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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-19285
MYO DIAGNOSTICS, INC.
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(Name of Small Business Issuer In Its Charter)
California
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(State or Other Jurisdiction of Incorporation or Organization)
95-4089525
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(I.R.S. Employer Identification No.)
3710 South Robertson Boulevard
Culver City, California 90232
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(Address of Principal Executive Offices and Zip Code)
(310) 559-5500
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(Issuer's telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act:
Title of Each Class
Name of Each Exchange 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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
Revenues for the fiscal year ended December 31, 1998 will be disclosed
pursuant to an amendment to this Form 10-KSB.
At March 31, 1999 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $8,916,370.
At December 31, 1998 the issuer had 8,916,370 shares of Common Stock,
$0.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
ITEMS OMITTED PURSUANT TO RULE 12b-25: None
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Table of Contents
Part I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Common Equity and Related Stockholder Matter
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants and Financial
Disclosure
Part III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and reports on Form 8-K
SIGNATURES
FINANCIAL STATEMENTS AND SCHEDULES
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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.
Hershel 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."
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 is
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. MCIC did not successfully introduce the product or conduct
MPR evaluations (other than limited evaluations for clinical purposes), and in
February 1998 the Company terminated this distribution agreement.
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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 November 1995 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.
* 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 the date of this Form 10-KSB, 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".
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* 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 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.
The Company presently requires Technologists who perform the tests on the
patient to receive three weeks training. 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.
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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 compared to
of the dysfunction: normal and the frequency it occurs during the
nine movements;
* The patterns of abnormal Graphic presentation of the abnormal muscle
muscle recruitment: 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'
diagnoses. The results were particularly impressive because the test was able
to detect injuries after a one to four week time lapse between the doctor's
diagnosis and the Company's examination. A test/retest study of 40 of these
patients indicated that 82% of the patients improved over a four week period.
The retest also validated the accuracy of the Company's classification.
Dr. Carabet received an option to purchase 15,000 shares of Common Stock
for $750 for the provision of facilities and services in connection with these
studies. The Company does not believe this affected his independence for
purposes of the studies.
The Company's MPR technology was submitted to leading academicians and
clinicians. Dr. V. Reggie Edgerton of UCLA and Dr. Steven Wolf of Emory
University reviewed the technical aspects of the MPR System in detail and
confirmed the validity of the science behind the MPR technology. They have
authored three published articles relating to the Company's MPR technology,
entitled "Evaluating Patterns of EMG Amplitudes for Back and Trunk Muscles of
Patients and Controls," International Journal of Rehabilitation and Health,
Vol. 2, No. 1 (1996), "Theoretical Basis for Patterning EMG Amplitudes to
Assess Muscle Dysfunction," Medicine and Science in Sports Exercise, Vol. 28,
No. 6 (1996), and most recently, AEMG activity in neck and back muscles during
selected static postures in adult males and females, Physiotherapy Theory and
Practice, (1997) 13, 179-195.
Dr. Edgerton and Dr. Wolf are members of the Company's Scientific Advisory
Board and receive fees for attendance at meetings of that Board. See
"Management -- Scientific Advisory Board." They have also received consulting
fees on specific projects for the Company.
Legal Validation of the System. In 1993, the California Workers
Compensation Appeals Board ("WCAB") issued a decision that the Company had
". . . persuaded the Court as to the validity of the lien-claimant's [Myo
Diagnostics] methodology and mechanism" and that "it found that the procedure
(muscle pattern recognition) is a valid and useful diagnostic medical tool
when used in the proper case. . . ." This determination was in connection
with an action pursuant to which an insurance carrier had sought refund of
payments made to a provider who had submitted claims for use of the MPR System
(and the WCAB denied the insurance company such refund). The Company believes
that this opinion helps to validate MPR as a valid medical/legal procedure.
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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 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.
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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 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
<PAGE> 9
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.
The license expires in 2013. The license is terminable by TRG upon 14 days
notice (subject to cure during such period) if the Company fails to observe
the terms of the Agreement.
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, 1998, the Company had 5 full time employees including
one involved in research and development and four involved in administration,
operations and marketing.
Item 2. Description of Properties.
The Company operates from leased facilities in Culver City, California
consisting of approximately 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 Matters to a Vote of Security Holders.
There were no matters submitted for approval to the holders of the
Company's outstanding Common Stock.
<PAGE> 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market for Common Stock; Record Holders
There is no public market for the Company's Common Stock. As of March 30,
1999, there were ninety-nine holders of record of the Common Stock.
Recent Sales of Unregistered Securities
Between October 1, 1998 and December 31, 1998, the Company issued an
aggregate of 500,000 shares of Common Stock of the Company at a price of $1.00
per share. Of these shares, 300,000 were purchased by St. James Securities
Inc., a registered broker-dealer under Canadian law in Toronto, Canada, and
200,000 by a qualified Canadian institutional buyer. The Company paid a
brokerage commission of 7% to St. James Securities in connection with this
issuance. The issuance of these securities was exempt from registration under
the Securities Act of 1933, as amended, pursuant to Section 4(2) of the
Securities Act, as a transaction not involving a public offering, and pursuant
to Regulation S as an off-shore transaction with an investor which is not a
U.S. Person.
Between January 1, 1998 and December 31, 1998, the Company issued a total of
211,998 options to purchase Common Stock of the Company at prices ranging from
$0.10 to $1.50 per share. The issuance of the options was in consideration of
cancellation of certain indebtedness of the Company by seven creditors. The
shares issuable under the options were not registered under the Securities Act
of 1933, as amended, and were issued in reliance upon an exemption from
registration.
Dividends
The Company has never paid any dividends on its Common Stock. The Company
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 Company is a development stage company that has yet to realize any
material revenues. The Company is ready to bring its product to market, but
needs additional funding to implement its marketing plan.
Forward Looking Statements
The Company may from time to time make "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this discussion, the words "estimate", "project", "anticipate" and similar
expressions are subject to certain risks and uncertainties, such as changes in
general economic conditions, competition, changes in federal regulations, as
well as uncertainties relating to raising additional financing and acceptance
of the Company's product and services in the marketplace, including those
discussed below that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as to the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations
Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997.
The Company incurred net losses of $793,195 for 1998 and $999,385 for 1997.
Revenues decreased from $10,266 for 1997 to $9,339 for 1998. Revenues
consisted primarily of fees for performance of MPR evaluations for clinical or
marketing trials. Revenues were less for 1998 as fewer MPR evaluations were
conducted during those periods.
The Company's operating expenses decreased to $761,063 during 1998 from
$1,001,868 during 1997. During 1998 as compared to 1997, (i) technical
services expenses decreased by $85,080, primarily as a result of lower product
development costs, (ii) research and development expenses decreased to $9,101
from $122,239 principally as a result of a decrease in salary expenses and
consulting fees, (iii) sales and marketing expenses decreased slightly, by
$19,086 as the Company focused the majority of its efforts on raising capital,
and (iv) general and administrative expenses decreased slightly to $638,879
from $662,380 principally as a result of a decrease in rental and utility
expenses and a decrease in consulting fees. Operating expenses during 1998
also included certain legal expenses pertaining to a 1997 claim against the
Company by a former employee (See Note 10 to the Financial Statements).
Financial Condition
<PAGE> 11
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 1998, the Company funded its operations principally from
net proceeds of $83,333 from the exercise of the Series B Warrants owned by
OMERB, from net proceeds of $167,000 from the sale of the Convertible Notes,
and from net proceeds of $500,000 obtained from the sale of Common Stock
pursuant to an agreement with St. James Securities.
As of December 31, 1998, the Company had four revolving lines of credit from
a commercial bank pursuant to which the Company could 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 were fully utilized as at December
31, 1998.
The Company presently has funds to continue operations at its present level
only through July 1999. 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 a Single Product: The Company has only one product, the MPR
System. There is no established market for this product. Accordingly, if for
any reason the MPR System cannot be marketed successfully (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
the Company to observe or perform any of its covenants, conditions or
agreements contained within the license. Any termination of the license would
have a material adverse effect on the Company and would likely result in the
Company not surviving.
Development Stage Company with Limited Operating History: The Company is in
the development stage and its operations are subject to all the risks inherent
in launching a new business enterprise, in developing and marketing a new
product or service, and in establishing a name and a business reputation. The
likelihood of success of the Company must be considered in light of problems,
expenses, difficulties and delays frequently encountered in converting
prototype designs into viable production designs, and in achieving market
acceptance with a new type of product or service. The Company has had limited
revenues to date, has operated at a loss since inception, and, because it is
only now entering its commercial stage, it will likely sustain operating
losses for an indeterminate time period. There can be no assurance that the
Company will ever generate material revenues or that the Company will ever be
profitable.
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. 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 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 1999 will determine the degree to which it can
implement its marketing plan.
<PAGE> 12
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 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 3,410,019 shares of
the Common Stock (which includes voting rights with respect to 111,900
shares), representing 38.2% of the outstanding voting power of the Company as
of December 31, 1998. As of December 31, 1998, all directors and officers of
the Company (including Mr. Appel) beneficially owned 45.2% 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.
<PAGE> 13
Absence of a Public Market: Presently, there is no public market for any
securities of the Company. No assurance can be given that any public market
will ever develop for any of the Company's securities. The Company does not
presently meet the requirements for listing securities on any national
securities exchange or the NASDAQ Stock Market. The absence of a public
market for the Company's securities makes an investment in such securities
highly illiquid. In addition, the absence of a public market results in there
being no true "market price" for the Company's securities which would enable
investors to determine the value of their investment.
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.
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 of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. When used in this discussion, the words "estimate", "project",
"anticipate" and similar expressions are subject to certain risks and
uncertainties, such as changes in general economic conditions, competition,
changes in federal regulations, as well as uncertainties relating to raising
additional financing and acceptance of the Company's product and services in
the marketplace, including those discussed below that could cause actual
results to differ materially from those projected. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as to the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Item 7. Financial Statements.
The response to this item is submitted in a separate section of this
report. See Financial Statements and Schedules on Page 27.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of Registrant.
Directors and Executive Officers
The following table sets forth information with respect to each director,
executive officer and key personnel of the Company as of December 31, 1998.
Name Age Position
________________________ ___ ______________________________________
Gerald D. Appel 61 President, Chief Executive Officer and
Chairman of the Board of Directors
Dr. Hershel Toomim, Sc.D. 81 Director
Wayne D. Cockburn 42 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.
<PAGE> 14
Dr. Toomim has served as a Director of the Company since he co-founded it
with Mr. Appel in 1988. Dr. Toomim also served as Vice President of Research
and Development of the Company from 1988 to 1996.
Mr. Cockburn has served as a Director of the Company since July 1995.
Mr. Cockburn has been employed by Lorus Therapeutics Inc., a Canadian
biopharmaceutical company, since January 1995, and is currently Vice
President, Business Development. From 1994 to 1995 Mr. Cockburn was an
investment banker with McDermid St. Lawrence Chisholm, Ontario, Canada, and
for more than the three years prior to that, he was a securities broker with
Midland Walwyn, Ontario, Canada.
Medical 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 to serve upon the SAB.
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.
<PAGE> 15
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 Rehabilitation 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 M.D. M.P.H M.B.A, Senior Advisor, is a 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 advises the Company on
strategic planning, alliance development and research and development. He
received his M.D., M.P.H. and M.A. degrees from Harvard University and, an
M.B.A. in Finance from Wharton School of Business.
Bill Finkle Ph.D. is an economist with a M.S. 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.
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, 1998, 1997 and 1996 (no other officer had annual compensation in excess of
$100,000 during either of those years):
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
______________ ____________
Name and Fiscal Number of All Other
Principal Year Salary Bonus Securities Compensation
Position Ended Underlying
Dec. 31, Options
Gerald Appel, 1998 $116,000 $0 0 $0
President & Chief 1997 $116,000 $0 0 $0
Executive Officer 1996 $116,000 $0 0 $0
<PAGE> 16
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. Any shares of Common Stock subject to an award that for any
reason expires or terminates unexercised are again available for issuance under
the 1997 Plan.
The 1997 Plan authorizes the Board of Directors or a committee of the Board
whose members shall serve at the pleasure of the Board (the "Administrator")
to grant stock options to eligible directors, officers, employees and
consultants of the Company. Stock Options granted under the 1997 Plan may, at
the discretion of the Administrator, either be "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or options which do not qualify as "incentive stock
options." The 1997 Plan currently is administered by the Board of Directors
of the Company. Subject to the provisions of the 1997 Plan, the Board will
have full and final authority to select the executives and other employees to
whom options will be granted thereunder, to grant the options and to determine
the terms and conditions of the options and the number of shares to be issued
pursuant thereto.
As of December 31, 1998, there were outstanding under the 1997 plan options
to purchase 400,000 shares of Common Stock at prices ranging from $0.10 per
share to $1.50
Option Grants in Last Fiscal Year
No options were granted to the Chief Executive Officer during the fiscal
year ended December 31, 1998.
Aggregate Option Exercises in Last Fiscal Year
No options were exercised during the fiscal year ended December 31, 1998.
Director Compensation
No options were granted to the Directors during the fiscal year ended
December 31, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of December 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, 3710 South Robertson Boulevard,
Culver City, California 90232, unless otherwise set forth below such person's
name.
Number of Percent of
Name and Address Shares Class
________________ _________ __________
Gerald D. Appel (1) 3,410,019 38.2%
Ontario Municipal Employees Retirement Board
One University Avenue, Ste 1000 1,179,339 13.2%
Toronto, Ontario M5J 2P1
Wayne D. Cockburn (2) 372,000 4.2%
Dr. Hershel Toomim, Sc.D (3) 252,000 2.8%
All of the directors and executive officers
as a group (3 persons) (4) 4,034,019 45.2%
(1) Includes 111,900 shares with respect to which Mr. Appel believes he has
voting power as a result of a proxy granted by Daniel J. Levendowski.
(2) Includes 40,000 shares of Common Stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(3) Includes 40,000 shares of Common Stock reserved for issuance upon
exercise of stock options that are currently exercisable.
(4) Includes 111,900 shares with respect to which Mr. Appel believes he has
voting power as a result of a proxy, and 80,000 shares of Common Stock
reserved for issuance upon exercise of stock options which are currently
exercisable.
<PAGE> 17
Item 12. Certain Relationships and Related Transactions
In May 1998, the Ontario Municipal Employees Retirement Board ("OMERB")
exercised its "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.
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 1998, the Company paid no royalties to
TRG.
On December 30, 1997, the Board approved the grant of an option to Jonathan
Fielding in connection with services that 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 $1.80 per share, of which 75,000 shares were vested as of the
date of grant, 65,000 shares vested on September 30, 1998 and the remaining
65,000 shares will vest on September 30, 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 prior to the expiry of the option. This option expires on September
30, 2002.
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, 1997 was $90,000. At December 31, 1998, loans outstanding totaled
$39,000.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits:
10.1 Form of 10% Convertible Note due August 13, 2000
10.2 Underwriting Agreement with St. James Securities dated
August 26, 1998
27.1 Financial Data Schedule.
(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, 1998, nor has the
Company sent to more than 10 of its security holders any proxy statement, form
of proxy or other proxy soliciting material with respect to any annual or
other meeting of security holders for the fiscal year ended December 31, 1998.
<PAGE> 18
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 D. 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 as his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any or all amendments to this Annual Report on
Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitutes, may lawfully do
or cause to be done by virtue hereof.
<PAGE> 19
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ GERALD D. APPEL President, Chief Executive February 11, 2000
- ---------------------------- Officer and Chairman of the
Gerald D. Appel Board of Directors (Principal
Financial and Accounting
Officer)
/s/ DR. HERSHEL TOOMIM Director February 11, 2000
- ----------------------------
Dr. Hershel Toomim, Sc.D.
/s/ WAYNE D. COCKBURN Director February 11, 2000
- ----------------------------
Wayne D. Cockburn
<PAGE> 20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Myo Diagnostics, Inc.
We have audited the accompanying balance sheet of Myo Diagnostics, Inc. (a
development stage company) (the "Company"), as of December 31, 1998 and the
related statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of Myo Diagnostics, Inc. as of
December 31, 1998, and the results of its operations, stockholders' equity,
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
As more fully discussed in Note 1 to the financial statements, the
accompanying financial statement disclosures related to the cumulative amounts
for the period from January 5, 1987 (date of inception) to December 31, 1998
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,
1998, the Company incurred a net loss of $793,195 and is in the development
stage at December 31, 1998. 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.
The financial statements as of December 31, 1997 and for the year then ended
were audited by other auditors who expressed an opinion with the same
qualifications on those statements in their report dated March 20, 1998.
Dickey, Rush, Duncan, Scott & Co., P.C.
Houston, Texas
October 29, 1999
<PAGE> 21
Myo Diagnostics, Inc.
(A Development Stage Company)
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
Current Assets ____________ ____________
Cash $ 240,861 $ 157,678
Accounts Receivable 2,295 0
Prepaid Expenses & Other Current Assets 7,097 81,276
____________ ____________
Total Current Assets 250,253 238,954
Furniture & Equipment, net 138,486 166,981
Capitalized Product Development Costs 1,470,875 1,071,800
Other Assets 31,780 33,095
____________ ____________
Total Assets $ 1,891,394 $ 1,510,830
____________ ____________
Current Liabilities
Accounts Payable & Accrued Expenses $ 363,206 $ 201,996
Notes Payable to Bank 270,000 270,000
Current Portion of Leases Payable 22,018 35,438
____________ ____________
Total Current Liabilities 655,224 507,434
Non Current Liabilities
Convertible Debenture Loans 167,000 -
Loans from Shareholder 39,000 -
Capital Leases Payable 44,886 40,213
Notes Payable 25,000 -
____________ ____________
Total Liabilities 931,110 547,647
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
8,916,370 and 8,323,037 issued and
outstanding 6,229,435 5,584,139
Paid In Capital 145,000 -
Deficit Accumulated during Development Stage (5,414,151) (4,620,956)
____________ ____________
Total Shareholders' Equity 960,284 963,183
____________ ____________
Total Liabilities & Shareholders' Equity $ 1,891,394 $ 1,510,830
____________ ____________
See accompanying notes and accountant's report.
<PAGE> 22
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
For the Year Ended Period From
December 31, Inception to
1998 1997 Dec 31, 1998
__________ __________ __________
Revenues $ 9,339 $ 10,266 $ 108,896
Operating Expenses
Research & Development 9,101 122,239 1,074,446
Technical Services 15,448 100,528 562,752
Sales & Marketing 97,635 116,721 511,808
General & Administrative 638,879 662,380 3,225,042
__________ __________ __________
Total Operating Expenses 761,063 1,001,868 5,374,048
__________ __________ __________
Loss from Operations (751,724) (991,602) (5,265,152)
Other Income (Expenses)
Interest Expense (32,917) (47,623) (239,208)
Miscellaneous (6,475) 0 (6,475)
Interest Income 223 40,640 103,786
__________ __________ __________
Total Other Income (Expenses) (39,169) (6,983) (141,897)
Provision for Income Taxes 2,302 800 7,102
__________ __________ __________
Net Loss $ (793,195) $ (999,385)$(5,414,151)
__________ __________ __________
Basic Loss Per Share ($0.09) ($0.12) ($0.96)
__________ __________ __________
Diluted Loss Per Share ($0.09) ($0.12) ($0.96)
__________ __________ __________
Weighted Average Common Shares 8,519,173 8,085,595 5,667,699
__________ __________ __________
See accompanying notes and accountant's report.
<PAGE> 23
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1997 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
Deficit
Common Stock Accumulated
______________________ During The
Shares Amount Stage Total
__________ __________ __________ __________
Issued upon incorporation
for services 910,000 $ 7,685 $ $ 7,685
Issued for services 952,250 9,523 9,523
Net Loss from inception
through 12/31/90 (20,367) (20,367)
Balance - 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 0 0
Issued for exchange of
$174,090 debt 144,619 174,090 174,090
Issued for services 60,000 600 600
Issued for net assets of limited
partnership, net of related
expenses of $1,350 755,330 372,885 372,885
Issued for cash in a private
placement net of related
expenses of $6,600 245,400 300,150 300,150
Issued for cash in a private
placement net of related
expenses of $164,036 680,741 835,964 835,964
Net loss (821,898) (821,898)
Balance - December 31, 1994 6,267,410 1,729,424 (1,765,407) (35,983)
See accompanying notes and accountant's report.
<PAGE> 24
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1997 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
Deficit
Common Stock Accumulated
______________________ During The
Shares Amount Stage Total
__________ __________ __________ __________
Issued for cash 15,000 750 750
Issued for cash in a private
placement net of related
expenses of $67,609 125,000 157,391 157,391
Issued for cash in a private
placement net of related
expenses of $64,243 111,111 135,757 135,757
Issued for cash 2,738 5,000 5,000
Net loss (1,067,280) (1,067,280)
Balance - December 31, 1995 6,521,259 2,028,322 (2,832,687) (804,365)
Issued for cash in a private
placement net of related
expenses of $14,243 500,000 985,757 985,757
Issued for cash 27,778 50,000 50,000
Forgiveness of accrued expenses 100,000 100,000 100,000
Issued for defaulted notes
payable 42,000 75,600 75,600
Stock options exercised 50,000 5,000 5,000
Conversion of debt 25,000 50,000 50,000
Issued for cash in a private
placement net of related
expenses of $169,000 480,000 982,000 982,000
Issuance of stock options 0 24,000 24,000
Net loss (796,054) (796,054)
Balance - December 31, 1996 7,746,037 4,300,679 (3,628,741) 671,938
Voided shares -3,000 0 0
Issued for cash in a private
placement net of related
expenses of $66,540 480,000 1,133,460 1,133,460
Issued for cash 100,000 150,000 150,000
Net Loss (999,385) (999,385)
Balance - December 31, 1997 8,323,037 5,584,139 (4,628,126) 956,013
Prior Period Adjustment 7,170 7,170
Balance - December 31, 1997
as Restated 8,323,037 5,584,139 (4,620,956) 963,183
See accompanying notes and accountant's report.
<PAGE> 25
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1997 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
Deficit
Common Stock Accumulated
______________________ During The
Shares Amount Stage Total
__________ __________ __________ __________
Stock warrants exercised 83,333 145,833 145,833
Issued for services 10,000 - 0
Issued for cash in a private
placement net of related
expenses of $537 500,000 499,463 499,463
Additional Paid-In Capital 145,000 145,000
Net Loss (793,195) (793,195)
Balance - December 31, 1998 8,916,370 $6,374,435 $(5,414,151)$ 960,284
See accompanying notes and accountant's report.
<PAGE> 26
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 & 1998 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
For the Year Ended Period From
December 31, Inception to
1998 1997 Dec 31, 1998
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (793,195) $ (999,385)$(5,414,151)
Adjustments to Net Income (Loss):
Depreciation & Amortization 62,573 53,858 368,326
Bad Debt Expense - 6,589 26,394
Stock Options Issued for
Services Rendered - - 24,000
Common Stock Issued in Consideration for
Extension of Repayment Terms for
Notes Payable to Related Parties - - 75,600
Common Stock Issued for Services
Rendered - - 12,527
(Increase)/Decrease in:
Accounts Receivables (2,295) (6,589) (9,239)
Other Receivables 66,040 - 66,040
Prepaid Expenses 7,314 (75,859) (73,962)
Other Assets 825 2,317 (32,270)
Increase/(Decrease) in:
Accounts Payable (7,935) 89,514 294,066
Other Current Liabilities 169,140 - 169,140
__________ __________ __________
Net Cash Provided (Used) by
Operating Activities (497,528) (929,555) (4,493,529)
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Fixed Assets (32,763) (8,735) (403,693)
Software Development Costs (399,075) (632,800) (1,470,875)
__________ __________ __________
Net Cash Provided (Used) by
Investing Activities (431,838) (641,535) (1,875,568)
See accompanying notes and accountant's report.
<PAGE> 27
Myo Diagnostics, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 & 1998 and from
January 5, 1987 (Inception) to December 31, 1998 (Unaudited)
For the Year Ended Period From
December 31, Inception to
1998 1997 Dec 31, 1998
__________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Convertible Debentures 167,000 - 167,000
Net Increase (Decrease) in Notes
Payables 25,000 (130,000) 295,000
Net Increase (Decrease) in Notes
Payables to Related Parties 39,000 - 263,090
Repayment (Borrowings) on Obligations
Under Capital Lease (8,747) (38,006) (53,350)
Net Proceeds from Issuance of
Common Stock 645,296 1,283,460 5,793,218
Increase (Decrease) in Paid-In Capital 145,000 - 145,000
__________ __________ __________
Net Cash Provided (Used) from
Financing Activities 1,012,549 1,115,454 6,609,958
__________ __________ __________
Prior Period Adjustment - 7,170 -
Net Increase (Decrease) in Cash 83,183 (448,466) 240,861
Beginning Cash 157,678 606,144 -
__________ __________ __________
Ending Cash $ 240,861 157,678 240,861
__________ __________ __________
Other Disclosure:
Income Tax Paid $ 2,302 $ 800 $ 7,102
Interest Expense 32,917 47,623 283,348
Supplemental Disclosure of Non-Cash Investing & 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.
During 1998, 10,000 shares of common stock were issued for services.
See accompanying notes and accountant's report.
<PAGE> 28
MYO DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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 has been 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, 1998,
the Company incurred a net loss of $793,195 and is in the development stage at
December 31, 1998. 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 1998 through private equity offerings,
the Company is negotiating with several investors about raising additional
capital through private placement offerings. Management of the Company
believes that its current cash on hand plus the additional capital that is
expected to be raised in the future will be sufficient to cover its working
capital needs until the Company's sales volume reaches a sufficient level to
cover operating expenses.
Business Combination
The Company held a 97.2% sole general partner interest in Myo Diagnostics,
Ltd. (the "Partnership"), a California limited partnership, that began
operations on April 18, 1991. The Partnership researched and developed the
hardware and related software to perform Muscle Pattern Recognition.
Effective on December 19, 1994, the Partnership's assets and liabilities were
transferred to the Company at its book value, and neither the Partnership nor
Corporation recognized a gain or loss. The 2.8% limited partners exchanged
their interests in the Partnership, totaling $547,885, for 755,330 shares of
common stock and $175,000 in notes payable. The business combination was
recorded in a manner similar to a "pooling-of-interest" method of accounting.
Under this method, assets and liabilities of the Partnership were recorded at
historical cost.
Development Stage Company
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company is devoting substantially all of
its present efforts to establish a new business, and its planned principal
operations have not yet commenced. All losses accumulated since inception has
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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:
Furniture and equipment 5 to 7 years
Computer hardware and software 5 years
<PAGE> 29
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.
Research and Development Costs
The Company accounts for research and development cost incurred in the
development of its software in conformance with SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The
accounting standard requires the capitalization of certain research and
development costs related to the initial program development and significant
program enhancements. All research and development costs incurred in
developing a product prior to reaching technological feasibility are charged
to expense in the period incurred. Upon reaching technological feasibility all
costs are then capitalized as Capitalized Product Development Costs. The
Company incurred such cost during 1998, 1997 and 1996 after technological
feasibility had been established. During 1998, 1997 and 1996, the Company
capitalized software development costs in the amount of $399,075, $632,800 and
$439,000, respectively. Capitalized software development cost will be
amortized over a period of time estimated to be the useful life of the
product, but not to exceed 60 months.
Research and development costs prior to reaching technological feasibility,
routine maintenance, debugging and custom programming costs are charged to
expense in the period in which they are incurred.
Capital Leases
The Company is the lessee of certain equipment under capital leases expiring
in various years through 2001. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease payments
or the fair value of the asset. The assets are amortized over the lower of
their related lease terms or their estimated productive lives. Amortization of
assets under capital leases is included in depreciation expense.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 that 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.
<PAGE> 30
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.
The Federal Deposit Insurance Corporation up to $100,000 insures deposits at
the bank. As of December 31, 1998 and 1997, the balances held at the bank
aggregated to $240,892 and $158.678, 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:
1998 1997
____________ ____________
Miscellaneous receivables $ 1,643 $ 67,683
Prepaid expenses 4,179 11,493
Employee advances 1,275 2,100
____________ ____________
Total $ 7,097 $ 81,276
____________ ____________
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
1998 1997
____________ ____________
Furniture and equipment $ 117,295 $ 117,567
Computer hardware and software 169,887 139,496
Equipment held under capital leases 120,254 120,254
Leasehold improvements 5,249 2,605
____________ ____________
$ 412,685 $ 379,922
Less accumulated depreciation and amortization 274,199 212,941
____________ ____________
Total 138,486 166,981
____________ ____________
NOTE 5 - OTHER ASSETS
Other assets at December 31 consisted of the following:
1998 1997
____________ ____________
Patents, net of accumulated amortization of
$6,047 and $4,732 $ 16,308 $ 17,623
Security deposits 15,472 15,472
____________ ____________
Total 31,780 33,095
____________ ____________
Amortization expense on patent costs charged to operations during the years
ended December 31, 1998 and 1997 was $1,315 and $1,188, respectively.
<PAGE> 31
NOTE 6 - NOTES PAYABLE TO BANK
As of December 31, 1998 and 1997, the Company has four revolving lines of
credit with a bank that provide for borrowings up to a total of $270,000. These
revolving lines of credit matured beginning May 10, 1998 through July 10, 1998
and are collateralized by standby letters of credit issued by certain third
parties. These revolving lines were extended by the bank into the Company's
1999 fiscal year pursuant to negotiations with the bank to arrange repayment.
The Company has $270,000 outstanding on these revolving lines of credit as of
December 31, 1998. See Note 15 - Subsequent Events.
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 entitled the Guarantors to purchase an aggregate of
400,000 shares of common stock for $1.13 per share if certain conditions were
met. The options became exercisable at various dates during 1995. None of
these options had been exercised as of December 31, 1998, the date of their
expiration.
NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES
Minimum future lease payments under capital leases as of December 31, 1998 for
each of the next five years are:
Years Ending December 31,
1999 $ 17,889
2000 17,889
2001 11,926
2002 -
2003 -
____________
Total minimum lease payments 47,704
Less amount representing interest 8,407
____________
Present value of minimum lease payment 39,297
Less current portion of obligations under capital leases 22,018
____________
Total $ 17,279
____________
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.
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, 1998 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, 1998, the
Company had net operating loss carryforwards of approximately $4,000,000 and
$1,300,000 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, 1998 that expires in 2012. The
ability of the Company to utilize the federal and state net operating loss
carryforwards may be subject to annual limitations under certain provisions of
the Internal Revenue Code.
Deferred tax assets (liabilities) for the years ended December 31, 1998 and
1997 consisted of the following:
Deferred tax assets 1998 1997
____________ ____________
Net operating loss carryforwards $ 1,917,000 $ 1,987,000
Research tax credit 133,000 133,000
Total deferred tax assets 2,050,000 2,120,000
Valuation allowance for deferred tax assets 1,972,000 2,042,000
____________ ____________
Deferred tax liabilities $ 78,000 $ 78,000
Deferred state taxes 78,000 78,000
____________ ____________
Net deferred tax assets $ - $ -
____________ ____________
The valuation allowance decreased by $70,000 during the year ended December
31, 1998.
<PAGE> 32
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facility and certain equipment under non-cancelable
operating leases expiring at various dates through 2001. Certain leases
contain renewal provisions.
Future minimum lease payments under these leases are as follows:
Years Ending December 31,
1999 $ 103,680
2000 10,980
2001 1,830
____________
Total $ 116,490
____________
Rent expense under operating leases was $131,835 and $127,044 for the years
ended December 31, 1998 and 1997, 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 10,1300 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.
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 1998, 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:
1998 1997
____________ ____________
Accounts payable $ 127,297 135,227
Accrued salaries 35,045 30,000
Accrued vacation payable 34,468 32,269
Payroll taxes payable 166,396 -
Customer deposits - 4,500
____________ ____________
Total $ 363,206 $ 201,996
____________ ____________
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.
<PAGE> 33
In 1996, the Company settled its obligation to pay $100,000 in connection with
services rendered in 1995 for 100,000 shares of common stock and issued 25,000
shares of its common stock for debt totaling $50,000. In 1996, the Company
also issued to note holders 42,000 shares of common stock valued at $75,600 as
consideration for the note holders extending the repayment terms pursuant to
the terms of the note agreement.
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
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. As
of December 31, 1998, the Company had no outstanding warrants.
Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the "1997 Plan") in December
1997. The purpose of the 1997 Plan is to attract, retain, and motivate certain
key employees of the Company by giving them incentives which are linked
directly to increases in the value of the common stock of the Company. Each
director, officer, employee, or consultant of the Company is eligible to be
considered for the grant of awards under the 1997 Plan. The maximum number of
shares of common stock that. may be issued pursuant to awards granted under
the 1997 Plan is 1,000,000, subject to certain adjustments to prevent
dilution. Any shares of common stock subject to an award, which for any reason
expires or terminates unexercised, are again available for issuance under the
1997 Plan.
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:
1997 Stock Weighted- Other Stock Weighted-
Option Plan Average Options and Average
Exercise Warrants Exercise
Price Price
___________ ___________ ___________ ___________
Granted 280,000 $ 1.98 310,000 $ 1.44
___________ ___________ ___________ ___________
Options outstanding,
December 31, 1997 280,000 $ 1.98 742,000 $ 1.23
Expired (280,000)$ - (472,000)$ -
Granted 305,000 $ 1.13 75,000 $ .10
___________ ___________ ___________ ___________
Options outstanding,
December 31, 1998 305,000 $ 1.13 345,000 $ 1.07
___________ ___________ ___________ ___________
Options exercisable,
December 31, 1998 - $ 1.13 175,000 $ 1.07
___________ ___________ ___________ ___________
The remaining weighted-average contractual life of options outstanding at
December 31, 1998 was 1.25 years.
<PAGE> 34
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:
For years Ended
December 31,
1998 1997
____________ ____________
Net loss
As reported $ (793,195) $ (999,385)
Pro forma $ (803,195) $ (1,020,285)
Loss per share
As reported $ (0.09) $ (0.12)
Pro forma $ (0.09) $ (0.12)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995.
NOTE 14-PRIOR PERIOD ADJUSTMENTS AND RESTATEMENTS
Certain adjustments defined as corrections of accounting errors and change in
accounting methods, the nature and amount of which has been detailed in the
following schedule, resulted in an understatement of assets, net income and
stockholders equity in prior years.
Prior Period Adjustment
During 1998, outdated and outstanding checks in the amount of $7,170 were
voided, resulting in the understatement of assets and overstatement of the
accumulated deficit. The change as of December 31, 1998 is summarized as
follows:
Assets Accum Deficit
____________ ____________
As previously reported $ 1,503,660 $ (4,628,126)
Void outdated/outstanding checks 7,170 7,170
____________ ____________
As adjusted $ 1,510,830 $ (4,620,956)
____________ ____________
Change in Accounting Principle
During 1998, the Company adopted a change in the method of accounting for the
costs associated with certain research and development costs related its
product. Certain of these research and development costs have been capitalized
in accordance with SFAS No. 86, Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed. Previously, the Company had expensed
all research and development costs. As a result of this change in accounting
for research and development cost the Company has capitalized cost previously
expensed in the years ended December 31, 1997 and 1996 in the amounts of
$632,800 and $439,000, respectively. These costs have been recorded in the
accompanying restated financial statement for the year ended December 31,
1997.
The following schedule reflects the restated amounts of various financial
statement captions affected by the restatement to change accounting methods:
1997 1997
Original Restated
Amounts Adjustments Amounts
___________ ___________ ___________
Cash $ 150,508 $ 7,175 $ 157,683
Capitalized Product Development Costs $ - $ 1,071,800 $ 1,071,800
Deficit Accumulated $(5,699,926)$ 1,078,970 $(4,620,956)
Research & Development $ 419,295 $ (297,056)$ 122,239
Technical Services $ 218,511 $ (117,983)$ 100,528
General & Administrative $ 881,141 $ (218,761)$ 662,380
Net Loss $(1,632,185)$ 632,800 $ (999,385)
NOTE 15-SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company had the following significant
financial transactions:
* The Company repaid a $25,000 short-term promissory note to a shareholder.
* The Company received $748,874 in additional capital from investors.
* In early 1999, Wells Fargo Bank called $140,000 of the Notes Payable the
Company owed the bank. The collateral that had been put up by two
individuals approximately five years ago were letters of credit backed by
personal guarantees at the Royal Bank of Canada. When Wells Fargo called the
loan, the Royal Bank provided the funds to repay the Company's loan with
Wells Fargo. The Royal Bank first turned to the two individuals for the money
that had been paid to Wells Fargo and then extended the two individuals loans
covering the amounts. These loans are currently outstanding. The Company
recognizes that even though its loan with Wells Fargo has been repaid, the
Company has an obligation to repay the loans now held by the two individuals.
While no formal agreement exists regarding this repayment, it is
management's belief that these loans will be repaid at some point in the
year 2000.
* The Company also received debt forgiveness of the remaining $130,000 Notes
Payable due to Wells Fargo Bank in consideration for stock options issued
to the bank.
<PAGE> 1
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR
AN OPINION OF COUNSEL (WHO MAY BE COUNSEL TO THE COMPANY) THAT SUCH
REGISTRATIONS IS NOT REQUIRED.
MYO DIAGNOSTICS, INC.
10% CONVERTIBLE NOTE DUE AUGUST 13, 2000
$40,000.00 Dated as of July 31, 1998
FOR VALUE RECEIVED, the undersigned, MYO DIAGNOSTICS, INC., a corporation duly
organized and existing under the laws of the State of California (the principal
amount of Forty Thousand and no/100 Dollars ($40,000.00) on August 13, 2000, and
to pay interest on the unpaid principal amount hereof at the rate of ten percent
(10%) per annum from the date hereof until paid. Interest shall be payable
semi-annually on June 30 and December 31 of each year, commencing December 31,
1998. Both principal and interest thereon are payable in lawful money of the
United States of American at the principal office of the Company. This note is
one of a series of notes of the Company, dated various dates, of the same title
and due dated in the aggregate principal amount of $167,000.00 (the "Notes").
ARTICLE ONE
PREPAYMENT
Section 1.01 Optional Prepayment. This Note may be prepaid by the Company in
whole or in part at any time without premium or penalty. Any such prepayment
shall be accompanied by interest to the date of prepayment.
Section 1.02 Notice of Prepayment. The Company shall give the Holder of this
Note written notice of each prepayment hereof not less than 30 days prior to the
prepayment date, specify such prepayment date, the principal amount to be
prepaid, and the date the right to convert this Note or any portion hereof shall
terminate pursuant to Section 2.01 hereof. Upon the giving of any such notice
of prepayment, the principal amount of this Note specified in such notice,
together with interest thereon, shall, subject to Section 2.01 hereof, become
due and payable on the prepayment date.
Section 1.03 Allocation of Prepayments. In the event of the prepayment of less
than all of the outstanding Notes pursuant to Section 1.01 hereof, the Company
shall allocate the principal amount so to be prepaid among the holders of Notes
in proportion to the respective principal amount of such Notes not theretofore
prepaid or converted, of which they shall be holders.
ARTICLE TWO
CONVERSION
Section 2.01 Conversion Right. The older of this Note shall have the right, at
the Holder's option, at any time and from time to time while this Note is
outstanding, or pursuant to Section 1.02 hereof (in respect of this Note or such
portion thereof) until the close of business on the first business day next
preceding the dated fixed for prepayment (unless the Company shall default in
such prepayment) to convert all or any part of the principal amount of this Note
into fully paid and non-assessable shares of Common Stock of the Company (the
"Common Stock") at the "Initial Conversion Price" (as hereinafter defined),
subject to adjustment as provided below (such price or such price, as last
adjusted, as the case may be, being referred to herein as the "Conversion
Price"). Such conversion shall be made by the surrender of this Note to the
Company at its principal office accompanied by the Holder's written request for
conversion, specifying the principal amount hereof to be converted. As used in
this Section 2.01, the following terms shall have the meanings indicated:
"Additional Offering" shall mean the sale by the Company after August 13, 1998,
of Common Stock or Convertible Debt Securities.
"Additional Offering Price" shall mean, (a) in the case of an Additional
Offering consisting of Common Stock, the total amount received by the Company in
connection with such Additional Offering, or (b) in the case of an Additional
Offering consisting of Convertible Debt Securities, the total amount received by
the Company as the consideration of the issuance of such Convertible Debt
Securities plus the minimum aggregate amount of additional consideration (as set
forth in the instruments relating thereto, without regard for any provision
contained therein for a subsequent adjustment of such consideration), payable to
the Company upon the conversion of such Convertible Debt Securities divided by
the aggregate number of shares of Common Stock issuable upon conversion of such
Convertible Debt Securities (as set forth in the instruments relating thereto,
without regard for any provision contained therein for a subsequent adjustment
of such number of shares).
<PAGE> 2
Convertible Debt Securities means promissory notes or similar instruments
issued by the Company which are convertible into Common Stock.
<PAGE> 3
Initial Conversion Price shall mean US $0.10 (ten cents) per share, provided,
however, that (i) in the event that the Company completes an Additional Offering
on or before September 13, 1998, for aggregate proceeds to the Company of US
$200,000.00 or more (not including in the case of an Additional Offering of
Convertible Debt Securities any additional consideration (as set forth in the
instruments relating thereto) payable to the Company upon the conversion of such
Convertible Debt Securities) at an Additional Offering Price equal to or in
excess of US $0.10 (ten cents) per share, "Initial Conversion Price" shall mean
the "Additional Offering Price", (ii) in the event that the Company completes
and Additional Offering on or before September 13, 1998, for aggregate proceeds
to the Company of US $200,000.00 or more (not including in the case of an
Additional Offering of Convertible Debt Securities any additional consideration
(as set forth in the instruments relating thereto) payable to the Company upon
the conversion of such Convertible Debt Securities) at an Additional Offering
Price of less than US $0.10 (ten cents) per share, "Initial Conversion Price"
shall mean the "Additional Offering Price", and no adjustment to the Conversion
Price shall be made under the provisions of Section 2.04 hereof with respect to
such Additional Offering, and (iii) in the event that the Company completes an
Additional Offering on or before September 13, 1998, for aggregate proceeds to
the Company of less than US $200,000.00 (not including in the case of an
Additional Offering of Convertible Debt Securities any additional consideration
(as set forth in the instruments relating thereto) payable to the Company upon
the conversion of such Convertible Debt Securities) "Initial Conversion Price"
shall mean the lesser of the Additional Offering Price and US $0.10 (ten cents)
per share, and no adjustment to the Conversion Price shall be made under the
provisions of Section 2.4 hereof with respect to such Additional Offering.
Section 2.02 Issuance of Certificates; Partial Conversion. Promptly after
receipt of the written request referred to in Section 2.01 hereof and surrender
of this Note as aforesaid, the Company shall issue and deliver to the Holder,
registered in such Holder's name (or in such other name or names as shall be
specified in such written request), a certificate or certificates for the number
of full shares of Common Stock issuable upon conversion of this Note (or
specified portion hereof), which certificates shall bear a legend to the same
effect as the legend set forth at the beginning of this Note. Such conversion
shall be deemed to have been effected and the Conversion Price shall be
determined as of the close of business on the date on which such written request
shall have been received by the Company, and this Note shall have been
surrendered as aforesaid, and the rights of the Holder hereof (or specified
portion thereof) shall cease and the person or persons in whose name such
certificate or certificates are to be registered shall be deemed to have become
a holder of record of the shares of Common Stock issuable upon such conversion.
Upon conversion of only a portion of this Note, the Company shall issue and
deliver to the Holder, at the expense of the Company, a new Note in the form
hereof for the unconverted portion hereof and bearing interest from the date to
which interest has been paid on such unconverted portion.
Section 2.03 Fraction Shares; Accrued Interest. No fractional share of Common
Stock shall be issued upon conversion of this Note or any portion hereof,
<PAGE> 4
and no payment or adjustment shall be made upon any such conversion with
respect to the Common Stock issued upon such conversion. If any fractional
interest in a share of Common Stock would, except for the provisions hereof, be
issuable upon the conversion of this note or any portion hereof, the Company
shall pay to the Holder an amount in cash equal to the current market price (as
determined by the Company in good faith) of such fractional interest. The
company shall pay all interest on this Note or specified portion hereof
surrendered for conversion accrued to the date upon which the aforementioned
written request shall have been received by the Company.
Section 2.04 Adjustment of Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
(a) Definitions. As used in this Section 2.04, the following terms shall have
the meanings indicated:
"Options" shall mean rights, options or warrants to purchase either Common
Stock or Convertible Securities.
"Initial Date" shall mean August 13, 1998.
"Convertible Securities" shall mean any evidences of indebtedness, shares (other
than Common Stock) or other securities convertible into Common Stock.
"Other Securities" shall mean any securities of the company other than Common
Stock and any other securities which the holder of a Note at any time shall be
entitled to receive, or shall have received, upon conversion of Note, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for, or as a distribution with respect to, Common
Stock (or other Securities).
(b) No Adjustment of Conversion Price. No adjustment in the Conversion Price
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share for an Additional Share of common Stock
issued or deemed to be issued by the Company is less than the per share
Conversion Price in effect on the date of such issue.
(c) Deemed Issue of Additional Shares of Common Stock.
(i) Options and Convertible Securities. In the event the Company, on or after
the Initial Date, shall issue any Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options, or
in the case of Convertible Securities and Options therefore, the shares into
which such Convertible Securities may be converted, shall be deemed to be
Additional Share of Common Stock issued as of the time of such issue, proved
that Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to Section 2.04 (e)
hereof, of such Additional Shares of Common Stock would be less than the
Conversion Price in effect on the date of and immediately prior to such issue,
and provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(a) no further adjustment in the Conversion Price shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock, upon the
exercise of such Options or the conversion of such Convertible Securities:
(b) if such Options or Convertible Securities by their terms provide, with the
passage of time or otherwise, for any decrease in the consideration payable to
the Company, or increase in the number of share of Common Stock issuable, upon
the exercise, conversion or exchange thereof, the Conversion Price computed upon
the original issue thereof, and any subsequent adjustment based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such options or the rights of
conversion or exchange under such Convertible Securities;
(c) Upon the expiration of any such Options or any rights of conversion under
such Convertible Securities which shall not have been exercised, the Conversion
Price computed upon the original issue thereof, and any subsequent adjustments
based thereon, shall, upon such expiration, be recomputed as if:
(x) in the case of Options for Convertible Securities or Options for Common
Stock the only Additional Share of Common Stock issued were the shares of Common
Stock actually issued upon the exercise of such Options or the conversion of
Convertible Securities and the consideration received therefor was the
consideration actually received by the Company for the issue of such Convertible
Securities which were actually converted, and
<PAGE> 5
(y) in the case of Options for Convertible Securities only the Convertible
Securities actually issued upon the exercise thereof were issued at the time of
issue of such Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have been issued was the
consideration actually received by the Company for the issue of all such
options, whether or not exercised, plus the consideration deemed to have been
received by the Company (determined pursuant to Section 2.04 (e)) upon the issue
of the Convertible Securities with respect to which such Options were actually
exercised;
(d) no readjustments pursuant to Section 2.04 (c)(I)(b) or Section 2.04
(c)(I)(c) above shall have the effect of increasing the Conversion Price by an
amount in excess of the amount of the adjustment thereof originally made in
respect of the issue of such Options or Convertible Securities; and
(e) in the case of any Options which expire by their terms not more than 30 days
after the date of issue thereof, no adjustment of the Conversion Price shall be
made until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the same manner provided in Section 2.04 (c)(I)(c)
above.
(i) Stock Dividends and Subdivisions. In the event the Company at any time or
from time to time on or after the Initial Date shall pay any dividend on Common
Stock payable in common Stock, or effect a subdivision of the outstanding shares
of Common Stock into greater number of shares, Additional Share of Common Stock
shall be deemed to have been issued:
(a) in the case of any such dividend, immediately after the close of business on
the record date for the determination of holders of any class of securities
entitled to receive such dividend, or
(b) in the case of any such subdivision, at the close of business on the date
immediately prior to the date upon which such corporate action becomes
effective.
(d) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common
Stock. Except as otherwise provided in Section 2.04 (g), in the event the
Company shall issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to Section 2.04(c)) without
consideration or for a consideration per share less than the Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the consideration per share received by the Company
for Additional Shares of Common Stock issued pursuant to Section 2.03(c)(I) and
the denominator of which shall be the Conversion Price in effect on the date of,
and immediately prior to the issuance of Additional Shares of Common Stock.
(e) Determination of Consideration. For purposes of this Section 2.04, the
consideration received by the Company for the issue of any Addition Shares of
Common Stock shall not included interest accrued and unpaid on Convertible
Securities. The consideration per share received by the Company for Additional
Shares of Common Stock deemed to have been issued pursuant to Section 2.04
(c)(I), relating to Option and Convertible Securities, shall be determined by
dividing:
(i) the total amount, if any, received or receivable by the Company as
consideration for the issue of such Options or Convertible Securities, plus the
minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained herein
for a subsequent adjustment of such consideration) payable to the Company upon
the exercise of such Options or the conversion of such Convertible Securities
and the conversion of such Convertible Securities, by
(ii) the maximum number of share of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) issuable upon the exercise of such
Options or the conversions or the conversion or exchange of such Convertible
Securities.
(f) Adjustment of Conversion Price Upon Issuance of Other Securities. In the
event Other securities shall be issued or shall become subject to issue upon the
conversion of any Notes (or Other Securities) of the Company (or any issuer of
Other Securities) for a consideration such as to dilute the conversion rights of
the holders of the Notes, the computations and adjustments with respect to the
Conversion Price shall be made nearly as possible in the manner so provided and
applied to determine the number of Other Securities from time to time receivable
upon the conversion hereof.
(g) Adjustment for Combinations, Reclassifications, Consolidation of Common
<PAGE> 6
Stock, Stock Dividends or Stock Subdivisions. In the event (a) the outstanding
shares of Common Stock shall be combined, reclassified or consolidated into a
lesser number of shares of Common Stock, or (b) any Additional Shares of Common
Stock shall be deemed to have been issued pursuant to Section 2.04 (c)(ii)
relating to stock dividends and stock subdivisions, the Conversion Price in
effect immediately prior to such combination, reclassification, consolidation,
stock dividend, or stock subdivision shall, concurrently with the effectiveness
of such stock combination, reclassification, consolidation, stock dividend, or
stock subdivision be proportionately increased or decreased.
(h) Adjustment for Merger of Reorganization, etc. In case of any consolidations
merger of the Company with or into another corporation or the conveyance of
substantially all of the assets of the company to another corporation, each Note
shall thereafter be convertible into the number of shares of stock, or other
securities, or other property, to which a holder of the number of shares of
Common Stock of the Company deliverable upon conversion of this Note would have
been entitled upon such consolidation, merger or conveyance, and appropriate
adjustment (as determined in good faith by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
of the Holder hereof, to the end that the provisions set forth herein (including
provisions with respect to changes in an other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock, or other securities, or other property
thereafter deliverable upon conversion.
Section 2.05 Notice of Adjustment. Upon any adjustment of the Conversion
Price, the Company shall give written notice thereof to the Holder thereof,
which notice shall state the Conversion Price resulting from such adjustment and
set forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
Section 2.06 Other Notices. In the event the Company proposes to take any
action of the type requiring an adjustment of the Conversion Price, the Company
shall give written notice thereof to the Holder of this Note, which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonable necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Conversion Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of the Notes. In case
of any action which would require the fixing of a record date, such notice shall
be given at least 20 days prior to the date so fixed, and in the case of all
other action, such notice shall be given at least 30 days prior to the taking of
such proposed action. In addition, whenever the Company proposes to declare a
dividend or distribution with respect to the Common Stock, it will give the
Holder of this Note written notice thereof at least 20 days prior to the record
date for such dividend or distribution.
Section 2.07 Reservation of Shares. The Company will at all times reserve and
keep available, free from preemptive rights, out of its authorized but unissued
shares of Common Stock, solely for the purpose of issue upon the conversion of
Notes, sufficient shares to provide for the conversion of all outstanding Notes.
The Company covenants that all shares of Common Stock which may be issued upon
conversion of this Note will, upon issuance by the Company in accordance with
the terms of this Note, be duly authorized, validly issued, fully paid and
non-assessable and free from any claims, liens or encumbrances with respect to
the issuance thereof, except for any restrictions on transfer imposed by
applicable securities laws. The Company will take all such action as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or any requirement of any
national stock exchange upon which the Common Stock may be listed.
Section 2.08 Government Approvals. If any shares of Common Stock required to
be reserved for the purpose of conversion of this Note require registration with
or approval of any governmental authority under an applicable law, or listing on
any national securities exchange, before such shares may be issued upon
conversion, the Company will, at its expense and as expeditiously as possible,
cause such shares to be duly registered or approved or listed on the relevant
national securities exchange, as the case may be.
Section 2.09 Taxes The Company will pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock upon conversion of this Note, provided, however, that the Company shall
not be required to pay any taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any certificate for such shares in a
name other than that of the Holder of this Note.
ARTICLE FOUR
COVENANTS
<PAGE> 7
Section 4.01 Use of Proceeds. The Company covenants that the proceeds from
the issuance of the Notes have or will be used to pay current operating expenses
of the Company, including payroll, payroll taxes, rent, compensation of William
L. Wayne or any other consultant approved by the holders of a majority in
principal amount of the Notes, and any other current operating expense approved
by William L. Wayne.
Section 4.02 Indebtedness. The Company covenants and agrees that during the
period commencing on August 13, 1998 and ending on August 13, 1999, it will not,
so long as any principal of, or interest on, the Notes remains outstanding and
unpaid, incur any indebtedness, whether secured or unsecured, for borrowed
money, including, without limitation, any Additional Offering of Convertible
Debt Securities (as such terms are defined in Section 2.01 hereof) without the
prior written consent of the holds of at lease 50% of the principal amount of
the Notes then outstanding.
ARTICLE FIVE
EVENTS OF DEFAULT
Section 5.01 Definitions of Effect. If any of the following events
("Events of Default") shall occur and be continuing:
(a) Default shall be made in the payment of the principal of this or any other
Note when and as the same shall become due and payable, whether at maturity or
at a date fixed for prepayment or by acceleration or otherwise; or
(b) Default shall be made in the payment of any installment of interest upon
this or any other Note when the same shall become due and payable, and such
default shall continue for a period of 5 days; or
(c) Default shall be made in the due observance or performance of any other
covenant, condition or agreement on the part of the Company to be observed or
performed pursuant to the terms hereof and such default shall continue for 30
days; or
(d) Default shall be made in any payment of principal of, or interest on, any
other indebtedness of the Company and such default shall continue for more than
the period of grace, if any, provided with respect hereto;
(e) (I) the Company shall commence any case, proceeding or other action (A)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debt, or (B) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against the
Company any case, proceeding or other action of a nature referred to in clause
(I) above which (A) result in the entry of any order for relief or any such
adjudication or appointment or (B) remains un-dismissed, un-discharged, or un-
bonded for a period of 60 days; or (iii) there shall be commenced against the
Company any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, restraint or similar process against all or any
substantial part of its assets which result in the entry of an order for any
such relief which shall not have been vacated, discharges, or stayed or bonded
pending appeal within 60 days from the entry thereof; or (iv) the Company shall
take any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clauses (I), (ii) or (iii) above;
or (v) the Company shall generally not, or shall be unable to, or shall admit in
writing an inability to, pay its debts as they become due; then, and in each and
every such case, the Holder of this Note may, by written notice to the Company
declare all sums of principal and interest then remaining unpaid on this Note
and all other amount payable hereunder, to be immediately due and payable,
whereupon the same shall immediately become due and payable. Except as
expressly provided above in this Section, presentment, demand, protest and all
other notices of any kind are hereby expressly waived.
ARTICLE SIX
MISCELLANEOUS
Section 6.01 Amendments. This Note may only be amended in writing signed by
the Holder and the Company.
Section 6.02 Notices. Any notice or other communication to the Holder of this
Note required or permitted hereunder shall be in writing and shall be personally
delivered or mailed, postage paid, by registered or certified mail, if the
Holder, addressed to such Holder at c/o Tullet & Tokyo Forex Ltd., 154
University Avenue, Suite 400, Toronto, Ontario M5H 3Y9, Canada or such other
<PAGE> 8
address as such Holder may designate to the Company in writing, and if to the
Company, addressee to the Company at 3760 South Robertson Blvd., Culver City, CA
90232 or to such other address as the Company may in writing designate to the
Holder.
Section 6.03 Suits for Enforcement. In case any one or more Events of Default
shall occur and be continuing, the Holder of this Note may precede to protect
and enforce its rights by suits in equity, action at law and/or by other
appropriate proceeding, whether for the specific performance (to the extent
permitted by law) of any covenant or agreement contained in this note or in aid
of the exercise of any power granted in this Note, or may proceed to enforce any
other legal or equitable right of the Holder of this Note. If any holder of a
Note shall demand payment thereof or take any action in respect of an Event of
Default, the Company will forthwith give written notice to the other holders of
Notes, specifying such action and the nature of the Event of Default.
Section 6.04 Remedies Cumulative. No remedy herein conferred upon the Holder
of this Note is intended to be exclusive of any other remedy, and each and every
such remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or by statute
or otherwise.
Section 6.05 Remedies no Waived. No course of dealing between the Company and
the Holder hereof shall operate as a waiver of any right of any Holder hereof
and no delay of the part of the Holder hereof in exercising any right hereunder
shall so operate.
Section 6.06 Successors and Assigns. All of the covenants and agreements in
the Note contained by or on behalf of the Company shall bind its successors and
assigns, whether so expressed or not.
Section 6.07 Headings. The headings of the section sand subsections of this
Note are inserted for convenience only and shall not be deemed to constitute a
part of this Note.
Section 6.08 Governing Law. This Note shall be deemed to be a contract made
under the laws of the State of California and shall be construed in accordance
with such laws.
IN WITNESS WHEREOF, the undersigned, has caused this Note to be executed in
its name and on its behalf as of the day and year first above written.
MYO DIAGNOSTICS, INC.
By:
Gerald D. Appel
President
<PAGE> 9
August 26, 1998
Myo Diagnostics Inc.
3760 S. Robertson Boulevard
Culver City, CA 90232
Attention: Gerald Appel, President & Chief Executive Officer
Dear Mr. Appel:
Re: Proposed Financing
St. James Securities Inc. ("SJS") hereby agrees to act as exclusive agent for
Myo Diagnostics Inc. (the "Corporation") in connection with a proposed offering
of equity units ("Equity Units") to be created and issued by the Corporation
pursuant to the following terms and conditions (the "Offering").
Issuer: Myo Diagnostics Inc.
Size of Offering:Up to 1.5 million Equity Units
Purchased Securities: Subject to adjustment and potential restrictions in
certain events, each Equity Unit shall be exercisable, for no additional
consideration, to acquire common shares ("Common Share") of the Corporation.
Agent: St. James Securities Inc.
Price:Such price as SJS and the Corporation may agree (the "Price"),
however such price will not be less than $US1.00 per Common Share.
Closing Date: February 26, 1999 or such other date as SJS and the
Corporation may agree (the "Closing Date").
Description of Agency: SJS agrees to purchase as principle investor no less
than 500,000 Equity Units prior to September 11, 1998. SJS will also act, on a
"best efforts" private placement basis, as exclusive agent for an additional 1
million Equity Units. SJS is not obliged under any circumstances to purchase in
excess of 500,000 Equity Units but may choose to do so in its sole discretion.
Due Diligence: Prior to the filing of the (final) prospectus qualifying the
Common Shares issuable on exercise of the Equity Units, the Corporation shall
allow SJS and their representatives to conduct all due diligence investigations
which SJS may reasonably require to fulfill their obligations as underwriters
and to responsibly execute the certificate required of them in the preliminary
prospectus and the (final) prospectus.
<PAGE> 10
SJS's Fees: 7% of gross proceeds of the Offering (the "Commission"),
Compensation Option: SJS shall also receive two hundred thousand (200,000)
compensation options, each compensation option entitling SJS to purchase one
Common Share of the Corporation at a price of $0.50 per common share at any time
prior to August 26, 2001.
Costs and Expenses: Offering costs and expenses are to be borne by the
Corporation, including the costs of SJS, its Consultant and its designated legal
counsel, all payable on the Closing Date.
If the foregoing accurately reflects your understanding of the terms of the
Offering, please execute this letter where indicated below and return a copy
(personally, by facsimile, by post or by courier) to St. James Securities Inc.,
150 York Street, Suite 1814, Toronto, Ontario, M5H 3S5, Attention: Rodger Gray,
President, prior to 9:30 a.m. September 2, 1998, whereupon this letter shall
become a binding agreement
between us.
Yours very truly,
ST. JAMES SECURITIES INC.
Per: _________________________________
John Illidge
Chairman
The foregoing accurately reflects the terms of the transaction that we are to
enter into and such terms are hereby agreed to.
ACCEPTED this day of August, 1998.
MYO DIAGNOSTICS INC.
Per: _________________________________
Gerald Appel
President and Chief Executive
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS OF MYO DIAGNOSTICS, INC. DATED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 240,861
<SECURITIES> 0
<RECEIVABLES> 2,295
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 250,253
<PP&E> 7,097
<DEPRECIATION> 62,573
<TOTAL-ASSETS> 1,891,394
<CURRENT-LIABILITIES> 655,224
<BONDS> 0
0
0
<COMMON> 6,229,435
<OTHER-SE> 960,284
<TOTAL-LIABILITY-AND-EQUITY> (1,891,394)
<SALES> 9,339
<TOTAL-REVENUES> 9,339
<CGS> 0
<TOTAL-COSTS> 761,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,917
<INCOME-PRETAX> (790,893)
<INCOME-TAX> 2,302
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793,195)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
