-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QN5AJk3YyvG1rHf9r2CxcKadUSarPiPhp9sFflK0u5HALlf9l15Hqbu8daPawYSs qITuYxSCdEaPXCvRMX4U8Q== 0000912057-97-009697.txt : 19970324 0000912057-97-009697.hdr.sgml : 19970324 ACCESSION NUMBER: 0000912057-97-009697 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970321 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MYO DIAGNOSTICS INC CENTRAL INDEX KEY: 0001029312 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 954089525 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-19285 FILM NUMBER: 97560301 BUSINESS ADDRESS: STREET 1: 3760 S ROBERTSON CITY: CULVER CITY STATE: CA ZIP: 90232 BUSINESS PHONE: 3105595500 MAIL ADDRESS: STREET 1: 3760 S ROBERTSON CITY: CULVER CITY STATE: CA ZIP: 90232 SB-2/A 1 SB-2/A As filed with the Securities and Exchange Commission on March 21, 1997 Registration No. 333-19285 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- Pre-Effective AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- MYO DIAGNOSTICS, INC. (Name of Small Business Issuer in its Charter) CALIFORNIA 384 95-4089525 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction of Classification Code Number) Identification No.) Incorporation or Organization) 3760 SOUTH ROBERTSON BLVD. CULVER CITY, CALIFORNIA 90232 (310) 559-5500 (Address and Telephone Number of Principal Executive Offices) ----------- 3760 SOUTH ROBERTSON BLVD. CULVER CITY, CALIFORNIA 90232 (310) 559-5500 (Address of Principal Place of Business or Intended Principal Place of Business) ----------- GERALD D. APPEL PRESIDENT MYO DIAGNOSTIC, INC. 3760 SOUTH ROBERTSON BLVD. CULVER CITY, CALIFORNIA 90232 (310) 559-5500 (Name, Address and Telephone number of Agent for Service) ----------- COPIES TO: Alan B. Spatz Troop Meisinger Steuber & Pasich 10940 Wilshire Boulevard Los Angeles, California 90024 (310) 824-7000 Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. MYO DIAGNOSTICS, INC. CROSS REFERENCE SHEET Item in Form SB-2 Location in Prospectus - ----------------- ---------------------- ITEM 1. Front of Registration Statement and Outside Front Cover of Prospectus . . . . . . . . . Outside Front Cover Page of Prospectus ITEM 2. Inside Front and Outside Back Cover Pages of Prospectus . . . . . . . . . . . . Inside Front and Outside Back Cover Page of Prospectus ITEM 3. Summary Information and Risk Factors. . . . "Prospectus Summary;" "Risk Factors" ITEM 4. Use of Proceeds . . . . . . . . . . . . . . Not Applicable ITEM 5. Determination of Offering Price . . . . . . Outside Front Cover Page of Prospectus ITEM 6. Dilution. . . . . . . . . . . . . . . . . . Not Applicable ITEM 7. Selling Security Holders. . . . . . . . . . "Principal and Selling Shareholders" ITEM 8. Plan of Distribution. . . . . . . . . . . . Outside Front Cover Page of Prospectus ITEM 9. Legal Proceedings . . . . . . . . . . . . . Not Applicable ITEM 10. Directors, Executive Officers, Promoters and Control Persons . . . . . . . . . . . . "Management" ITEM 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . "Principal and Selling Shareholders" ITEM 12. Description of Securities . . . . . . . . . "Risk Factors;" "Dividend Policy;" "Description of Capital Stock" ITEM 13. Interest of Named Experts and Counsel . . . Not Applicable ITEM 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . "Management" ITEM 15. Organization Within Last Five Years . . . . Not Applicable ITEM 16. Description of Business . . . . . . . . . . "Prospectus Summary;" "Management's Discussion and Analysis of Results of Operations and Financial Condition;" "Business" ITEM 17. Management's Discussion and Analysis or Plan of Operation. . . . . . . . . . . . "Management's Discussion and Analysis of Results of Operations and Financial Condition" ITEM 18. Description of Property . . . . . . . . . . "Business" ITEM 19. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . "Certain Transactions" ITEM 20. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . "Risk Factors;" "Description of Capital Stock" ITEM 21. Executive Compensation. . . . . . . . . . . "Management" ITEM 22. Financial Statements. . . . . . . . . . . . Financial Statements ITEM 23. Changes in and Disagreements With Accountants on Account and Financial Disclosure. . . . . . . . . . . . "Experts" PROSPECTUS 3,255,561 SHARES MYO DIAGNOSTICS, INC. COMMON STOCK This Prospectus relates to the offer and sale from time to time by certain shareholders (the "Selling Shareholders") of Myo Diagnostics, Inc., a California corporation (the "Company"), of up to 3,255,561 shares of Common Stock, no par value (the "Shares"), of the Company. The Company will not receive any proceeds from the sale of the Shares. The Selling Shareholders may sell all or a portion of the shares of Common Stock offered hereby from time to time in brokerage transactions in the over-the-counter market at prices and terms prevailing at the times of such sales. The Selling Shareholders may also make private sales directly or through brokers. The Selling Shareholders may individually pay customary brokerage commissions and expenses. In connection with any sales, the Selling Shareholders and any brokers participating in such sales may be deemed to be underwriters within the meaning of the Securities Act, in which event commissions received by such brokers may be deemed underwriting commissions under such Act. Under the 1934 Act and the regulations thereunder, any person engaged in a distribution of the shares of Common Stock offered by this Prospectus may not simultaneously engage in market making activities with respect to the shares of Common Stock of the Company during the applicable "cooling off" periods prior to the commencement of such distribution. in addition, and without limiting the foregoing, the Selling Shareholders will need to comply with applicable provisions of the 1934 Act and the rules and regulations thereunder including, without limitation, Rules 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of shares of Common Stock by the Selling Shareholders. There is no public market for the Common Stock, and none is likely to develop as a result of this offering. At December 31, the net tangible book value per share of the Common Stock was $.03 per share, and the Company had an accumulated deficit of $4,067,741. The Company expects to incur losses for the foreseeable future. A purchaser of these shares risks loss of his or her entire investment. THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 5 HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is ______________, 1997 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission in Washington, D.C., a Registration Statement under the Securities Act with respect to the shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and with respect to any contract or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. For further information with respect to the Company and the shares offered hereby, reference is hereby made to the Registration Statement and exhibits thereto. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates. Prior to the date of this Prospectus, the Company was not subject to the informational requirements of the Securities Exchange Act of 1934. Upon the effectiveness of the Registration Statement of which this Prospectus is a part the Company became subject to such informational requirements and, in accordance therewith, will file reports and other information with the Securities and Exchange Commission in accordance with its rules. Such reports and other information concerning the Company may be inspected and copied at the public reference facilities referred to above as well as certain regional offices of the Securities and Exchange Commission. The Commission maintains a Web site which contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission (such as the Company) at HTTP:\\www.sec.gov. The Common Stock will not be listed upon any national securities exchange. The Company intends to furnish its shareholders with audited reports containing annual financial statements. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE HEREIN. PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY READ THIS PROSPECTUS PRIOR TO MAKING AN INVESTMENT IN THE COMPANY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE INHERENTLY UNCERTAIN. ACTUAL RESULTS MAY DIFFER FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS FOR THE REASONS, AMONG OTHERS, DESCRIBED IN "RISK FACTORS." THE COMPANY Myo Diagnostics, Inc. (the "Company") is a development stage company which was formed in 1988 to develop and bring to market a new medical information system: Muscle Pattern Recognition ("MPR"). The Company's MPR system (the "MPR System") provides objective evidence of abnormal muscle recruitment and detailed information on the site, nature and severity of muscle dysfunction. Muscle recruitment is the engagement of muscles in order to perform a specific movement. The Company believes that no other system in use today is capable of objectively evaluating data to be used in diagnosing muscle dysfunction in of the back and delivering a report outlining the existence, nature and severity of abnormal muscle recruitment patterns of the back without the need for a subjective evaluation of raw data by the treating physician. This belief is based on the Company's active participation in the healthcare industry for the past eight years, the collective knowledge of the members of the Medical and Scientific Advisory Boards of the Company, and the Company's ongoing review of scientific literature and inquires of experts, scientists, clinicians and rehabilitation professionals in the field. The MPR System is designed to assist physicians to help establish a diagnosis, select a treatment and assess the effectiveness of such treatment. The MPR System also addresses needs that have become increasingly important in the new health care environment. In medical/legal cases for instance, the MPR System can serve as a forensic medical tool. Furthermore, the MPR System supports the cost-containment and risk management drive of managed care providers and health care insurers by giving them the capability to measure treatment outcomes, to eliminate unnecessary care, and prevent fraud. The Company licenses the MPR process and related technology from Toomim Research Group ("TRG"), a partnership of three of the Company's shareholders, which holds a United States patent on the MPR technology. The MPR System involves proprietary hardware, software and protocols which presently has the capability of evaluating back and neck muscles. In 1990, the Company received FDA premarket approval of the MPR System. The Company has completed production and design of the system and conducted a number of marketing and clinical tests. As of the date of this Prospectus, the Company has not commenced significant marketing efforts of the MPR System, and Company has not performed MPR evaluations except as part of research and development, clinical studies and test marketing. 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. For the Company to be successful, the Company must 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). To create market awareness, 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 involving 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 (insurance companies, health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs")) and providers (such as 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. 3 Although the Company has begun to implement its marketing plan (through commencing initial direct sales efforts and contacting potential strategic partners), to fully implement the marketing plan in 1997 and 1998, the Company estimates it would need an additional $2.0 million to $2.5 million of additional funding. The amount of additional funding if any, the Company receives will be determined by the degree to which it can implement its marketing plan. The additional funding will be used to hire sales and marketing personnel, finance clinical studies and conduct the public relations campaign. Without any additional funding, the Company does not believe that it will be able to develop sufficient awareness efforts to operate profitably in the foreseeable future. The Company's principal office is located at 3760 Robertson Blvd., Suite 212, Culver City, California 90232 and its telephone number is (310) 559-5500. 4 RISK FACTORS AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. AN INVESTOR RISKS LOSS OF HIS OR HER ENTIRE INVESTMENT. RELIANCE ON SINGLE PRODUCT The Company has only one product, the MPR System. There is no established market for this product. See "New and Uncertain Market." Accordingly, if for any reason the MPR System cannot be marketed successfully (including the many reasons described elsewhere under "Risk Factors"), 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) if the Company becomes insolvent or generally fails to pay its debts when due, (ii) the assignment by the Company of its property for the benefit of the Company's creditors or the appointment of a receiver for any part of the Company's property, (iii) the commencement of any proceedings under bankruptcy or insolvency law by or against the Company, (iv) the sale or other transfer of the license by the Company without TRG's consent and (v) the failure of a license of the Company to comply with the terms of 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 the light of problems, expenses, difficulties and delays frequently encountered in converting prototype designs into viable production designs, and in achieving market acceptance with a new type of product or service. The Company has had limited revenues to date, has operated at a loss since inception, and, because it is only now entering its commercial stage, it will likely sustain operating losses for an indeterminate time period. There can be no assurance that the Company will ever generate material revenues or that the Company will ever be profitable. NEW AND UNCERTAIN MARKET Until now, muscle injuries have always been diagnosed and evaluated subjectively by physicians through physical examination. Accordingly, there is no established demand for a computer-assisted procedure to assist in the diagnosis of such injuries, and it is difficult to predict if, and when, the procedure will gain wide acceptance by prescribers. A prerequisite to success will be the ability of the Company to establish MPR as a standard medical practice for use in the diagnosis of muscle dysfunction. The Company believes it will take a minimum of three to five years for such awareness to be achieved, if it can be achieved at all. Factors that may affect market acceptance could include resistance to change, concerns over the lack of track record of the procedure, and the risk for insurance companies to use the results of the procedure to challenge or overrule the diagnostic or treatment decisions of a physician. NEED FOR ADDITIONAL FUNDING To create market awareness of its MPR System, the Company will need to devote significant resources to marketing and sales. The Company's plan is to develop market awareness through a public relations campaign, including attendance at trade shows and professional conferences, scientific presentations and clinical studies. The Company believes its success will depend, in part, on the Company's ability to conduct additional clinical studies. In addition, and very critical to this process, will be direct contact with payors (primarily insurance companies, HMOs and PPOs) and providers (including physicians, rehabilitation professionals, hospitals and diagnostic clinics) to create 5 awareness of the MPR System and to educate them as to its benefits and clinical applicability. See "Business -- Marketing and Distribution." To fully implement its marketing plan in 1997 and 1998, the Company estimates it will need an additional $2.0 million to $2.5 million. The amount of additional funding, if any, the Company receives will determine for the degree to which it can implement its marketing plan. Without any additional funding, the Company does not believe it will develop sufficient marketing awareness to operate profitably in the foreseeable future. The Company may obtain additional funds 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. See "Preferred Stock". 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 be dependent, 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, that 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. 6 PRODUCT LIABILITY The Company may be subject to substantial product liability costs if claims arise out of problems associated with the use of the Company's MPR System. While the Company maintains insurance against such potential liabilities, there can be no assurance that such product liability insurance will adequately insure against such risk. CONTROL BY MANAGEMENT Gerald D. Appel owns beneficially 3,715,019 shares of the Common Stock (which includes voting rights with respect to 111,900 shares), representing 48.0% of the outstanding voting power of the Company as of December 31, 1996. All directors and officers of the Company (including Mr. Appel) currently have voting power with respect to 51.3% 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 and Selling 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 effect the voting power and other rights of the holders of the Common Stock. No shares of Preferred Stock are presently outstanding and the Company has no present plans to issue shares of Preferred Stock. ABSENCE OF PUBLIC MARKET Presently, there is no public market for any securities of the Company and it is unlikely that one will develop as a result of the sale of the Shares. No assurance can be given that any public market will ever develop for the Common Stock. The absence of a public market for the Common Stock makes an investment in the Common Stock highly illiquid. In addition, the absence of a public market results in there being no true "market price" for the Common Stock which would enable investors to determine the value of their investment. The Common Stock is not listed on a national securities exchange or on the NASDAQ Stock Market. The Company does not presently meet the requirements for listing the Common Stock on any national securities exchange or the NASDAQ Stock Market. SHARES ELIGIBLE FOR FUTURE SALE Any shares of Common Stock sold pursuant to this Prospectus will be freely tradable without restriction or registration under the Securities Act. An additional 5,016,031 shares of outstanding Common Stock are either "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act or shares which were issued to investors outside the United States. In general, "restricted securities" may be resold publicly in reliance on Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 77,000 shares) or the average weekly public trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months proceeding the sale and who is deemed to have owned shares, provided in Rule 144, for at least three years, is entitled to sell such shares under Rule 144(k) without limit regarding the volume limitations, manner of sale provisions, public information or notice requirements. In general, in the case of sales by non-public issuers (such as the Company), equity securities sold outside the United States may not be resold in the United States or to United States persons during a restricted period of one year unless such sales are registered under the Securities Act. 7 At January 31, 1997 the Company had outstanding options or warrants to purchase an aggregate of 1,000,755 shares of Common Stock at various times through March 1999 at a weighted average exercise price of $1.67 per share. Except with respect to the shares covered by this Prospectus and 600,000 shares included in units anticipated to be sold within two weeks from the date of this Prospectus (see "Description of Capital Stock"), the Company has no obligation to register any shares of Common Stock for its shareholders. However, the Company may grant registration rights in connection with the sales of convertible debt and/or equity securities. 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. See "Absence of Public 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. 8 THE COMPANY The Company was incorporated in California on January 5, 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 TRG. 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 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. DIVIDEND POLICY The present policy of the Company is to retain earnings to provide funds for use in its business. The Company has not paid cash dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1996. At December 31, 1996 ------------------------ Shareholders' Equity Preferred Stock, no par value -- 10,000,000 shares authorized, no shares outstanding ------ Common Stock, no par value -- 50,000,000 shares authorized; 7,746,037 shares outstanding(1) $ 4,300,679 Deficit accumulated during the development stage (4,067,741) ------------ Total Shareholders' Equity $ 232,938 ------------ ------------ - ------------------------------ (1) Does not include 1,000,755 shares of Common Stock issuable upon exercise of outstanding warrants and options. 9 MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company is a development stage company which 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. RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995. The Company incurred net losses of $1,067,280 in 1995 and $1,234,254 in 1996. Revenues declined in 1996 to $13,650 from $67,600 in 1995. Revenues in both years consisted primarily of fees for performance of MPR evaluations in connection with test marketing. Revenues were less in 1996 as no new test marketing commenced during that period. These revenues related to approximately 30 MPR evaluations made in 1996 and 125 MPR evaluations made in 1995. In 1995 and 1996 royalties to TRG in connection with these evaluations accrued in the amount of $4,650, of which TRG has waived claims to all but $630 (which has not been paid). The Company's operating expenses increased to $1,239,938 in 1996 from $1,090,639 in 1995. Sales and marketing expense decreased, due to a reduction in marketing efforts as the Company focused its efforts on raising capital and further product development. General and administrative expenses increased from $515,810 in 1995 to $703,282 in 1996 principally as a result of a $134,000 increase in legal fees relating primarily to the Company's capital raising efforts, a $51,000 increase in compensation expenses due to the hiring of four additional personnel involved, in part, in administration, and an increase in $26,000 in rental expense due to an expansion of the Company's leased facilities. FINANCIAL CONDITION The Company has funded its operating expenses principally through equity and debt financings, as the Company has had no material cash flows from operations. During the year ended December 31, 1996, the Company funded its operations principally through the sales of Common Stock generating net proceeds of $2,022,757. The Company has six revolving lines of credit from a commercial bank pursuant to which the company may from time to time borrow up to an aggregate of $400,000 at interest rates equal to the bank's prime rate of interest plus .75% to 1.50%. These lines, which were fully utilized at December 31, 1996, mature at various times through July, 1997. The Company was able to obtain these lines of credit because six unaffiliated individuals delivered to the bank irrevocable letters of credit in support of such lines, for which these individuals received options to purchase an aggregate of 400,000 shares of Common Stock for $1.13 per share. The Company has commitments from two existing shareholders to purchase 480,000 units, which commitments are anticipated to be fulfilled within several weeks after the date of this Prospectus. Each unit consists of one share of Common Stock and one quarter stock purchase warrant. Each whole warrant will entitle the holder to purchase one share of Common Stock for $3.00 at any time within one year after its issuance. The issuance of these units would generate net proceeds of $1,116,000 to the Company. The Company believes that the proceeds from the sale of these units will enable the Company to fund operations through the end of fiscal 1997. While the Company also anticipates generating revenues from the sale of MPR evaluations in 1997, the amount of such revenues remains extremely uncertain due to the fact that the MPR technology is a new product. As of January 31, 1997, the Company had one contract with a distributor to market and sell the Company's MPR's System. See "Business--Marketing and Distribution." Although the Company believes that it can fund operations through the end of fiscal 1997, it estimates it needs additional funding of approximately $2.0 million to $2.5 million to fully implement its marketing plan in 1997 and 1998. See "Business--Marketing and Distribution" for a description of the marketing plan. The amount of additional funding (if any) the Company receives will determine the degree to which it can implement its marketing plan. Without any additional funding, the Company does not believe that it will be able to develop sufficient market awareness of the MPR System to operate profitably in the foreseeable future. 10 BUSINESS OVERVIEW 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 to assist in the diagnosis of muscle injury. It can identify affected muscle sites, determine the nature of the dysfunction, and measure its severity. The results of an MPR evaluation are presented in a comprehensive report which is generated at the Company's central processing facility. The Company believes that the capabilities of its MPR System are unique and the MPR System addresses an unmet market need which has become even more pressing in view of the cost-consciousness of the present health care environment. The MPR System supports the cost-containment and risk management goals of insurers and managed care providers by giving them means to measure treatment outcomes, to eliminate unnecessary care and to detect outright fraud. It can serve as a forensic medical tool in medical/legal cases and reduce the exposure of insurers of disability and workers compensation risks. MPR's scientific foundation originates from the research of Dr. Toomim, one of the principals of the Company. Over the ten-year period that preceded the formation of the Company, Dr. Toomim did extensive research on the patterns of interactions occurring between the various muscles which participate in the execution of a movement. Central to the MPR concept is the discovery of movement-specific patterns which can be captured by simultaneously recording the electromyographic ("EMG") signals of all participating muscles. The comparison of a patient's patterns with those of "normal" subjects, using an expert system, 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 technicians 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 the 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. As of January 31, 1997, MCIC had introduced the product into six markets: Cleveland, Columbus, Cincinnati and Dayton, Ohio; Pittsburgh, Pennsylvania; and Louisville, Kentucky. The other states in which it plans to introduce the product are Michigan and Indiana. The Company will receive a fee for each MPR evaluation it performs through MCIC and receives revenues from the leasing of products. As of January 31, 1997, no MPR evaluations had been conducted through MCIC other than limited evaluations for clinical purposes. 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 was plagued by major flaws. "Liability System Incentives to Consume Excess Medical Care," a study by the RAND Corporation Institute for Civil Justice, found an estimated 59% of the costs submitted in support of soft injury claims for auto accidents is excess. This study further indicated that 11 "the implications of this analysis reached far beyond auto insurance premiums. Our data clearly suggests that large amount 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 to 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: - 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. 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. - ESTABLISH THE PRODUCT IN THE HMO AND CORPORATE MARKETS through strategic partnerships with major health care firms and insurance companies. The Company hopes that these strategic partners will introduce MPR to users with whom they have existing relationships, which will provide accelerated entry into a large number of HMOs and major corporations. One such partnership is presently being negotiated. - 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 Prospectus, the Company had no clinical study in process, and its ability to conduct additional clinical studies (each 12 of which costs approximately $250,000) is dependent upon obtaining additional funding. See "Risk Factors--Need For Additional Funding". - DEVELOP NEW APPLICATIONS OF ITS CORE TECHNOLOGY. The Company intends to use its know-how and core technology to address other applications related to arm and leg muscles. For example, the development of appropriate protocols may allow the Company to introduce evaluation systems for carpal tunnel syndrome, rotator cuff injuries and pre- and post-operative arthroscopic surgery evaluation. In addition, the Company plans to develop a disability management information system designed to provide the elements necessary to predict potential high risk of injury, avoid injuries through appropriate preventative intervention, assess injury through MPR and other data, establish protocols for treatment of injuries, manage chronic back injury cases and establish outcome measures. This system of "disease management" provides significant elements of cost containment which are currently being sought by payors. The Company does not anticipate completing development of new applications for at least the next two years; in addition, its ability to complete development of new applications will be contingent in part upon obtaining additional funding or generating sufficient revenues from the MPR System. PRODUCT The MPR System is a computer-assisted evaluation procedure which is based on the simultaneous measurement of electromyographic signals produced by up to 16 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 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 29 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 14 of these 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 technician/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, and after connecting the electrodes to the data acquisition device, the technician performs a calibration of the instrument. The purpose of the calibration is to prevent skin-specific variances to affect the readings, thereby ensuring that the patterns from various subjects can be compared. The patient is then 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. Technicians who perform the tests on the patient are presently required to receive two weeks training from the Company. No special governmental or regulatory license or approval is required for the technicians to perform the service. 13 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 continuously updated as more data is collected. The report which is produced is reviewed by a Company employee to ascertain that the data was properly collected and processed. The system of statistical analysis used in the MPR evaluations is based on well-established principles of statistics which indicate that data which falls two standard deviations or more from the mean value of the data base to which it is compared has a statistical certainly of 95%-99% depending upon how far beyond two standard deviations the data falls. The MPR System requires that this phenomenon occur in multiple instances before it is considered to be significant for further analysis. This assures that there is a very high probability that the data is significant and a very low probability of falsely identifying an artifact as being significant. THE MUSCLE PATTERN RECOGNITION REPORT. The MPR Report provides the physician with findings to classify the patient as normal or with a graded level of muscle dysfunction. It provides four critical statements about the muscle groups examined, along with detailed information supportive of these conclusions: - - EVIDENCE OF DYSFUNCTION: Reports if muscle recruitment is normal or abnormal and, if abnormal, the location of the abnormality; - - FREQUENCY AND SEVERITY OF THE DYSFUNCTION: The severity of the dysfunction as compared to normal and the frequency it occurs during the nine movements; - - THE PATTERNS OF ABNORMAL MUSCLE RECRUITMENT: Graphic presentation of the abnormal muscle patterns including the patterns of muscle compensation; - - THE BIO-MECHANICAL EXPLANATION OF THE ABNORMAL MUSCLE RECRUITMENT PATTERNS: Describes the reason for the functional adjustments made during movement. Patients may be retested to measure progress and treatment and to assist the physician in making a decision for discharge. Such retests are not normal, but are done at the discretion of the physician. When a patient is retested to ascertain if additional treatment is advisable and the second MPR evaluation is compared to the baseline test, several other critical questions are addressed: - - IS THE PATIENT'S MUSCLE RECRUITMENT PATTERN NOW WITHIN THE RANGE OF NORMAL? - - IF STILL DYSFUNCTIONAL, HAS THE PATIENT PROGRESSED THROUGH TREATMENT? - - SHOULD THE INSURANCE COMPANY CONTINUE TO FUND FURTHER (OR DIFFERENT) TREATMENT? 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. 14 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 two 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), and "Theoretical Basis for Patterning EMG Amplitudes to Assess Muscle Disfunction," MEDICINE AND SCIENCE IN SPORTS EXERCISE, Vol. 28, No. 6 (1996). They have also authored one other article on the MPR technology which has been accepted for publication in the Spring of 1997. 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. 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 use in the 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 has created 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 15 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 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 a primary target because their reimbursement policies and practices have a profound impact on the medical diagnostic industry; they largely dictate pricing policies, methods of distribution and growth strategies. Insurance companies are also playing an increasingly important role as prescribers. For example, recent workers compensation reforms in California have given insurers more control over treatment regimen. An insurer can now dictate the treatment of a patient for up to four months. Because MPR can serve to control direct medical costs and indirect costs such as lost time, disability claims and litigation costs, the Company believes that its procedure will be well received by insurers who may become a major source of referrals, particularly in the workers compensation market. HMOS AND PPOS are expected to be of vital importance to the Company due to their leadership role in the cost containment drive and the considerable market share they enjoy. SELF-INSURED EMPLOYERS paid claims representing 34% of the claims paid in California for worker's compensation in 1995, according to Table No. 1, 1995 STATE WIDE TOTALS, DEPARTMENT OF INDUSTRIAL RELATIONS, OFFICE OF SELF-INSURANCE PLANS, (1996). This could be a significant market for the MPR System. HEALTH CARE PLAN ADMINISTRATORS are large organizations which provide services to public and private self-insured employers. In their role to manage private plans, they can influence care strategies and/or treatment selection criteria, and they may have authority to commit funds for evaluation and treatment. Most of them have financial incentives to contain costs and limit payors' exposure related to ongoing treatment and disability. HOSPITALS, INDEPENDENT CLINICS, DIAGNOSTIC CENTERS AND PHYSICIANS will be recruited as evaluation centers for MPR evaluations. These providers may become the delivery system for corporate clients and insurance companies. They may service the medical/legal market and may later become the sites for entry into the medical back pain and physical medicine market. SERVICE DELIVERY STRATEGIES. The Company intends to market its services on a per-use basis, directly ("Direct Services Operations") and through distributors. As of the date of this Prospectus, 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 either be provided 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 16 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 Prospectus, the Company had no contracts for mobile testing services. DISTRIBUTORS. The Company intends to establish distributor operations through limited exclusive arrangements 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 which will refer MPR, are attracted by the low capital investment and high margin of MPR. 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 introduce the MPR procedure in 20 markets in the five states in which it operates. As of January 31, 1997, MCIC had introduced the product into six markets: Cleveland, Columbus, Cincinnati and Dayton, Ohio; Pittsburgh, Pennsylvania; and Louisville, Kentucky. The other states in which it plans to introduce the product are Michigan and Indiana. The Company will receive a fee for each MPR evaluation it performs through MCIC and receives revenues from the leasing of products. As of January 31, 1997, no MPR evaluations had been conducted through MCIC other than limited evaluations for clinical purposes. MANUFACTURING The Data Acquisition Module consists of a standard laptop computer, a modified board and the Company's proprietary software. The Company acquires the laptop computers from an outside source. The modified boards are manufactured by the subcontractor who participated in their development, and with whom the Company has established a long term relationship. Once tested, the boards are shipped to the Company which installs them along with its proprietary software and tests the completed Module. FACILITIES AND EMPLOYEES The Company operates from leased facilities in Culver City, California. 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 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. As of January 31, 1997, the Company had 14 full time employees, including five involved in research and development, seven involved in administration and operations, and two involved in marketing. 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 were required for the data collection system. 17 The Company purchases the data acquisition device from an unaffiliated manufacturer. The Company has been advised by the manufacturer that the device may be used as a result of notification under Section 510(k) of the FDA Act as a substantially equivalent medical device. In the event that the data acquisition device is not available from a third party, the Company could manufacture the device itself (and, in past years, did manufacture such device). The Company's authority to manufacture and market the data acquisition device would be based upon its notification under Section 510(k) of the FDA Act that its device was a substantially equivalent medical device, which notification was accepted by the FDA in 1990. The Company believes that no other aspect of the MPR System is subject to regulation by the FDA. INTELLECTUAL PROPERTY The Company licenses the right to manufacture, market, sell, distribute and further develop the MPR System and MPR technology and any related or derivative technology throughout the world pursuant to an exclusive license with TRG, a partnership among Gerald D. Appel, Daniel J. Levendowski and Hershel Toomim. Mr. Appel and Mr. Toomim are directors of the Company, and Mr. Appel is the principal shareholder and Chief Executive Officer of the Company. The MPR System and related technology and all additions or modifications thereto remain the property of TRG, provided, however, that any derivative technology developed by the Company for purposes other than the evaluation and treatment of muscle dysfunction in the back, arms and legs ("Derivative Technology") will be the property of the Company. The Company pays royalties to TRG for the use of the MPR technology and any Derivative Technology as follows: (i) the lesser of $30.00 per use or 10% of total revenues received by the Company for each of the first 10,000 times the MPR procedure is ever used, (ii) the greater of $12.50 per use or 5% of total revenues received by the Company for each use thereafter, (iii) 5% of total revenues received by the Company for each sale, lease, license or other transfer of the MPR procedure or related equipment or technology and (iv) 3% of total revenues received by the Company for each sale, lease, license or other transfer of the Derivative Technology. The Company is not required to make any payments on revenues pursuant to (iii) or (iv) to the extent royalties were previously paid on such revenues pursuant to (i) or (ii). The procedure has been used in clinical tests approximately 350 times to date. The license expires in 2013. The license is terminable by TRG upon 14 days notice (subject to cure during such period) (i) if the Company fails to observe the terms of the Agreement, (ii) if the Company becomes insolvent or generally fails to pay its debts when due, (iii) the assignment by the Company of its property for the benefit of the Company's creditors or the appointment of a receiver for any part of the Company's property, (iv) the commencement of any proceedings under bankruptcy or insolvency law by or against the Company and (v) the sale or other transfer of the license by the Company without TRG's consent. 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. 18 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information with respect to each executive officer and director of the Company. Name Age(1) Position - ---- --- -------- Gerald D. Appel 60 President, Chief Executive Officer and Chairman of the Board of Directors Patricia Colvin 58 Director of Operations Kathleen Day 40 Director of Research and Development Dr. Theodore Goldstein 58 Medical Director Dr. Hershel Toomim, Sc.D. 80 Director Wayne C. Cockburn 40 Director _____________ (1) At December 31, 1996 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. Ms. Colvin has served as Director of Operations of the Company since March 1997. Prior to joining the Company, Ms. Colvin served as Operations Manager and Director of Human Resources for Stylus/Expressions Inc. for seven years. Ms. Colvin has also served as Director of Human Resources and Operations at the Fashion Channel, where she was responsible for hiring over 700 employees, and as Divisional Vice President of Sales Support, Training and Development at the May Company. Ms. Day has served as Director of Research and Development of the Company since March 1997. Ms. Day has been a member of the UCLA Neurophysiology laboratory, headed by V. Reggie Edgerton. As such, she has participated in projects funded by the National Institute of Health and NASA. Ms. Day has been associated with the development of the MPR technology for the past four years. Dr. Goldstein became Medical Director of the Company in March 1997. He has been a practicing orthopedist for more than 30 years. He is currently the Director of the West Coast Spine Institute in Los Angeles, California. Dr. Goldstein lectures extensively on back injury and has co-authored the book, "Win The Battle Against Back Pain," (1996). He graduated from the University of Illinois Medical School with honors in 1964. DR. TOOMIM has served as a Director of the Company since he co-founded it with Mr. Appel in 1988. Dr. Toomim also served as Vice President of Research and Development of the Company from 1988 to 1996. MR. COCKBURN has served as a Director of the Company since July 1995. Mr. Cockburn has been employed by Imutec Corporation, a Canadian biopharmaceutical company, since January 1995, and is currently Vice President of Corporate Development. From 1994 to 1995 Mr. Cockburn was an investment banker with McDermid St. Laurence Chisholm, Ontario, Canada, and for more than the three years prior to that, he was a securities broker with Midland Walwyn, Ontario, Canada. 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. 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. 19 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. ROBERT SAMUEL MAYER, M.D. Dr. Mayer is an Assistant Professor in the Department of Physical Medicine and Rehabilitation at Rush Medical College and a practicing Physiatrist at the Rehabilitation Clinic, S.C. Dr. Mayer serves as the Residency Program Director for the Rush-Marianjoy Residency in Physical Medicine and Rehabilitation. Dr. Mayer also serves on the Editorial Advisory Committee for the journal SPINE. 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 SAR. This Board meets twice yearly in January and July, and members receive $2,500 for each meeting attended. 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. ROBERT I. JENNRICH, PH.D., M.S. Dr. Jennrich received his Bachelor of Science and Master of Science in Mathematics from the University of Wisconsin and his Ph.D. in Mathematics from UCLA. Dr. Jennrich is currently a professor within the Department of Mathematics at UCLA. He has published over 60 papers in peer-reviewed journals, his most important papers concerning biological and technical applications of advanced statistics. Dr. Jennrich is an active member of the Institute of Mathematical Statistics, the American Statistical Association and the Psychometric Society and has received numerous honors from these and other societies. JULES ROTHSTEIN, PH.D. Dr. Rothstein is a Professor and Chairman for The Department of Physical Therapy at the University of Illinois at Chicago. Dr. Rothstein is the Editor for the journal PHYSICAL THERAPY. ROLAND ROY, PH.D. Dr. Roy is currently a Researcher for the Brain Research Institute at the University of California at Los Angeles. Dr. Roy also serves as the Co-Director for the Laboratory for Neural Control of Movement and Neural Muscular Plasticity. 20 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. EXECUTIVE REMUNERATION The following table sets for certain information regarding the compensation of the Chief Executive Officer for the year ended December 31, 1996 (no other officer had annual compensation in excess of $100,000 during that year): Summary Compensation Table ---------------------------- Name and Principal Positions Year Salary ---------------------------- ---- ------ Gerald D. Appel, President and Chief 1996 $124,000 Executive Officer EMPLOYEE STOCK OPTION PLAN The Board of Directors has approved the establishment of a stock option plan pursuant to which the Company may from time to time issue up to 1,000,000 shares of Common Stock to selected employees. No written plan has been adopted, and no options have been granted under such a plan. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Articles of Incorporation include a provision that eliminates the personal liability of its directors to the Company and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") (concerning contracts or transactions between the Company and a director) or (vii) under Section 316 of the California Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation also include an authorization for the Company to indemnify its agents (as defined in Section 317 of the California Code), through bylaw provisions, by agreement or otherwise, to the fullest extent permitted by law. Pursuant to this latter provision, the Company's Bylaws provide for indemnification of the 21 Company's directors, officers, agents and employees. In addition, the Company, at its discretion, may provide indemnification to persons whom the Company is not obligated to indemnify. The Company has entered into indemnity agreements with all directors which provide the maximum indemnification permitted by law. These agreements, together with the Company's Bylaws and Articles of Incorporation, may require the Company, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. Section 317 of the California Code and the Company's Bylaws make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Company is currently reviewing director and officer liability insurance policies and may purchase such a policy in the future. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 22 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth as of the date hereof, certain information regarding the ownership of the Common Stock by: (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock; (ii) each of the Company's directors (other than members of the Medical Advisory Board and Scientific Advisory Board); (iii) all of the Company's executive officers and directors as a group and (iv) each Selling Shareholder. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each of the persons has sole voting and investment power with respect to the Shares owned. Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended. Under this Rule, certain 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 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 persons actual voting power at any particular date.
Beneficial Ownership Prior to Beneficial Ownership Offering After the Offering (1) --------------------------- ----------------------- Number Number of of Shares Shares Number of Name Owned Percent Offered Shares Percent - ----------------------------------- ------------ ------- --------- ------------ ------- Gerald D. Appel 3,715,019(2) 48.0% 1,000,000 2,715,019(2) 35.1% 3760 South Robertson Blvd. Culver City, California 90232 Ontario Municipal Employees 1,401,561(3) 17.2% 1,401,561 0 0% Retirement Board One University Avenue, Suite 1100 Toronto, Ontario M5J 2P1 Canada Altamira Management Ltd. 750,000(4) 9.2% 375,000 375,000 4.6% 250 Bloor Street East, Suite 300 Toronto, Ontario M4W 1E6 Canada Bona Vista Asset Management Ltd. 450,000(5) 5.6% 225,000 225,000 2.8% 2300 Yonge Street, Suite 2900 P.O. Box 2384 Toronto, Ontario M4P 1E4 Canada Hershel Toomim 3710 South Robertson Blvd. Culver City, California 90232 192,000 2.5% 192,000 0 0% Wayne Cockburn 63,000(6) 0.8% 62,000 1,000 -- Imutec Corporation 1285 Morningside Avenue Scarboro, Ontario M1B 3W2 Canada All directors and executive officers as a 3,970,019(2) 51.3% 1,254,000 2,716,019 35.1% group (6 persons)
________________ (1) Assumes all shares offered are sold. 23 (2) 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. (3) Includes 405,555 shares which may be acquired at prices ranging from $1.50 to $2.00 per share upon exercise of warrants. (4) Includes 75,000 shares which may be acquired for $3.00 per share upon exercise of warrants, and 375,000 shares Altamira Management Ltd. has the right and obligation to purchase immediately following the date of this Prospectus, of which 75,000 shares for $3.00 per share may be acquired upon the exercise of warrants. (5) Includes 45,000 shares which may be acquired for $3.00 per share upon exercise of warrants, and 225,000 shares Bona Vista Asset Management Ltd. has the right and obligation to purchase immediately following the date of this Prospectus, of which 45,000 shares for $3.00 per share may be acquired upon the exercise of warrants. (6) Includes 1,000 shares registered in the name of 260-274 Geary Avenue Ltd. over which Mr. Cockburn has exclusive voting and investment power. CERTAIN TRANSACTIONS In December 1994, the Company entered into a Securities Purchase Agreement (the "December Purchase Agreement") with Ontario Municipal Employees Retirement Board ("OMERB"). Pursuant to the terms of the December Purchase Agreement, the Company sold to OMERB 680,741 shares of Common Stock for an aggregate purchase price of $1,000,000, and granted to OMERB currently exercisable warrants to purchase 100,000 shares (the "Series A Warrant") and 83,333 shares (the "Series B Warrant") of Common Stock with a current exercise price of $1.50 and $1.75 per share, respectively. The Series A Warrant expires on December 23, 1997 and the Series B Warrant expires on June 23, 1998. In August 1995, the Company entered into another Securities Purchase Agreement (the "August Purchase Agreement") with OMERB. Pursuant to the terms of the August Purchase Agreement, the Company sold to OMERB 111,111 shares of Common Stock for an aggregate purchase price of $200,000, and granted to OMERB currently exercisable warrants to purchase 222,222 shares of Common Stock (the "Series C Warrant") with a current exercise price of $2.00 per share. The Series C Warrant expires on December 31, 1998. The Company licenses the right to manufacture, market, sell, distribute and further develop the MPR System and technology and any related or derivative technology throughout the world pursuant to an exclusive twenty-year license with TRG, a partnership among Gerald D. Appel, Daniel J. Levendowski and Hershel Toomim. Mr. Appel is the Chairman of the Board, Chief Executive Officer, President and a principal shareholder of the Company, and Dr. Toomim is a director and a principal shareholder of the Company. See "Business--Intellectual Property." In May 1996 the Company issued to Waldorf Investment Advisory Services, a corporation controlled by Mr. Cockburn, 100,000 shares of Common Stock in satisfaction of obligations aggregating $100,000 of the Company to such corporation for investment banking and financial consulting services rendered during the prior several years. This corporation presently provides no services to the Company. From time to time Gerald D. Appel has loaned funds to the Company. These loans were payable on demand with interest at the rate of 10% per annum. The largest amount outstanding to Mr. Appel for these loans at any time since January 1, 1995 was $90,000. At the date of this Prospectus, no loans were outstanding. In connection with the transaction in which Myo Diagnostics, Ltd. (the "Partnership") transferred all of its assets and liabilities to the Company in December, 1994 (see "The Company"), the limited partners of the Partnership 24 (other than the Company) received, among other things, notes of the Company in the aggregate amount of $150,000. The Company defaulted in payment of these notes and, pursuant to the terms of the notes, the noteholders were entitled to receive (and did receive), for no additional consideration, 42,000 shares of Common Stock. Of these notes, $12,500 were issued to Gerald D. Appel, who received 6,000 shares of Common Stock as a result of the default. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue up to 50,000,000 shares of Common Stock. Subject to dividend and liquidation preferences that may be applicable to any shares of Preferred Stock outstanding, the holders of Common Stock are entitled to receive dividends as and when declared by the Board of Directors out of funds legally available therefor, and, upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. The holders of Common Stock are entitled to one vote for each share of Common Stock held of record by them, may cumulate votes in the election of directors, have no preemptive or conversion rights and are not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. The Common Stock currently outstanding is fully paid and non-assessable. At December 31, 1996, there were 7,746,037 shares of Common Stock outstanding which were held of record by 95 persons. The Company is also authorized to issue up to 10,000,000 shares of Preferred Stock. The Board of Directors of the Company is authorized to fix the dividend rights, dividend rate, conversion rights, voting rights, liquidation preferences, rights and terms of redemption (including sinking fund provisions) on any wholly-unissued series of Preferred Stock, the number of shares constituting any such series and the designation thereof. At present, no shares of Preferred Stock are outstanding and the Company has no present plans to issue shares of Preferred Stock. At January 1, 1997 the Company had outstanding options or warrants to purchase an aggregate of 1,000,755 shares of Common Stock at various times through March 1999 at a weighted average exercise price of $1.67 per share. The Company has commitments from certain shareholders to purchase 480,000 shares of Common Stock and warrants to purchase 120,000 shares of Common Stock, which warrants are exercisable at a price of $3.00 per share for one year from issuance. It is anticipated that these units will be issued within two weeks of the date of this Prospectus. In the event of such issuance, the Company will issue a warrant to the broker/dealer participating in the Offering to purchase 43,200 shares of Common Stock for an exercise price of $2.50 per share at any time within two years from the date of issuance. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California. EXPERTS The financial statements of the Company as of December 31, 1996 and for the year then ended have been audited by Singer Lewak Greenbaum & Goldstein, LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of the Company for the year ended December 31, 1995 have been audited by Lever, Lippe, Hellie & Company LLP, independent certified public accountants ("Lever"), as indicated in their report with respect thereto, and are included in reliance upon such report given upon the authority of such firm as experts in auditing and accounting. Lever declined the engagement to audit the Company's financial statements for 1996 because it does not generally audit publicly traded companies. Lever's report on the financial statements for 1994 and 1995 did not contain an adverse opinion or disclaimer of opinion, and was not modifed as to uncertainty, audit scope, or accounting principles. The Company had no disagreements with Lever, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. 25 INDEX TO FINANCIAL STATEMENTS
Page ---- AUDITED FINANCIAL STATEMENTS OF MYO DIAGNOSTICS, INC. Report of Independent Certified Public Accountants for the year ended December 31, 1996. . . . . . . . .F-2 Independent Auditors' Report for the year ended December 31, 1995. . . . . . . . . . .. . . . . . . . ..F-3 Balance Sheet as of December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-4 Statements of Operations for the period from January 5, 1997 (inception) to December 31, 1996 (unaudited), and for the years ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . .F-5 Statements of Changes in Shareholders' Equity from January 5, 1987 to December 31, 1996 (Amounts to December 31, 1994 are unaudited) . . . . . . . . . . . . . . . . . . . .F-6 Statements of Cash Flows for the period from January 5, 1997 (inception) to December 31, 1996 (unaudited), and for the years ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . .F-8 Notes to Financial Statements for the years ended December 31, 1996 and 1995 . . . . . . . . . . . . . .F-9
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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, 1996, and the related statements of operations, changes in shareholders' equity, 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 1996, and the results of its operations and 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, 1996, 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, 1996, the Company incurred a net loss of $1,235,054. In addition, the Company is in the development stage at December 31, 1996. 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. /s/ Singer Lewak Greenbaum & Goldstein LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California February 7, 1997 F-2 [Letterhead of Lever, Lippe, Hellie & Company LLP] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Myo Diagnostics, Inc. Culver City, California We have audited the accompanying statements of operations, shareholders' deficit, and cash flows of Myo Diagnostics, Inc. (a development stage company), a California corporation (the "Company") for the year ended December 31, 1995. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations, shareholders' deficit, and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the statements of operations, shareholders' deficit, and cash flows referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 1995 in conformity with generally accepted accounting principles. As more fully discussed in Note 1 to the financial statements, the accompanying financial statements disclosures related to the cumulative amounts for the period from January 5, 1987 (date of inception) to December 31, 1995 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. /s/ Lever, Lippe, Hellie & Company LLP LEVER, LIPPE, HELLIE, & COMPANY LLP Los Angeles, California June 6, 1996 F-3 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, 1996
ASSETS Current assets: Cash (note 2) $ 606,144 Accounts receivable, less allowance for doubtful accounts of $25,672 - Prepaid expenses and other assets 5,417 ------------ Total current assets 611,561 ------------ Furniture and equipment, net (note 3) 204,112 Other assets (note 4) 35,412 ------------ $851,085 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses (note 9) $ 112,482 Notes payable to bank (note 5) 400,000 Current portion of obligations under capital leases 38,539 ------------ Total current liabilities 551,021 ------------ Obligations under capital leases 67,126 Commitments and contingencies (note 9) Shareholders' equity (notes 10 and 11) 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, 7,746,037 shares issued and outstanding 4,300,679 Deficit accumulated during the development stage (4,067,741) ------------ Total shareholders' equity 232,938 ------------ $851,085 ------------ ------------
The accompanying notes are an integral part of these financial statements. F-4 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
January 5, 1987 (inception) to December 31, 1996 1996 1995 -------------- --------- -------- (unaudited) Revenue $ 89,291 $ 13,650 $ 67,600 Operating expenses Research and development 1,149,436 256,211 239,307 Technical services 530,186 182,910 191,588 Sales and marketing 297,452 97,535 143,934 General and administrative 2,080,213 703,282 515,810 ----------- ----------- ----------- Total operating expenses 4,057,287 1,239,938 1,090,639 ----------- ----------- ----------- Loss from operations (3,967,996) (1,226,288) (1,023,039) Other income (expenses) Interest expense (158,668) (63,990) (49,251) Interest income 62,923 56,024 5,810 ----------- ----------- ----------- Loss before provision for income taxes (4,063,741) (1,234,254) (1,066,480) Provision for income taxes (note 8) 4,000 800 800 ----------- ----------- ----------- Net loss $(4,067,741) $(1,235,054) $(1,067,280) ----------- ----------- ----------- ----------- ----------- ----------- Net loss per share $ (0.97) $ (0.17) $ (0.16) ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding 4,202,873 7,195,757 6,599,036 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-5 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1996 (AMOUNTS TO DECEMBER 31, 1994 ARE UNAUDITED)
Deficit Accumulated Common Stock During the ------------------------------ Development 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 December 31, 1990 - - (20,367) (20,367) ----------- -------- ---------- --------- Balance, December 31, 1990 1,862,250 17,208 (20,367) (3,159) Issued for services 305,950 2,404 - 2,404 Issued for cash 11,230 25,000 - 25,000 Net loss - - (243,621) (243,621) ----------- -------- ---------- -------- Balance, December 31, 1991 2,179,430 44,612 (263,988) (219,376) Net loss - - (258,180) (258,180) ----------- -------- ---------- -------- Balance, December 31, 1992 2,179,430 44,612 (522,168) (477,556) Issued for cash 11,230 1,123 - 1,123 Net loss - - (421,341) (421,341) ----------- -------- ---------- -------- Balance, December 31, 1993 2,190,660 45,735 (943,509) (897,774) Stock split 2,190,660 - - - Issued for exchange of $174,090 of debt 144,619 174,090 - 174,090 Issued for services 60,000 600 - 600 Issued for net assets of limited partnership, net of related expenses of $1,350 755,330 372,885 - 372,885 Issued for cash in 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) 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)
(continued) The accompanying notes are an integral part of these financial statements. F-6 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED) JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1996 (AMOUNTS TO DECEMBER 31, 1994 ARE UNAUDITED)
Deficit Common Stock Accumulated ------------------------------- During the Development Shares Amount Stage TOTAL ----------- ------------ ------------ ----------- Balance forward 6,521,259 $ 2,028,322 $ (2,832,687) $ (804,365) Issued for cash 27,778 50,000 - 50,000 Issued for cash in a private placement, net of related expenses of $14,243 500,000 985,757 - 985,757 Issued for the forgiveness of accrued expenses 100,000 100,000 - 100,000 Issued for debt 25,000 50,000 - 50,000 Issued as consideration for late payment of notes payable 42,000 75,600 - 75,600 Stock options exercised 50,000 5,000 - 5,000 Issued for cash in a private placement, net of related expenses of $218,000 480,000 982,000 - 982,000 Issuance of stock options - 24,000 - 24,000 Net loss - - (1,235,054) (1,235,054) ----------- ------------ ------------ ----------- Balance, December 31, 1996 7,746,037 $ 4,300,679 $ (4,067,741) $ 232,938 ----------- ------------ ------------ ----------- ----------- ------------ ------------ -----------
The accompanying notes are an integral part of these financial statements. F-7 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FROM JANUARY 5, 1987 (INCEPTION) TO DECEMBER 31, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
January 5, 1987 (inception) to December 31, 1996 1996 1995 -------------- ------------ ------------- (unaudited) Cash flows from operating activities: Net loss $ (4,067,741) $(1,235,054) $ (1,067,280) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 251,895 34,677 36,104 Bad debt expense 19,450 19,450 - Compensation expense resulting from the issuance of stock options 24,000 24,000 - Common stock issued in consideration for the extension of the repayment terms for notes payable to related parties 75,600 75,600 - Common stock issued for services rendered 12,527 (Increase) decrease in: Accounts receivable - 12,018 (26,269) Prepaid expenses and other assets (5,417) 242 (5,206) Other assets (35,412) (10,596) (12,867) Increase (decrease) in: Accounts payable and accrued expenses 212,482 (130,086) 264,483 Accrued interest payable - (45,520) - ------------- ------------ ------------- Net cash used in operating activities (3,512,616) (1,255,269) (811,035) ------------- ------------ ------------- Cash flows from investing activities: Purchase of furniture and equipment (363,195) (61,777) (39,917) ------------- ------------ ------------- Net cash used in investing activities (363,195) (61,777) (39,917) ------------- ------------ ------------- Cash flows from financing activities: Net borrowings under bank lines of credit 400,000 - - Borrowings on notes payable to related parties 633,590 95,500 12,000 Repayments on notes payable to related parties (409,500) (191,500) (114,500) Repayment on obligations under capital lease (6,597) (6,597) - Net proceeds from issuance of common stock 3,864,462 2,022,757 298,898 ------------- ------------ ------------- Net cash provided by financing activities 4,481,955 1,920,160 196,398 ------------- ------------ ------------- Net increase (decrease) in cash 606,144 603,114 (654,554) Cash, beginning of period - 3,030 657,584 ------------- ------------ ------------- Cash, end of period $ 606,144 $ 606,144 $ 3,030 ------------- ------------ ------------- ------------- ------------ ------------- Supplemental Cash Flow Information Cash paid during the years for: Interest $ 202,808 $ 109,510 $ 49,251 ------------- ------------ ------------- ------------- ------------ ------------- Taxes $ 4,000 $ 800 $ 800 ------------- ------------ ------------- ------------- ------------ -------------
Non-cash Financing Activities During 1996, $112,262 of furniture and equipment was acquired under capital leases. During 1996, 100,000 shares of common stock were issued for the forgiveness of accrued expenses and 25,000 shares were issued for the conversion of debt. The accompanying notes are an integral part of these financial statements. F-8 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 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, name was changed to Devion Group and then to Myo Diagnostics, Inc. on September 15, 1989. The principal activity of the Company is the research and development of Muscle Pattern Recognition. Muscle Pattern Recognition provides an objective evaluation of soft tissue muscle injuries. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, during the year ended December 31, 1996, the Company incurred a net loss of $1,235,054. In addition, the Company is in the development stage at December 31, 1996. 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 sheet is dependent upon the Company's ability to meet its financing requirements, and the success of its plans to sell its products. The Company has commitments from certain shareholders to purchase 480,000 shares of common stock for $2.50 per share. It is anticipated that these shares will be issued within two weeks of the effective date of Form SB-2 filed by the Company with the Securities and Exchange Commission. The Company believes that the capital received from the sale of the 480,000 shares described above and the revenue from anticipated sales will provide enough working capital for the foreseeable future. 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 their book value and neither the Partnership or Corporation recognized a gain or loss. The 2.8% limited partners exchanged their interests in the Partnership, totaling $547,885, for 755,330 shares of common stock and $175,000 in notes payable. The business combination was recorded in a manner similar to a "pooling-of- interest" method of accounting. Under this method, assets and liabilities of the Partnership were recorded at historical cost. F-9 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEVELOPMENT STAGE COMPANY The Company is a development stage company as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company is devoting substantially all of its present efforts to establish a new business and its planned principal operations have not yet commenced. All losses accumulated since inception have been considered as part of the Company's development stage activities. The cumulative amounts presented for the statement of operations and cash flows from the Company's inception are unaudited because it is impractical to audit the financial statement information for the first seven years of the Company's existence due to the lack of sufficient accounting records. Net sales 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. The estimated useful lives as follows: Furniture and equipment 5 to 7 years Computer hardware and software 5 years Leasehold improvements are amortized over three years, which is the shorter of their estimated useful lives or the remaining term of the lease. Expenditures for maintenance and repair are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the disposal of furniture and equipment is recorded in the statement of operations. PATENT Patents, which are included in other assets in the accompanying balance sheet, 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. F-10 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CAPITAL LEASES The Company is the lessee of certain equipment under capital leases expiring in various years through 2001. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over the lower of their related lease terms or their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for 1996. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. These costs consist primarily of salaries and consulting fees. INCOME TAXES The Company uses the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for 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). NET LOSS PER SHARE Net loss per share is based on the weighted average number of common and common equivalent shares outstanding during each year. In connection with the Company's filing of a registration statement on Form SB-2, stock options and warrants issued for consideration below the offering per share price during the twelve months before the filing of the registration statement have been included in the calculation of common stock equivalent shares using the treasury stock method, as if they had been outstanding for all periods presented. 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, and 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, 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. F-11 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. NOTE 2 - CONCENTRATION OF CREDIT RISK The Company maintains cash deposits at a bank located in southern California. Deposits at the bank are insured by the Federal Deposit Insurance Corporation up to $100,000. As of December 31, 1996, the uninsured portion of balances held at the bank aggregated to $557,556. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. NOTE 3 - FURNITURE AND EQUIPMENT Furniture and equipment at December 31, 1996 consist of the following: Leasehold improvements $ 2,605 Furniture and equipment 108,832 Computer hardware and software 139,496 Equipment held under capital leases 112,262 --------- 363,195 Less accumulated depreciation 159,083 --------- $ 204,112 --------- --------- NOTE 4 - OTHER ASSETS Other assets at December 31, 1996 consist of the following: Patents, net of accumulated amortization of $3,544 $ 18,811 Security deposits 16,601 ---------- $ 35,412 ---------- ---------- Amortization expense on patent costs charged to operations during the years ended December 31, 1996 and 1995 was $1,279 and $1,188, respectively. F-12 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 5 - NOTES PAYABLE TO BANK The Company has six revolving lines of credit with a bank that provide for borrowings up to a total of $400,000. Borrowings under these lines of credit bear interest at the bank's prime rate (8.25% as of December 31, 1996) plus .75% to 1.50%, payable monthly. These revolving lines of credit will mature beginning January 10, 1997 through July 10, 1997, and are collateralized by standby letters of credit issued by certain third parties. The Company has $400,000 outstanding on these revolving lines of credit as of December 31, 1996. 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 $400,000. The Company granted stock options to the Guarantors the Company's common stock as consideration for the guarantees. These options entitle the Guarantors to purchase an aggregate of 400,000 shares of common stock for $1.13 per share if certain conditions are met. The options became exercisable at various dates during 1995 and expire upon certain conditions. These options have not been exercised as of December 31, 1996 (see note 11). NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES Minimum future lease payments under capital leases as of December 31, 1996 for each of the next five years are: Years Ending December 31, ------------ 1997 $ 51,354 1998 34,618 1999 17,889 2000 17,889 2001 11,926 --------- Total minimum lease payments 133,676 Less amount representing interest 28,011 --------- Present value of minimum lease payment 105,665 Less current portion of obligations under capital leases 38,539 --------- $67,126 --------- --------- 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. F-13 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 7 - RELATED PARTY TRANSACTIONS LICENSING AGREEMENT The Company is obligated under a licensing agreement to a partnership whose partners are officers and stockholders of the Company (see Note 9). NOTE 8 - INCOME TAXES As discussed in Note 1, the Company changed its tax status effective January 1, 1993. As of December 31, 1996, the Company has approximately $3,500,000 in federal net operating loss carryforwards, attributable to losses incurred since the change in its tax status, that may be offset against future taxable income through the year 2009. The deferred income tax benefit of the loss carryforward of approximately $1,400,000 has been offset by a valuation allowance of the same amount as management does not believe the recoverability of this deferred tax asset is more likely than not. Accordingly, no deferred income tax benefit has been recognized in the 1996 and 1995 financial statements. The provision for income taxes consists of current taxes payable in the amount of $800, which represents the California minimum franchise tax. NOTE 9 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its facility and certain equipment under non-cancelable operating leases expiring at various dates through 1999. Certain leases contain renewal provisions. Future minimum lease payments under these leases are as follows: YEARS ENDING DECEMBER 31, ------------ 1997 $ 125,000 1998 124,000 1999 93,000 -------- $342,000 -------- -------- Rent expense under all operating leases was $70,316 and $41,309 for the years ended December 31, 1996 and 1995, respectively. F-14 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED) LICENSE AGREEMENT The Company has a licensing agreement with Toomin Research Group ("TRG"), a partnership, whose partners are also shareholders of the Company (see Note 7). Under the terms of the licensing agreement, the Company is entitled to exclusive rights to the product under development by the Company, beginning on August 1, 1993 and ending on August 1, 2013, unless terminated earlier. As consideration for the exclusive rights to the product, the Company pays TRG a royalty. The royalty is payable quarterly under the following terms: - The Company shall pay a royalty on the lesser of 10% of total revenue or $30 per patient examined and reported upon up to the first 10,000 examinations. After the first 10,000 examinations, the Company shall pay a royalty of 5% of total revenue but not less than $12.50 per patient examined and reported upon. - The Company shall pay a royalty of 5% of total revenue for each sale, lease, rental, license, transfer or assignment of the product under license to the extent that no royalty was paid on such total revenue. - The Company shall pay a royalty of 3% of total revenue for any derivative technology developed by the Company to the extent that no royalty was paid on such total revenue. Under the terms of this agreement, included in accounts payable and accrued expenses are royalties payable of $1,350 as of December 31, 1996. COMMON STOCK AND WARRANTS The Company has commitments from certain shareholders to purchase 480,000 shares of common stock at $2.50 per share and warrants to purchase 120,000 shares of common stock, which warrants are exercisable at a price of $3.00 per share for one year from issuance. It is anticipated that these shares will be issued within two weeks of the effective date of Form SB-2 filed by the Company with the Securities and Exchange Commission registering the resale of common stock by several shareholders, including the directors of the Company. In the event of such issuance, the Company will also issue a warrant to the broker/dealer participating in the offering to purchase 43,200 shares of common stock for an exercise price of $2.50 per share at any time within two years from the date of issuance. F-15 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 10 - SHAREHOLDERS' EQUITY On May 4, 1994, the Board of Directors authorized a two-for-one stock split of the Company's common stock for shareholders as of that date. As a result of the split, 2,190,660 shares were issued. All references in the accompanying financial statements to the per share amount have been restated to reflect the stock split. In 1996 the Company settled its obligation to pay $100,000 in connection with services rendered in 1995 for 100,000 shares of common stock and issued 25,000 shares of its common stock for debt totaling $50,000. In 1996, the Company also issued to note holders 42,000 shares of common stock valued at $75,600 as consideration for the note holders extending the repayment terms pursuant to the terms of the note agreement. NOTE 11 - STOCK OPTIONS AND WARRANTS WARRANTS As of December 31, 1996, the Company had outstanding warrants to purchase a total of 568,755 shares of common stock that were issued in conjunction with private placement offerings as follows: NUMBER OF SHARES WARRANT PRICE EXPIRATION ALLOCATED PER SHARE DATE ------------- -------------- ----------- 120,000 $3.00 12/05/97 100,000 1.50 12/23/97 83,333 1.75 06/23/98 43,200 2.50 12/05/98 222,222 2.00 12/31/98 These warrants have not been exercised as of December 31, 1996. STOCK OPTION AGREEMENTS Options were granted which under certain agreements allowing employees, consultants, and Guarantors to purchase shares of common stock. These options expire upon certain events. The following summarizes the Company's stock option transactions under the stock option agreements: F-16 MYO DIAGNOSTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED) STOCK OPTION AGREEMENTS (Continued)
WEIGHTED- SHARES UNDER AVERAGE OPTION EXERCISE PRICE ---------- --------------- Options outstanding, January 1, 1994 50,000 $0.10 Granted 400,000 $1.13 ---------- Options outstanding, December 31, 1994 450,000 $1.02 Granted 20,000 $0.44 ---------- Options outstanding, December 31, 1995 470,000 $0.99 Granted 12,000 $0.50 Exercised (50,000) $0.10 ---------- Options outstanding, December 31, 1996 432,000 $1.08 ---------- ---------- Weighted-average fair value of options granted during 1996 12,000 $2.09 ---------- ----------
As of December 31, 1996, 429,500 options were exercisable at a weighted- average exercise price of $1.08. 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 income and earnings per share would be reduced to the pro forma amounts indicated below: For the Years Ended December 31, ----------------------------- 1996 1995 ---------- ---------- Net loss As reported $(1,235,054) $(1,067,280) ----------- ----------- ----------- ----------- Pro forma $(1,238,034) $(1,094,497) ----------- ----------- ----------- ----------- Loss per share As reported $ (0.17) $ (0.16) ----------- ----------- ----------- ----------- Pro forma $ (0.17) $ (0.17) ----------- ----------- ----------- ----------- These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1996 and 1995, respectively: dividend yields of 0% and 0%; expected volatility of 0% and 0%; risk-free interest rates of 7% and 7%; and expected life of 2.75 and 5.00 years. The weighted-average per share fair value of options granted during the years ended December 31, 1996 and 1995 was $2.09 and $1.49, respectively, and the weighted-average exercise price of options granted during the years ended December 31, 1996 and 1995 was $0.50 and $0.44, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-17 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or any other individual has been authorized to give any information or make any representations in connection with the Offering covered by this Prospectus other than those contained in this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the Shares in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. TABLE OF CONTENTS Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . . . . . . . . . . 10 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Principal and Selling Shareholders . . . . . . . . . . . . . . . . . . . . . 23 Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 25 Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-1 UNTIL _______________, 1997, (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,255,561 Shares MYO DIAGNOSTICS, INC. Common Stock -------------------- PROSPECTUS -------------------- , 1997 -------------- ---- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Articles of Incorporation include a provision that eliminates the personal liability of its directors to the Registrant and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the Registrant or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") (concerning contracts or transactions between the Registrant and a director) or (vii) under Section 316 of the California Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Registrant's shareholders for any violation of a director's fiduciary duty to the Registrant or its shareholders. The Registrant's Articles of Incorporation also include an authorization for the Registrant to indemnify its agents (as defined in Section 317 of the California Code), through bylaw provisions, by agreement or otherwise, to the fullest extent permitted by law. Pursuant to this latter provision, the Registrant's Bylaws provide for indemnification of the Registrant's directors, officers, agents and employees. In addition, the Registrant, at its discretion, may provide indemnification to persons whom the Registrant is not obligated to indemnify. Registrant has entered into indemnity agreements with all directors which provide the maximum indemnification permitted by law. These agreements, together with the Registrant's Bylaws and Articles of Incorporation, may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. Section 317 of the California Code and the Registrant's Bylaws make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Registrant is currently reviewing director and officer liability insurance policies and may purchase such a policy in the future. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-1 Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein: DOCUMENT EXHIBIT NUMBER - -------- ------------- Registrant's Amended and Restated Articles of Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Registrant's Bylaws. . . . . . . . . . . . . . . . . . . . . . . 3.2 Registrant's Form of Indemnification Agreement . . . . . . . . . 10.1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table itemizes the expenses incurred by the Registrant in connection with the issuance and distribution of the securities being registered. All the amounts shown are estimates except the Securities and Exchange Commission registration fee: Registration fee--Securities and Exchange Commission. . . . . . . . . . . . . . . . . $ 2,388 Accounting fees and expenses . . . . . . . . . . . . . $ 7,500 Legal fees and expenses. . . . . . . . . . . . . . . . $ 35,000 Printing . . . . . . . . . . . . . . . . . . . . . . . $ 6,500 Miscellaneous. . . . . . . . . . . . . . . . . . . . . $ 1,000 --------- Total. . . . . . . . . . . . . . . . . . . . $ 52,388 --------- --------- ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES In May 1994 the Company issued 11,230 shares of Common Stock for $1,123 upon exercise of an option issued for a certain securities brokerage services provided by Don Mockoviak, a securities broker. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In August 1994 the Company issued options to purchase 400,000 shares of Common Stock for $1.13 per share to six Canadian residents who provided letters of credit to facilitate the Company's obtaining a revolving line of credit from a commercial bank. The issuance of these shares was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In December 1994 the Company issued 60,000 shares for $600 upon exercise of an option granted to Wayne Cockburn, a Canadian resident, for financial consulting and investment banking services provided by that individual. The issuance of these shares was exempt from registration pursuant to Regulation S and Section 4(2) of the Act as a transaction not involving any public offering. In December 1994 the Company issued to 12 individuals an aggregate of 755,330 shares of Common Stock and notes in the aggregate principal amount of $175,000 in exchange for limited partnership interests and revenue participation interests of limited partners and others in Myo Diagnostics, Ltd., a limited partnership for which the Company was the general partner (the "Partnership"). In June 1996 the Company issued 42,000 shares of Common Stock to said former limited partners of the Partnership as a penalty for failing to timely pay principal and interest on notes issued to such partners. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In December 1994 the Company issued 680,741 shares of Common Stock and warrants to purchase 183,333 shares of Common Stock for an aggregate of $1,000,000 to the Ontario Municipal Employees Retirement Board, Ontario, Canada ("OMERB"). The issuance of these securities was exempt from registration pursuant to II-2 Regulation S and pursuant to Section 4(2) as a transaction not involving any public offering. The Company paid a brokerage commission of $100,000 to Michael Ryshpan, Ontario, Canada, for services in connection with this transaction. In December 1994 the Company issued 144,619 shares of Common Stock to Gerald D. Appel, Chief Executive Officer, Chairman of the Board and principal shareholder of the Company, in cancellation of indebtedness of $212,589 owed by the Company to Mr. Appel for advances made by Mr. Appel to the Company. The issuance of to these shares was exempt from registration pursuant to Section 4(2) as a transaction not involving any public offering. In March 1995, the Company issued: (i) an option to purchase 15,000 shares of Common Stock for $.10 per share to J. Steven Nelson, who was then an executive officer of the Company, and (ii) an option to purchase 5,000 shares of Common Stock for $1.17 per share to Harry Clark, an employee of the Company. The issuance of these options was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In April 1995 the Company issued 15,000 shares of the Common Stock for $750 upon an exercise of an option granted in 1992 to Dr. Norman Carabet, a physician who had provided facilities and services in connection with clinical studies by the Company. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In August 1995 the Company issued 125,000 shares of Common Stock and warrants to purchase 200,000 shares of Common Stock for an aggregate of $225,000 to Hydra Capital ("Hydra"), an institutional investment fund in Ontario, Canada, and issued 113,849 shares of Common Stock and warrants to purchase 222,000 shares of Common Stock for an aggregate purchase price of $205,000 to OMERB. The issuance of these securities was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In January 1996 the Company issued 27,778 shares for an aggregate of $50,000 to Mark Sekundiak, a shareholder of the Company who was a resident of Canada. The issuance of these shares was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In February 1996, the Company issued to Hydra a note in the amount of $50,000 and warrants to purchase 20,000 shares of Common Stock for $2.50 per share for an aggregate of $50,000. In December 1996, the Company issued to Hydra 25,000 shares of Common Stock in cancellation of this note. The issuance of these securities was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In May 1996, Registrant sold 500,000 shares of its Common Stock for $2.00 per share, or an aggregate purchase price of $1,000,000, to 17 Canadian investors. The issuance of these securities was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In June 1996, Registrant issued an option to purchase 12,000 shares of Common Stock for $.50 per share to Dr. Howard Fullman, an individual who is on the Medical Advisory Board of the Registrant, in satisfaction of certain consulting services provided by this individual. The issuance of this option was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering by the Registrant. In September 1996 the Registrant issued 50,000 shares of Common Stock for $.10 per share upon exercise of an option granted in September 1993 to Dr. Phillip Fagan, an individual who is on the Company's Medical Advisory Board, for consulting services to the Registrant. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. In December 1996 the Registrant issued and sold 480,000 units to Altamira Management Ltd. and Bona Vista Asset Management Ltd., Canadian institutional investors for an aggregate of $1,200,000. Each unit was comprised of one share of Common Stock and one quarter stock purchase warrant. Each whole warrant entitles the holder to purchase one share of Common Stock at a price of $3.00 per share through December 1997. The Registrant utilized the services of Griffiths McBurney & Partners, a broker/dealer in Ontario, Canada, in connection with this II-3 transaction, which received a fee of $84,000 and warrants to purchase 43,200 shares of Common Stock at a price of $2.50 per share, exercisable through December 1998. The issuance of these securities was exempt from registration pursuant to Regulation S and pursuant to Section 4(2) of the Act as a transaction not involving any public offering. ITEM 27. EXHIBITS. EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1 Amended and Restated Articles of Incorporation of Registrant.* 3.2 Bylaws of Registrant.* 4.1 Specimen Stock Certificate of Common Stock of Registrant.* 5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.* 10.1 Form of Indemnification Agreement.* 10.2 Licensing Agreement, dated October 31, 1993, by and between Registrant and Toomim Research Group, as amended.* 10.3 Securities Purchase Agreement, dated December 23, 1994, by and among Registrant, OMERB, Gerald Appel and Hershel Toomim.* 10.4 Securities Purchase Agreement, dated August 18, 1995, by and among Registrant, OMERB and Gerald Appel.* 10.5 Series A Warrant of OMERB, dated December 23, 1994, as amended.* 10.6 Series B Warrant of OMERB, dated December 23, 1994, as amended.* 10.7 Series C Warrant of OMERB, dated August 18, 1995, as amended.* 10.8 Waiver Letter, dated December 8, 1995, from OMERB to Registrant.* 10.9 Letter Agreement, dated July 8, 1996, by and between Registrant and OMERB.* 10.10 Letter Agreement, dated December 13, 1994, by and among Registrant and Donald Patterson, Ronald Goldsack, James Connacher, Chris Skillen, Richard Reid and James Black, and Form of Stock Option Agreement, dated December 19, 1994, by and among Registrant and such persons, as amended.* 10.11 Lease Agreement, dated August 1, 1996, by and between Registrant and The Urcis Family Trust.* 10.12 Non-transferable Warrant of Griffiths McBurney & Partners, dated December 6, 1996.* 10.13 Form of Warrant, dated December 6, 1996, by and among Registrant and persons purchasing units in private placement of December 6, 1996.* 10.14 Stock Option Agreement, dated March 23, 1995, by and between Registrant and Steve Nelson.* 10.15 Business PrimeLine Promissory Notes, between Registrant and Wells Fargo Bank, National Association, as amended.* 10.16 Master Equipment Lease Agreement, dated March 1, 1996 by and between Registrant and Medical Consulting Imaging Co., and Distribution Agreement, dated March 1, 1996, by and among Registrant, Medical Consulting Imaging Co. and MCIC/HNI.* 23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion to be filed as Exhibit 5.1 hereto).* 23.2 Consent of Lever, Lippe, Hellie & Company LLP. 23.3 Consent of Singer Lewak Greenbaum & Goldstein, LLP. 24.1 Power of Attorney (included in signature page).* 27 Financial Data Schedule.* - -------------------------- * Previously filed. II-4 ITEM 28. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (1) to file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form or prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial BONA FIDE offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suite of proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 20, 1997. MYO DIAGNOSTICS, INC. BY: /S/ GERALD D. APPEL ----------------------------- GERALD D. APPEL, PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE ----------- ------ ----- /s/ Gerald D. Appel President, Chief Executive March 20, 1997 - ------------------------ Officer and Chairman of GERALD D. APPEL the Board of Directors (Principal Financial and Accounting Officer) * Director March 20, 1997 - ------------------------ DR. HERSHEL TOOMIM, SC.D. * Director March 20, 1997 - ------------------------- WAYNE C. COCKBURN * By: /S/ GERALD D. APPEL -------------------------------- GERALD D. APPEL, HIS ATTORNEY-IN-FACT II-6 EX-23.2 2 EXHIBIT 23.2 [Letterhead of Lever, Lippe, Hellie & Company LLP] INDEPENDENT AUDITORS' CONSENT We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 6, 1996, in the Registration Statement on Form SB-2 and related Prospectus of Myo Diagnostics, Inc. for the registration of 3,255,561 shares of its Common Stock. /s/ Lever, Lippe, Hellie & Company LLP LEVER, LIPPE, HELLIE & COMPANY LLP Los Angeles, California March 20, 1997 EX-23.3 3 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the inclusion in this Registration Statement of Form SB-2 of our report dated February 7, 1997 on our audit of the financial statements of Myo Diagnostics, Inc. for the year ended December 31, 1996. We also consent to the reference to our firm under the caption "Experts." /s/ Singer Lewak Greenbaum & Goldstein LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California March 20, 1997 -----END PRIVACY-ENHANCED MESSAGE-----