Goldstein lectures extensively on back injury and has co-authored the book,
"Win The Battle Against Back Pain," (1996).
GUNNAR ANDERSSON M.D., PH.D. Dr. Andersson is Chairman of Orthopedic
Surgery at Rush Presbyterian - St. Luke's Medical Center in Chicago. He is the
deputy editor for the journal SPINE. Dr. Andersson is also a managing partner
of Midwest Orthopedics and has served as President of the International Society
for the Study of the Lumbar Spine.
PHILIP J. FAGAN, JR., M.D. Dr. Fagan obtained his medical degree from
the Tulane University School of Medicine, New Orleans in 1969. He is the Chief
Executive Officer and President of Emergency Department Physicians Medical
Group Inc. Dr. Fagan is the Director of the Emergency Department for Daniel
Freeman Marina Hospital, Marina Del Rey and the Hollywood Presbyterian Medical
Center, Los Angeles. He is the Medical Director of E.R. Physicians Medical
Group, Inc., and Chief Executive Officer and Medical Director of the Burbank
Urgent Care and Industrial Medicine Clinic. He is a Diplomate of the American
Board of the Emergency Physicians and the American Board of Family Practice and
a Fellow of the American Academy of Family Physicians and the American College
of Emergency Physicians.
HOWARD FULLMAN, M.D. Dr. Fullman has been trained as a medical
technologist and as such has consulted for major health care firms regarding
medical devices and procedures. He presently sits on the Board of Directors of
several privately held medical services companies. Dr. Fullman has a medical
practice in Los Angeles California.
ALAN J. GOLDMAN, M.D. Dr. Goldman was awarded his degree in medicine
from the University of Michigan Medical School in 1971. Currently he is in
private practice while serving as an Assistant Clinical Professor of Neurology
at the University of California at Irvine. For ten years beginning in 1976, he
was an Assistant Clinical Professor of Neurology at UCLA and was the Chief of
Staff and Chairman of the Department of Medicine at the Medicine Center at
Garden Grove, California. Dr. Goldman serves as a neurological reviewer of new
technologies for a number of national insurance carriers.
DR. MICHAEL SINEL, M.D. Dr. Sinel received his medical degree from
the State University of New York at Downstate Medical Center. He is board
certified in physical medicine, rehabilitation and pain management. He is
engaged in ongoing clinical research and has published several scientific
articles. Dr. Sinel is attending physician at Cedars-Sinai Medical and with
the UCLA Comprehensive Spine Center.
SCIENTIFIC ADVISORY BOARD
The Company has a Scientific Advisory Board ("SAB") whose members are
persons who were contacted by the Company, based upon their prominence and
expertise in scientific fields related to the Company's business (including the
scientific aspects of the MPR technology and in the area of statistical
analysis, including modeling), who accepted invitations
<PAGE>
to serve upon the SAB. This Board meets twice yearly in January and July, and
members receive $2,500 for each meeting attended.
GUNNAR ANDERSSON M.D., PH.D. Dr. Andersson is Chairman of Orthopedic
Surgery at Rush Presbyterian - St. Luke's Medical Center in Chicago. He is the
deputy editor for the journal SPINE. Dr. Andersson is also a managing partner
of Midwest Orthopedics and has served as President of the International Society
for the Study of the Lumbar Spine.
ANTHONY DELITTO, PH.D. Dr. Delitto is an Associate Professor and
Chairman of the Department of Physical Therapy in the School of Health and
Rehabilitation Services at the University of Pittsburgh. Dr. Delitto also
serves as the Director of Research for the Comprehensive Spine Center at the
University of Pittsburgh and Vice President for Education and Research at CORE
network.
V. REGGIE EDGERTON, PH.D., M.S. Dr. Edgerton received his Bachelor of
Science in Physical Education and Biology from East Carolina University, his
Master of Science in Physical Education from the University of Iowa and Ph.D.
in Exercise Physiology from Michigan State University. Dr. Edgerton is
currently a professor within the Physiological Sciences Department at UCLA and
has served as Chairman of UCLA's Department of Kinesiology. Dr. Edgerton has
published over 200 papers in peer-reviewed journals focusing primarily on
muscle fiber and its activity. Since 1980, he has been the Project Program
Director of the NIH Grant regarding neurological sciences. He has also worked
with NASA and has published extensively regarding muscle adaptation outside
Earth's atmosphere. Dr. Edgerton has been an officer of and/or associated with
organizations including the American Physiological Society, the American
College of Sports Medicine, the American Society of Gravitational Biology, the
Society for Neurosciences, the Neurotrauma Society, and the American Spinal
Injury Association.
JULES ROTHSTEIN, PH.D., PT. Dr. Rothstein received his B.S. in
Physical Therapy, physical therapy certification, M.A. in Kinesiology and Ph.D.
in Physical Therapy from New York University. Dr. Rothstein is currently Chair
and Professor of Physical Therapy at the University of Illinois at Chicago. He
serves as an editor of the JOURNAL OF PHYSICAL THERAPY, the leading peer review
journal for physical therapy. He joined with Dr. Wolf and Serge Roy to author
the ARehabilitation Specialist's Handbook.
STEVEN L. WOLF, PH.D. Dr. Wolf received his Bachelor of Arts in
Biology from Clark University, his Master of Science degrees in Physical
Therapy from Boston University and Anatomy from Emory University and his Ph.D.
in Anatomy and Neurophysiology from Emory University. Dr. Wolf is currently a
professor and Director of Research within the Department of Rehabilitation
Medicine, Emory University School of Medicine. Dr. Wolf has published over 130
papers in peer-reviewed journals, authored six books focusing on
electromyography, biofeedback, physical therapy and rehabilitation and has made
over 300 presentations, including key note speaker for groups including the
American Association of Orthopedic Surgeons, the American Physical Therapy
Association, the International Society for Electrokinesiology and the American
Neurology Association. Dr. Wolf has received over 20 grants from organizations
including the National Institute of Aging and the Veterans Administration. Most
recently, Dr. Wolf has served as Chairman of the Advisory Council of the
American Physical Therapy Association, Board of Director of the International
Society for Electrokinesiology, Chairman of the Scientific Abstracts Committee
of the World Confederation of Physical Therapy, External Reviewer for
Rehabilitation Graduate Programs for the University of Toronto and
Massachusetts General Hospital (Harvard University) and on the Advisory
Committee for the MGH Institute of Health Professions.
JONATHAN FIELDING MD MPH MBA, Senior Advisor, is a successful health
care entrepreneur as the founder of a wellness company selling to the employer
market, former Johnson & Johnson executive, and an expert in public health
research and practice. He is a Professor at the Schools of Public Health and
Medicine, UCLA, a consultant to health care companies and government agencies,
and Acting Health Officer of Los Angeles County. He is advising Myo management
on strategic planning, alliance development and research and development. He
received his MD, MPH and MA degrees from Harvard University and MBA in Finance
from Wharton School of Business.
BILL FINKLE PHD is an economist with a MS in Mathematics and a Ph.D.
in Economics from M.I.T. Dr. Finkle has conducted epidemiological studies,
including many projects sponsored by the National Institutes of Health, since
the 1970s. Dr. Finkle is President of Consolidated Research, Inc., a firm of
specialists in Epidemiology, Economics, and Statistics conduction research for
clients in the health care industry with emphasis on firms in the
Pharmaceutical Industry. Dr. Finkle brings to Myo Diagnostics, Inc. a
combination of research and business experience which we expect to be
exceedingly useful.
<PAGE>
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, 1997 and 1996 (no other officer had annual compensation in
excess of $100,000 during either of those years):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Number of
Fiscal Year Annual Compensation Securities
Ended ------------------- Underlying All Other
Name and Principal Position December 31, Salary Bonus Options Compensation
- --------------------------- ------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gerald Appel, President and 1997 $ 124,000 $ 0 0 $ 0
Chief Executive Officer 1996 $ 124,000 $ 0 0 $ 0
</TABLE>
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 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.
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 March 27, 1998, the Board had granted options covering an
aggregate of 590,000 shares of Common Stock, 280,000 of which were granted
under the 1997 Plan to certain directors, executive officers and consultants
of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to the Chief Executive Officer
during the year ended December 31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
The Chief Executive Officer did not hold any stock options of the
Company during the fiscal year ended December 31, 1997.
DIRECTOR COMPENSATION
On December 30, 1997, the Board of Directors approved the grant under
the Company's 1997 Plan of an option to purchase 20,000 shares of Common Stock
for $1.80 per share to each non-employee director of the Company (Hershel
Toomim and Wayne Cockburn). These grants were to compensate Messrs. Toomim and
Cockburn for services rendered in
<PAGE>
1997 as they did not receive any other compensation for such services. Each
option has a five-year term, but expires earlier if the optionee ceases to be a
director.
In addition, the Board of Directors approved the grant under the 1997
Plan to each of the four non-employee directors as of January 1, 1998 of an
option to purchase 20,000 shares for services to be rendered in 1998 for $1.80
per share. The options are identical to the options granted for services
rendered in 1997, except they are not exercisable unless the optionee continues
to serve as a director through December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 31, 1998, 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) the Chief Executive Officer 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 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, 3760 South Robertson Boulevard, Culver City, California 90232, unless
otherwise set forth below such person's name.
<TABLE>
<CAPTION>
Number
Name and Address of Shares Percent of Class
- ---------------- ------------ ----------------
<S> <C> <C>
Gerald D. Appel (1)............................................ 3,715,019 44.64%
Ontario Municipal Employees Retirement Board (2)............... 1,401,561 16.24
One University Avenue, Ste 1000, Tornoto, Ontario M5J 2P1
Altamira Management Ltd. (3)................................... 750,000 8.85
250 Bloor Street East, Ste 300, Toronto, Ontario M4W 1E6
Bona Vista Asset Management Ltd. (4)........................... 450,000 5.35
2300 Younge Street, Ste 2900, Toronto, Ontario M4P 1E4
Dr. Hershel Toomim, Sc.D (5)................................... 212,000 2.54
Wayne C. Cockburn (6).......................................... 82,000 *
Harvey Wineberg................................................ -- --
Donald Christie (7) ........................................... 37,500 *
All of the directors and executive officers as a group
(8 persons) (8).......................................... 4,076,519 48.45%
</TABLE>
- ----------------------------
* Less than 1%
(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
<PAGE>
(2) Includes 305,555 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(3) Includes 150,000 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(4) Includes 90,000 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(5) Includes 20,000 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(6) Includes 20,000 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(7) Includes 20,000 shares of Common Stock reserved for issuance upon exercise
of warrants which are currently exercisable.
(8) Includes 111,900 shares with respect to which Mr. Appel believes he has
voting power as a result of a proxy, and 90,000 shares of Common Stock
reserved for issuance upon exercise of stock options which are currently
exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1994, the Company entered into a Securities Purchase
Agreement (the "December Purchase Agreement") with Ontario Municipal Employees
Retirement Board ("OMERB"). Pursuant to the terms of the December Purchase
Agreement, the Company sold to OMERB 680,741 shares of Common Stock for an
aggregate purchase price of $1,000,000, and granted to OMERB currently
exercisable warrants to purchase 100,000 shares (the "Series A Warrant") and
83,333 shares (the "Series B Warrant") of Common Stock with a current exercise
price of $1.50 and $1.75 per share, respectively. On December 15, 1997, OMERB
elected to exercise the "Series A Warrant" to purchase 100,000 shares of the
Company's Common Stock for $1.50 per share, for a total purchase price of
$150,000. The Series B Warrant expires on June 23, 1998.
In August 1995, the Company entered into another Securities Purchase
Agreement (the "August Purchase Agreement") with OMERB. Pursuant to the terms
of the August Purchase Agreement, the Company sold to OMERB 111,111 shares of
Common Stock for an aggregate purchase price of $200,000, and granted to OMERB
currently exercisable warrants to purchase 222,222 shares of Common Stock (the
"Series C Warrant") with a current exercise price of $2.00 per share. The
Series C Warrant expires on December 31, 1998.
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. See "Description of
Business--Intellectual Property."
In May 1996 the Company issued to Waldorf Investment Advisory
Services, a corporation controlled by Mr. Cockburn, 100,000 shares of Common
Stock in satisfaction of obligations aggregating $100,000 of the Company to
such corporation for investment banking and financial consulting services
rendered during the prior several years. This corporation presently provides no
services to the Company.
On December 30, 1997, the Board approved the extension of the
expiration date of certain warrants (the "Guaranty Warrants") which had been
issued by the Company to six individuals who had guaranteed an aggregate of
$400,000 of loans obtained by the Company from Wells Fargo Bank, of which
$270,000 is outstanding. The Board approved the extension of the expiration
date of such Guaranty Warrants to December 31, 1998.
On December 30, 1997, the Board approved the extension of the
expiration date of certain warrants issued to Altamira Management, Ltd. And
Bona Vista Asset Management, Ltd. Such warrants to purchase an aggregate of
240,000 shares of Common Stock (hereinafter the "Financing Warrants") were
granted in December 1996 and April 1997 as part of a private placement. The
expiration date of the Financing Warrants was extended to December 31, 1998.
On December 30, 1997, the Board approved the grant of an option to
Jonathan Fielding in connection with services which Mr. Fielding has provided
and will provide as a consultant to the Company (which services commenced in
September 1997). Mr. Fielding also serves on the Scientific Advisory Board of
the Company. The option provides for the purchase of up to 205,000 shares of
Common Stock for $1.50 per share, of which 75,000 shares were vested as of the
date of grant and
<PAGE>
65,000 shares will vest on each of September 30, 1998 and 1999. In addition,
the option provides for the purchase of up to an additional 50,000 shares of
Common Stock for $2.00 per share if the fair market value of the Common Stock
exceeds $7.00 per share. This option expires on September 30, 2002.
On December 30, 1997, the Board of Directors also approved the grant
to Donald Christie of a five-year option to purchase 20,000 shares for $1.80
per share. This option was granted in consideration of consulting services
provided by Mr. Christie to the Company.
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 March 30, 1998, no loans were outstanding.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
See attached 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
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, 1997, 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 meetng of security holders for the fiscal year ended December 31, 1997.
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
DECEMBER 31, 1997
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Shareholders' Equity (Deficit) 4 - 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Myo Diagnostics, Inc.
We have audited the accompanying balance sheets of Myo Diagnostics, Inc. (a
development stage company) (the "Company") as of December 31, 1997 and 1996,
and the related statements of operations, shareholders' equity (deficit), and
cash flows for the years 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Myo Diagnostics, Inc. as of
December 31, 1997 and 1996, and the results of its operations and cash flows
for the years 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, 1997 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,
1997, the Company incurred a net loss of $1,632,185 and is in the development
stage at December 31, 1997. 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.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 20, 1998
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 150,508 $ 606,144
Accounts receivable, less allowance for doubtful
accounts of $32,261 and $25,672 - -
Prepaid expenses and other current assets 81,276 5,417
---------- ----------
Total current assets 231,784 611,561
FURNITURE AND EQUIPMENT, net 166,981 204,112
OTHER ASSETS 33,095 35,412
---------- ----------
TOTAL ASSETS $ 431,860 $ 851,085
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 201,996 $ 112,482
Notes payable to bank 270,000 400,000
Current portion of obligations under capital leases 35,438 38,539
---------- ----------
Total current liabilities 507,434 551,021
OBLIGATIONS UNDER CAPITAL LEASES 40,213 67,126
---------- ----------
Total liabilities 547,647 618,147
---------- ----------
COMMITMENTS AND CONTINGENCIES
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
8,323,037 and 7,746,037 shares issued and outstanding 5,584,139 4,300,679
Deficit accumulated during the development stage (5,699,926) (4,067,741)
----------- -----------
Total shareholders' equity (deficit) (115,787) 232,938
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 431,860 $ 851,085
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
January 1,
For the Year Ended 1987
December 31, (Inception) to
------------------------- December 31,
1997 1996 1997
------------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
REVENUES $ 10,266 $ 13,650 $ 99,557
------------- ------------- -------------
OPERATING EXPENSES
Research and development 419,295 256,211 1,568,731
Technical services 218,511 182,910 748,697
Sales and marketing 116,721 97,535 414,173
General and administrative 880,141 703,282 2,960,354
------------- ------------- -------------
Total operating expenses 1,634,668 1,239,938 5,691,955
------------- ------------- -------------
LOSS FROM OPERATIONS (1,624,402) (1,226,288) (5,592,398)
------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest expense (47,623) (63,990) (206,291)
Interest income 40,640 56,024 103,563
------------- ------------- -------------
Total other income (expense) (6,983) (7,966) (102,728)
------------- ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,631,385) (1,234,254) (5,695,126)
PROVISION FOR INCOME TAXES 800 800 4,800
------------- ------------- -------------
NET LOSS $ (1,632,185) $ (1,235,054) $ (5,699,926)
------------- ------------- -------------
------------- ------------- -------------
BASIC LOSS PER SHARE $ (0.20) $ (0.18) $ (1.31)
------------- ------------- -------------
------------- ------------- -------------
DILUTED LOSS PER SHARE $ (0.20) $ (0.18) $ (1.31)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 8,085,895 6,963,810 4,345,200
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
------------------------ Development
Shares Amount Stage Total
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
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
DECEMBER 31, 1990 - - (20,367) (20,367)
--------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1990 1,862,250 17,208 (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, DECEMBER 31, 1991 2,179,430 44,612 (263,988) (219,376)
NET LOSS (258,180) (258,180)
--------- ----------- --------- ---------
BALANCE, DECEMBER 31, 1992 2,179,430 44,612 (522,168) (477,556)
ISSUED FOR CASH 11,230 1,123 1,123
NET LOSS (421,341) (421,341)
--------- ----------- --------- ---------
BALANCE, DECEMBER 31, 1993 2,190,660 45,735 (943,509) (897,774)
STOCK SPLIT 2,190,660
ISSUED FOR EXCHANGE OF $174,090
OF 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 PRIVATE PLACEMENT,
net of related expenses of $6,600 245,400 300,150 300,150
ISSUED FOR CASH IN PRIVATE PLACEMENT,
net of related expenses of $164,036 680,741 835,964 835,964
NET LOSS (821,898) (821,898)
--------- ----------- --------- ---------
BALANCE, DECEMBER 31, 1994 6,267,410 1,729,424 (1,765,407) (35,983)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
------------------------- Development
Shares Amount Stage Total
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
ISSUED FOR CASH 15,000 $ 750 $ $ 750
ISSUED FOR CASH IN PRIVATE PLACEMENT,
net of related expenses of $67,609 125,000 157,391 157,391
ISSUED FOR CASH IN 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, DECEMBER 31, 1995 6,521,259 2,028,322 (2,832,687) (804,365)
ISSUED FOR CASH 27,778 50,000 50,000
ISSUED FOR CASH IN PRIVATE PLACEMENT,
net of related expenses of $14,243 500,000 985,757 985,757
ISSUED FOR THE FORGIVENESS OF
ACCRUED EXPENSES 100,000 100,000 100,000
ISSUED FOR DEBT 25,000 50,000 50,000
ISSUED AS CONSIDERATION FOR LATE
PAYMENT OF NOTES PAYABLE 42,000 75,600 75,600
STOCK OPTIONS EXERCISED 50,000 5,000 5,000
ISSUED FOR CASH IN PRIVATE PLACEMENT,
net of related expenses of $218,000 480,000 982,000 982,000
ISSUANCE OF STOCK OPTIONS 24,000 24,000
NET LOSS (1,235,054) (1,235,054)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 7,746,037 4,300,679 (4,067,741) 232,938
ISSUED FOR CASH IN PRIVATE PLACEMENT,
net of related expenses of $66,540 480,000 1,133,460 1,133,460
WARRANTS EXERCISED 100,000 150,000 150,000
CANCELLED SHARES (3,000) - -
NET LOSS (1,632,185) (1,632,185)
---------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1997 8,323,037 $ 5,584,139 $ (5,699,926) $ (115,787)
---------- ------------ ------------ -----------
---------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
December 1,
For the Year Ended 1987
December 31, (Inception) to
-------------------------------- December 31,
1997 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,632,185) $ (1,235,054) $ (5,699,926)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 53,858 34,677 305,753
Bad debt expense 6,589 19,450 26,394
Compensation expense resulting from
the issuance of stock options - 24,000 24,000
Common stock issued in consideration
for the extension of the repayment
terms for notes payable to related
parties - 75,600 75,600
Common stock issued for services
rendered - - 12,527
(Increase) decrease in
Accounts receivable (6,589) 12,018 (6,944)
Prepaid expenses and other assets (75,859) 242 (81,276)
Other assets 2,317 (10,596) (33,095)
Increase (decrease) in
Accounts payable and accrued expenses 89,514 (130,086) 301,996
Accrued interest payable - (45,520) -
------------- -------------- --------------
Net cash used in operating activities (1,562,355) (1,255,269) (5,074,971)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (8,735) (61,777) (371,930)
------------- -------------- --------------
Net cash used in investing activities (8,735) (61,777) (371,930)
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
December 1,
For the Year Ended 1987
December 31, (Inception) to
-------------------------------- December 31,
1997 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under bank lines
of credit $ (130,000) $ - $ 270,000
Borrowings on notes payable to related
parties - 95,500 633,590
Repayments on notes payable to related
parties - (191,500) (409,500)
Repayment on obligations under capital lease (38,006) (6,597) (44,603)
Net proceeds from issuance of common stock 1,283,460 2,022,757 5,147,922
------------- -------------- --------------
Net cash provided by financing activities 1,115,454 1,920,160 5,597,409
------------- -------------- --------------
Net increase (decrease) in cash (455,636) 603,114 150,508
CASH, BEGINNING OF PERIOD 606,144 3,030 -
------------- -------------- --------------
CASH, END OF PERIOD $ 150,508 $ 606,144 $ 150,508
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 47,623 $ 109,510 $ 250,431
------------- -------------- --------------
------------- -------------- --------------
INCOME TAXES PAID $ 800 $ 800 $ 4,800
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1997, $7,992 of furniture and equipment was acquired under capital
leases.
During 1996, $112,262 of furniture and equipment was acquired under capital
leases.
During 1996, 100,000 shares of common stock were issued for the forgiveness of
accrued expenses, and 25,000 shares were issued for the conversion of debt.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
Myo Diagnostics, 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 Myo Diagnostics, Inc. on September 15, 1989. The
principal activity of the Company is the research and development of
Muscle Pattern Recognition. Muscle Pattern Recognition 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, 1997, the Company incurred a net loss of $1,632,185 and
is in the development stage at December 31, 1997. 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 1997 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 or 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.
8
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 patients,
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:
<TABLE>
<S> <C>
Furniture and equipment 5 to 7 years
Computer hardware and software 5 years
</TABLE>
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.
9
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. These
costs consist primarily of salaries and consulting fees.
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 bases 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.
NET LOSS PER SHARE
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number of
common shares available. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Earnings per share for 1996 has
been restated using the methodologies of SFAS No. 128.
10
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 - CASH
The Company maintains cash deposits at a bank located in southern
California. Deposits at the bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. As of December 31, 1997 and 1996,
the uninsured portion of balances held at the bank aggregated to $162,578
and $557,556, respectively. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk on
cash.
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Miscellaneous receivables $ 67,683 $ 198
Prepaid expenses 11,493 5,219
Employee advances 2,100 -
--------- --------
TOTAL $ 81,276 $ 5,417
--------- --------
--------- --------
</TABLE>
11
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment $ 117,567 $ 108,832
Computer hardware and software 139,496 139,496
Equipment held under capital leases 120,254 112,262
Leasehold improvements 2,605 2,605
---------- ----------
379,922 363,195
Less accumulated depreciation and
amortization 212,941 159,083
---------- ----------
TOTAL $ 166,981 $ 204,112
---------- ----------
---------- ----------
</TABLE>
NOTE 5 - OTHER ASSETS
Other assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Patents, net of accumulated amortization
of $4,732 and $3,544 $ 17,623 $ 18,811
Security deposits 15,472 16,601
---------- ----------
TOTAL $ 33,095 $ 35,412
---------- ----------
---------- ----------
</TABLE>
Amortization expense on patent costs charged to operations during the
years ended December 31, 1997 and 1996 was $1,188 and $1,279,
respectively.
NOTE 6 - NOTES PAYABLE TO BANK
As of December 31, 1997, the Company has four revolving lines of credit
with a bank that provide for borrowings up to a total of $270,000. At
December 31, 1996, the Company had six revolving lines of credit with a
bank that provided for borrowings up to a total of $400,000. Borrowings
under these lines of credit bear interest at the bank's prime rate (8.5%
as of December 31, 1997) plus 0.75% to 1.5%, payable monthly. These
revolving lines of credit will mature beginning May 10, 1998 through July
10, 1998 and are collateralized by standby letters of credit issued by
certain third parties. The Company has $270,000 outstanding on these
revolving lines of credit as of December 31, 1997.
12
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE TO BANK (CONTINUED)
As collateral for the bank revolving lines of credit, certain third
parties (the "Guarantors") have guaranteed the notes payable to bank by
obtaining standby letters of credit totaling $270,000. The Company
granted stock options to the Guarantors for the Company's common stock as
consideration for the guarantees. These options entitle the Guarantors to
purchase an aggregate of 400,000 shares of common stock for $1.13 per
share if certain conditions are met. The options became exercisable at
various dates during 1995. On December 30, 1997, the Board of Directors
approved the extension of the expiration date of these options to December
31, 1998. None of these options had been exercised as of December 31,
1997 (see note 13).
NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES
Minimum future lease payments under capital leases as of December 31, 1997
for each of the next five years are:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998 $ 42,383
1999 17,889
2000 17,889
2001 11,926
2002 and thereafter -
---------
Total minimum lease payments 90,087
Less amount representing interest 14,436
---------
Present value of minimum lease payment 75,651
Less current portion of obligations
under capital leases 35,438
---------
TOTAL $ 40,213
---------
---------
</TABLE>
Interest rates on capitalized leases vary from 7% to 21.79% 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.
13
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS
LICENSING AGREEMENT
The Company is obligated under a licensing agreement to a partnership
whose partners are officers and shareholders of the Company (see Note 10).
NOTE 9 - INCOME TAXES
The Company has not recorded a current or deferred provision for federal
income taxes for the year ended December 31, 1997 due to losses incurred
during that period. 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. At
December 31, 1997, the Company had net operating loss carryforwards of
approximately $5,100,000 and $2,300,000 for federal and state income tax
purposes, respectively, expiring in varying amounts through the year 2012,
which are available to offset future federal and state taxable income. The
Company also had a research tax credit of approximately $133,000 at
December 31, 1997 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.
Deferred tax assets (liabilities) for the years ended December 31, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $1,987,000 $1,400,000
Research tax credit 133,000 -
---------- ----------
Total deferred tax assets 2,120,000 1,400,000
Valuation allowance for deferred tax assets 2,042,000 1,400,000
---------- ----------
78,000 -
Deferred tax liabilities
Deferred state taxes 78,000 -
---------- ----------
NET DEFERRED TAX ASSETS $ - $ -
---------- ----------
---------- ----------
</TABLE>
The valuation allowance increased by $642,000 during the year ended
December 31, 1997.
14
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998 $ 131,835
1999 103,680
2000 10,980
2001 1,830
----------
TOTAL $ 248,325
----------
----------
</TABLE>
Rent expense under operating leases was $127,044 and $70,316 for the years
ended December 31, 1997 and 1996, respectively.
LICENSE AGREEMENT
The Company has a licensing agreement with Toomin 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.
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.
15
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LICENSE AGREEMENT (Continued)
Under the terms of this agreement, included in accounts payable and
accrued expenses are royalties payable of $0 and $1,350 as of December 31,
1997 and 1996, respectively.
LITIGATION
In or about July 1997, a former employee of the Company threatened to file
a claim against the Company and the president of the Company for
employment related matters including, without limitation, harassment and
retaliation and termination of employment in violation of public policy.
Pursuant to mediation in or about December 1997, the parties resolved the
claim via a settlement and release agreement requiring the Company to pay
$97,250, net of insurance reimbursements of $43,500, which was charged to
general and administrative expense on the statement of operations during
the year ended December 31, 1997. The Company has unpaid settlement
payments of $40,750 accrued in accounts payable as of December 31, 1997.
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Accounts payable $ 135,227 $ 95,011
Accrued salaries 30,000 -
Accrued vacation payable 32,269 12,971
Customer deposits 4,500 4,500
---------- ---------
TOTAL $ 201,996 $ 112,482
---------- ---------
---------- ---------
</TABLE>
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.
16
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
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.
In 1997, the Company sold an additional 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.
NOTE 13 - STOCK OPTIONS AND WARRANTS
WARRANTS
As of December 31, 1997, the Company had outstanding warrants to purchase
a total of 631,955 shares of common stock that were issued in conjunction
with private placement offerings and other transactions as follows:
<TABLE>
<CAPTION>
Number of
Shares Warrant Price Expiration
Description Allocated Per Share Date
--------------------- --------- ------------- ----------
<S> <C> <C> <C>
Series B warrants 83,333 $ 1.75 06/23/98
Agency agreement 43,200 $ 2.50 12/05/98
Financing warrants 120,000 $ 3.00 12/31/98
Financing warrants 120,000 $ 3.00 12/31/98
Series C warrants 222,222 $ 2.00 12/31/98
Agency agreement 43,200 $ 2.50 04/16/99
---------
WARRANTS OUTSTANDING,
DECEMBER 31, 1997 631,955
---------
---------
WARRANTS EXERCISABLE,
DECEMBER 31, 1997 631,955
---------
---------
</TABLE>
During the year ended December 31, 1997, the Company issued 163,200
warrants with an average warrant price per share of $2.87. Additionally,
100,000 shares were exercised at $1.50 per share during the year ended
December 31, 1997.
17
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
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.
The following summarizes the Company's stock option transactions under the
stock option agreements:
<TABLE>
<CAPTION>
1997 Weighted- Other Weighted-
Stock Average Stock Average
Option Exercise Options and Exercise
Plan Price Warrants Price
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Options outstanding,
January 1, 1994 - $ - 50,000 $ 0.10
Granted - $ - 400,000 $ 1.13
-------- ---------
Options outstanding,
December 31, 1994 - $ - 450,000 $ 1.02
Granted - $ - 20,000 $ 0.44
-------- ---------
Options outstanding,
December 31, 1995 - $ - 470,000 $ 0.99
Granted - $ - 12,000 $ 0.50
Exercised - $ - (50,000) $ 0.10
-------- ---------
Options outstanding,
December 31, 1996 - $ - 432,000 $ 1.08
Granted 280,000 $ 1.98 310,000 $ 1.44
-------- ---------
</TABLE>
(continued)
18
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTION AGREEMENTS (Continued)
<TABLE>
<CAPTION>
1997 Weighted- Other Weighted-
Stock Average Stock Average
Option Exercise Options and Exercise
Plan Price Warrants Price
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
OPTIONS OUTSTANDING,
DECEMBER 31, 1997 280,000 $ 1.98 742,000 $ 1.23
-------- ---------
-------- ---------
OPTIONS EXERCISABLE,
DECEMBER 31, 1997 - 432,000
-------- ---------
-------- ---------
</TABLE>
The remaining weighted-average contractual life of options outstanding at
December 31, 1997 and 1996 was 2.50 and 3.25 years, respectively.
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 123, the Company's net
loss and loss per share would be reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net loss
As reported $ (1,632,185) $ (1,235,054)
Pro forma $ (1,653,085) $ (1,298,834)
Loss per share
As reported $ (0.20) $ (0.18)
Pro forma $ (0.20) $ (0.18)
</TABLE>
19
<PAGE>
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTION AGREEMENTS (Continued)
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. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the years ended
December 31, 1997 and 1996, respectively: dividend yields of 0% and 0%;
expected volatility of 35% and 54%; risk-free interest rates of 5.7% and
7%; and expected life of 2.50 and 2.75 years. The weighted-average per
share fair value of options granted during the years ended December 31,
1997 and 1996 was $0.54 and $2.09, respectively, and the weighted-average
exercise price of options granted during the years ended December 31, 1997
and 1996 was $1.60 and $0.50, respectively.
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company had the following
significant financial transactions:
- The Company received $50,000 from short-term promissory notes, including
$25,000 from an officer of the Company.
- The Company received $145,833 when 83,333 shares of stock warrants were
exercised for $1.75 per share and 83,333 shares of Series D warrants at
$1.75 per share were issued.
- The Company received $125,000 of additional paid-in capital from an
investor.
20
<PAGE>
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.
MYO DIAGNOSTICS, INC.
/s/ Gerald Appel
-----------------------------------------
By: 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 and Gary Weinhouse, and each of them, as his true and lawful
attorneys-in-fact and agents 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 attorneys-in-fact and agents, and each of them, 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 attorneys-in-fact and agents, or either of them, or their
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald D. Appel President, Chief Executive Officer and March 30, 1998
- --------------------------------- Chairman of the Board of Directors
Gerald D. Appel (Principal Financial and Accounting Officer)
/s/ Hershel Toomim Director March 30, 1998
- ---------------------------------
Dr. Hershel Toomim, Sc.D.
/s/ Wayne Cockburn Director March 30, 1998
- ---------------------------------
Wayne C. Cockburn
/s/ Harvey Wineberg Director March 30, 1998
- ---------------------------------
Harvey Wineberg
/s/ Donald Christie Director March 30, 1998
- ---------------------------------
Donald Christie
</TABLE>
<PAGE>
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.+
4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1 to Form SB-2 filed on
January 6, 1997, and the amendments thereto.
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 Series A Warrant of OMERB, dated December 23, 1994, as amended.
Incorporated by reference to Exhibit 10.5 to Form SB-2 filed on
January 6, 1997, and the amendments thereto.
10.6 Series B Warrant of OMERB, dated December 23, 1994, as amended.
Incorporated by reference to Exhibit 10.6 to Form SB-2 filed on
January 6, 1997, and the amendments thereto.
10.7 Series C Warrant of OMERB, dated August 18, 1995, as amended.
Incorporated by reference to Exhibit 10.7 to Form SB-2 filed on
January 6, 1997, and the amendments thereto.
10.8 Waiver Letter, dated December 8, 1995, from OMERB to Registrant.
Incorporated by reference to Exhibit 10.8 to Form SB-2 filed on
January 6, 1997, and the amendments thereto.
10.9 Letter Agreement, dated July 8, 1996, by and between Registrant
and OMERB. Incorporated by reference to Exhibit 10.9 to Form SB-2
filed on January 6, 1997, and the amendments thereto.
10.10 Letter Agreement, dated December 13, 1994, by and among Registrant
and Donald Patterson, Ronald Goldsack, James Connacher, Chris
Skillen, Richard Reid and James Black, and Form of Stock Option
Agreement, dated December 19, 1994, by and among Registrant and such
persons, as amended. Incorporated by reference to Exhibit 10.10 to
Form SB-2 filed on January 6, 1997, and the amendments thereto.
10.11 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.
10.12 Non-transferable Warrant of Griffiths McBurney & Partners, dated
December 6, 1996. Incorporated by reference to Exhibit 10.12 to
Form SB-2 filed on January 6, 1997, and the amendments thereto.
10.13 Form of Warrant, dated December 6, 1996, by and among Registrant
and persons purchasing units in private placement of December 6,
1996. Incorporated by reference to Exhibit 10.13 to Form SB-2 filed
on January 6, 1997, and the amendments thereto. Form of Amendment to
Warrant.
10.14 Stock Option Agreement, dated March 23, 1995, by and between
Registrant and Steve Nelson. Incorporated by reference to Exhibit
10.14 to Form SB-2 filed on January 6, 1997, and the amendments
thereto.
10.15 Business PrimeLine Promissory Notes, between Registrant and Wells
Fargo Bank, National Association, as amended. Incorporated by
reference to Exhibit 10.15 to Form SB-2 filed on January 6, 1997,
and the amendments thereto.
10.16 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.
10.17 Renewal Notices with respect to Business PrimeLine Promissory Notes
between Registrant and
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
Wells Fargo Bank, National Association. Incorporated by reference
to Exhibit 10.1 to Form 10-QSB for the quarter ended June 30, 1997.
10.18 Form of Warrant, dated April 16, 1997, by and among Registrant and
persons purchasing units in private placement of April 16, 1997.
Form of Amendment to Warrant.+
10.19 1997 Stock Option Plan.+
10.20 Amendment Number Three, Waiver and Consent between Toomim
Research Group and Myo Diagnostics, Inc.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
- --------------------
+ Previously Filed
<PAGE>
AMENDMENT NO. THREE, WAIVER AND CONSENT
THIS AMENDMENT NO. THREE, WAIVER AND CONSENT (hereafter the "Amendment")
is made by and between Toomim Research Group, a partnership ("Licensor") and
MYO DIAGNOSTICS, INC. (hereafter "Licensee"), with reference to the following
recitals:
RECITALS
A. WHEREAS, Licensor and Licensee are parties to that certain Licensing
Agreement, dated as of October 31, 1993, amended by Amendment No. One dated
December 23, 1994 and by Amendment No. Two dated November 30, 1995
(hereinafter in total referred to as the "License Agreement"); and
B. WHEREAS, the License Agreement was assigned by Licensee to Myo
Diagnostics, Ltd., a Limited Partnership, a California partnership, (the
"Partnership") with the consent of the Licensor; and
C. WHEREAS, the Partnership has dissolved and the License Agreement has
been assigned to the Licensee; and
D. WHEREAS, Licensor and Licensee desire to amend the License Agreement
in certain respects, and Licensor is willing to waive compliance with certain
provisions of the License and consent to the assignment of the License
Agreement to Licensee;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
AGREEMENT
1. In the event the license contemplated in the Licensing Agreement is
conveyed or assigned to any third party for any reason whatsoever as a result
of (a) the Licensee becoming insolvent or failing generally to pay its debts
as they become due; or (b) the assignment by Licensee of Licensee's property
for the benefit of Licensee's creditors or the appointment of a receiver for
any part of Licensee's property; or (c) the filing of any proceeding under
any bankruptcy or insolvency law which shall have been commenced by or
against Licensee, the Royalty Payments described in Paragraph 5 of the
Licensing Agreement shall remain in full force and effect and shall not in
any way be voided as a result of the occurrence of the foregoing events.
2. Paragraph 15 (b), Paragraph 15(c) and Paragraph 15(d) of the
License Agreement are hereby deleted.
3. Licensor hereby represents and warrants to Licensee that this
Amendment has been duly executed and delivered by Licensor and that the
License Agreement, as amended or modified by this Amendment constitutes the
legal, valid, and binding obligation of Licensor, enforceable against
Licensor in accordance with its terms.
1
<PAGE>
4. Licensee hereby represent and warrants to Licensor that this
Amendment has been duly executed and delivered by Licensee and that the
License Agreement, as amended or modified by this Amendment constitutes the
legal, valid, and binding obligation of Licensor, enforceable against
Licensor in accordance with its terms.
5. This Amendment may be executed in two or more counterparts and by
different parties in separate counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Parties hereto have executed and delivered this
Amendment as of the date and year set forth opposite their respective
signatures below.
READ AND AGREED:
TOOMIM RESEARCH GROUP MYO DIAGNOSTICS, INC.
(Licensor) (Licensee)
Dated: April 6, 1998
By: By:
------------------------------ ---------------------------
Hershel Toomim Signature
By: Gerald D. Appel, President
------------------------------ -----------------------------
Daniel J. Levendowski Printed Name and Title
By: April 6, 1998
------------------------------ -----------------------------
Gerald D. Appel Date
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM AUDITED FINANCIAL STATEMENTS OF MYO DIAGNOSTICS, INC. AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 150,508
<SECURITIES> 0
<RECEIVABLES> 32,261
<ALLOWANCES> 32,261
<INVENTORY> 0
<CURRENT-ASSETS> 251,784
<PP&E> 379,922
<DEPRECIATION> 212,941
<TOTAL-ASSETS> 431,860
<CURRENT-LIABILITIES> 507,434
<BONDS> 0
0
0
<COMMON> 5,589,139
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 431,860
<SALES> 10,266
<TOTAL-REVENUES> 50,906
<CGS> 0
<TOTAL-COSTS> 1,634,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,623
<INCOME-PRETAX> (1,631,385)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,632,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,632,185)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
